Legislature(2013 - 2014)HOUSE FINANCE 519

04/09/2014 06:00 PM FINANCE


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06:06:08 PM Start
06:06:35 PM HB287
07:29:53 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
<Pending Referral>
+= SB 191 GENERAL OBLIGATION BOND FUND TRANSFER TELECONFERENCED
<Bill Hearing Postponed>
+= HB 287 APPROVE TESORO ROYALTY OIL SALE TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 9, 2014                                                                                            
                         6:06 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
6:06:08 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 6:06 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mark Neuman, Vice-Chair                                                                                          
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Joe  Balash, Commissioner  Designee,  Department of  Natural                                                                    
Resources;  Doug Chapados,  CEO  and  President, Petro  Star                                                                    
Inc.;  James   Tangaro,  Vice  President,   Kenai  Refinery,                                                                    
Tesoro; Representative Mike Chennault.                                                                                          
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Tara Sweeney, Vice President, External Affairs, Arctic                                                                          
Slope Regional Corporation.                                                                                                     
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 287    APPROVE TESORO ROYALTY OIL SALE                                                                                       
                                                                                                                                
          HB 287 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
6:06:35 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze discussed the agenda.                                                                                          
                                                                                                                                
HOUSE BILL NO. 287                                                                                                            
                                                                                                                                
     "An  Act approving  and ratifying  the sale  of royalty                                                                    
     oil by  the State of  Alaska to Tesoro  Corporation and                                                                    
     Tesoro   Refining  and   Marketing  Company   LLC;  and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
6:07:12 PM                                                                                                                    
                                                                                                                                
JOE  BALASH, COMMISSIONER  DESIGNEE,  DEPARTMENT OF  NATURAL                                                                    
RESOURCES, discussed that HB 287  had been introduced by the                                                                    
governor to approve  the sale of royalty oil  to Tesoro (one                                                                    
of the  instate refineries). He  spoke to an  amendment that                                                                    
he hoped would be offered by members.                                                                                           
                                                                                                                                
Co-Chair Stoltze noted that the  amendment had been proposed                                                                    
by Representatives Thompson and Wilson.                                                                                         
                                                                                                                                
Commissioner Balash  discussed that the sales  contract with                                                                    
one of  the state's  six instate refineries  highlighted the                                                                    
value the facilities provided to the state's economy.                                                                           
                                                                                                                                
Co-Chair Stoltze  asked for verification that  the amendment                                                                    
had been  provided to the  public. [His staff  Daniel George                                                                    
nodded in verification.]                                                                                                        
                                                                                                                                
Commissioner  Balash continued  to discuss  the legislation.                                                                    
He  stressed the  importance of  a healthy  instate refining                                                                    
industry and ensuring that Alaskans  had energy security. Of                                                                    
the state's six refineries,  four made products for consumer                                                                    
markets and  provided more  than 900  jobs in  Valdez, North                                                                    
Pole,  Nikiski, and  in other  communities.  He stated  that                                                                    
keeping  the  refineries  open was  good  business  for  the                                                                    
state. He remarked that unfortunately  it appeared the state                                                                    
would lose one  [Flint Hills Refinery]. He  relayed that the                                                                    
operation of refineries  in Alaska was good  for the state's                                                                    
business and  its national security;  having a  ready source                                                                    
of jet fuel was critical  for the state's military strategic                                                                    
infrastructure  at various  locations throughout  the state.                                                                    
He emphasized that  if the state wanted a shot  at basing F-                                                                    
35s in Alaska it needed to  have a secure source of jet fuel                                                                    
available. He communicated that due  to a variety of factors                                                                    
the  refineries'  margins  were  severely  diminishing.  The                                                                    
largest problem related to the  jet fuel market. He detailed                                                                    
that  the Ted  Stevens  International  Airport in  Anchorage                                                                    
operated  as one  of the  busiest  air cargo  hubs in  North                                                                    
America.  As a  result a  large demand  was created  for the                                                                    
supply of refined product; it  provided additional scale for                                                                    
the  operations  that  made  the  manufacture  of  gasoline,                                                                    
diesel,  home  heating  fuel, and  marine  fuels  more  cost                                                                    
effective  and efficient.  He stated  that  without the  air                                                                    
cargo  business  the costs  for  refinery  products used  in                                                                    
Alaska would increase. The  biggest challenge the refineries                                                                    
faced  in  competing for  the  jet  fuel market  related  to                                                                    
pricing. He  elaborated that the feed  stock into refineries                                                                    
was priced  on a basis that  was tied to the  ANS West Coast                                                                    
deliveries; in the last ten  years there had been a dramatic                                                                    
change  in  the pricing  structure.  He  expounded that  ten                                                                    
years earlier  ANS had  been priced at  a $2.00  discount to                                                                    
West  Texas  Intermediate   (WTI);  however,  currently  ANS                                                                    
traded roughly  at a $10  premium to WTI. He  explained that                                                                    
the "bizarre phenomenon"  in the market place  was driven in                                                                    
many ways by oil production the mid-continental U.S.                                                                            
                                                                                                                                
6:13:31 PM                                                                                                                    
                                                                                                                                
Commissioner Balash anticipated that  in the long run things                                                                    
would even  out and a  narrowing of pricing would  occur. In                                                                    
the  meantime  the  cost   disadvantage  was  impairing  the                                                                    
state's  oil  refineries  from competing  in  the  jet  fuel                                                                    
market. The  department had  heard from  Interior refineries                                                                    
(particularly  in North  Pole) about  challenges they  faced                                                                    
since the  pricing change  had occurred  and due  to federal                                                                    
actions  on pipeline  tariffs and  other. Beginning  in 2012                                                                    
the  state  had  been  in   discussions  with  the  refinery                                                                    
ownership. He  relayed that the  state had negotiated  a new                                                                    
contract for the  sale of its royalty to Flint  Hills in the                                                                    
prior  year; the  contract had  made a  significant move  on                                                                    
price for the sales. Additionally,  the state had been in an                                                                    
ongoing  conversation with  Petro Star  (the entity  did not                                                                    
purchase  royalty oil)  related the  effect of  Quality Bank                                                                    
issues  and  other  cost  pressures  that  were  eliminating                                                                    
margins. Representatives  from Petro Star would  share their                                                                    
concerns with  the committee. The department  had hoped that                                                                    
the  problem  would  correct itself  through  normal  market                                                                    
forces;  however, the  announcement in  February that  Flint                                                                    
Hills was closing  its North Slope facility  had changed the                                                                    
conversation. Since  the Flint  Hills announcement  a subset                                                                    
of  the governor's  cabinet had  begun meeting  regularly on                                                                    
the issues as a whole. He  spoke to a small pipeline between                                                                    
the  Trans-Alaska  Pipeline  System (TAPS)  and  North  Pole                                                                    
refineries  that was  owned by  the  Golden Valley  Electric                                                                    
Association. He  explained that a  pair of pipelines  ran to                                                                    
and  from  TAPS  connecting  crude to  the  two  North  Pole                                                                    
refineries.  The revenue  requirement on  the two  pipelines                                                                    
was $4.5 million  in 2013; the cost was split  85 percent to                                                                    
15 percent between Flint Hills  and Petro Star respectively.                                                                    
The  consequence of  the impending  Flint Hills  closure was                                                                    
that the full cost would be  borne solely by Petro Star. Due                                                                    
to concerns about the potential  cost increase to Petro Star                                                                    
the department  had reached out  to the entity  to determine                                                                    
whether it had  plans to close. Petro Star  had relayed that                                                                    
it  did  not  intend  to  close at  present,  but  that  the                                                                    
possibility  was  real  if something  did  not  change.  The                                                                    
department had considered  various options including selling                                                                    
the state's  royalty at  a discount  to mirror  pricing like                                                                    
WTI; it  had also  considered a  discount for  select sales.                                                                    
However,  after conversing  with the  Department of  Law the                                                                    
department   had   been    convinced   that   federal   U.S.                                                                    
Constitutional questions around  the Interstate Commerce Act                                                                    
and  equal protection  clauses could  require  the state  to                                                                    
sell or  value all of  its royalty at the  discounted price.                                                                    
He  reasoned   that  at  the   current  85,000   barrels  of                                                                    
production per  day the price  tag could be measured  in the                                                                    
$100 to  $200 million  range. Therefore, the  department was                                                                    
not willing to consider the option.                                                                                             
                                                                                                                                
6:19:34 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash relayed  that the  consequences of  the                                                                    
closure of  additional refineries  and the  potential effect                                                                    
of  military  basing decisions  by  the  U.S. Department  of                                                                    
Defense  and  the continued  viability  of  the Eielson  Air                                                                    
Force   Base    were   being   taken   seriously    by   the                                                                    
administration. He elaborated that  aside from the valuation                                                                    
issues  the  scenario  put  the state  in  the  position  of                                                                    
picking winners and  losers; the state had  a limited supply                                                                    
of royalty  to go around  and production would need  to come                                                                    
from   some  of   the  private   producers   as  well.   The                                                                    
administration had worked to create  a package of provisions                                                                    
to  determine a  defined value  that would  not be  fungible                                                                    
that  could be  provided for  a finite  period of  time. The                                                                    
package  would  also  offer incentives  to  make  additional                                                                    
investments  in  the   facilities  to  increase  efficiency,                                                                    
profit, and ability  to compete for the jet  fuel market and                                                                    
the  manufacture  of  other  products  used  in  Alaska.  He                                                                    
provided  highlights on  the  proposal.  First, the  package                                                                    
included a  royalty valuation provision  similar to  the one                                                                    
used for  the sale of  Cook Inlet natural gas  to utilities.                                                                    
Second,  it included  an  investment  incentive for  capital                                                                    
investments  in  the   refinery  infrastructure.  Third,  it                                                                    
included  a credit  that was  modeled in  part on  the small                                                                    
producer credit for  the oil and gas  production tax system.                                                                    
He detailed that  the two tax provisions  would be available                                                                    
for the upcoming five years;  the credits would also include                                                                    
specific limitations to ensure  that the state was providing                                                                    
a  value  that  could  be used  to  ensure  that  refineries                                                                    
continued to  operate and  provide economic  benefits, jobs,                                                                    
and energy security in Alaska.                                                                                                  
                                                                                                                                
6:22:57 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze pointed to the amendment.                                                                                      
                                                                                                                                
Representative  Wilson  MOVED  to  ADOPT  Amendment  1  (28-                                                                    
GH2862\A.3, Nauman, 4/9/14)(copy on file).                                                                                      
                                                                                                                                
Co-Chair Stoltze OBJECTED for discussion.                                                                                       
                                                                                                                                
Representative  Wilson explained  the  amendment. Section  2                                                                    
included a  $15 million tax  credit for any refinery  in the                                                                    
state  selling  to  a  third-party  (it  did  not  apply  to                                                                    
refineries on the North Slope  producing and using their own                                                                    
oil). She  detailed that a  company could receive  the money                                                                    
in cash  if it was not  able to take the  entire $15 million                                                                    
in a  tax credit. She relayed  that some of the  funds could                                                                    
come  from an  oil and  gas tax  credit fund  that currently                                                                    
held $90  million. Section  3 included a  tax credit  in the                                                                    
amount of $50  million; no single entity would  take over $5                                                                    
million of  the credit. She  noted that Section 3  would not                                                                    
include North  Slope refineries unless they  decided to sell                                                                    
to a  third party  at some  point in  the future.  Section 1                                                                    
allowed  a  company to  sell  barrels  for a  discount.  She                                                                    
explained that  if a company  had 8,000 barrels to  sell the                                                                    
discount would  be required to  apply to all  8,000 barrels.                                                                    
The provision  would enable companies  to sell extra  oil to                                                                    
another  market.   She  asked  for  verification   that  her                                                                    
understanding of Section 1 was accurate.                                                                                        
                                                                                                                                
Co-Chair  Stoltze  noted  that   the  royalty  contract  was                                                                    
inalterable by  the legislature and  that it was  unusual to                                                                    
add ancillary  language to a  royalty contract.  He observed                                                                    
that the provision  in Amendment 1 was a  departure from the                                                                    
norm.  He  could not  recall  another  time that  a  royalty                                                                    
contract had a substantive amendment.                                                                                           
                                                                                                                                
6:26:14 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash agreed.  He detailed  that historically                                                                    
royalty contracts had been  approved as standalone measures;                                                                    
however,  the state  constitution allowed  for a  measure to                                                                    
include  multiple features  provided that  they were  all on                                                                    
the same subject.                                                                                                               
                                                                                                                                
Co-Chair  Stoltze  understood.   He  suspected  the  actions                                                                    
resulted  from the  urgency of  the situation.  Commissioner                                                                    
Balash  agreed. He  spoke to  the need  to take  action that                                                                    
would  stabilize   the  industry  and  give   confidence  to                                                                    
decision makers in Washington, D.C.                                                                                             
                                                                                                                                
Representative Wilson  added that  the amendment  included a                                                                    
five-year sunset.  She had asked  what would change  in five                                                                    
years.  She   had  been  told  that   upgrades  to  increase                                                                    
efficiencies  would occur.  She believed  the primary  issue                                                                    
was the difference  between ANS West Coast  and WTI pricing.                                                                    
She hoped  pricing would even  out. She observed  that there                                                                    
were some  strange dynamics  occurring that  would hopefully                                                                    
dissipate in the upcoming five years.                                                                                           
                                                                                                                                
Representative Thompson  pointed to Section 3,  page 5, line                                                                    
19  of the  amendment.  He referred  to language  specifying                                                                    
that   a  qualified   infrastructure   expenditure  was   an                                                                    
expenditure directly attributable  to the in-state purchase.                                                                    
He asked  if the language  was referring to the  Flint Hills                                                                    
Refinery  or  to  equipment  upgrades  that  would  increase                                                                    
efficiency.                                                                                                                     
                                                                                                                                
Co-Chair   Stoltze  asked   for   clarification  about   the                                                                    
reference to Flint Hills.                                                                                                       
                                                                                                                                
Representative  Thompson wondered  if  the  credit would  be                                                                    
available to a  company wanting to purchase  the Flint Hills                                                                    
Refinery. Commissioner  Balash replied in the  negative. The                                                                    
language  did not  pertain to  the  purchase of  refineries.                                                                    
Rather,  it  was  in  reference  to  the  tangible  personal                                                                    
property referred to on page 5, line 20 of the amendment.                                                                       
                                                                                                                                
6:29:26 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  asked about the  current refinery                                                                    
capacity  for producers  on  the  North Slope.  Commissioner                                                                    
Balash believed  the two  North Slope  refineries had  a per                                                                    
day capacity of 15,000 and 10,500 barrels.                                                                                      
                                                                                                                                
Representative Guttenberg  was concerned that  the amendment                                                                    
may allow a  company to move production away  from the North                                                                    
Slope and to  repurchase it from a separate  entity in order                                                                    
to qualify for the credit.                                                                                                      
                                                                                                                                
Commissioner Balash  replied that there was  a two-part test                                                                    
including the  volumetric limitation, which would  require a                                                                    
company  to make  a significant  change in  its capacity  in                                                                    
order to qualify. The second  related to the manner in which                                                                    
a company  did business; the  question was whether or  not a                                                                    
company  sold primarily  to third  parties  in arm's  length                                                                    
transactions. He pointed to page  3, line 3 of the amendment                                                                    
specifying  that  a  refinery's  primary  function  was  the                                                                    
manufacturing  and  sale of  products  to  third parties  in                                                                    
arm's length  transactions. He detailed that  an arrangement                                                                    
where  a  company sold  to  a  third party  and  repurchased                                                                    
products at a later time did  not qualify as an arm's length                                                                    
transaction.                                                                                                                    
                                                                                                                                
Representative Guttenberg  asked if a company  would qualify                                                                    
for  the credit  if  it  leased a  facility  and bought  the                                                                    
products  produced  at  the  facility.  Commissioner  Balash                                                                    
believed  that there  would be  a practical  consequence and                                                                    
limitation on the practice if  it occurred; he noted that it                                                                    
would be noticed quickly.                                                                                                       
                                                                                                                                
Representative Guttenberg  asked if the department  would be                                                                    
alerted to  the situation when  the company applied  for the                                                                    
tax credit. Commissioner Balash replied in the affirmative.                                                                     
                                                                                                                                
6:32:27 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  asked if the amendment  had been written                                                                    
by the  administration. Commissioner Balash replied  that an                                                                    
amendment had been drafted by  the administration and passed                                                                    
through Legislative Legal Services.                                                                                             
                                                                                                                                
Co-Chair  Austerman  asked how  the  $15  million and  other                                                                    
credits had  been selected  for the  amendment. Commissioner                                                                    
Balash replied  that the  figures had been  arrived at  by a                                                                    
"backing in  process." He detailed  that the  department had                                                                    
used  the  price  differential that  would  be  required  to                                                                    
achieve  a   pricing  close  to   WTI  and  had   looked  at                                                                    
calculating  the  value  from  a  royalty  perspective.  The                                                                    
number was then shifted to a defined tax credit.                                                                                
                                                                                                                                
Co-Chair Austerman  pointed to page  3, lines 20  through 21                                                                    
that allowed a company to  carry the credit forward for five                                                                    
years if  it had tax credits  in excess of actual  taxes. He                                                                    
asked for  verification that subsection (d)  would entitle a                                                                    
company to  receive payment  in cash from  the state  at the                                                                    
end of a five-year period if it  had not used all of its tax                                                                    
credits.                                                                                                                        
                                                                                                                                
Commissioner Balash replied in  the affirmative; the credits                                                                    
were intended to be refundable.  He detailed that similar to                                                                    
other credits, a company would  be eligible for a tax credit                                                                    
refund  through  the  Department  of Revenue  (DOR)  if  its                                                                    
corporate income tax  liability was not as large  as the tax                                                                    
credit.                                                                                                                         
                                                                                                                                
Co-Chair Austerman  asked whether other credits  provided to                                                                    
the  oil  industry   were  refundable.  Commissioner  Balash                                                                    
replied that  certain production  tax credits  were eligible                                                                    
for a refund.                                                                                                                   
                                                                                                                                
Co-Chair Austerman  asked if the  credit was limited  by the                                                                    
number   of  refineries.   He   believed  three   refineries                                                                    
currently  fell under  the  amendment.  He wondered  whether                                                                    
other  refineries could  be eligible  if companies  used the                                                                    
infrastructure credit to bring them up to speed.                                                                                
                                                                                                                                
Commissioner Balash did not believe  the scenario was likely                                                                    
or feasible.  He elaborated that  there were  currently four                                                                    
refineries  that would  qualify  including  the Flint  Hills                                                                    
Refinery;  however,   because  the  credits  would   not  be                                                                    
available  until  January 1,  2015  he  expected that  there                                                                    
would only  be three facilities  that would qualify  [due to                                                                    
the pending closure of the Flint Hills Refinery].                                                                               
                                                                                                                                
Representative Gara asked  if there was a  $15 million total                                                                    
cap on the amendment.                                                                                                           
                                                                                                                                
6:36:26 PM                                                                                                                    
                                                                                                                                
Commissioner  Balash referred  to  page 3,  line  18 of  the                                                                    
amendment.  The total  cap  for a  one-year  period was  $20                                                                    
million. The  investment incentive  credit was capped  at $5                                                                    
million and the refinery credit was $15 million.                                                                                
Representative Gara asked if the  total credit for the three                                                                    
refineries could  be $60  million per  year for  five years.                                                                    
Commissioner Balash replied in the affirmative.                                                                                 
                                                                                                                                
Representative Gara pointed  to language on page  3, line 14                                                                    
of the  amendment that  specified the  tax credit  could not                                                                    
reduce  a  tax  payer's  liability below  zero.  He  thought                                                                    
Commissioner  Balash  had  indicated that  an  entity  could                                                                    
still  receive the  credit if  its tax  liability was  below                                                                    
zero.                                                                                                                           
                                                                                                                                
Commissioner Balash  answered that a company  could not have                                                                    
a  liability   below  zero;   however,  any   unused  credit                                                                    
available to a company could  be refunded. He used a company                                                                    
beginning with a tax liability  of $2 million as an example.                                                                    
He elaborated that if the  company had earned the $5 million                                                                    
investment incentive  credit it  would be required  to apply                                                                    
the credit  against its $2 million  liability. The remaining                                                                    
$3  million could  be refunded,  but  not used  to take  the                                                                    
company's tax liability below zero.                                                                                             
                                                                                                                                
Representative Gara  thought it  sounded like  the liability                                                                    
was below zero.                                                                                                                 
                                                                                                                                
Co-Chair Austerman  replied that the liability  could not be                                                                    
below zero  on the  books, but the  credit could  be carried                                                                    
forward for a refund in the future.                                                                                             
                                                                                                                                
6:39:11 PM                                                                                                                    
                                                                                                                                
Representative Holmes asked for  clarification that the cash                                                                    
refund could be received by a company in any given year.                                                                        
                                                                                                                                
Co-Chair  Austerman  replied  in   the  affirmative,  but  a                                                                    
company could also choose to carry the credit forward.                                                                          
                                                                                                                                
Co-Chair  Stoltze  asked  Commissioner  Balash  to  clarify.                                                                    
Commissioner Balash  answered that a tax  payer could choose                                                                    
to  carry  the  credit  forward,  but  he  believed  it  was                                                                    
unlikely.  He  detailed that  a  company  could receive  the                                                                    
refund each year [during the five-year period].                                                                                 
                                                                                                                                
Co-Chair Austerman pointed  to the language on  page 3, line                                                                    
14.                                                                                                                             
                                                                                                                                
Representative Wilson  spoke to the $5  million and reminded                                                                    
members that $50  million of investment in  a refinery would                                                                    
be required  in order to  receive the tax credit.  She asked                                                                    
for verification  that at  the end  of the  five-year period                                                                    
the  three refineries  would have  invested $750  million to                                                                    
qualify for  the credit. Commissioner Balash  replied in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Representative Wilson  asked about  the current  balance and                                                                    
purpose of  the oil  and gas  tax credit  fund. Commissioner                                                                    
Balash answered that the oil  and gas tax credit refund fund                                                                    
had been established in 2007.  The decision had been to move                                                                    
away  from transferrable  credits, which  had put  companies                                                                    
that had earned a tax credit  in the position of selling the                                                                    
credit at a discount. He  explained that the legislature had                                                                    
established the fund because the  impact on the treasury was                                                                    
the same  and the goal  was to see  the value of  the credit                                                                    
realized by  the party making  the investment. The  fund had                                                                    
enabled  companies  to  avoid   selling  the  credits  at  a                                                                    
discount to another company with a tax liability.                                                                               
                                                                                                                                
Representative Wilson  wondered how the money  was deposited                                                                    
into  the fund.  Commissioner Balash  replied that  the fund                                                                    
was  capitalized by  the legislature  in its  appropriations                                                                    
process. He relayed  that the fund was currently  in use and                                                                    
in  operation  by  DOR.  He was  uncertain  of  the  current                                                                    
balance.                                                                                                                        
                                                                                                                                
Representative Wilson remarked that  the commissioner of DOR                                                                    
had  reported  that  the  fund   contained  $90  million  at                                                                    
present.  She  believed  a specified  amount  of  money  was                                                                    
deposited into the fund from each barrel of royalty oil.                                                                        
                                                                                                                                
6:43:12 PM                                                                                                                    
                                                                                                                                
Commissioner Balash deferred to DOR on the fund details.                                                                        
                                                                                                                                
Representative  Wilson wanted  to  ensure  that the  account                                                                    
funds were  not limited  to general fund  appropriations and                                                                    
that money was deposited specifically for tax credits.                                                                          
                                                                                                                                
Co-Chair   Stoltze  invited   presenters   to  address   the                                                                    
committee. He  relayed that a  more robust  discussion would                                                                    
continue at a later time.                                                                                                       
                                                                                                                                
6:44:01 PM                                                                                                                    
                                                                                                                                
TARA SWEENEY, VICE PRESIDENT, EXTERNAL AFFAIRS, ARCTIC                                                                          
SLOPE REGIONAL CORPORATION (via teleconference), read from                                                                      
a prepared statement:                                                                                                           
                                                                                                                                
     Good evening  Co-Chair Stoltze, Co-Chair  Austerman and                                                                    
     distinguished  members  of  the Committee.  I  am  Tara                                                                    
     Sweeney, Senior Vice President  of External Affairs for                                                                    
     Arctic Slope  Regional Corporation.  Co-presenting with                                                                    
     me this evening is Doug  Chapados, president and CEO of                                                                    
     Petro Star Inc. Thank you  for the opportunity to speak                                                                    
     before you today.                                                                                                          
                                                                                                                                
     By   way   of   background,   Arctic   Slope   Regional                                                                    
     Corporation  ("ASRC") was  established pursuant  to the                                                                    
     Alaska Native Claims Settlement  Act of 1971 ("ANCSA").                                                                    
     Our  corporate  headquarters  are  located  in  Barrow,                                                                    
     Alaska,  and  we  have  administrative  and  subsidiary                                                                    
     offices   across   the   state.   We   are   owned   by                                                                    
     approximately  11,000  Iñupiat  shareholders,  many  of                                                                    
     whom live  in the  villages of  Point Hope,  Point Lay,                                                                    
     Wainwright,  Atqasuk,  Barrow, Nuiqsut,  Kaktovik,  and                                                                    
     Anaktuvuk Pass.                                                                                                            
                                                                                                                                
     From very  humble beginnings, ASRC has  grown to become                                                                    
     the  largest  locally-owned  and operated  business  in                                                                    
     Alaska.  ASRC  has  five  diverse  lines  of  business,                                                                    
     including  the  only  Alaska-owned  refining  and  fuel                                                                    
     marketing operation  in the state known  as Petro Star.                                                                    
     We have approximately  10,000 employees nationwide, and                                                                    
     our  family  of  companies  has   nearly  half  of  our                                                                    
     employees   working   across   Alaska  -   in   Barrow,                                                                    
     Fairbanks,  Anchorage,  Kenai,  Kodiak,  Dutch  Harbor,                                                                    
     Valdez  and  across the  North  Slope  oil fields.  The                                                                    
     remainder of our employees work in the lower 48.                                                                           
                                                                                                                                
Ms.  Sweeney referred  to a  PowerPoint presentation  titled                                                                    
"Arctic  Slope Regional  Corporation Path  to a  Sustainable                                                                    
Refining  Industry" dated  April  2014 (copy  on file).  She                                                                    
turned to slide 2 and continued reading from a statement:                                                                       
                                                                                                                                
     Our presentation today will focus  on the current shape                                                                    
     of in-state refining  in Alaska and why  we support the                                                                    
     Governor's   proposal   to   stabilize   the   refining                                                                    
     industry.                                                                                                                  
                                                                                                                                
     The recent  announcement that Flint Hills  Resources is                                                                    
     shutting  down its  refinery in  June  has sent  shock-                                                                    
     waves throughout  the state, but Flint  Hills' economic                                                                    
     problems  are not  unique. Alaska  refineries that  are                                                                    
     dependent  upon   drawing  ANS  crude  from   TAPS  are                                                                    
     fighting  to   remain  in   business  in   this  state.                                                                    
     Leadership from  this committee and the  legislature is                                                                    
     needed  to  help this  vital  industry  to ensure  that                                                                    
     petroleum products  Alaskans need  are refined  here in                                                                    
     Alaska, from Alaska crude oil.                                                                                             
                                                                                                                                
Ms. Sweeney directed attention to slide 3 and read from                                                                         
prepared remarks:                                                                                                               
                                                                                                                                
     What this slide indicates is  that ASRC is committed to                                                                    
     Alaska. By  the nature of  our ownership, we  intend to                                                                    
     be in Alaska for the long-term.  As you can see we have                                                                    
     a presence across the state  in employing all facets of                                                                    
     Alaskan society from  engineers to equipment operators,                                                                    
     payroll technicians to attorneys,  the five North Slope                                                                    
     crafts, to lending officials.                                                                                              
                                                                                                                                
     In 2013  alone we invested  over $36 million  in Alaska                                                                    
     infrastructure  projects; provided  over $2  million in                                                                    
     charitable  contributions  and  over  $380  million  in                                                                    
     wages  to Alaskans.  These numbers  are real,  tangible                                                                    
     and  meaningful  to  the   people  the  legislature  is                                                                    
     assembled to represent.                                                                                                    
                                                                                                                                
6:47:50 PM                                                                                                                    
                                                                                                                                
Ms. Sweeney moved to slide 4 titled "Introduction to Petro                                                                      
Star." She read from her remarks:                                                                                               
                                                                                                                                
     ASRC was  one of the  original investors in  Petro Star                                                                    
     Inc.,  and ASRC's  support has  been crucial  to making                                                                    
     Petro  Star a  viable  refiner in  Alaska. Since  2007,                                                                    
     ASRC has  reinvested over $280 million  in Petro Star's                                                                    
     operations. This includes the  ASRC Board of Directors'                                                                    
     2008 decision to invest over  $150 million to build the                                                                    
     facilities   necessary  for   the  Petro   Star  Valdez                                                                    
     Refinery  to  produce   EPA-mandated  ultra-low  sulfur                                                                    
     diesel fuel  (ULSD). This was, and  remains, the single                                                                    
     largest  investment in  ASRC's history  and established                                                                    
     Petro Star as one of  only two instate refiners capable                                                                    
     of producing that essential fuel.  At this time I would                                                                    
     like to turn it over to Doug Chapados.                                                                                     
                                                                                                                                
DOUG CHAPADOS, CEO AND PRESIDENT, PETRO STAR INC., turned                                                                       
to an overview of Petro Star on slide 5 and read from a                                                                         
prepared statement:                                                                                                             
                                                                                                                                
     Good evening Co-Chair  Stoltze, Co-Chair Austerman, and                                                                    
     members  of   the  Committee.   I  am   Doug  Chapados,                                                                    
     president  & CEO  of Petro  Star Inc.  Petro Star  is a                                                                    
     wholly-owned  subsidiary   of  Arctic   Slope  Regional                                                                    
     Corporation.  This slide  provides  the committee  with                                                                    
     additional  background on  our company.  Petro Star  is                                                                    
     the only  locally-owned refiner in the  state of Alaska                                                                    
     with two refineries; one located  in North Pole and the                                                                    
     other in Valdez.                                                                                                           
                                                                                                                                
     We  are one  of  two refiners  in  Alaska that  provide                                                                    
     ultra-low sulfur  diesel to the Alaskan  market, and we                                                                    
     also  produce and  supply jet  fuel, marine  diesel and                                                                    
     home heating oil.                                                                                                          
                                                                                                                                
     Petro  Star's North  Pole  and  Valdez refineries  were                                                                    
     commissioned  in 1985  and 1993,  and  have a  combined                                                                    
     crude processing  capacity of 82,000 barrels  per day -                                                                    
     nearly  equal  to  the  capacity  Flint  Hills  is  now                                                                    
     shutting  down.  Refined  products  from  Petro  Star's                                                                    
     refineries  can be  found in  consumer  fuel tanks  and                                                                    
     equipment across  the state.  In addition  to refining,                                                                    
     much  of  Petro  Star's   production  is  sold  through                                                                    
     company   owned  marine   terminals  and   heating  oil                                                                    
     distributorships located  in Valdez,  Kodiak, Unalaska,                                                                    
     and the Interior.                                                                                                          
                                                                                                                                
     Currently, 100% of the Alaska  military jet fuel demand                                                                    
     at JBER,  Eielson AFB, Ft. Wainwright,  and Coast Guard                                                                    
     Air Station  Kodiak is produced and  delivered by Petro                                                                    
     Star.  In 2013  alone, Petro  Star worked  with 750  in                                                                    
     state vendors,  generated 282  million gallons  in fuel                                                                    
     sales,  and  provided  products and  services  to  over                                                                    
     14,000 customers.                                                                                                          
                                                                                                                                
     Petro  Star thus  plays  an  important role  throughout                                                                    
     Alaska, especially  within the communities in  which it                                                                    
     does business.                                                                                                             
                                                                                                                                
6:51:06 PM                                                                                                                    
                                                                                                                                
Mr. Chapados spoke to the company's two refineries on slide                                                                     
6:                                                                                                                              
                                                                                                                                
     Valdez Refinery                                                                                                            
                                                                                                                                
        · 60,000 barrel/day crude distillation unit                                                                             
        · 12,000 barrel/day distillate hydrotreater and                                                                         
          associated process units                                                                                              
        · 270 million gallon annual capacity                                                                                    
        · Primary products are commercial and military                                                                          
          specification jet fuels and ULSD                                                                                      
        · Only Petro Star simultaneously produces - year                                                                        
          round - both arctic grade and #2 marine/highway                                                                       
          diesel                                                                                                                
                                                                                                                                
     North Pole Refinery                                                                                                        
                                                                                                                                
        · 22,000 barrel/day crude distillation unit                                                                             
        · 95 million gallon annual capacity                                                                                     
        · Primary products include commercial and military                                                                      
          spec jet fuels, home heating oil and low-sulfur                                                                       
          diesel                                                                                                                
        · North Pole also serves as the bulk distribution                                                                       
          point for ULSD sales within the Fairbanks-area                                                                        
         and volumes destined for the North Slope                                                                               
                                                                                                                                
Mr.  Chapados relayed  that the  12,000 barrels  per day  of                                                                    
ultra-low  sulfur diesel  produced  at  the Valdez  Refinery                                                                    
represented half  of the state's  demand. He added  that the                                                                    
North  Pole  Refinery  was significantly  smaller  than  the                                                                    
Valdez Refinery and was directly  adjacent to the Foot Hills                                                                    
Refinery in  North Pole. The  North Pole Refinery  served as                                                                    
the  bulk  distribution point  for  volumes  headed for  the                                                                    
North Slope and other communities.                                                                                              
                                                                                                                                
Mr.  Chapados moved  to slide  7 titled  "Petro Star's  2013                                                                    
Contribution to  the Alaska Economy." He  read from prepared                                                                    
remarks:                                                                                                                        
                                                                                                                                
     While  the  numbers  are   aggregated  to  include  our                                                                    
     Anchorage operations, you can  see the breakdown within                                                                    
     the   Interior,  Valdez,   Kodiak,  and   Unalaska.  An                                                                    
     important  takeaway  is  that Petro  Star,  alone,  has                                                                    
     invested  nearly $300  million in  capital projects  in                                                                    
     the state over the last seven years.                                                                                       
                                                                                                                                
Mr. Chapados read from slide 7:                                                                                                 
                                                                                                                                
        · Provided 304 full time positions in Alaska,                                                                           
          including:                                                                                                            
             o 151 in Fairbanks/North Pole                                                                                      
             o 66 in Valdez                                                                                                     
             o 25 in Kodiak                                                                                                     
             o 25 in Unalaska                                                                                                   
                                                                                                                                
        · Paid salaries and wages of $28 million, including                                                                     
             o $10.5 million in Fairbanks/North Pole                                                                            
             o $7.8 million in Valdez                                                                                           
             o $1.5 million in Kodiak                                                                                           
             o $1.8 million in Unalaska                                                                                         
                                                                                                                                
        · Produced 270 million gallons of refined products                                                                      
             o 65 million gallons at the North Pole                                                                             
               Refinery                                                                                                         
             o 205 million gallons at the Valdez Refinery                                                                       
             o Supplies 100% of Alaska's military jet fuel                                                                      
               demand  (JBER, Eielson  AFB, Ft.  Wainwright,                                                                    
               Coast Guard  Air Station Kodiak) and  100% of                                                                    
               USCG  MGO  (marine  diesel  fuel)  demand  in                                                                    
               Kodiak and Unalaska                                                                                              
                                                                                                                                
        · Re-invested approximately $300 million in capital                                                                     
          projects in Alaska, over the last seven years                                                                         
                                                                                                                                
Mr. Chapados expounded that most  of the 66 Valdez employees                                                                    
were  engaged   in  the   refinery  operation.   The  Kodiak                                                                    
employees operated  a marine terminal and  fuel distribution                                                                    
point.  The 25  employees in  Unalaska were  divided between                                                                    
three  marine terminals.  He noted  that the  refineries had                                                                    
the total capacity  to produce over 360  million gallons per                                                                    
year;  the  company  was  currently  producing  270  million                                                                    
gallons  per  year.  Petro   Star  had  significant  reserve                                                                    
capacity to meet demand that would  not be met in the future                                                                    
given the Flint Hills Refinery closure.                                                                                         
                                                                                                                                
6:54:54 PM                                                                                                                    
                                                                                                                                
Mr. Chapados  provided additional  2013 statistics  on slide                                                                    
8:                                                                                                                              
                                                                                                                                
     Engaged 750 vendors statewide, including:                                                                                  
        · Interior 250                                                                                                          
        · Valdez 100                                                                                                            
        · Kodiak 70                                                                                                             
                                                                                                                                
     Generated   fuel   sales   of  282   million   gallons,                                                                    
     including:                                                                                                                 
        · Interior 82 million                                                                                                   
        · Valdez 40 million                                                                                                     
        · Kodiak 15 million                                                                                                     
        · Unalaska 30 million                                                                                                   
                                                                                                                                
     Provided  products and  services  to  more than  14,100                                                                    
     customers, including:                                                                                                      
        · Interior 8,000+                                                                                                       
        · Valdez 1,100+                                                                                                         
        · Kodiak 4,000+                                                                                                         
        · Unalaska 200+                                                                                                         
                                                                                                                                
     Other significant Kodiak facts:                                                                                            
        · Petro Star supplies 50% of the Kodiak's diesel,                                                                       
          heating oil, and gasoline demand                                                                                      
        · Petro Star provides 100% of the fuel requirements                                                                     
          for Kodiak Electric Association, the City of                                                                          
          Kodiak and Kodiak Island Borough School District                                                                      
        · Petro Star is the only propane distributor on                                                                         
          Kodiak Island                                                                                                         
                                                                                                                                
Mr.  Chapados  expounded  that  total  fuel  sales  included                                                                    
products   the  company   bought  and   resold  from   other                                                                    
refineries.  Most customers  in  the  Interior, Valdez,  and                                                                    
Kodiak primarily  purchased heating oil. The  company sold a                                                                    
significant volume  of marine diesel  to the  fishing fleets                                                                    
in Kodiak and Unalaska.                                                                                                         
                                                                                                                                
Mr. Chapados turned to slide 9 titled "Current Challenges"                                                                      
and read from a statement:                                                                                                      
                                                                                                                                
     It is  critical for  this committee to  understand that                                                                    
     the  challenges facing  the in-state  refining industry                                                                    
     are  not  new.  Two  years  ago  ASRC  and  Petro  Star                                                                    
     approached  the State  of  Alaska highlighting  warning                                                                    
     signs of a weak  refining industry, and the discussions                                                                    
     for a solution have been on-going.                                                                                         
                                                                                                                                
     In  short there  are  two major  challenges facing  in-                                                                    
     state  refining. The  first  is the  high  cost of  ANS                                                                    
     crude. ANS is  one of the most expensive  in the United                                                                    
     States  despite being  of lower  quality than  lighter,                                                                    
     sweeter  crude from  fields like  the  Bakken in  North                                                                    
     Dakota  - which  currently  sells at  a large  discount                                                                    
     compared to ANS.                                                                                                           
                                                                                                                                
     Several key  takeaways are that  the failure of  any of                                                                    
     the  remaining   in-state  refineries   would  decrease                                                                    
     competition  within  Alaska  fuel markets,  and  remove                                                                    
     most of the existing brakes on prices.                                                                                     
                                                                                                                                
     Failure of the Interior  refineries would eliminate any                                                                    
     local source of  military jet fuel for  Eielson AFB and                                                                    
     of commercial jet fuel  for the Fairbanks International                                                                    
     Airport.                                                                                                                   
                                                                                                                                
Mr. Chapados  relayed that Petro Star's  North Pole Refinery                                                                    
had  been  visited  by  the   defense  logistics  agency  to                                                                    
determine how the Flint Hills  Refinery closure would impact                                                                    
Petro Star.  The officials were interested  in the company's                                                                    
status  and  its  future  ability   to  supply  product  for                                                                    
Eielson.  He continued  to  address slide  9  in a  prepared                                                                    
statement:                                                                                                                      
                                                                                                                                
     The  second   major  challenge  is  the   Quality  Bank                                                                    
     methodology, which  is unique  to refineries  that draw                                                                    
     crude oil from, and return oil to, TAPS.                                                                                   
                                                                                                                                
     The TAPS  Quality Bank is regulated  principally by the                                                                    
     Federal Energy  Regulatory Commission  (FERC) and  to a                                                                    
     lesser extent  by the  Regulatory Commission  of Alaska                                                                    
     (RCA). In 2002, when the  Quality Bank was litigated in                                                                    
     a months-long  proceeding, the FERC  ultimately settled                                                                    
     on  a  Quality  Bank  methodology that  made  the  TAPS                                                                    
     refiners pay shippers more than  any party requested at                                                                    
     the hearing  and the RCA  concurred. This  led directly                                                                    
     to  the  excessive  Quality  Bank  penalties  that  are                                                                    
     imposed on the TAPS refiners today.                                                                                        
                                                                                                                                
     Petro  Star has  paid  over $525  million in  penalties                                                                    
     over the last  nine years, and nearly  half that amount                                                                    
     in  the past  three years  alone: The  Quality Bank  is                                                                    
     getting worse  at the same  time market  conditions are                                                                    
     getting worse  for Alaska refiners and  its effects are                                                                    
     devastating. Over  these past three years,  most of the                                                                    
     margin  between Petro  Star's crude  oil price  and the                                                                    
     price  it  received  for   its  refined  products  like                                                                    
     commercial  jet  fuel  was paid  out  in  Quality  Bank                                                                    
     penalties.                                                                                                                 
                                                                                                                                
     Faced with  the combination of exorbitant  Quality Bank                                                                    
     fees and  high crude  costs, Petro  Star and  ASRC have                                                                    
     had to  put on  hold capital  projects that  would grow                                                                    
     Petro Star's  business in Alaska and  benefit consumers                                                                    
     statewide just when these are needed most.                                                                                 
                                                                                                                                
7:00:12 PM                                                                                                                    
                                                                                                                                
Mr.  Chapados provided  a look  at  the governor's  proposal                                                                    
from a refinery perspective on slide 10:                                                                                        
                                                                                                                                
     Royalty Oil                                                                                                                
        · Benefit to in-state refiners because it expands                                                                       
          the potential pool of available ANS crude.                                                                            
                                                                                                                                
     In-State Refinery Tax Credit                                                                                               
        · This provision is equitable because it is done on                                                                     
          a per refinery basis, and aims to mitigate the                                                                        
          high price of ANS crude.                                                                                              
                                                                                                                                
     Qualified     In-State      Refinery     Infrastructure                                                                    
     Expenditures Tax Credit                                                                                                    
        · This provision spurs reinvestment into the                                                                            
          industry  by in-state  refiners with  a reasonable                                                                    
          cap. If  refiners make  significant infrastructure                                                                    
          investments they are responsible  for at least 90%                                                                    
          of the total project cost.                                                                                            
                                                                                                                                
Mr. Chapados  elaborated on  slide 10.  He relayed  that the                                                                    
royalty  oil  benefit  was an  expansion  of  the  potential                                                                    
suppliers of  ANS crude  oil to  the instate  refineries. He                                                                    
stated that as the volumes of  oil in TAPS had diminished it                                                                    
was becoming increasingly difficult  to source crude oil for                                                                    
sale  to  instate refineries.  The  company  expected to  be                                                                    
interested in talking to the  state about purchasing royalty                                                                    
oil in the  future. The provision offered  another method to                                                                    
get  oil to  instate refiners  specifically through  instate                                                                    
producers.  Petro Star  believed  the  instate refinery  tax                                                                    
credit was equitable  because it was done on  a per refinery                                                                    
basis; it aimed  to mitigate the high cost of  ANS crude oil                                                                    
and  addressed   the  fact  that   not  all   refiners  were                                                                    
purchasing oil from the state at present.                                                                                       
                                                                                                                                
Co-Chair   Stoltze  made   a   joking   comment  about   the                                                                    
confidentiality note at the bottom of the presentation.                                                                         
                                                                                                                                
Mr. Chapados  concluded his remarks.  Petro Star  viewed the                                                                    
qualified  instate refinery  infrastructure expenditure  tax                                                                    
credit  as  a  mechanism   to  spur  reinvestment  into  the                                                                    
industry  by  instate refiners  with  a  reasonable cap.  He                                                                    
stated  that if  refiners  made  significant commitments  to                                                                    
infrastructure investments they would  be responsible for 90                                                                    
percent of the  costs. He relayed that Petro  Star had spent                                                                    
over $150  million on its ultra-low  sulfur diesel facility.                                                                    
He  wanted the  company to  qualify  for the  $5 million  in                                                                    
credits, but he did not believe it would happen.                                                                                
                                                                                                                                
7:02:34 PM                                                                                                                    
                                                                                                                                
Ms. Sweeney provided concluding remarks:                                                                                        
                                                                                                                                
     As you  know ASRC has deep  roots in Alaska and  by the                                                                    
     nature  of  our  mission  and  our  structure  we  will                                                                    
     continue to be  an economic driver in this  state and a                                                                    
     strong  advocate  for   fair  and  meaningful  business                                                                    
     development policy.  As stated  earlier, we  have grown                                                                    
     from  very  humble  beginnings  into  Alaska's  largest                                                                    
     locally  owned company  and an  employer of  choice for                                                                    
     thousands of Alaskans.                                                                                                     
                                                                                                                                
     We make  disciplined business decisions focused  on our                                                                    
     mission.  The investments  we have  made were  based on                                                                    
     Alaska's future  potential, not because  they qualified                                                                    
     for  state   subsidies,  tax  credits,   or  financing.                                                                    
     Rather,  they were  grounded  in  ASRC's commitment  to                                                                    
     this state and its residents.                                                                                              
                                                                                                                                
     While we  will continue to  operate in Alaska  with the                                                                    
     long-term  on  the horizon,  uncertainties  surrounding                                                                    
     the continued viability of refining  in Alaska makes us                                                                    
     question   whether   we   should  employ   our   assets                                                                    
     elsewhere.                                                                                                                 
                                                                                                                                
     The  stark  economic  realities that  face  the  Alaska                                                                    
     refining industry  have required ASRC to  suspend major                                                                    
     new   capital   investments   in  refining   and   fuel                                                                    
     distribution. ASRC has been compelled  to put on hold a                                                                    
     significant multi-million  dollar capital  project that                                                                    
     is necessary  for the long-term  health of both  of our                                                                    
     refineries.   This   particular  project   would   have                                                                    
     benefitted Alaskans  in South Central and  the Interior                                                                    
    as well as organizations like the Alaska Railroad.                                                                          
                                                                                                                                
     We  fully support  the governor's  proposal because  it                                                                    
     remedies  one of  the  outstanding  threats to  instate                                                                    
     refiners. Please know that neither  Petro Star nor ASRC                                                                    
     are looking  for an exit  strategy. We are  seeking the                                                                    
     stability  that  is   necessary  to  justify  long-term                                                                    
     investment and  maintain a viable refining  industry in                                                                    
     Alaska. Thank you. Quyanaqpak.                                                                                             
                                                                                                                                
7:04:57 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  asked about  Petro Star's  tax liability                                                                    
in order  to get an idea  what the $15 million  credit would                                                                    
do.  Mr. Chapados  preferred  to not  share  the figure.  He                                                                    
noted that it would have  been miniscule in 2013. He relayed                                                                    
that for  the current year  the company  did not have  a tax                                                                    
liability year to date.                                                                                                         
                                                                                                                                
Co-Chair  Austerman asked  for  clarification. Mr.  Chapados                                                                    
explained that the  company would have needed  to generate a                                                                    
profit in order to have a tax liability.                                                                                        
                                                                                                                                
Co-Chair   Austerman  referred   to  earlier   testimony  by                                                                    
Commissioner Balash  related to  unused tax  liabilities and                                                                    
carry forward. He asked whether  the removal of the language                                                                    
related  to making  cash payment  to companies  if they  had                                                                    
enough tax to not fulfill  credits would impact Petro Star's                                                                    
business plans.                                                                                                                 
                                                                                                                                
Ms.  Sweeney  asked  for  the  amendment  sections  Co-Chair                                                                    
Austerman was referring to.                                                                                                     
                                                                                                                                
Co-Chair  Austerman  pointed  to  page 3,  line  14  of  the                                                                    
amendment.  He  wondered  how Petro  Star's  business  plans                                                                    
would  be impacted  by the  removal of  language on  page 3,                                                                    
line 14 related  to the carry forward of  unused tax credits                                                                    
in a five-year period and  on lines 19 through 21 pertaining                                                                    
to a refund of an unused portion of the credit.                                                                                 
                                                                                                                                
Ms. Sweeney replied  that the removal of  the language would                                                                    
have  a   significant  impact  on  Petro   Star's  viability                                                                    
(especially the removal of language on line 19).                                                                                
                                                                                                                                
Co-Chair Austerman surmised that  without a tax liability it                                                                    
would be difficult  to receive a tax credit  unless it could                                                                    
be  carried forward.  Ms. Sweeney  believed  that under  the                                                                    
section a company  with zero tax liability  was eligible for                                                                    
a refund.                                                                                                                       
                                                                                                                                
Co-Chair Austerman  explained that the company  did not have                                                                    
a liability,  but money would  come out of  someone's pocket                                                                    
to pay it to do business  to help make it profitable. He had                                                                    
a problem  creating a profit for  a company out of  a no tax                                                                    
situation and giving the company money.                                                                                         
                                                                                                                                
7:09:17 PM                                                                                                                    
                                                                                                                                
Ms. Sweeney pointed  to ASRC's ownership in  Petro Star. She                                                                    
elaborated  that they  would not  be  having the  discussion                                                                    
with  the committee  if they  did not  feel that  there were                                                                    
issues related to the viability  of the refining industry in                                                                    
Alaska. She  did not believe  the provisions would  create a                                                                    
windfall  for  the  organizations,  but it  would  help  the                                                                    
industry stabilize and determine  ways to grow. She referred                                                                    
to the  five-year sunset date  on the provision;  during the                                                                    
time  she was  hopeful Petro  Star would  be positioned  for                                                                    
growth.                                                                                                                         
                                                                                                                                
Representative   Thompson   remarked   on   the   railroad's                                                                    
declining business. He wondered  about Petro Star's role and                                                                    
how the railroad's business could increase in the future.                                                                       
                                                                                                                                
Mr. Chapados answered that Petro  Star had been in extensive                                                                    
conversations with the Alaska  Railroad Corporation on plans                                                                    
to install  rail loading and  offloading facilities  to move                                                                    
Petro  Star's  product to  market  more  efficiently and  in                                                                    
larger  volumes. The  facilities  would  address the  finite                                                                    
amount  of trucking  capacity  in the  state.  He could  not                                                                    
provide  further information  given  that  the details  were                                                                    
covered by a non-disclosure  agreement. He relayed that both                                                                    
organizations were excited about the potential.                                                                                 
                                                                                                                                
Co-Chair Stoltze commented on the railroad.                                                                                     
                                                                                                                                
7:12:20 PM                                                                                                                    
                                                                                                                                
Representative   Guttenberg   pointed   to  slide   9   that                                                                    
identified the Quality  Bank as a profit  center for royalty                                                                    
owners and  shippers and  a burden on  Petro Star.  He asked                                                                    
for further detail.                                                                                                             
                                                                                                                                
Mr.  Chapados answered  that Petro  Star  believed that  the                                                                    
Quality Bank was  currently the product of  a flawed judge's                                                                    
decision at the Federal  Energy Regulatory Commission (FERC)                                                                    
level.  He  relayed  that   the  decision  was  increasingly                                                                    
impacting the  company. He detailed  that in the  past month                                                                    
the combined  cost of  ANS crude oil  plus the  Quality Bank                                                                    
had  exceeded  the  sale  value  for  jet  fuel  Petro  Star                                                                    
delivered  to the  Anchorage market.  He explained  that the                                                                    
Quality  Bank  was  used  to  compensate  shippers  for  the                                                                    
degradation that their oil underwent  when TAPS refiners re-                                                                    
injected oil  back into the  pipeline; it also  adjusted for                                                                    
the varying qualities  of crude oils on the  North Slope. He                                                                    
relayed that 2013 had been  Petro Star's worst year in terms                                                                    
of profit from  ongoing operations; it had  paid $72 million                                                                    
to  the  Quality Bank.  The  four  major recipients  of  the                                                                    
payment were the three major oil producers and the state.                                                                       
                                                                                                                                
Representative Gara  asked for  verification that  the prior                                                                    
year was  Petro Star's worst  year for profits and  that the                                                                    
company was  on track for  a loss  in the current  year. Mr.                                                                    
Chapados responded in the affirmative.                                                                                          
                                                                                                                                
Representative Gara  noted that a company  would receive the                                                                    
proposed  $15  million   credit  even  if  it   had  no  tax                                                                    
liability.  He looked  at  the $5  million  credit (page  5,                                                                    
lines 2 through  4) and observed that a  company could claim                                                                    
the credit  if it made  enough investments. He asked  if the                                                                    
company would receive the $5  million credit even if it made                                                                    
no profit.                                                                                                                      
                                                                                                                                
Mr. Chapados replied in the affirmative.                                                                                        
                                                                                                                                
Representative  Gara  remarked   on  the  state's  difficult                                                                    
fiscal  environment.  He  provided a  hypothetical  scenario                                                                    
where  the company's  had a  $2 million  loss and  the state                                                                    
gave it $20 million. Under  the scenario, the state gave the                                                                    
company  an $18  million profit;  $15 million  of which  the                                                                    
company  did  nothing  for  and  $5  million  of  which  was                                                                    
reimbursement  for  qualified  expenditures on  capital.  He                                                                    
wondered why the bill should not be more closely tailored.                                                                      
                                                                                                                                
Mr. Chapados answered that the  amendment had been developed                                                                    
by  the administration  in response  to  the challenges  the                                                                    
company had presented  to the governor. He spoke  to the $18                                                                    
million in  profit from  Representative Gara's  scenario. He                                                                    
detailed that in  order to receive the money  Petro Star and                                                                    
ASRC  would need  to  invest  $50 million  in  one year.  He                                                                    
believed  the figure  was  representative  of the  company's                                                                    
commitment in prior years and what  it would like to have in                                                                    
the coming years. Petro Star  saw the credits as a mechanism                                                                    
that  would  allow  the refining  industry  to  weather  the                                                                    
current storm.                                                                                                                  
                                                                                                                                
7:18:01 PM                                                                                                                    
                                                                                                                                
Representative Gara was uncomfortable  with Section 3 of the                                                                    
amendment.  He wondered  if there  was  something the  state                                                                    
could  do  to  help  Petro   Star  avoid  the  Quality  Bank                                                                    
penalties. He  wondered if  an infrastructure  upgrade could                                                                    
be more narrowly  tailored that would not  require the state                                                                    
to spend as much money.                                                                                                         
                                                                                                                                
Mr.  Chapados  replied  that  FERC  ultimately  decided  the                                                                    
methodology related to the Quality  Bank. He elaborated that                                                                    
more  than 20  years  earlier the  Regulatory Commission  of                                                                    
Alaska (RCA) had  disagreed with the FERC  ruling. In recent                                                                    
years the  RCA had  concurred with  FERC's decision.  He did                                                                    
not  believe the  state could  significantly adjust  for the                                                                    
increased penalties Petro  Star paid. Petro Star  had made a                                                                    
request to the administration for  the entities to work with                                                                    
other  parties to  the ongoing  Quality  Bank proceeding  to                                                                    
determine if  a settlement  was possible; a  settlement that                                                                    
would  forestall  additional  litigation  and  to  make  the                                                                    
Quality  Bank more  reasonable.  He  underscored that  Petro                                                                    
Star did  not believe  the Quality Bank  should be  zero; it                                                                    
appreciated that it  was having an impact on  the quality of                                                                    
crude  oil in  the  pipeline; however,  Petro  Star did  not                                                                    
believe its current payment of $72 million was reasonable.                                                                      
                                                                                                                                
7:20:27 PM                                                                                                                    
                                                                                                                                
Representative  Edgmon  understood  the  importance  of  the                                                                    
refinery. He  wondered about  the five-year  transition plan                                                                    
and  what  Petro Star  would  do  to improve  its  economics                                                                    
during  that  time.  He  spoke from  the  perspective  of  a                                                                    
village corporation chairman; the  corporation had shut down                                                                    
a  couple  of  its  subsidiary  companies,  which  had  been                                                                    
painful.  He   noted  that   the  implications   related  to                                                                    
refineries were larger statewide.                                                                                               
                                                                                                                                
Ms. Sweeney replied that the  bill represented a step in the                                                                    
right  direction for  the companies.  She relayed  that ASRC                                                                    
deployed  its  assets  with   a  disciplined  approach.  She                                                                    
detailed that  ASRC had a  congressional mandate  to provide                                                                    
benefits  back  to  its   shareholders  through  ANCSA.  The                                                                    
company had  to look  at its  business lines  and investment                                                                    
opportunities  dispassionately when  it looked  at what  fit                                                                    
its  business   portfolio.  She  stated  that   it  was  the                                                                    
company's  fiduciary  responsibility  to manage  the  assets                                                                    
appropriately   on   behalf   of   its   shareholders.   She                                                                    
communicated that with provisions  such as the ones included                                                                    
in the amendment, the company  could work to stabilize Petro                                                                    
Star so that  ASRC could look at reinvesting  its money into                                                                    
the organization to enable it to grow.                                                                                          
                                                                                                                                
7:23:18 PM                                                                                                                    
                                                                                                                                
Representative Edgmon asked for  verification that the five-                                                                    
year proposal had been offered  by the governor. Ms. Sweeney                                                                    
replied in the affirmative.                                                                                                     
                                                                                                                                
Representative Edgmon  asked if  ASRC had  originally wanted                                                                    
the time  period to  be longer. Ms.  Sweeney replied  in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Mr.  Chapados  added that  the  refining  industry was  very                                                                    
capital intensive.  He elaborated that investments  were not                                                                    
typically  made on  a five-year  timeframe; typically  Petro                                                                    
Star was looking  out 10 to 20 years or  longer. He spoke to                                                                    
making a return on investment  and referred to the ultra-low                                                                    
sulfur diesel investment; the investment  did not pay off in                                                                    
a  short  period of  time,  but  the  company had  made  the                                                                    
commitment  to produce  the product.  He  shared that  Petro                                                                    
Star had projects  in the queue including at  least one rail                                                                    
transportation project.  The bill  would factor  into ASRC's                                                                    
decision  to  invest  in  the   project.  He  stressed  that                                                                    
efficiency was important  to Petro Star; over  the years the                                                                    
company  had made  extensive efforts  to  increase fuel  and                                                                    
electricity efficiency  at the  plant. The  company believed                                                                    
increasing efficiency was the one  way it could compete with                                                                    
larger  competitors,  while  remaining viable.  He  detailed                                                                    
that  it had  been a  recipe for  success in  terms of  high                                                                    
energy costs  experienced in Alaska; the  company used crude                                                                    
oil  as  fuel;  therefore,  it  had  incentive  to  maximize                                                                    
efficiency and minimize the volume of energy consumed.                                                                          
                                                                                                                                
7:26:08 PM                                                                                                                    
                                                                                                                                
JAMES  TANGARO,  VICE  PRESIDENT,  KENAI  REFINERY,  TESORO,                                                                    
relayed  that  Tesoro  had  testified   in  support  of  the                                                                    
legislation  in the  past.  He observed  that  the bill  had                                                                    
changed.                                                                                                                        
                                                                                                                                
Co-Chair  Stoltze  noted  that the  bill  would  potentially                                                                    
change given a pending amendment.                                                                                               
                                                                                                                                
Mr. Tangaro communicated that the  Tesoro Kenai Refinery had                                                                    
started  in  1969  during Alaska's  original  oil  boom;  it                                                                    
continued  to  process  oil from  the  Swanson  River,  Cook                                                                    
Inlet,  North   Slope,  and  other  sources.   The  refinery                                                                    
employed approximately 210 people  and had the capability of                                                                    
processing 72,000 barrels per day.  The company had about 30                                                                    
full-time  contractors   and  approximately   515  employees                                                                    
statewide. He  stated that the  most important  component of                                                                    
the  bill  was  the   royalty  oil  contract;  the  contract                                                                    
extension would provide  a stable supply of  ANS crude while                                                                    
giving   the   company   the   volumetric   flexibility   to                                                                    
accommodate  seasonal fluctuations  in  its  run rates.  The                                                                    
availability,  flexibility,  and  stability offered  by  the                                                                    
contract extension would have  a positive effect on Tesoro's                                                                    
ability to maintain operations at the Kenai Refinery.                                                                           
                                                                                                                                
Mr. Tangaro  referred to the proposed  amendment and relayed                                                                    
that the company  appreciated the governor's acknowledgement                                                                    
that Alaska continued  to be a challenging  location for the                                                                    
refining industry  and that the refining  jobs were critical                                                                    
to  Alaskan communities.  He  relayed  that maintaining  the                                                                    
refineries  had many  statewide benefits.  He observed  that                                                                    
refining  was  a  complicated  business.  He  spoke  to  the                                                                    
importance  of maintaining  a level  playing  field for  all                                                                    
participants in  Alaska's refining  business. He  noted that                                                                    
the  company's prior  testimony  on the  legislation was  on                                                                    
record from a past hearing.                                                                                                     
                                                                                                                                
Co-Chair  Stoltze apologized  for  the  short timeframe.  He                                                                    
thanked Mr. Tangaro for his testimony.                                                                                          
                                                                                                                                
HB  287  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
7:29:53 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 7:29 p.m.                                                                                          

Document Name Date/Time Subjects
HB 287 ASRC Committee Remarks.pdf HFIN 4/9/2014 6:00:00 PM
HB 287
HB 287 ASRC Presentation HFIN 04.09.14.pdf HFIN 4/9/2014 6:00:00 PM
HB 287
HB 287 ASRC Press Release 3-31-2014.pdf HFIN 4/9/2014 6:00:00 PM
HB 287
HB 287 ASRC PSI Letter to GSP 3-2-2014.pdf HFIN 4/9/2014 6:00:00 PM
HB 287
HB 287 ECE Whitepaper 2-19-2014.pdf HFIN 4/9/2014 6:00:00 PM
HB 287
SB 191 Extract from HB 65.pdf HFIN 4/9/2014 6:00:00 PM
SB 191 Alaska Public Debt book DOR 2013-2014 FINAL_web.pdf HFIN 4/9/2014 6:00:00 PM
SB 191
SB 191 Extract from HB 65.pdf HFIN 4/9/2014 6:00:00 PM
SB 191
HB 287 Amendment 1 Thompson&Wilson.pdf HFIN 4/9/2014 6:00:00 PM
HB 287