Legislature(2013 - 2014)BARNES 124

03/22/2013 01:00 PM RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 158 DNR HUNTING CONCESSIONS TELECONFERENCED
Heard & Held
-- Public Testimony from 3:00 - 4:00 p.m. Only --
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:06:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE announced  that the first order of  business is CS                                                               
FOR SENATE BILL NO. 21(FIN) am(efd  fld), "An Act relating to the                                                               
interest rate applicable to certain  amounts due for fees, taxes,                                                               
and payments  made and  property delivered  to the  Department of                                                               
Revenue; providing  a tax credit  against the  corporation income                                                               
tax  for qualified  oil and  gas  service industry  expenditures;                                                               
relating to the oil and gas  production tax rate; relating to gas                                                               
used in  the state; relating  to monthly installment  payments of                                                               
the  oil  and  gas  production  tax;  relating  to  oil  and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to  oil and  gas  production  tax credit  certificates;                                                               
relating  to nontransferable  tax  credits  based on  production;                                                               
relating to the  oil and gas tax credit fund;  relating to annual                                                               
statements by  producers and explorers; establishing  the Oil and                                                               
Gas   Competitiveness  Review   Board;   and  making   conforming                                                               
amendments."                                                                                                                    
                                                                                                                                
1:07:14 PM                                                                                                                    
                                                                                                                                
MICHAEL PAWLOWSKI, Oil & Gas  Development Project Manager, Office                                                               
of  the   Commissioner,  Department   of  Revenue   (DOR),  first                                                               
highlighted the  main provisions of  CSSB 21(FIN) am(efd  fld) as                                                               
compared to  those previously considered  by the  committee under                                                               
the companion  bill, HB  72 [slide  2].  He  said the  other body                                                               
added a provision adjusting the  interest rate for delinquent tax                                                               
payments and refunds of tax  overpayments, decreasing the rate to                                                               
3  percent above  the annual  rate  charged by  the 12th  Federal                                                               
Reserve  District.   Another provision  was added  establishing a                                                               
corporate income  tax credit  for qualified  oil and  gas service                                                               
industry expenditures.   The production tax rate  was adjusted in                                                               
the other body  to a 35 percent  flat tax rate and  the repeal of                                                               
progressivity  was  retained.    Tax  credits  were  adjusted  to                                                               
eliminate the  current 20 percent capital  expenditure tax credit                                                               
for the North  Slope after December 31, 2013, and  the loss carry                                                               
forward credit  was increased to  35 percent for the  North Slope                                                               
after December  31, 2013.  A  $5 per barrel tax  credit was added                                                               
by the other  body as a balance mechanism to  the 35 percent flat                                                               
tax.    The  gross  revenue   exclusion  (GRE)  was  refined  and                                                               
expanded,  establishing the  same 20  percent exclusion  from the                                                               
gross value at  the point of production for oil  and gas produced                                                               
from:   1)  new units;  2)  new participating  areas in  existing                                                               
units;  and 3)  metered  wells subject  to  demonstration by  the                                                               
producer  of  certain conditions  to  the  Department of  Natural                                                               
Resources (DNR) and Department of  Revenue (DOR).  The other body                                                               
added  a provision  establishing an  Oil and  Gas Competitiveness                                                               
Review Board.  As in  the original bill, the committee substitute                                                               
(CS) holds  harmless the  provisions south  of 68  degrees [North                                                               
latitude], which  is the  dividing line  between the  North Slope                                                               
basin and the areas referred to as Middle Earth and Cook Inlet.                                                                 
                                                                                                                                
1:10:45 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  next provided  details of  the main  provisions in                                                               
the bill,  starting with the  interest rate for  delinquent taxes                                                               
[slide 3] in Section  4, page 2, lines 16-27, of  the bill.  This                                                               
issue relates to the tension between  the time DOR has to conduct                                                               
audits and  the interest rate  that is  charged by the  state for                                                               
delinquent  taxes,  as  well  as  charged to  the  state  when  a                                                               
producer  overpays  its  taxes.   Under  existing  language,  the                                                               
interest  rate is  5 percentage  points above  the interest  rate                                                               
charged to member  banks by the 12th Federal  Reserve District or                                                               
an  annual rate  of 11  percent, whichever  is greatest.   It  is                                                               
known  that  interest  rates  change over  time  as  the  Federal                                                               
Reserve policies are set as the  markets move.  The interest rate                                                               
of 11 percent  or the federal rate was reasonable  at the time it                                                               
was  established,  but  since then  the  divergence  between  the                                                               
actual rate  of interest  and the  11 percent  has widened.   The                                                               
interest rate set by the other  body is more similar to what goes                                                               
on  in the  federal  Internal Revenue  Service (IRS)  provisions,                                                               
which  is 3  percent  above  the greater  amount  of the  Federal                                                               
Reserve district.  The provision  eliminates that tension between                                                               
a fixed rate  and a rate that floats with  the actual market rate                                                               
of interest  because there could  be a situation where  under the                                                               
lesser of, interest  rates would rise above that  11 percent rate                                                               
and the mechanism  would have the same problem  it has currently,                                                               
which is  that the actual rates  of the market are  lower and the                                                               
11  percent  rate is  higher.    The  provision applies  in  both                                                               
directions -  when someone overpays  the state so the  state must                                                               
provide a refund or when someone  underpays the state so must pay                                                               
the state the underpayment.                                                                                                     
                                                                                                                                
1:13:11 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI,  responding to Co-Chair  Feige, said  the original                                                               
statute was established in 1991.                                                                                                
                                                                                                                                
1:13:30 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI, responding to  Representative Tuck, confirmed that                                                               
under CSSB  21(FIN) am(efd fld)  the applied interest  rate would                                                               
be  the same  whether it  is the  state owing  a taxpayer  or the                                                               
taxpayer owing  the state.   In  further response,  Mr. Pawlowski                                                               
confirmed this is also the case under current law.                                                                              
                                                                                                                                
REPRESENTATIVE TUCK  inquired whether lowering the  interest rate                                                               
would  incentivize taxpayers  to  be loose  in calculating  their                                                               
taxes, given the state has not audited the industry.                                                                            
                                                                                                                                
MR. PAWLOWSKI replied he would not  describe it as loose, in that                                                               
it  goes both  ways and  the rules  often change.   For  example,                                                               
transportation regulations  were recently changed by  the Federal                                                               
Energy  Regulatory Commission  (FERC) that  led to  amendments to                                                               
tax returns.  The federal  government can make changes to tariffs                                                               
that have  changes on taxes  that were paid  over time.   The tax                                                               
rate  under Alaska's  complex net  system varies  monthly and  an                                                               
outside action  by a federal agency  could have an impact  on tax                                                               
payments going  back years.   Therefore, both  the state  and the                                                               
industry are at risk in that type of thing.                                                                                     
                                                                                                                                
1:15:05 PM                                                                                                                    
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner,  Office of the Commissioner,                                                               
Department  of Revenue  (DOR),  addressing Representative  Tuck's                                                               
statement about  audits, stressed  there are  many misconceptions                                                               
regarding audits.   He explained DOR is  currently auditing 2007,                                                               
in  which half  the year  was  under the  production profits  tax                                                               
(PPT) and the  other half was under Alaska's  Clear and Equitable                                                               
Share  (ACES).   The  department  is  well within  the  statutory                                                               
guidelines of  six years; once  through 2007 the  department will                                                               
accelerate  through  the  ACES  years because  it  will  be  able                                                               
combine years  for certain companies.   The general misconception                                                               
being heard  is that since DOR  is auditing 2007, it  has no clue                                                               
what happened during 2008-2012, which  is not true.  Corporations                                                               
pay taxes on a monthly basis  under ACES, so DOR receives revenue                                                               
on a monthly  basis and receives a vast amount  of information on                                                               
a monthly basis.  Every March  31, called the thirteenth month, a                                                               
true-up is  conducted of  the previous  12 months  of information                                                               
that DOR  has already  received.   It is  in the  taxpayer's best                                                               
interest to  be as accurate as  possible and it is  in DOR's best                                                               
interest to review  those monthly payments to make  sure they are                                                               
as accurate as  possible.  On that thirteenth  month true-up, DOR                                                               
does an analysis and then it goes into the queue for the audit.                                                                 
                                                                                                                                
1:17:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  asked whether  DOR has noticed  over the  years a                                                               
systematic underpayment of taxes.                                                                                               
                                                                                                                                
MR. TANGEMAN replied they seem to  be fairly accurate and go both                                                               
ways with some overpayments and  some underpayments, which is why                                                               
it is a two-way street for the interest rate provision.                                                                         
                                                                                                                                
MR. PAWLOWSKI  interjected that  the information  can be  seen by                                                               
legislators who are willing to  sign a confidentiality agreement.                                                               
The  audits  are  taxpayer-specific information  along  the  same                                                               
lines as an individual's IRS personal tax information.                                                                          
                                                                                                                                
1:18:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK  said  his  concern   is  not  so  much  the                                                               
information as it is ensuring  that the taxes are done correctly.                                                               
He inquired how often there  are overpayments to the state versus                                                               
underpayments and is DOR able to do that month by month.                                                                        
                                                                                                                                
MR.  TANGEMAN responded  the monthly  payments  are an  estimated                                                               
payment  using the  taxpayer's  estimated  capital and  operating                                                               
expenditures; so  there will  be pluses  and minuses  each month,                                                               
but they  will not be large  swings.  It is  the thirteenth month                                                               
in March  that trues  up those  twelve months  and brings  in the                                                               
side boards that much tighter, and  then it gets in the queue for                                                               
the audit.                                                                                                                      
                                                                                                                                
MR.  PAWLOWSKI  added that  in  2010,  Senate  Bill 309  made  an                                                               
adjustment that  these interest  rates could be  waived due  to a                                                               
retroactive change  in regulation.   He encouraged members  to be                                                               
very cautious  about grabbing  specific instances  of overpayment                                                               
or underpayment  because over  time the  rules have  been changed                                                               
both  prospectively  and  retroactively.    When  the  department                                                               
retroactively changes a regulation or  a federal decision is made                                                               
or  the   law  is  changed   retroactively,  it  can   result  in                                                               
overpayment  or  underpayment.     This  interest  rate  is  very                                                               
important in the relationship that  happens when the rules change                                                               
on taxes that were already filed.                                                                                               
                                                                                                                                
MR.  TANGEMAN  concurred  there  has been  a  number  of  changes                                                               
starting with PPT,  then ACES, and through today.   When a change                                                               
to regulations or statute is  made and is retroactive and affects                                                               
a previous tax  filing, both the taxpayer and DOR  have the right                                                               
to re-open that if  a change needs to be made.   For example, for                                                               
2007 DOR received re-openers through  2010.  The entire return is                                                               
not re-opened; the taxpayer is  able to re-open the specific part                                                               
of that  return that  was affected and  the clock  starts ticking                                                               
again on that six-year window.                                                                                                  
                                                                                                                                
1:21:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked what the  interest rate is  on delinquent                                                               
tax payments in other jurisdictions.                                                                                            
                                                                                                                                
MR. PAWLOWSKI answered  the interest rate in  CSSB 21(FIN) am(efd                                                               
fld) of  3 percent above  the 12th Federal Reserve  District rate                                                               
was modeled  after a  portion of  the IRS rates.   He  offered to                                                               
research the rates of other jurisdictions.                                                                                      
                                                                                                                                
CO-CHAIR  SADDLER  inquired  whether  that is  what  is  normally                                                               
called the discount rate or overnight rate.                                                                                     
                                                                                                                                
MR. PAWLOWSKI replied that is  beyond his level of understanding,                                                               
but said this was an amendment entered by the other body.                                                                       
                                                                                                                                
MR. TANGEMAN offered  to provide the committee  with the specific                                                               
IRS language that will put it into context.                                                                                     
                                                                                                                                
1:22:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR   said  it  sounds  like   Mr.  Tangeman  is                                                               
suggesting these audits  can be accomplished in  a timely fashion                                                               
and that DOR is looking  at this information regularly.  However,                                                               
she continued, members  still do not have  that 2007 information,                                                               
so  somewhere  in  that  system  it  is  perhaps  not  as  easily                                                               
accomplished as is being suggested.   She offered her belief that                                                               
the concern is not about  retroactive adjustments due to changes,                                                               
but rather  that members want to  look at the overall  picture of                                                               
whether  the   credits  under  ACES   are  actually   working  to                                                               
incentivize  investments  that  will   lead  to  new  production.                                                               
Without  that audit  information, members  do not  have the  full                                                               
picture of what  is happening.  Members want to  know if there is                                                               
truth  in  reporting, which  is  why  that audit  information  is                                                               
needed.  She requested Mr. Tangeman to speak to this.                                                                           
                                                                                                                                
MR.  TANGEMAN clarified  re-openers  are allowed  if changes  are                                                               
made to  state or federal statutes.   It is a  misconception that                                                               
DOR does not know what happened  in 2007 because an audit has not                                                               
been done.   He said he strongly disagrees with  that because DOR                                                               
does know what was provided on  a monthly basis and then trued up                                                               
on March  31, 2008.   The  information DOR  has provided  and has                                                               
based decisions  on takes into  account actual information.   The                                                               
state is  in a much  stronger position now because  tax decisions                                                               
can be  based on looking back  at actual information and  how the                                                               
state and industry has reacted under  the net tax system of ACES.                                                               
In  2007 the  state was  not  in that  position.   Last year  DOR                                                               
presented  a  five-year look  back  specifically  on the  capital                                                               
credit; there are staff within  the tax division that work solely                                                               
on  tax credits.   He  said he  will provide  Representative Tarr                                                               
with a copy of the five-year look  back on those tax credits.  It                                                               
is very telling,  he continued, because DOR was able  to break it                                                               
down  into five  categories  of where  those  credits were  being                                                               
utilized in the state.                                                                                                          
                                                                                                                                
1:24:48 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI resumed his presentation,  noting the qualified oil                                                               
and gas industry  service expenditure tax credit [slide  4] is in                                                               
Section 7,  page 3, beginning  on line 14 of  the bill.   He said                                                               
this  provision recognizes  that a  healthy oil  and gas  service                                                               
industry is critical  to having a healthy oil  industry.  Certain                                                               
work, such  as the  pads and  drilling, can be  done only  in the                                                               
field in  Alaska.  However,  work that supports the  oil industry                                                               
does not necessarily  have to be done in Alaska.   This provision                                                               
attempts  to  create  an  additional  incentive  for  encouraging                                                               
support work,  such as modification and  manufacturing, to happen                                                               
in  Alaska.   This tax  credit is  limited to  10 percent  of the                                                               
qualified   service  industry   expenditures   or  $10   million,                                                               
whichever is least.   To qualify for  this nontransferable credit                                                               
a company  must be a taxpayer  and must apply the  credit against                                                               
its  corporate  income tax  liability.    The  nexus to  the  oil                                                               
industry  is  that it  has  to  be  the in-state  manufacture  or                                                               
modification  of tangible  personal  property that  has a  useful                                                               
life of  three years  or more  that is  used in  the exploration,                                                               
development, or  production of oil  and gas.  This  would include                                                               
modules, additional work on infrastructure,  and such things that                                                               
are  actually  used in  the  oil  industry.   This  benefit  goes                                                               
directly  to  those companies  that  are  actually providing  the                                                               
modified or manufacturing  materials to the industry,  not to the                                                               
oil and gas industry itself.   Drawing attention to page 3, lines                                                               
30-31,  he pointed  out that  these expenditures  cannot then  be                                                               
taken  as a  deduction,  or as  a credit  and  a deduction  under                                                               
another provision  in this  title.   An oil  producer that  has a                                                               
fabrication shop  would therefore be unable  to take expenditures                                                               
that  qualify  for  this  credit   as  a  write-off  against  its                                                               
production tax.                                                                                                                 
                                                                                                                                
1:28:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked for examples  of the kind of  process, or                                                               
product, or service most likely to enjoy this credit.                                                                           
                                                                                                                                
MR. PAWLOWSKI  related that examples heard  in testimony included                                                               
the  hot  oil   units  being  built  in   Anchorage  and  modules                                                               
fabricated on  the Kenai Peninsula.   Modules could  be purchased                                                               
and  shipped  to  Alaska;  or,  they could  be  built  in  Alaska                                                               
employing  people in  the state,  which  is what  this credit  is                                                               
intended to  incentivize.  He  said the limitation on  the credit                                                               
that a  person must  be a  taxpayer to  receive the  credit could                                                               
provide  some   incentive  for   companies  to   actually  become                                                               
taxpayers under Alaska's corporate income tax code.                                                                             
                                                                                                                                
1:29:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  asked whether  the producer having  a module                                                               
built would be able to write off  what it pays to build or modify                                                               
that module, or  would the tax credit go to  the company that has                                                               
the contract to do the module.                                                                                                  
                                                                                                                                
MR. PAWLOWSKI  answered the  company that  is actually  doing the                                                               
manufacture or  modification is  the one that  files for  the tax                                                               
credit.                                                                                                                         
                                                                                                                                
REPRESENTATIVE TUCK  posed a scenario in  which a module-building                                                               
company in Louisiana  puts in a lower bid  than a module-building                                                               
company in  Alaska.  He  inquired what  the incentive is  for the                                                               
producer to pick the Alaska  company since the producer would not                                                               
get a tax credit from picking the Alaskan manufacturer.                                                                         
                                                                                                                                
MR. PAWLOWSKI  replied the  company doing  the contract  does not                                                               
get the  benefit.  The company  actually doing the work  gets the                                                               
tax benefit, which allows that  company to compete better on that                                                               
contract and  that bid because  it can  put this tax  credit into                                                               
its analysis of what it is  doing as a company to compete better.                                                               
Representative Tuck's  concern is  shared by  the other  body and                                                               
the  administration.    A  module,  or work  like  that,  is  not                                                               
necessarily  something  that  has  to  be  done  in  Alaska,  but                                                               
providing an incentive for that  activity to happen in Alaska and                                                               
to  make  Alaska's businesses  more  competitive  was seen  as  a                                                               
reasonable provision to support the overall effort.                                                                             
                                                                                                                                
1:30:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  observed the  fiscal note states  that there                                                               
is "no  data with which  to quantify  the revenue impact  of this                                                               
provision,  although it  is possible  that the  impact may  be as                                                               
high as a negative $25 million  per year" and "the revenue impact                                                               
of this provision is indeterminate".   She asked what information                                                               
the  committee should  go on  to determine  the kind  of exposure                                                               
this  particular provision  would  give  the state,  particularly                                                               
given  that  it cannot  go  below  zero  which would  be  further                                                               
committing, which, technically, the state cannot do.                                                                            
                                                                                                                                
MR. PAWLOWSKI  responded that in  developing the fiscal  note the                                                               
department looks  at the  total number of  taxpayers that  may be                                                               
eligible for this  type of credit, and the level  of their income                                                               
tax returns,  in estimating the  impact.   He said it  is correct                                                               
that the corporate  income tax credit cannot be used  to reduce a                                                               
corporate income taxpayer's liability below zero.                                                                               
                                                                                                                                
1:31:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR surmised  that adding  at least  $25 million                                                               
per year would be the best  thing to do for knowing the potential                                                               
fiscal impact of this provision.                                                                                                
                                                                                                                                
MR. PAWLOWSKI  answered the table  on page  4 of the  fiscal note                                                               
integrates all of the assumptions  that go into the total revenue                                                               
impact.   The  $25 million  per year  upper estimate  has already                                                               
been added on line  9 of the fiscal note; that  is added into the                                                               
revenue impact and subsequently the  bottom line fiscal impact of                                                               
the legislation.  So, it has already been included.                                                                             
                                                                                                                                
1:32:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  understood "they  would  be  able to  claim  the                                                               
credit if they received the work order from the company."                                                                       
                                                                                                                                
MR.  PAWLOWSKI  replied  correct.    "If  the  company  made  the                                                               
expenditures, the  credit would be based  on those expenditures,"                                                               
he said.   For example, say an Alaskan company  buys a truck from                                                               
out of state  and then that company puts  $200,000 into upgrading                                                               
that truck for use in arctic  conditions on the North Slope.  The                                                               
credit would  be based  on the $200,000  of modifications  to the                                                               
machinery,  not  the overall  value  of  the  machinery.   It  is                                                               
limited  to the  modification expenditures,  not the  actual work                                                               
order.                                                                                                                          
                                                                                                                                
1:33:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  concluded that each  time there is a  benefit, or                                                               
there  is a  credit, it  does not  necessarily mean  that someone                                                               
took business  away from  a Lower 48  provider; rather,  it gives                                                               
Alaskan welders, fabrication shops, and  machinists at least a 10                                                               
percent leg up.   A certain amount of new  business could then be                                                               
expected  to go  to Alaska  companies that  otherwise would  have                                                               
gone Outside  and this  could represent  a significant  amount of                                                               
money going into the Alaska economy.                                                                                            
                                                                                                                                
MR. PAWLOWSKI concurred,  adding it is important to  note that to                                                               
qualify for this  credit the company must be paying  taxes to the                                                               
State  of  Alaska  under  the  corporate  income  tax.    Another                                                               
important nexus is  that this is tangible  personal property with                                                               
a useful  life of  three years  or more  use in  the exploration,                                                               
development,  or  production  of  oil  and gas.    That  type  of                                                               
property is subject  to the state's oil and gas  property tax, so                                                               
it  feeds  into the  overall  equation  that benefits  the  state                                                               
throughout.   He  further agreed  it is  about more  spending for                                                               
actual additional work in the state,  which is the intent of this                                                               
provision as it was added in the other body to accomplish.                                                                      
                                                                                                                                
1:35:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE commented that that  could represent a significant                                                               
number  of jobs  and  a significant  amount  of additional  money                                                               
going  into the  Fairbanks  and Anchorage  economies which  would                                                               
then flow through the rest of the state's economy.                                                                              
                                                                                                                                
CO-CHAIR  SADDLER posited  there  are benefits  to  this kind  of                                                               
thing that  are outside the scope  of the actual fiscal  note and                                                               
not just the general fund.   It also helps the industry and there                                                               
are  benefits  to  having  the presence  of  a  healthy,  capable                                                               
support industry,  which tends to  lower the cost  of development                                                               
in Alaska  and which speaks  to the  overall goal to  reverse the                                                               
decline of production.                                                                                                          
                                                                                                                                
MR.  PAWLOWSKI concurred  there are  ancillary benefits  that are                                                               
impossible to  model in  the fiscal  note.   The ability  to hold                                                               
down costs in the industry itself  is critical to the state which                                                               
operates  on a  net tax  system.   The more  efficient, the  more                                                               
profitable  the companies  are, the  more profitable  the state's                                                               
share is.                                                                                                                       
                                                                                                                                
1:36:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  surmised this might  be a way to  get people                                                               
who do not  have a corporate liability to change  their status to                                                               
corporate to take advantage of this tax credit.                                                                                 
                                                                                                                                
MR.  PAWLOWSKI  agreed, saying  companies  that  file as  limited                                                               
liability  companies are  not corporate  income tax  payers.   To                                                               
qualify  for this  credit,  a company  would  have to  reorganize                                                               
under a structure that is subject to the corporate income tax.                                                                  
                                                                                                                                
REPRESENTATIVE  TUCK inquired  as  to the  percentage of  service                                                               
companies that are currently limited liability versus corporate.                                                                
                                                                                                                                
MR. PAWLOWSKI replied he could not venture a guess.                                                                             
                                                                                                                                
REPRESENTATIVE  TUCK said  it  would  be nice  to  know how  many                                                               
companies this might affect.                                                                                                    
                                                                                                                                
1:38:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  returned to  the fiscal note  and maintained                                                               
that the  $25 million mentioned in  the note is not  reflected in                                                               
the math.  Additionally, she observed,  if this is intended to be                                                               
a  revenue generator,  there is  also no  actual revenue-positive                                                               
portion included in the fiscal note.                                                                                            
                                                                                                                                
MR.  PAWLOWSKI answered  if he  implied there  was an  attempt to                                                               
model a  revenue positive, there  is not.   It is a  negative $25                                                               
million  estimate.   Drawing attention  to page  4 of  the fiscal                                                               
note, he reviewed  the amounts in each line under  the column for                                                               
fiscal year 2014,  saying lines 9 and 10 are  each a negative $25                                                               
million.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  TARR responded  she double  checked the  math and                                                               
the aforementioned is in the language  but not the math for total                                                               
revenue impact.                                                                                                                 
                                                                                                                                
MR. PAWLOWSKI said he will check  the fiscal note and get back to                                                               
the committee afterwards.                                                                                                       
                                                                                                                                
1:40:28 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  resumed his presentation,  moving to the  tax rate                                                               
provision [slide 5]  in Section 9, beginning on page  4, line 29.                                                               
Referring specifically  to page 5, line  5, he said the  flat tax                                                               
rate of 25  percent was changed by the other  body to 35 percent.                                                               
Repeal  of the  "sum of"  language, he  continued, is  similar to                                                               
that  in   the  original   bill  and   reflects  repeal   of  the                                                               
progressivity function.   The  provision applies  to oil  and gas                                                               
produced after December 31, 2013.                                                                                               
                                                                                                                                
MR. PAWLOWSKI next  reviewed changes to Section 2,  page 2, lines                                                               
3-10,  regarding the  community revenue  sharing fund  [slide 6].                                                               
As   originally  introduced,   the  legislative   discretion  for                                                               
appropriations was  linked to receipts from  the corporate income                                                               
tax.  The  other body removed this reference  since the corporate                                                               
income tax  is functionally  general fund  revenue.   The linkage                                                               
was made to  the general fund, not to specific  fund source.  The                                                               
legislature's discretion to appropriate,  the actual mechanism of                                                               
the appropriation, and  the funding are not  changed.  Guidelines                                                               
for  the  appropriation, page  2,  lines  8-10, are  retained  at                                                               
either $60  million or up  to $180 million a  year.  There  is no                                                               
change to  the eligibility determinations for  communities or the                                                               
actual program itself.                                                                                                          
                                                                                                                                
1:42:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  asked Mr. Pawlowski to  provide a comparison                                                               
of  the  thinking  from  the  original bill  that  made  it  more                                                               
specific  as to  the  fund source.   She  related  she has  heard                                                               
concern from folks about the changes  and said there is a feeling                                                               
that  the original  version left  a little  more stability  as to                                                               
there being funding for the revenue sharing program.                                                                            
                                                                                                                                
MR.  PAWLOWSKI  replied  the  original  bill  linked  it  to  the                                                               
corporate income tax.  He understood  it was a principle issue in                                                               
the Senate  regarding interpretation of the  constitution and the                                                               
dedication of funds.  It  is different in that the administration                                                               
had  initially identified  a direct  stream of  revenue that  the                                                               
legislature then appropriates  on an annual basis.   A subsequent                                                               
argument was that  it could be more stable by  applying it to the                                                               
general  fund  more  broadly and  maintaining  the  appropriation                                                               
guidelines.  He acknowledged there is some concern around it.                                                                   
                                                                                                                                
1:43:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE understood that when  the legislature came up with                                                               
progressivity it tied the revenue  sharing funds to that statute.                                                               
He inquired  where the revenue  sharing funds came from  prior to                                                               
their being tied to progressivity.                                                                                              
                                                                                                                                
MR. PAWLOWSKI responded it came from the general fund.                                                                          
                                                                                                                                
1:44:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON offered  her concern that municipalities                                                               
are facing  the same problem  of decreasing income as  the state.                                                               
She said  she would therefore  like to return to  this particular                                                               
provision at a later time.                                                                                                      
                                                                                                                                
1:45:08 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  continued his presentation, addressing  changes to                                                               
the qualified capital expenditure tax  credit [slide 7].  He said                                                               
the substantive change  in Section 15, page 13, lines  1-3, is no                                                               
different  than  what  the  committee  had  seen  before  in  the                                                               
treatment  of  the qualified  capital  expenditure  credit.   The                                                               
capital expenditure credits  for activity on the  North Slope are                                                               
not  available after  January  1,  2014; therefore,  expenditures                                                               
have  to be  made before  January 1,  2014, to  qualify for  this                                                               
credit for the  North Slope.  A change made  by the original bill                                                               
was that until this bill is  passed, capital credits on the North                                                               
Slope and  credits on the  North Slope  must be divided  over two                                                               
years.  The decision was to  close out this program and allow the                                                               
tax certificates  to be  taken in  a single year.   An  impact of                                                               
those credits  is seen in the  fiscal note for fiscal  year 2014,                                                               
which is about  $400 million to close out  the state's obligation                                                               
for the credits that are based on the expenditures in 2013.                                                                     
                                                                                                                                
MR.  PAWLOWSKI, in  response to  Representative  P. Wilson,  said                                                               
[Section  15]  begins  on  page  12,  line  14,  but  the  actual                                                               
meaningful  language  is on  page  13,  lines  1-3.   He  further                                                               
responded this can be seen in the  fiscal note on page 4, line 6.                                                               
He clarified  he is  flagging for  members the  fiscal obligation                                                               
that comes  from the qualified capital  expenditure credits being                                                               
taken  in one  year, as  opposed  to spread  across two,  because                                                               
closing out this  program frontloads the fiscal  impact in fiscal                                                               
year 2014.                                                                                                                      
                                                                                                                                
1:48:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR asked  why not  let the  capital expenditure                                                               
credit run  out over the  two years  to reduce the  fiscal impact                                                               
[in 2014], given the fiscal impact of the bill.                                                                                 
                                                                                                                                
MR. PAWLOWSKI  answered the fiscal  impact is an  obligation with                                                               
the state's credits that is  based on industry expenditures.  The                                                               
administration's concern was pushing that  fiscal impact off into                                                               
the future when it is just a real  fiscal impact.  It is a choice                                                               
of  deferring  the state's  obligation  to  fiscal year  2015  or                                                               
taking care of it in the near  term, so ultimately it is a policy                                                               
call.                                                                                                                           
                                                                                                                                
REPRESENTATIVE TARR presumed the program  could be closed out and                                                               
administered over two  years as it has currently  been working so                                                               
that the fiscal impact could be divided in two.                                                                                 
                                                                                                                                
MR. PAWLOWSKI  replied the other  intent in allowing  recovery of                                                               
the  credit in  a single  year  was recognizing  that ending  the                                                               
qualified  capital expenditure  credit program  has an  impact on                                                               
some  businesses  that  are  making   decisions.    Providing  an                                                               
additional boost  as an  exchange for  ending that  program would                                                               
allow  the state  to get  an obligation  off the  books and  also                                                               
provide  a  benefit  to  the  companies  that  are  currently  in                                                               
development.                                                                                                                    
                                                                                                                                
1:50:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ISAACSON inquired whether  there is any discussion                                                               
with  the industry  to know  if this  would exclude  any projects                                                               
that are currently being planned.                                                                                               
                                                                                                                                
MR. PAWLOWSKI  responded removal of  this credit for sure  has an                                                               
impact on  companies.  The  qualified capital  expenditure credit                                                               
is a  piece of  the system  the companies  look at  in evaluating                                                               
work that can happen  in Alaska.  The context it  needs to be put                                                               
in, however,  is that the  system is being made  more competitive                                                               
overall compared  to the current  system.   So there may  be some                                                               
impact, but there is also  an improvement in the overall economic                                                               
climate that  goes along with  the rest of  the tax changes.   To                                                               
some degree, loss of the  qualified capital expenditure credit is                                                               
actually offset by the per barrel credit.                                                                                       
                                                                                                                                
1:51:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK understood  the qualified capital expenditure                                                               
credit is  for all companies on  the North Slope, whether  new or                                                               
existing.  By making it  for expenditures before January 1, 2014,                                                               
and  the  $5  per  barrel  [credit],  it  seems  that  these  new                                                               
provisions  will not  apply to  "those guys"  for possibly  many,                                                               
many years.   He  asked whether this  is an  intentional shifting                                                               
from the new players to the  old players, given it takes about 10                                                               
years to go from exploration to production.                                                                                     
                                                                                                                                
MR. PAWLOWSKI requested he be  able to address this question when                                                               
he discusses the carried forward tax credit.                                                                                    
                                                                                                                                
1:53:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  noted  the  qualified  capital  expenditure                                                               
credit has  been characterized as  allowing gold plating.   Given                                                               
the date  certain of  the bill as  written, she  inquired whether                                                               
there are  any concerns that  people will  try to hurry  and take                                                               
advantage of that.  She  further inquired how that would dovetail                                                               
into  the January  2014 implementation  of these  provisions that                                                               
would  include the  $5  per barrel  and,  thus, a  "double-whammy                                                               
potential" for that to happen.                                                                                                  
                                                                                                                                
MR. PAWLOWSKI  answered the issue  of gold plating should  not be                                                               
tied to the  qualified capital expenditure credit.   Rather, gold                                                               
plating  is an  effect of  the marginal  tax rate  in conjunction                                                               
with  the capital  credits that  provide state  participation and                                                               
spending that  can reach significant  levels; that is  actually a                                                               
function of  the ability to  buy down  a company's tax  rate that                                                               
can  lead to  some  interesting distortions  in  behavior.   When                                                               
talking  about  gold  plating  the  focus  should  not  be  on  a                                                               
particular credit, but  rather taking a step back  and looking at                                                               
the  system as  it currently  exists as  a whole.   A  dilemma of                                                               
walking through  sectionals is the  way these  interact together.                                                               
The ability  of companies to  frontload expenditures and  ramp up                                                               
activity to take advantage of  credits and deductions before they                                                               
shift  off  into  the  future  is part  of  the  reason  why  the                                                               
effective  date of  January 1,  2014,  was chosen  rather than  a                                                               
later  effective date.   Because  the season  is really  over the                                                               
winter, it would be relatively  difficult to frontload into 2013,                                                               
which is  a reason why  the administration  decided not to  put a                                                               
later effective  date.  The department  has a good handle  on the                                                               
rules and  regulations about frontloading and  prepaying, and the                                                               
administration  believes  the  January 1,  2014,  effective  date                                                               
diminishes that possibility,  although that is not  say it cannot                                                               
happen under any circumstance.                                                                                                  
                                                                                                                                
1:55:45 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI turned  back to his presentation,  saying the issue                                                               
mentioned by  Representative Tuck  is dealt  with in  Section 16,                                                               
page 13, line 4, regarding  the carried-forward tax credit [slide                                                               
8].  Companies  that do not have production do  not have revenues                                                               
against which  to write  off expenditures, nor  do they  have the                                                               
ability  to use  that  $5 per  barrel  credit.   In  the bill  as                                                               
originally  introduced by  the administration,  a company  had to                                                               
carry forward the loss carry  forward credit until production and                                                               
that was  given a  time value  of money  increase of  15 percent.                                                               
However, in  CSSB 21(FIN) am(efd  fld), page 13, lines  6-10, the                                                               
loss carry  forward credit was  increased to 35 percent  to match                                                               
the  base rate  of the  tax and  allowed to  be monetized,  so no                                                               
longer does  this credit need  to be carried forward  and applied                                                               
against  production.    A  new  entrant  that  does  not  have  a                                                               
liability would  be able to  generate 35 percent credit  based on                                                               
its lease  expenditures and its  loss and that would  provide the                                                               
incentive that  Representative Tuck was earlier  asking about for                                                               
a new entrant  that does not have a liability  and is looking for                                                               
some of that state support up front.                                                                                            
                                                                                                                                
1:57:58 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI,  continuing his response to  Representative Tuck's                                                               
earlier  question, stated  the  bill,  as originally  introduced,                                                               
required  that a  company without  a production  tax liability  -                                                               
without production -  had to wait to get this  credit by carrying                                                               
forward  the credit  until the  company had  production.   In the                                                               
original bill,  the value of that  credit increased at a  rate of                                                               
15 percent  a year.   The other  body heard testimony  similar to                                                               
that heard by this committee,  and the discussion resolved around                                                               
the   state  foregoing   tax  revenue   in   the  future   versus                                                               
participating  for  this group  of  companies.   The  other  body                                                               
decided to  simplify the system  and allow the companies  to come                                                               
to the  state for the  cash payment  or transfer of  this credit.                                                               
Under ACES, a  company gets a 20 percent capital  credit plus the                                                               
25 percent  loss credit.   Under CSSB 21(FIN) am(efd  fld), those                                                               
companies would get  a 35 percent loss credit that  can be turned                                                               
into the  state for a monetary  payment.  In further  response to                                                               
Representative Tuck, Mr. Pawlowski confirmed  this would be on an                                                               
annual basis.                                                                                                                   
                                                                                                                                
1:59:36 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI, responding to  Representative P. Wilson, confirmed                                                               
this provision will  enable a small company that does  not have a                                                               
big cash flow to get some funds so it can continue its work.                                                                    
                                                                                                                                
1:59:59 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI resumed  his  presentation,  addressing the  newly                                                               
created  $5 per  oil barrel  tax  credit [slide  9] contained  in                                                               
Section 22, page  16, lines 4-9.  He said  this credit applies to                                                               
each barrel  of oil that is  subject to tax under  the production                                                               
tax.  This  credit is applicable to the  producer's tax liability                                                               
for the year  the oil was produced, is not  transferable, and any                                                               
unused portion  may not  be carried  forward for  use in  a later                                                               
calendar  year.   Further,  this  credit may  not  be applied  to                                                               
reduce the producer's  tax liability below zero.   The other body                                                               
added this  provision to balance the  high, high base rate  of 35                                                               
percent.  The provision essentially  creates a progressive system                                                               
without using the progressivity  mechanism that exists in current                                                               
statute.   Under  the current  system, credits  are provided  for                                                               
upfront  capital expenditures.   This  provision would  provide a                                                               
credit  for directly  targeted production  - if  a barrel  is not                                                               
produced, there is  no $5 per barrel.  For  example, to earn $100                                                               
million in credits  under the current system,  the producer would                                                               
spend $500 million  in capital (20 percent of  $500 million would                                                               
be $100 million).  Under CSSB  21(FIN) am(efd fld), the same $100                                                               
million credit  would be earned  by adding 20 million  barrels of                                                               
production (20 million  barrels at $5 a barrel  is $100 million).                                                               
The other  body shifted  away from  incentives that  are directly                                                               
tied to the expenditure of  funds to incentives that are directly                                                               
tied to the production of oil.                                                                                                  
                                                                                                                                
2:02:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR drew attention to  page 4 of the fiscal note,                                                               
line 8,  regarding the $5  per taxable barrel allowance.   Noting                                                               
the provision's  impact of negative  $425 million in  fiscal year                                                               
2014 that  doubles to an impact  of negative $825 in  fiscal year                                                               
2015, she asked which DOR forecast the figures are based on.                                                                    
                                                                                                                                
MR. PAWLOWSKI replied it is  based on DOR's fall [2012] forecast.                                                               
The  impact is  less  in  fiscal year  2014  because  the law  is                                                               
effective January  1, 2014, and  therefore only  encompasses half                                                               
that fiscal  year; 2015  is the  first fiscal  year in  which the                                                               
bill is in effect for the entire year.                                                                                          
                                                                                                                                
2:03:18 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  returned to his presentation,  explaining that the                                                               
gross  revenue  exclusion  (GRE)  for North  Slope  oil  and  gas                                                               
[slides  10-11]  is  an additional  incentive  directly  tied  to                                                               
production.  The GRE, Section 29,  page 21, beginning on line 17,                                                               
provides an additional  benefit for new production  that is based                                                               
on 20  percent of the  gross value of new  oil or gas  that meets                                                               
one of  three criteria.  As  in the original bill,  one criterion                                                               
is that the oil or gas is  produced from a lease or property that                                                               
does not contain a lease that was  within a unit as of January 1,                                                               
2003.  This  is for the new areas in  new units, recognizing that                                                               
two  of the  units that  qualify are  ones that  were brought  on                                                               
during  a period  of multiple  changes in  the tax  system.   The                                                               
second  criterion is  oil or  gas produced  from a  participating                                                               
area established after December 31,  2011, that was within a unit                                                               
formed [under AS 38.05.180(p)] before  January 1, 2003.  So these                                                               
would  be new  pockets of  oil within  the existing  units.   The                                                               
third criterion  is that the oil  or gas is produced  from a well                                                               
that has been accurately metered  and measured by the operator to                                                               
the  satisfaction  of  the  commissioner  of  the  Department  of                                                               
Revenue (DOR), the producer demonstrates  to DOR that the well is                                                               
producing  from  a  reservoir  that  the  Department  of  Natural                                                               
Resources (DNR) has certified was  not contributing to production                                                               
before January 1, 2013, and  the producer demonstrates to DOR the                                                               
volume of  oil [or  gas] produced  from that well.   This  was an                                                               
attempt by the other body to  bring the GRE into the legacy units                                                               
in a way  that targeted some of  the harder to reach  oil that is                                                               
not  contributing  to  production   in  the  currently  producing                                                               
forecast of  oil, so  new production  within the  existing units.                                                               
In the other body it was easy  to agree on the application of the                                                               
gross revenue exclusion to new units  in new areas, but there was                                                               
a lot  of work on how  to get the  GRE into the legacy  fields to                                                               
apply to some of the harder to  reach oil, which is where most of                                                               
the oil is in the near term.                                                                                                    
                                                                                                                                
2:06:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE, for purposes of  investment and making a decision                                                               
whether to drill in a particular  area, inquired at what point in                                                               
this timeline DNR  would approve that particular  production.  He                                                               
further  inquired  whether DNR  would  wait  for the  company  to                                                               
actually  produce from  that new  reservoir or  would approve  it                                                               
ahead of time before the investment decision is actually made.                                                                  
                                                                                                                                
MR. PAWLOWSKI  offered his belief that  the intent is to  push it                                                               
to something that  can be done before the  investment decision is                                                               
made.                                                                                                                           
                                                                                                                                
CO-CHAIR FEIGE surmised DNR will address this in its comments.                                                                  
                                                                                                                                
2:07:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  noted discussion occurred in  the other body                                                               
that the  third criterion is too  broad and would apply  to areas                                                               
that are already  planned for production.   Regarding the January                                                               
2013 date,  she suggested the  date could  be shifted to  make it                                                               
more  clearly only  apply to  new oil  so as  not to  incentivize                                                               
development that was already going to happen.                                                                                   
                                                                                                                                
MR.  PAWLOWSKI responded  [the  administration's] perspective  on                                                               
the idea  that already-planned  development, and  the distinction                                                               
that it  is not new  oil, is  very difficult and  problematic and                                                               
deserves more  thorough conversation.   For example,  Liberty was                                                               
planned  to   happen  for  years  in   the  production  forecast.                                                               
Counting that  as new oil because  it is in the  revenue forecast                                                               
is a  best guess of what  might happen in the  future, and saying                                                               
somehow that that is not new oil  is perhaps a step too far.  The                                                               
point in this  language is that DNR is the  one that defines what                                                               
is  not   contributing  to  production.     The  contributing  to                                                               
production date of 2013 is because  it comes into effect in 2014.                                                               
So, if  that pool of  oil, or that trapped  pocket of oil  in the                                                               
reservoir,  was not  contributing to  production this  year, then                                                               
that  is  new   production.    Because  DOR  must   take  a  very                                                               
conservative look  at what  the fiscal impact  of that  might be,                                                               
there  was  much  discussion  regarding  the  range  put  on  the                                                               
potential fiscal impact of this  provision.  The actual impact of                                                               
the  provision will  depend on  what the  companies can  prove to                                                               
DNR.   The  issue  DOR  had in  developing  the  fiscal note  was                                                               
providing  the broadest  possible  spectrum  for policymakers  to                                                               
make a  decision, and that  is why a broad  range is seen  in the                                                               
fiscal note.   Many  projects have been  in the  revenue forecast                                                               
over the  years and  then disappeared.   The  concept of  what is                                                               
truly new  oil is  new oil  that is being  developed that  is not                                                               
contributing to production  today.  The wellbores  in the revenue                                                               
forecast are defined as the currently producing.                                                                                
                                                                                                                                
2:09:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR inquired  whether  the  committee could  get                                                               
more information  if that date  was pushed  out one year  to when                                                               
the  new  policy is  actually  implemented  and then  the  fiscal                                                               
impact looked at.                                                                                                               
                                                                                                                                
MR. PAWLOWSKI offered  to provide a letter that  DOR prepared and                                                               
sent  to the  other body  that had  a description  of where  this                                                               
fiscal impact  range comes from  and the actual barrels  that are                                                               
being forecast  in the production  forecast.  He said  the letter                                                               
would help  provide an idea  of the way the  dates can work.   He                                                               
cautioned members about  looking at the production  forecast as a                                                               
given because  it has  been seen  over the years  how much  it is                                                               
actually  not  a given  that  that  new  production is  going  to                                                               
happen, Liberty being just one example.                                                                                         
                                                                                                                                
2:10:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  asked whether  it  is  the  Alaska Oil  and  Gas                                                               
Conservation  Commission (AOGCC)  or the  Division of  Oil &  Gas                                                               
that actually certifies that it is a producing well.                                                                            
                                                                                                                                
MR.  PAWLOWSKI  deferred to  Deputy  Commissioner  Balash for  an                                                               
answer.                                                                                                                         
                                                                                                                                
2:11:27 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  continued his presentation, noting  the other body                                                               
added  an Oil  and Gas  Competitiveness Review  Board to  statute                                                               
[slide 12].  This provision is  in Section 33, page 22, beginning                                                               
on  line 25,  and  is modeled  after  the competitiveness  review                                                               
board  created in  the province  of Alberta,  Canada.   The other                                                               
body's  intent  was  to provide  a  venue  for  institutionalized                                                               
knowledge that  is de-politicized by  having both the  public and                                                               
the private  sector sitting  together to look  at the  impact and                                                               
effects of regulations and fiscal  terms on Alaska's place in the                                                               
world.  The proposed new  statute, AS 43.98.050 beginning on page                                                               
23,  line 26,  establishes the  board's duties  and requires  the                                                               
board to  provide annual written findings  and recommendations to                                                               
the  legislature.   The provision  recognizes  that while  fiscal                                                               
terms  are  critical  to  the  health of  Alaska's  oil  and  gas                                                               
industry, the  good work by  DNR, as  well as other  activity the                                                               
state can do, matter as well.   Page 24, line 3, states the board                                                               
"identify  factors   that  affect  investment  in   oil  and  gas                                                               
exploration,  ... including  tax  structure, ...  infrastructure;                                                               
workforce  availability;  and   regulatory  requirements".    The                                                               
board's  goal is  to recognize  that it  is a  broad spectrum  of                                                               
issues affecting the competitiveness of  the state.  The board is                                                               
set to sunset December 31, 2022, and is made up of nine members.                                                                
                                                                                                                                
2:13:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER,  regarding  the importance  of  stability  and                                                               
predictability, inquired  whether this review board  will be seen                                                               
as a  good or bad message  to industry, given it  will be looking                                                               
at what changes need to be made.                                                                                                
                                                                                                                                
MR. PAWLOWSKI  answered he understands the  concern that industry                                                               
and many Alaskans  have about the variability of  the tax system.                                                               
He  said it  is  important to  note that  those  changes are  not                                                               
always statutory; many over the  years have been regulatory.  For                                                               
example,  the  Murkowski  Administration,  through  a  regulatory                                                               
change,  aggregated  the  economic  limit  factor  (ELF)  in  the                                                               
Prudhoe Bay Unit,  which led to a substantial tax  increase.  So,                                                               
it is  important to  recognize it is  not just  statutory changes                                                               
that can and  have led to perceptions of instability.   The other                                                               
body  looked  at  the benefits  that  an  institutionalized,  de-                                                               
politicized board had  on the province of Alberta, and  saw it as                                                               
a  positive and  as a  message to  Alaskans that  it is  not just                                                               
deciding to take a step forward  and saying things are done.  The                                                               
world and  technology are  changing and Alaska  needs to  be ever                                                               
vigilant about how  to consistently be competitive as  well as be                                                               
more competitive.                                                                                                               
                                                                                                                                
CO-CHAIR  SADDLER  concluded the  state  actually  still has  the                                                               
capacity to do  that kind of continual horizon  scanning now, and                                                               
this just formalizes it for 10 years as a feedback loop.                                                                        
                                                                                                                                
2:15:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR understood  Alberta is  about $4  billion in                                                               
debt  based on  changes  to  its royalty  structure  for the  oil                                                               
sands.  She asked how such a  board has worked in Alberta and why                                                               
Alaska would want to use that as a model.                                                                                       
                                                                                                                                
MR. PAWLOWSKI  confirmed the Oil  and Gas  Competitiveness Review                                                               
Board  in Alberta  led to  the change  in the  province's royalty                                                               
terms, but said production  and investment increased dramatically                                                               
after  the change  was passed.   While  Alberta is  in a  deficit                                                               
today, he proposed  that Alberta is not necessarily  in a deficit                                                               
because it  changed its terms,  but because growth in  oil supply                                                               
in  the  mid-continent  and  transportation  bottlenecks  out  of                                                               
Alberta are resulting in the  province's oil selling for dramatic                                                               
discount to the world market.                                                                                                   
                                                                                                                                
2:16:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired what that price is.                                                                                     
                                                                                                                                
MR. PAWLOWSKI believed it was in the range of $50-$60.                                                                          
                                                                                                                                
CO-CHAIR FEIGE  related that a parliamentary  representative from                                                               
Alberta  visited  his  office  and   was  complaining  about  the                                                               
province getting  $55 a barrel  for its oil.   He opined  that an                                                               
"Excel pipeline" could  move that oil and provide  a better price                                                               
to Alberta.                                                                                                                     
                                                                                                                                
2:17:10 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, speaking  to  the  competitiveness review  board,                                                               
reported  Alberta's  premier  recently stated  that  despite  the                                                               
short-term deficit Alberta is currently  in, it is not the intent                                                               
of  the province  to  change its  taxes on  the  oil industry  to                                                               
overcome that short-term deficit.   Alberta is taking a long-term                                                               
look at  the investment that  is coming into the  province, which                                                               
is huge.                                                                                                                        
                                                                                                                                
2:17:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  recalled  that after  Alaska made  its                                                               
changes, Alberta's board also made  changes.  However, because of                                                               
the board, Alberta  realized it before Alaska  and changed things                                                               
right  away.   So,  she  surmised, having  the  board helped  the                                                               
province be on the ball much better than what Alaska is doing.                                                                  
                                                                                                                                
MR.  PAWLOWSKI said  the  aforementioned  interpretation of  what                                                               
happened in  Alberta is fair,  based on  his work talking  to the                                                               
province.   He  encouraged members  to look  at the  benchmarking                                                               
slides  provided to  the  committee  by Econ  One  in an  earlier                                                               
presentation for western  Canada.  There was a  marked decline in                                                               
the  rate   of  investments  in   Alberta  and  an   increase  in                                                               
Saskatchewan because  Alberta made its changes,  investment moved                                                               
to Saskatchewan  and British Columbia  because of  the proximity.                                                               
In  the  other  body,  the legislature's  consultant  stated  the                                                               
ability  to quickly  move things  away from  Alaska is  much more                                                               
difficult than  in the  Lower 48  or Alberta.   So, the  delay in                                                               
reaction in Alaska  has not been as severe as  it was in Alberta,                                                               
but  Alaska has  had  a similar  decline, which  is  seen in  the                                                               
benchmarking slides of Alaska's failure  to keep up with the rate                                                               
of growth in  investment that is going on around  the world right                                                               
now.                                                                                                                            
                                                                                                                                
2:19:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  inquired whether Mr. Pawlowski  believes the                                                               
language under the duties of  the competitiveness review board is                                                               
broad enough  that the board  would be looking  at transportation                                                               
issues.   She  surmised the  name "competitiveness  review board"                                                               
could be interpreted  to be broad enough to be  looking at all of                                                               
those factors  so as to  prevent the oversights that  happened in                                                               
Alberta.                                                                                                                        
                                                                                                                                
MR. PAWLOWSKI, in  response, drew attention to page  24, lines 3-                                                               
6, and  said there could  perhaps be additional language  in that                                                               
section  of  the bill  to  talk  about identifying  factors  that                                                               
affect investments.  The administration,  he added, is interested                                                               
in a dialogue with the  committee about any changes or expansions                                                               
to the issues in the bill.                                                                                                      
                                                                                                                                
2:20:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE   next  turned  to  the   Department  of  Natural                                                               
Resources' presentation  about the  gross revenue exclusion.   He                                                               
noted that  CSSB 21(FIN)  am(efd fld) made  some changes  to this                                                               
provision from what was written in HB 72.                                                                                       
                                                                                                                                
2:21:32 PM                                                                                                                    
                                                                                                                                
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department of  Natural Resources (DNR), discussed  the three-part                                                               
test for  the gross revenue  exclusion [slide 2], stating  that a                                                               
producer  can  qualify  its  production  for  the  gross  revenue                                                               
exclusion (GRE) by satisfying one  of the three parts, but cannot                                                               
qualify twice.   The first  of the three  ways to qualify  is for                                                               
production  from  a  unit  formed  after  2003.    The  only  two                                                               
currently  producing  units  that  fit that  definition  are  the                                                               
Nikaitchuq and Oooguruk  units.  The second of the  three ways to                                                               
qualify  is for  production from  a  unit formed  prior to  2003,                                                               
provided  that production  comes from  a participating  area (PA)                                                               
that was  formed after 2012.   Moving to  the third of  the three                                                               
ways  to  qualify, he  related  that  the  other body  wanted  to                                                               
identify a  way for production  from legacy units and  legacy PAs                                                               
to  qualify.   Thus,  the third  way is  for  production that  is                                                               
demonstrated  to  DNR  to  be  from  a  reservoir  not  currently                                                               
contributing  to  production.    He said  the  GRE  targets  what                                                               
everybody wants, which is new production.                                                                                       
                                                                                                                                
2:23:52 PM                                                                                                                    
                                                                                                                                
MR.  BALASH explained  the North  Slope has  18 units  and within                                                               
those units  are 38  separate participating areas  [slide 3].   A                                                               
given  piece  of  land  that   is  a  unit  might  have  multiple                                                               
reservoirs and multiple formations  that are at different depths.                                                               
The PAs  are used as a  way to define the  ownership horizontally                                                               
and vertically.  Leases and units  are two dimensional and PAs go                                                               
to  the third  dimension.   Regulations describe  the authorities                                                               
and  processes that  DNR uses  in  managing its  units to  govern                                                               
these PAs  [11 AAC 83.351, PA  formation, expansion, contraction;                                                               
11 AAC  83.343, Plans of  development; 11 AAC  83.371, Allocation                                                               
of production  and costs;  11 AAC  83.303, Protect  all parties].                                                               
Moving to slide 4, which identifies  the PAs in nine of the North                                                               
Slope units  and the year those  PAs were formed, he  pointed out                                                               
that  Prudhoe Bay  has the  highest number  of PAs  and that  the                                                               
Northstar Fido  PA is  no longer  pending as  it was  approved in                                                               
2012.                                                                                                                           
                                                                                                                                
2:25:40 PM                                                                                                                    
                                                                                                                                
MR. BALASH  said the North  Slope's largest unit, and  the mother                                                               
lode, is  the Prudhoe Bay Unit.   Using animation on  slide 5, he                                                               
demonstrated "a  topside view"  of what  the underlying  PAs look                                                               
like, first showing  the initial production area  (IPA), and then                                                               
the  PAs  at  differing  depths:   Lisburne;  West  Beach;  Point                                                               
McIntyre; Niakuk, which  was two separate PAs  that were combined                                                               
later;  Midnight  Sun;  Polaris;  Aurora;  Borealis;  Orion;  and                                                               
Raven.  Most  of the acreage in the Prudhoe  Bay Unit is occupied                                                               
by at least one PA if not multiple PAs, he noted.                                                                               
                                                                                                                                
2:27:10 PM                                                                                                                    
                                                                                                                                
MR. BALASH  then demonstrated what  the aforementioned  look like                                                               
from the vertical perspective [slide  6], beginning with the IPA,                                                               
and mother lode, of Sadlerochit [in  1977].  The Lisburne PA came                                                               
in 1983; West  Beach, Point McIntyre, and North  Prudhoe Bay came                                                               
in  1993; the  combined Niakuks  came in  1994; and  Midnight Sun                                                               
[came in 1998].   He explained these are  all occurring sometimes                                                               
at different  depths and other times  at the same depth  but from                                                               
separate  formations that  are distinct  and defined  differently                                                               
geologically, and the oil in  each has different geochemistry.  A                                                               
number  of blocks  of  land  have PAs  in  all  four horizons,  a                                                               
testament to the richness of  Alaska's hydrocarbon system.  These                                                               
are all distinct  layers of reservoir rock that  produce oil, but                                                               
they are  different accumulations,  and, generally  speaking, are                                                               
not in communication with one another.                                                                                          
                                                                                                                                
2:29:05 PM                                                                                                                    
                                                                                                                                
MR. BALASH said the Division of  Oil & Gas evaluates and approves                                                               
participating  areas using  the  process spelled  out  in 11  AAC                                                               
83.351,  PA formation,  expansion, contraction  [slide 7].   Very                                                               
important  is that  a PA  may include  only the  land capable  of                                                               
producing  or  contributing  to  production  of  hydrocarbons  in                                                               
paying quantities.  That means if  a well is drilled into a field                                                               
it is going  to drain oil from the reservoir  in question, so the                                                               
participating area  that is contributing to  production is really                                                               
important to  everybody - the owners  of the field, the  State of                                                               
Alaska, as well  as the individual lessees inside the  field.  It                                                               
is important  because that is  how both  the money and  the costs                                                               
are divided  up.  Everybody "in  the sandbox" has an  interest in                                                               
making  sure  these PAs  reflect  reality  to ensure  everybody's                                                               
interests are protected.  As  the given PA moves into production,                                                               
it can  be seen through  differences in pressure or  flow whether                                                               
there  is acreage  within the  PA  that is  not contributing  and                                                               
therefore should not  be included.  That portion of  the PA would                                                               
then be  contracted out and left  back into the larger  unit.  It                                                               
is here  that DNR uses  its unitization criteria [11  AAC 83.303]                                                               
for evaluating whether  and when to grant  a PA.  It  goes to the                                                               
fundamental governance  of the department's  oil and  gas leases,                                                               
which is to promote conservation,  prevent waste, and protect all                                                               
of the parties.                                                                                                                 
                                                                                                                                
2:31:38 PM                                                                                                                    
                                                                                                                                
MR.  BALASH, continuing  his discussion  of DNR's  evaluation and                                                               
approval  of PAs,  explained  that when  preparing  to move  into                                                               
production, the  operator of the unit  submits application [slide                                                               
8].   Submittal includes  [Exhibits C  and D]  which lay  out the                                                               
legal descriptions  of where and at  what depths the PA  is.  The                                                               
exhibits also lay out the  specific allocation factors; it is not                                                               
simply a  matter of counting  up the  acres or square  footage of                                                               
rock or pore space, but actually goes  to where the oil is in the                                                               
reservoir and  how much of  it is  on the specific  properties in                                                               
question.  [Exhibits E and F] are  included if it is a net profit                                                               
share  (NPS) lease;  while there  are not  many of  those, it  is                                                               
important to  call that out.   Moving to  slide 9, he  added that                                                               
Exhibits  C  and  D  lay  out  specifically  the  amount  of  oil                                                               
contained in  place and on  which leases,  as well as  what tract                                                               
factor  is  going to  be  used  in  the  allocation of  cost  and                                                               
production of the share of the barrels that get produced.                                                                       
                                                                                                                                
2:33:25 PM                                                                                                                    
                                                                                                                                
MR. BALASH  explained that  once development  activities commence                                                               
and a PA  is formed, a Plan of Development  (POD) [required under                                                               
11 AAC 83.343]  is submitted to the department [slide  10].  That                                                               
POD lays  out the process and  means by which the  lease and unit                                                               
is going  to be developed  and produced.   Those plans  come into                                                               
the Division of Oil & Gas for  review and approval.  They lay out                                                               
where  the  facilities  are  going  to  be,  the  pipelines,  any                                                               
production islands  that need to  be made, and also  identify any                                                               
gathering lines  that bring production  from outlying  areas into                                                               
the production  facilities and processing  facilities themselves.                                                               
That POD  is submitted  annually for review  and approval;  it is                                                               
very rare  that the division  does not approve a  POD, especially                                                               
once a  field is in production.   The POD is  essentially the red                                                               
button  on the  desk, so  if  there is  not a  POD approved,  the                                                               
operator is  not supposed to be  producing the oil.   That is not                                                               
good for anyone, including the  state, so what usually results is                                                               
a negotiation  of sorts  between the  lessees, the  operator, and                                                               
the Division of Oil & Gas.   Those things are rather technical in                                                               
nature.   It is  part of the  division's day-to-day  business and                                                               
something [the  department] thinks  is going to  be useful  as it                                                               
moves   forward  in   evaluating   how  this   third  bucket   of                                                               
qualification for the GRE is going to actually play out.                                                                        
                                                                                                                                
2:35:17 PM                                                                                                                    
                                                                                                                                
MR.  BALASH  informed the  committee  that  the third  qualifying                                                               
mechanism for  the GRE will  likely come  into play in  the tract                                                               
allocation factors, given the division  goes through this process                                                               
on an  annual basis [slide  11].   The department has  a specific                                                               
regulatory  process [11  AAC 83.371]  for allocating  production.                                                               
It  is part  of Exhibit  C  that is  submitted when  the PAs  are                                                               
formed and  which provides  the bases  for calculating  the tract                                                               
factors   of  acreage,   original  oil   in  place,   the  amount                                                               
recoverable,  and the  value of  the hydrocarbons.   Each  of the                                                               
working interest owners receive their  revenue and pay their cost                                                               
based on  these tract  factors.   It is  part of  the negotiation                                                               
that goes on among the private  parties themselves as well as the                                                               
state.   The state has  its own  interest in ensuring  that those                                                               
tract factors  reflect the  state's ownership  of the  barrels in                                                               
the  field,  especially  when  there  are  leases  with  multiple                                                               
royalty rates.   From time to  time revisions need to  be made to                                                               
the allocation factors,  he continued [slide 12].   As production                                                               
unfolds, PAs either expand or contract  and work is done with the                                                               
operators  over  time to  make  sure  that  those PAs  remain  as                                                               
accurate as possible.                                                                                                           
                                                                                                                                
2:37:29 PM                                                                                                                    
                                                                                                                                
MR. BALASH  provided an example  of the aforementioned  using the                                                               
Kuparuk River Unit, noting that  slide 13 shows the unit boundary                                                               
as well  as the main PA  boundary inside the unit.   He explained                                                               
that the  various bubbles depicted  inside the field show  all of                                                               
the wells  that have  been drilled.   [The green  bubbles depict]                                                               
the wells  that are producing  oil [and the blue  bubbles depict]                                                               
water injection;  in some  cases it is  both, depending  upon the                                                               
maturation  of  the field.    Last  year, ConocoPhillips  Alaska,                                                               
Inc.,  drilled Shark's  Tooth  in the  southwest  portion of  the                                                               
Kuparuk River  Unit.  It was  billed as an exploration  well, but                                                               
was in  a participating area.   Conoco announced a  discovery and                                                               
DNR  has  had preliminary  discussions  with  the operator  about                                                               
whether  the Shark's  Tooth  discovery is  in the  PA  or is  new                                                               
production  [slide  14].   The  department  understands that  the                                                               
accumulation itself probably lies  beyond the original Kuparuk PA                                                               
boundary, but  that some portion of  it is clearly inside  the PA                                                               
boundary.  So, as the department  thinks about this third test on                                                               
the qualification for the GRE, the  operator is going to have the                                                               
burden  of  showing  to DNR  geologically,  probably  using  four                                                               
dimensional  seismic or  other technical  tools, why  it believes                                                               
this  particular   accumulation  is   not  contributing   to  the                                                               
production  from the  wells located  to the  northeast.   This is                                                               
going  to be  an interesting  dialogue that  unfolds between  the                                                               
division  and industry,  he posited,  because for  acreage to  be                                                               
included  in  the  PA  it  is  presumed  to  be  contributing  to                                                               
production.  The operator is therefore  going to have to make the                                                               
argument,  as well  as  demonstrate, that  what  it is  targeting                                                               
through a given well or plan  of development is actually going to                                                               
result  in  the production  of  barrels  that are  not  currently                                                               
contributing to the production stream from that PA.                                                                             
                                                                                                                                
2:40:37 PM                                                                                                                    
                                                                                                                                
MR. BALASH  related the department  thinks there are a  couple of                                                               
ways  to engage  in that  dialogue  with the  companies and  will                                                               
probably  look at  establishing some  regulations to  govern that                                                               
process.   Making it  a part  of the  annual Plan  of Development                                                               
reviews is one way  to go about it, so DNR would  have as part of                                                               
its  approval  a very  specific  element  in that  approval  that                                                               
identifies the  location in the PA  that is going to  qualify for                                                               
the  GRE.   Then, DNR's  hands would  basically be  clean of  the                                                               
issue, at which  point it could be turned over  to the Department                                                               
of Revenue  to work  with the  lessees on how  they are  going to                                                               
account for  those barrels  and count  them when  calculating the                                                               
value of the GRE in the overall tax calculation.                                                                                
                                                                                                                                
2:41:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE, regarding using the  third way to qualify for the                                                               
GRE, drew  attention to slide  14 [Shark's Tooth Well]  and asked                                                               
whether that  is something  DNR could  determine fairly  early in                                                               
the overall project timeline, even  before an investment decision                                                               
would have to be made.                                                                                                          
                                                                                                                                
MR. BALASH  replied yes, DNR  thinks there  are ways to  do that.                                                               
However, in  this particular case  the discovery well  itself was                                                               
drilled  into a  participating area,  so conversation  will start                                                               
with  providing  information  on  why  the  company  thinks  this                                                               
particular  accumulation   or  part  of  the   reservoir  is  not                                                               
contributing   to  production   today.     Whether   that  is   a                                                               
conversation  that  needs  to  happen   prior  to  the  company's                                                               
planning  that goes  into the  ultimate POD  in a  given year  is                                                               
something that DNR will be sitting  down and working out.  Today,                                                               
with the  legislation evolving the way  it is, DNR does  not have                                                               
everything mapped  out specifically as  far as what  that process                                                               
will look like.  But what  the department does know, is that when                                                               
talking  about  a  reservoir  that is  in  a  participating  area                                                               
already,  then industry  is  going to  have to  come  to DNR  and                                                               
demonstrate  on  technical terms  why  it  is  this well  is  not                                                               
contributing to production today.                                                                                               
                                                                                                                                
2:43:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  presumed chemical  differences  in  the oil  and                                                               
differing  reservoir pressures  would be  the kind  of indicators                                                               
that DNR would be looking at.                                                                                                   
                                                                                                                                
MR.  BALASH responded  by providing  an extreme  example but  one                                                               
that highlights how  it really works.  When  BP discovered Badami                                                               
some 20 years  ago and moved into development in  the late 1990s,                                                               
BP  had drilled  the wells,  tested  the pressure,  and shot  the                                                               
seismic.   Thinking  it understood  what was  there BP  built the                                                               
production  facilities and  a  pipeline, but  when  the unit  was                                                               
actually  opened up  for production,  the production  dropped off                                                               
rapidly,  which was  not  expected.   The  reason  was that  this                                                               
accumulation of  oil was actually  separated by lots and  lots of                                                               
faults, so  there was not communication  throughout the reservoir                                                               
rock as BP had expected and counted on.                                                                                         
                                                                                                                                
2:45:12 PM                                                                                                                    
                                                                                                                                
MR. BALASH  continued, explaining  that, today,  four dimensional                                                               
seismic is used in the legacy  fields of Kuparuk and Prudhoe Bay.                                                               
This uses  the element of  time to  create a fourth  dimension in                                                               
which  it can  be  seen visually  where the  oil  is moving  and,                                                               
importantly, where it is not.   If it can be seen that identified                                                               
oil is not moving into  those production wells, then something is                                                               
keeping that  oil from  moving in.   Today, industry  is drilling                                                               
more sophisticated,  directionally targeted wells  that penetrate                                                               
those  particular  pockets  to allow  the  production  to  occur.                                                               
Sometimes there  is a sense that  an oil field is  like a balloon                                                               
or bag full  of oil - just  drill the well and suck  out the oil.                                                               
In  reality,  especially  in  some   of  these  more  complicated                                                               
reservoirs, it  is more  like a  Hefty bag full  of all  kinds of                                                               
bags, balloons, and  Ziploc bags.  A lot of  them are filled with                                                               
oil, some are filled with gas,  and others are filled with water.                                                               
When drilling  the wells it is  a matter of ensuring  that all of                                                               
the  fluids are  actually being  drained,  not just  some of  the                                                               
isolated ones,  by making sure  there are penetrations  into each                                                               
of  the  pockets  of  the  rock that  contains  the  oil.    This                                                               
particular provision  added by the  Senate is going to  require a                                                               
lot of  work between industry  and the  departments, but it  is a                                                               
provision that  is going to  be pretty powerful in  ensuring that                                                               
more of the people's oil is produced.                                                                                           
                                                                                                                                
2:47:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER inquired  how it can be proved  that a reservoir                                                               
in  a  participating area  has  not  previously [contributed]  to                                                               
production.                                                                                                                     
                                                                                                                                
MR. BALASH answered one way  is with four dimensional seismic, in                                                               
which multiple  three dimensional  images are  taken of  the same                                                               
area over time.  So, over  time, it can be seen graphically where                                                               
the  oil,  water,  and  gas  are moving  in  the  reservoir,  and                                                               
specific  parts of  the  reservoir  that are  not  moving can  be                                                               
identified.  If  they are not moving, it could  be for any number                                                               
of  reasons, but  primarily it  is likely  due to  some fault  or                                                               
break in the rock itself  or a penetration geologically with some                                                               
other  strata that  is shielding  that portion  of the  reservoir                                                               
from  flowing  through  the  rest   of  the  sandstone  into  the                                                               
production wells.   He said another  way is one he  has been told                                                               
about by reservoir engineers.   In this method, massive reservoir                                                               
models  are used  to track  the pressures  and fluid  dynamics to                                                               
tell how much energy is in  the reservoir, where it is, and where                                                               
it is  going.  Predictions  are then compared against  the actual                                                               
results to  learn what is  going on inside the  reservoir itself.                                                               
Thus, reservoir models  and four dimensional seismic  can be used                                                               
to  demonstrate  to  DNR  that  a  given  area  is  not  in  fact                                                               
contributing to production.                                                                                                     
                                                                                                                                
2:50:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER commented  it  sounds like  there  is no  clear                                                               
answer  of yes  or  no  that there  is  contribution.   He  asked                                                               
whether there  is a probability  or reliability factor  that must                                                               
be applied to this.                                                                                                             
                                                                                                                                
MR. BALASH  replied the risk  of undertaking the new  activity is                                                               
on the  operator.  The  risk is on the  operator if an  area that                                                               
looks  like  it is  not  contributing  is  drilled and  then  the                                                               
operator does not get anything out of it.                                                                                       
                                                                                                                                
2:51:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  inquired  whether  acreage judged  not  to  be                                                               
contributing goes into  a "fallow" category in which  there is no                                                               
point any more to drill in that area.                                                                                           
                                                                                                                                
MR. BALASH responded  he was told by  a "guy with a  lot of white                                                               
hair  once that  'technology changes,  markets change,  but rocks                                                               
don't change.'"   There are portions of the fields  that 30 years                                                               
ago  will be  described as  "fallow",  but that  today are  worth                                                               
going after.   The key  is in the  active management of  the unit                                                               
and  PAs, and  that  those parts  contributing  to production  be                                                               
recorded as  such in the  PAs in these  tract factors.   If, over                                                               
time,  it is  found that  it is  not contributing,  DNR contracts                                                               
that out  of the  PA and  leaves it to  the operator  to possibly                                                               
find an  opportunity in  the future.   Returning  to slide  6, he                                                               
pointed out  that the Kuparuk  horizon has a lot  of unaffiliated                                                               
acreage.   While he  cannot say  how much  of that  might contain                                                               
hydrocarbons, to the extent that  there are hydrocarbons present,                                                               
whether  they  are   economic  is  going  to   be  the  question.                                                               
Something  that is  not a  PA today  is not  being produced,  but                                                               
technology  improvements or  market  condition  changes may  make                                                               
some  of  those  additional  hydrocarbons  commercial  and  worth                                                               
pursuing.  That  is the kind of opportunity that  is trying to be                                                               
unlocked  here.   In  further response  to  Co-Chair Saddler,  he                                                               
confirmed that the  GRE is supposed to  encourage and incentivize                                                               
that.                                                                                                                           
                                                                                                                                
2:54:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  requested further  elaboration on  the                                                               
evaluation and approval of participating areas [slides 7-8].                                                                    
                                                                                                                                
MR. BALASH  answered DNR  follows an order  in the  management of                                                               
leases  and the  production of  oil;  the order  starts with  the                                                               
lease and then  exploration is undertaken.   For oil accumulation                                                               
that is thought  to cover multiple leases the  companies come [to                                                               
DNR]  and get  a unit.   Once  they have  that unit  the operator                                                               
provides DNR  with a Plan  of Development (POD) that  tells what,                                                               
where, and  when something  will be built,  what will  be drilled                                                               
and  where, and  where the  production,  then, is  going to  come                                                               
from.   The PA  is really  an expectation  as the  operator moves                                                               
into  development and  it is  to include  the depth  of the  unit                                                               
itself, and the acreage, that the  oil is thought to be and where                                                               
the  drilling will  occur to  produce it.   For  example, if  the                                                               
depth  is  between  6,500  and 6,300  feet  under  the  [surface]                                                               
outline of  an area - that  would be the participating  area (PA)                                                               
inside the unit  and that is what DNR records  in the unit files.                                                               
The operator  then executes the  Plan of Development,  moves into                                                               
production, and begins to count the money.                                                                                      
                                                                                                                                
2:56:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON  understood there would be a  PA for the                                                               
precise [aforementioned] area within  the unit and surmised there                                                               
would have  to be another PA  if, within that unit,  there is oil                                                               
at a different [depth].                                                                                                         
                                                                                                                                
MR. BALASH, using  slide 6, confirmed and  illustrated that there                                                               
can  be separate  PAs at  different depths  because they  are, in                                                               
fact, different accumulations of oil.                                                                                           
                                                                                                                                
2:57:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON returned  to slide  7, saying  she does                                                               
not understand the  three criteria [listed under  11 AAC 83.303]:                                                               
promote conservation, prevent waste, and protect all parties.                                                                   
                                                                                                                                
MR. BALASH  replied DNR  exercises its authority  to form  a unit                                                               
and  manage  the development  of  the  resource for  these  three                                                               
[aforementioned]  reasons; they  are  the criteria  on which  DNR                                                               
bases its  decisions.   In Texas  150 years  ago, people  used to                                                               
drill  wells  everywhere  they   could,  causing  energy  in  the                                                               
reservoir  to be  wasted  because there  would  be less  ultimate                                                               
recovery  of the  hydrocarbon.    While the  Alaska  Oil and  Gas                                                               
Conservation  Commission (AOGCC)  is  ultimately responsible  for                                                               
conservation  of  the   resource,  there  is  a   role  of  DNR's                                                               
management  that is  incorporated when  the department  evaluates                                                               
units and participating areas.                                                                                                  
                                                                                                                                
2:58:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  surmised, then,  that Alaska  does not                                                               
want to  waste its resource,  and if  too many wells  are drilled                                                               
there would not be enough pressure to get all of the oil out.                                                                   
                                                                                                                                
MR. BALASH responded yes, that is a part of it.                                                                                 
                                                                                                                                
REPRESENTATIVE P. WILSON inquired how the state controls that.                                                                  
                                                                                                                                
MR. BALASH answered it is not  so much the state telling how many                                                               
wells can or  cannot be drilled, but the state  ensuring there is                                                               
a clear  plan for the development  of the reservoir itself  so it                                                               
is developed in  a prudent way.  The ultimate  approval for wells                                                               
is  granted by  AOGCC,  but as  the owner  of  the resource  [the                                                               
state] wants to ensure there are  not "food fights" over who gets                                                               
to drill  the wells and  who gets to be  in charge of  the field.                                                               
It gets  to be  a very  important point  when there  are multiple                                                               
lessees in the same unit, such as in Prudhoe Bay and Kuparuk.                                                                   
                                                                                                                                
REPRESENTATIVE P. WILSON understood the  state also wants to keep                                                               
the land as  environmentally good as it can, so  does not want to                                                               
needlessly drill different places.                                                                                              
                                                                                                                                
MR. BALASH replied correct.                                                                                                     
                                                                                                                                
3:00:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  inquired  whether  it would  be  better  to                                                               
determine what  would count as new  production through regulation                                                               
or through more direct language in the bill.                                                                                    
                                                                                                                                
MR. BALASH  responded DNR thinks  the language in the  bill today                                                               
is workable, but  the department is unsure whether it  will be so                                                               
prescriptive as to set out  a regulation that guides its approval                                                               
process.  The department wants to  be able to provide the lessees                                                               
with some clarity  as to how DNR will go  about certifying that a                                                               
portion of the  reservoir is not contributing  to production, but                                                               
the department  has not landed on  that exactly.  In  the end, it                                                               
will probably be a combination of  both - there is probably going                                                               
to be  an avenue through the  POD process and probably  an avenue                                                               
through  something more  rigid that  is laid  out in  regulation.                                                               
The statute provides  DNR with the authority  and ultimately that                                                               
is going to be something DNR can  spell out one way or the other.                                                               
The key words in the statute are "contributing to production".                                                                  
                                                                                                                                
3:02:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  posed  a  scenario  where  the  reason  for                                                               
previously not  developing something  was cost related  and asked                                                               
whether  that   reason  could   be  considered   appropriate  for                                                               
something to qualify as new production.                                                                                         
                                                                                                                                
MR.  BALASH answered  it will  probably  be more  of a  technical                                                               
question than  a cost question.   The cost question will  come up                                                               
in the  decision of whether  to undertake the  activity necessary                                                               
to get  at those hydrocarbons.   For  example, would it  be worth                                                               
the money to drill a separate  well in the portion of a reservoir                                                               
with an  accumulation of, say, 100,000  barrels?  That will  be a                                                               
cost equation  weighed by the  operator, while DNR  will consider                                                               
just the  technical question of  whether it is  contributing and,                                                               
if it is not, then it is eligible for the GRE.                                                                                  
                                                                                                                                
3:03:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  observed that on  slide 4 the  Nikaitchuq PA                                                               
is  shown as  coming in  2011, but  the exhibits  on slide  9 are                                                               
dated as received  in 2010.  She inquired whether  it takes about                                                               
a year  from the time the  paperwork for a PA  is submitted until                                                               
the PA is actually approved.   She further inquired whether there                                                               
are any PAs  under consideration right now that are  not shown on                                                               
slide 4.                                                                                                                        
                                                                                                                                
MR. BALASH  replied all of DNR's  processes take some time.   The                                                               
department  goes through  a thorough  evaluation of  the material                                                               
that comes in because  it is important.  As far  as whether it is                                                               
typical to take a  year, it probably has more to  do with the POD                                                               
cycle and how  DNR goes about approving first the  unit, then the                                                               
PODs, and then the timing of the  PA coming in is pretty close to                                                               
when [the operator]  is going to actual  development drilling and                                                               
production.   So, sometimes  there is a  lag between  approval of                                                               
the POD,  the actual construction,  and then  the PA itself.   He                                                               
deferred to  a representative  of the  Division of  Oil &  Gas to                                                               
address whether there are any pending PAs.                                                                                      
                                                                                                                                
3:04:57 PM                                                                                                                    
                                                                                                                                
TEMPLE DAVIDSON, Unit Manager, Central  Office, Division of Oil &                                                               
Gas,  Department of  Natural Resources  (DNR),  stated there  are                                                               
currently  two PA  expansion applications  pending  on the  North                                                               
Slope, a  PA formation  application that  just recently  came in,                                                               
and a  couple [of  PA applications] that  the division  thinks it                                                               
may see later in the year.                                                                                                      
                                                                                                                                
3:05:30 PM                                                                                                                    
                                                                                                                                
MR. BALASH,  responding to Representative Tuck,  confirmed that a                                                               
PA is determined by DNR.                                                                                                        
                                                                                                                                
REPRESENTATIVE TUCK surmised there  would be coordination between                                                               
DNR and the Department of  Revenue (DOR) in determining whether a                                                               
field or a PA qualifies for the GRE.                                                                                            
                                                                                                                                
MR. BALASH responded  not much coordination is needed  for a unit                                                               
or a  PA.  The  paperwork that DNR does  in its normal  course of                                                               
business  will be  used by  the  lessee to  prepare the  lessee's                                                               
taxes; therefore, that part will  be relatively siloed.  However,                                                               
it  is this  third category  where the  coordination between  the                                                               
departments is  going to  have to  step up a  little bit,  and an                                                               
example of that  kind of coordination can be seen  in the changes                                                               
to  the production  forecast that  DOR  puts together.   He  said                                                               
DNR's Division of Oil & Gas  was much more involved over the past                                                               
year in  helping DOR put  those numbers together and  risk weight                                                               
the future new production in a way that made sense.                                                                             
                                                                                                                                
3:06:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK asked whether  any other departments would be                                                               
involved for the  third item to qualify for the  GRE.  He further                                                               
asked  whether this  would  be a  negotiations  process with  the                                                               
industry, given it may be hard to define exactly the PAs.                                                                       
                                                                                                                                
MR. BALASH replied he would not  call it a negotiation so much as                                                               
a verification exercise.   "They come in,  they make application,                                                               
they  demonstrate to  us,  they  show us  why  it  is they  think                                                               
particular  acreage  should  be  included in  the  PA,  and  they                                                               
generally  provide the  kind of  information our  staff needs  to                                                               
make those  approvals.   If they don't  have the  information, we                                                               
ask for  more ...."   A dialogue  definitely takes place,  but he                                                               
would not go so far as to call it a negotiation.                                                                                
                                                                                                                                
3:08:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  inquired whether  DNR has an  appeal process                                                               
or other method  for reaching agreement if it  disagrees with the                                                               
package that  is presented.   He requested further detail  on how                                                               
that agreement is reached.                                                                                                      
                                                                                                                                
MR. BALASH answered the POD process  and the PA process each take                                                               
place at  the division level and  are signed off by  the division                                                               
director.   Those decisions can  be appealed to  the commissioner                                                               
and ultimately to superior court.                                                                                               
                                                                                                                                
3:09:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK understood  there  is an  appeal, but  asked                                                               
whether  [the division]  makes recommendations  for modifications                                                               
in those  cases where there is  a disagreement.  He  explained he                                                               
is trying  to see whether there  is a partnership that  is taking                                                               
place or whether it is a yay or nay answer that can be appealed.                                                                
                                                                                                                                
MR. BALASH directed attention to slide  10 and stated that if the                                                               
POD  submitted  by  the  operator   is  deemed  insufficient  for                                                               
approval, then  DNR can propose  modifications.  If  the operator                                                               
agrees, the POD is approved.   If the operator disagrees there is                                                               
the potential  that the  POD expires, which  neither DNR  nor the                                                               
operator wants.                                                                                                                 
                                                                                                                                
3:10:05 PM                                                                                                                    
                                                                                                                                
[CO-CHAIR FEIGE held over CSSB 21(FIN) am(efd fld).]                                                                            

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HRES CSHB158 Tarr Amendment A.5.pdf HRES 3/22/2013 1:00:00 PM
HB 158
HRES HB158 Letter Packet 10.pdf HRES 3/22/2013 1:00:00 PM
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CSSB 21 SFIN Sectional for HRES 03 22 2013 .pdf HRES 3/22/2013 1:00:00 PM
SB 21
SB0021D.pdf HRES 3/22/2013 1:00:00 PM
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SB0021-7-2-031813-REV-Y.pdf HRES 3/22/2013 1:00:00 PM
SB 21
SB021CS(FIN)amS-DNR-DOG-3-22-13.pdf HRES 3/22/2013 1:00:00 PM
SB 21
SB021CS(FIN)amS-DOR-TAX-03-21-13.pdf HRES 3/22/2013 1:00:00 PM
SB 21
HRES SB21 DNR - GRE.pdf HRES 3/22/2013 1:00:00 PM
SB 21
Oil Tax Provisions Comparison 03222013 Final.pdf HRES 3/22/2013 1:00:00 PM