Legislature(2013 - 2014)BARNES 124

04/02/2013 09:00 AM RESOURCES


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09:02:54 AM Start
09:03:12 AM SB21
03:22:19 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 2:00 p.m. Today from 4/1/13 --
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only 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."   [Before the committee  was the  proposed committee                                                               
substitute,  HCS   CSSB  21,  Version  B,   labeled  28-GS1647\B,                                                               
Nauman/Bullock,  3/29/13,  adopted  as the  working  document  on                                                               
3/29/13.]                                                                                                                       
                                                                                                                                
CO-CHAIR FEIGE resumed the taking of public testimony.                                                                          
                                                                                                                                
9:03:12 AM                                                                                                                    
                                                                                                                                
ANDY  ROGERS supported  CSSB 21(FIN)  am(efd fld),  but expressed                                                               
his concern that  the bill has been weakened  during its movement                                                               
through  the committee  process.    He said  he  hopes the  final                                                               
compromise  will be  a bill  that Alaska  can survive  and thrive                                                               
with.   To  only  pull  out progressivity  and  then move  things                                                               
around  such  that  there  is   still  a  punitively  high  total                                                               
government take is not  enough.  At the end of  the day, the only                                                               
thing that  really matters is  the total government  take number.                                                               
He acknowledged  it will be painful  to the state to  reduce that                                                               
number and  live within its means.   He urged the  small producer                                                               
tax credit be kept in the bill,  saying it is only a small bit of                                                               
economic development  that can be  kept in  the tax code  and the                                                               
state wants small, young, hungry  explorers and producers looking                                                               
at establishing themselves in Alaska.                                                                                           
                                                                                                                                
9:05:17 AM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE,  regarding Mr. Rogers' statement  that government                                                               
take will still be too high, asked what amount is low enough.                                                                   
                                                                                                                                
MR. ROGERS replied that is the  million dollar question and it is                                                               
legislators who  are in the  seats to make  that call.   The easy                                                               
answer is whatever  number it takes to  incentivize oil companies                                                               
of a variety of sizes and  flavors to invest in Alaska over other                                                               
domestic  and global  opportunities.   He suggested  a comparison                                                               
can be made to other states and  the world to see what would make                                                               
Alaska competitive with  them, but said that right  now Alaska is                                                               
not in the game with any of them.                                                                                               
                                                                                                                                
CO-CHAIR FEIGE noted that is what the committee is doing.                                                                       
                                                                                                                                
9:06:32 AM                                                                                                                    
                                                                                                                                
MICHAEL JESPERSON  supported the committee's  proposed substitute                                                               
(CS), but  agreed the  bill has  been watered  down and  he would                                                               
like  to see  more  incentive included  for  exploration and  new                                                               
production.    However, he  continued,  the  current proposal  is                                                               
better  than anything  seen over  the last  several years.   When                                                               
today's  decline in  the Trans-Alaska  Pipeline System  (TAPS) is                                                               
compared to what was predicted  when Alaska's Clear and Equitable                                                               
Share  (ACES)  was passed,  the  prediction  was off  by  several                                                               
years.  The  bill needs to be  passed so his children  can have a                                                               
future.  It  will take three to four years  before the state sees                                                               
more investment  to make up  for the revenues that  are predicted                                                               
to be lost,  but long term the incentives and  reduced taxes will                                                               
put more  oil in  the pipeline,  which will  give the  state more                                                               
money to spend over the long run.                                                                                               
                                                                                                                                
9:08:05 AM                                                                                                                    
                                                                                                                                
LAURIE FAGNANI  said she is  the owner of a  small communications                                                               
firm  in Anchorage.    She employs  two  dozen full-time  graphic                                                               
designers,  web  developers, and  account  planners,  and she  is                                                               
testifying today  because her employees  need her to  advocate on                                                               
their behalf to  secure Alaska's future.  Since the  start of oil                                                               
flowing  in  the  pipeline,  oil   production  levels  have  been                                                               
directly tied  to good paying jobs  in the oil and  gas industry.                                                               
Similarly, almost all state revenues  are tied to oil production.                                                               
She said  her employees understand  this connection and  see that                                                               
their  futures are  tied to  production levels  in the  pipeline.                                                               
One of many companies indirectly  reliant on oil and gas industry                                                               
in  Alaska,  her company  has  a  diverse portfolio  in  tourism,                                                               
mining, and  health care.   The decisions legislators  make today                                                               
will impact the livelihood of the  state as well as the future of                                                               
her employees and  her ability to run a business.   Regarding the                                                               
point  of  competitiveness,  she  explained  she  operates  in  a                                                               
competitive  marketplace  and every  day  she  worries about  her                                                               
competitiveness.  If she is not  competitive or if she senses she                                                               
is  losing market  share, she  changes her  strategy, maneuvering                                                               
herself into a more competitive  position because that is how the                                                               
marketplace works.  Sometimes, however,  a client relationship is                                                               
about price;  if they  can get it  less expensive  someplace else                                                               
they are  going to move their  business.  This is  how the market                                                               
works and it  is up to her  to decide what business  she wants to                                                               
go  after,  what  business  she  wants to  invest  in,  and  what                                                               
business she wants  to keep.  Just like  the legislature spending                                                               
royalty  revenues generated  by Alaska's  legacy fields,  she has                                                               
made commitments  to her family  and her employees that  they can                                                               
count on her to  fund their futures.  Just like  the state, it is                                                               
her responsibility  to maneuver her  company so that  she remains                                                               
competitive  and attractive  to new  clients and  to attract  new                                                               
investment  from her  existing clients.   Clearly,  Alaska has  a                                                               
pricing problem.  Changing how  the state taxes the industry, and                                                               
especially  how  the  state protects  the  small  producers  with                                                               
extending  credits,  is   a  step  in  the   right  direction  to                                                               
increasing  production and  keeping  Alaska  competitive among  a                                                               
global playing field.  It is time  to get Alaska back in the game                                                               
by  changing ACES  so Alaska  can compete  and win  market share.                                                               
Alaska's future depends on action now.                                                                                          
                                                                                                                                
9:11:11 AM                                                                                                                    
                                                                                                                                
MARLEANNA HALL  stated she has lived  in Alaska all of  her life,                                                               
has attended  school in the  state, and has  a family and  job in                                                               
Alaska.   She  was educated  in the  public schools  in Nome  and                                                               
Eagle River and received a  bachelor's degree from the University                                                               
of Alaska Anchorage.  Her son  is now attending public school and                                                               
she hopes  when he  is her  age that he  will be  able to  find a                                                               
well-paying job in  a good economy in Alaska.   She urged passage                                                               
of the  bill, ending progressivity and  encouraging investment in                                                               
the future development  of Alaska's natural resources.   The bill                                                               
is  a start,  but more  needs to  done.   Investment needs  to be                                                               
increased  in Alaska,  keeping the  doors open  of locally  owned                                                               
businesses.   She offered her  hope that the  committee considers                                                               
the long term over the short  term.  She specifically thanked her                                                               
representative,  Representative  Hawker,  and encouraged  him  to                                                               
vote in favor of the bill.                                                                                                      
                                                                                                                                
9:12:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  thanked Ms.  Hall and  assured her  he has                                                               
been working on this issue for many years.                                                                                      
                                                                                                                                
9:12:29 AM                                                                                                                    
                                                                                                                                
KATI CAPOZZI  said this  is her  third year  in a  row testifying                                                               
before  the  legislature  advocating for  meaningful  changes  to                                                               
Alaska's oil tax policies.  When  she first testified in favor of                                                               
oil tax reforms in March 2011,  TAPS was running at about 636,000                                                               
barrels per day.  When  she testified before the Senate Resources                                                               
Standing  Committee on  February 21,  2013, TAPS  was running  at                                                               
580,000 barrels.   When she  testified before the  Senate Finance                                                               
Committee on  March 12,  2013, TAPS was  at 568,000  barrels, and                                                               
yesterday  it was  563,905 barrels.    For nearly  two years  and                                                               
three  legislative  sessions,  the legislature  and  public  have                                                               
debated  the merits  of whether  a  tax reform  is necessary  and                                                               
poured over countless slides indicating  Alaska does not compete.                                                               
The supply of  oil in the pipeline has dropped  by 72,000 barrels                                                               
per day.   This  is concerning  because there  is no  reason why,                                                               
during historically  high oil prices,  Alaska should not  also be                                                               
enjoying  the increased  investment that  results in  production.                                                               
Argument has been heard over  the last several hearings that more                                                               
time  is needed,  but she  thinks three  legislative sessions  is                                                               
quite a bit  of time.  The time for  getting something meaningful                                                               
was a  few years ago.   Every person living  in Alaska is  in the                                                               
oil industry, she maintained, regardless  of who the person works                                                               
for.  Increased investment is needed for everyone.                                                                              
                                                                                                                                
9:14:12 AM                                                                                                                    
                                                                                                                                
JOHN STURGEON offered his support  for the bill and his agreement                                                               
with what has been said.   He urged that meaningful tax reform be                                                               
passed so Alaska's economy can continue to grow.                                                                                
                                                                                                                                
9:15:14 AM                                                                                                                    
                                                                                                                                
JIM  SYKES testified  he supports  increased oil  production, but                                                               
opposes the proposed  committee substitute (CS).   There are many                                                               
upsides for companies, but he  agrees Alaska can incentivize some                                                               
of the smaller  producers better.  However, he  sees some serious                                                               
downsides to  the state.   The current CS  essentially guarantees                                                               
more corporate  profits on top  of already corporate  profits and                                                               
investment level  is insufficient  now, so he  does not  see that                                                               
necessarily changing.   More production is  not necessarily going                                                               
to mean more revenue and tax  breaks are not necessarily going to                                                               
mean more investment.   It starts eliminating  the downside price                                                               
risk at about  $90, which, in his opinion does  not pass the "red                                                               
face"  test.   It  eliminates  the upside  price  risk by  almost                                                               
eliminating  progressivity.   It allows  the use  of the  state's                                                               
money  without requiring  actual performance  of new  production.                                                               
It looks to  him that it applies to the  legacy fields, which are                                                               
already  among the  most  profitable oil  fields  on the  planet.                                                               
Alaska's legacy  fields are  the "ATM" that  has leveled  out the                                                               
ups  and downs  of  other investments  made  by Alaska  producers                                                               
elsewhere in  the world.   What does  Alaska get out  of it?   It                                                               
gives  out  cash  in  advance,   it  risks  negative  cash  flows                                                               
regardless of oil  price, and it is unlikely to  recoup the value                                                               
of the  credits under  almost any likely  scenario.   Net profits                                                               
will accrue  to corporations  and the  state will  essentially be                                                               
accepting an effective lower net take per barrel.                                                                               
                                                                                                                                
9:17:10 AM                                                                                                                    
                                                                                                                                
MR.  SYKES  continued, saying  much  more  needs  to be  done  in                                                               
understanding exactly how this will  work and what the state will                                                               
get out of it.  While he  agrees a long-term solution needs to be                                                               
made, this  current CS is  a strategy based  on hope and  that is                                                               
not a prudent  strategy.  Something he finds  difficult to accept                                                               
in a prudent  fiscal strategy is that the  administration has had                                                               
five years to  audit the current tax regime, but  has not.  Until                                                               
there is an  audited tax regime, it  is not a good  idea to start                                                               
changing it.   He  offered his  belief that  the State  of Alaska                                                               
cannot lower its taxes enough  to take away another oil producing                                                               
region's  production boom,  any  more than  anyone took  Alaska's                                                               
production boom  in the  late 1970s and  early 1980s.   Companies                                                               
will  go to  an  area, especially  where  technology created  the                                                               
boom, not any tax policy.   Regarding the question of how schools                                                               
will  be funded  unless  more oil  production  is stimulated,  he                                                               
asked  how  will  the  state pay  for  schools,  roads,  bridges,                                                               
hydroelectric  dams,  and  public   safety  when  cash  is  taken                                                               
directly out  of Alaska's cash reserve.   It is just  a hope that                                                               
some of  it may  be returned.   Alaska finds  itself in  the same                                                               
place that Bob Bartlett warned  about in 1955 - outside interests                                                               
are controlling the  state's natural resources when  they want to                                                               
develop them.   Without any guarantees that tax  breaks are going                                                               
to  actually increase  production or  increase revenue,  which is                                                               
two  separate questions,  it really  is  more about  price.   The                                                               
throughput scare  being visited upon  the state is really  not an                                                               
issue.   The committee  needs to ask  questions, such  as finding                                                               
out the  internal rates  of return  for the  companies.   Even if                                                               
confidentiality   agreements   must   be  signed   to   get   the                                                               
information, legislators  need to understand where  the companies                                                               
are so it is understood what the  state is going to do to benefit                                                               
and what the  companies are going to do if  they receive a break.                                                               
He said he will be forwarding materials to the committee.                                                                       
                                                                                                                                
9:20:08 AM                                                                                                                    
                                                                                                                                
LISA HERBERT,  Executive Director,  Greater Fairbanks  Chamber of                                                               
Commerce, noted  the chamber represents  over 700  businesses and                                                               
organizations  throughout the  Interior.   The chamber's  primary                                                               
purpose  is business  advocacy with  the mission  of promoting  a                                                               
healthy  economic  environment  for   business  as  well  as  the                                                               
community at  large.  One of  the chamber's top priorities  is to                                                               
encourage   increased   oil   production   by   encouraging   the                                                               
legislature  and  the  administration  to  establish  competitive                                                               
investment opportunity  through taxation and  regulatory policies                                                               
that  will facilitate  additional  oil exploration,  development,                                                               
and increased production.  The need  exists now to take the steps                                                               
necessary  to ensure  the  health  and viability  of  TAPS.   The                                                               
chamber supports  the governor's four guiding  principles for tax                                                               
reform.  For the last  three years, thousands of business owners,                                                               
employees, and  residents have testified before  the legislature,                                                               
or  submitted comment  cards, supporting  reform of  Alaska's oil                                                               
tax  policy to  make the  state  more competitive.   The  chamber                                                               
supports reform of oil taxes in  a fair, meaningful way.  Several                                                               
chamber  members,  such  as Flowline  Alaska,  Airport  Equipment                                                               
Rentals, Alyeska  Pipeline Service Company, have  been negatively                                                               
impacted  by   decreased  oil  throughput.     These   and  other                                                               
businesses  have  had  to  lay   off  employees  and  scale  back                                                               
operations.   Fairbanks is the  hub for  work on the  North Slope                                                               
and  reforming oil  taxes will  regain Alaska's  competitiveness.                                                               
She  urged the  committee  to pass  a bill  that  will result  in                                                               
increased oil production  and increased work on  the North Slope.                                                               
The chamber is reviewing [Version  B] and will continue to remain                                                               
engaged as the bill moves through the legislative process.                                                                      
                                                                                                                                
9:22:05 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   TARR  commented   she   thinks  everyone   would                                                               
characterize his  or her position  as wanting meaningful  oil tax                                                               
reform.   She asked whether Ms.  Herbert thinks Version B  is the                                                               
meaningful tax reform that is needed.                                                                                           
                                                                                                                                
MS. HERBERT replied the chamber's  natural resources committee is                                                               
meeting tomorrow morning, at which  time its members will look at                                                               
Version B and respond to the committee.                                                                                         
                                                                                                                                
9:23:31 AM                                                                                                                    
                                                                                                                                
DANIEL DONKEL,  Donkel Oil & Gas,  LLC, noted he has  30 years of                                                               
involvement as an  investor and founder of  several oil companies                                                               
in Alaska.   Due to  illness, his testimony  will be read  by his                                                               
consulting geologist, David Gross, formerly of Chevron Alaska.                                                                  
                                                                                                                                
9:24:43 AM                                                                                                                    
                                                                                                                                
DAVID  GROSS, Consulting  Geologist,  provided  the testimony  of                                                               
Daniel  Donkel,  founder of  Donkel  Oil  &  Gas, LLC  and  Danco                                                               
Exploration, Inc.  He read the testimony as follows:                                                                            
                                                                                                                                
     My primary  reason for being  here today is  to explain                                                                    
     what I believe is necessary  for this legislature to do                                                                    
     if  it  wants  to  see those  smaller  companies  whose                                                                    
     business  is confined  to exploration,  production, and                                                                    
     sale of  crude oil,  companies commonly referred  to as                                                                    
     independents,  flourish  in  Alaska.     I  am  in  the                                                                    
     business of bringing such companies  to Alaska and have                                                                    
     been for  30 years.   For my business and  the business                                                                    
     of those I bring to  Alaska to be successful I believe,                                                                    
     no, I know,  this legislature needs to  do three things                                                                    
     that  are  not being  considered  in  this bill.    The                                                                    
     legislature  should:    1)  adopt  a  simple,  easy-to-                                                                    
     explain 75  percent exploration production  credit that                                                                    
     cannot  be  manipulated  to  exclude  independents;  2)                                                                    
     while  leaving  a fixed  royalty  in  place, provide  a                                                                    
     seven-year exemption from taxes  for all new production                                                                    
     outside the existing participating  areas; 3) leave the                                                                    
     ACES tax,  including its progressivity,  as is  for all                                                                    
     existing  participating areas.    I am  going to  share                                                                    
     some information with  you that the majors  do not want                                                                    
     you  to  know.   By  majors,  I  mean ...  those  fully                                                                    
     integrated  companies that  explore, drill,  transport,                                                                    
     refine, and  distribute refined products  for wholesale                                                                    
     and retail.                                                                                                                
                                                                                                                                
9:26:44 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE interjected,  saying  the  three-minute limit  on                                                               
testimony is approaching  and the committee is in  receipt of Mr.                                                               
Donkel's  five  pages  of  written   testimony,  which  has  been                                                               
accepted [for the record].                                                                                                      
                                                                                                                                
MR. DONKEL  requested Mr.  Gross be  allowed to  continue, saying                                                               
this  is one  of the  most  important pieces  of information  the                                                               
State   of  Alaska   has  never   heard   because  the   existing                                                               
independents  with investment  in the  ground will  not tell  the                                                               
legislature or  the public  in case of  retaliation.   The reason                                                               
for his testimony  is so the public  can hear what he  has to say                                                               
after 30 years of investing in the state.                                                                                       
                                                                                                                                
CO-CHAIR FEIGE  stated Mr.  Donkel's testimony  is posted  on the                                                               
legislature's website for access by the public.                                                                                 
                                                                                                                                
9:29:30 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR   requested  Mr.   Donkel  to   explain  his                                                               
exploration credit idea.                                                                                                        
                                                                                                                                
MR. DONKEL  responded that  after listening  to testimony  by the                                                               
Department of  Natural Resources and  others, it is clear  to him                                                               
that this  bill simply strips  ACES, gives  all the money  to the                                                               
majors,  and annihilates  the small  independents, none  of which                                                               
have  been able  to produce  a profit  in Alaska.   For  example,                                                               
Pioneer testified  the other day that  it has been in  Alaska for                                                               
10  years without  a profit.   Brooks  Range has  been in  Alaska                                                               
since 1999 without a profit, and  Armstrong has not had a profit.                                                               
He said his  proposed exploration credit of 75  percent is almost                                                               
equivalent to  that seen in  the Cook  Inlet with the  Cook Inlet                                                               
Recovery Act  combined with  ACES.  It  was announced  today that                                                               
[indisc.] Energy was able to get  $17 million in credits and that                                                               
has led to four wells in  the Redoubt Shoal that the state almost                                                               
had abandoned two years in  bankruptcy court.  He maintained ACES                                                               
is working  and suggested the  [GVR] be undone and  replaced with                                                               
the 20 percent credits that are  being taken away.  This way, the                                                               
state  would continue  to  get the  $1 billion  a  year, not  the                                                               
majors,  and  a tax  credit  would  be  provided that  is  clear,                                                               
simple, and  reliable and that  can be  monetized each year.   As                                                               
the independents  stated in their  testimony, they will  put this                                                               
money in  the ground to  get the state  more production.   If the                                                               
majors  want  to drill  outside  of  participating areas  in  the                                                               
legacy fields  or the producing  units, they can, and  [under his                                                               
proposal] they will  get a seven-year tax holiday from  ACES.  He                                                               
maintained this  would be  the most  single most  important thing                                                               
the state could do.                                                                                                             
                                                                                                                                
9:32:25 AM                                                                                                                    
                                                                                                                                
PAMELA BRODIE, spoke as follows:                                                                                                
                                                                                                                                
     If SB  21 would  make the  difference, leading  the oil                                                                    
     industry to exploration and  development they would not                                                                    
     otherwise pursue, it would be  logical and rational ...                                                                    
     for them  to guarantee such  exploration.  But  they do                                                                    
     not.  If they would  pursue this exploration regardless                                                                    
     of the tax  cut, it would be logical for  them to lobby                                                                    
     for the  tax cut and  wait for  it, which they  do, but                                                                    
     also   to  give   the  state   guarantees  for   future                                                                    
     exploration  and development.   But  they do  not.   It                                                                    
     seems  to  me  that  only  if they  do  not  plan  more                                                                    
     development anyway, is it logical  for them to give the                                                                    
     state no guarantees.  And  this is what they are doing.                                                                    
     It  is a  frightening prospect  that oil  throughput is                                                                    
     declining   and   the   oil  industry   is   apparently                                                                    
     uninterested  in  more  exploration regardless  of  tax                                                                    
     rates.   But  even more  frightening would  be for  the                                                                    
     state to  lower taxes  to no purpose  as the  amount of                                                                    
     oil declines.   Please vote  no on  SB 21 so  the state                                                                    
     won't face double losses.                                                                                                  
                                                                                                                                
9:33:53 AM                                                                                                                    
                                                                                                                                
LARRY SMITH  stated he has been  a builder around the  Cook Inlet                                                               
area  for the  last  50 years.    He said  it  is reasonable  for                                                               
Alaskans to  have differing views  and letting everyone  speak to                                                               
their own  interests is how  democracy works best.   In listening                                                               
to various experts, he has chosen  Jack Roderick as the expert to                                                               
listen to.   He reminded  members that Mr. Roderick  advised that                                                               
the  legislature get  it  in writing  and that  the  eyes of  the                                                               
nation are upon Alaska.  Mr.  Smith quoted a response from former                                                               
Alaska Governor Jay  Hammond when asked how he would  tax the oil                                                               
companies:   "for every  cent we could  possibly get;  after all,                                                               
just as  it is  the obligation  of oil  company CEOs  to maximize                                                               
benefits for their  shareholders, so it is the  obligation of the                                                               
state CEO to do the same for his."   He noted that when SB 21 was                                                               
on the  Senate floor, Senator  Gary Stevens offered  an amendment                                                               
that  would  have  sunsetted  the  law,  giving  the  legislature                                                               
another chance to see if  the oil industry actually had increased                                                               
production, but it failed by a  narrow margin.  He urged that the                                                               
House consider this same amendment.   He recalled former Governor                                                               
Hammond's  statement that  the biggest  mistake of  his political                                                               
life  was when  he  did not  veto the  elimination  of the  state                                                               
income tax  and that  it would  have been  better to  suspend it.                                                               
Mr. Smith said he opposes the bill  as written, but if it must be                                                               
passed that  it incorporate a  suspension of the  ACES provisions                                                               
rather than  eliminating them.   This would allow  the provisions                                                               
to  be brought  back more  easily.   He further  reminded members                                                               
that  in her  inaugural  address, former  Governor  Palin used  a                                                               
statement  made  about  mining  by  Bob  Bartlett  at  the  state                                                               
constitutional  convention,  but  she   applied  it  to  the  oil                                                               
industry - the days of robber barons in Alaska [are] dead.                                                                      
                                                                                                                                
9:37:37 AM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE closed public testimony  after ascertaining no one                                                               
else wished to testify.                                                                                                         
                                                                                                                                
9:37:53 AM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE recessed the meeting until 2:00 p.m.                                                                             
                                                                                                                                
2:05:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE called  the  House  Resources Standing  Committee                                                               
meeting  back  to  order.   Representatives  P.  Wilson,  Hawker,                                                               
Olson, Seaton, Saddler,  and Feige were present at  the call back                                                               
to order.  Representatives Tarr,  Tuck, and Johnson arrived after                                                               
the meeting was called back to order.                                                                                           
                                                                                                                                
CO-CHAIR  FEIGE stated  the  committee will  next  hear from  the                                                               
administration and  consultants regarding  the provisions  of the                                                               
proposed committee  substitute, HCS  CSSB 21, Version  B [adopted                                                               
as the working document on 3/29/13].                                                                                            
                                                                                                                                
2:06:10 PM                                                                                                                    
                                                                                                                                
MICHAEL PAWLOWSKI, Oil & Gas  Development Project Manager, Office                                                               
of  the Commissioner,  Department  of Revenue  (DOR), provided  a                                                               
PowerPoint presentation entitled,  "Preliminary Fiscal Impact HCS                                                               
CSSB21(RES)".   He said he will  review the 12 key  provisions of                                                               
Version B,  will describe the  potential fiscal impacts  of those                                                               
provisions  based on  the Fall  2012 Revenue  Forecast, and  will                                                               
review hypothetical additional production  scenarios.  He pointed                                                               
out that this presentation is  a preliminary fiscal analysis, not                                                               
a fiscal note, and the  presentation assumes an effective date of                                                               
1/1/2014 for the major provisions.                                                                                              
                                                                                                                                
2:07:40 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI addressed  the first major provision  in Version B,                                                               
page 28, line 8, which  would repeal the progressive surcharge as                                                               
of  1/1/2014  that is  found  under  AS 43.55.011(g)  (slide  3).                                                               
Known  as progressivity,  this surcharge  is  the additional  tax                                                               
that is  added to the 25  percent base tax under  the current tax                                                               
system   [Alaska's    Clear   and   Equitable    Share   (ACES)].                                                               
Progressivity  increases the  tax  rate when  the production  tax                                                               
value is  greater than $30  a barrel.  The  progressive surcharge                                                               
may add up  to be 50 percent  of the total tax rate  at very high                                                               
prices, for a maximum tax rate  of 75 percent.  The fiscal impact                                                               
from  eliminating this  provision  would vary  by year  depending                                                               
upon price, underlying spending,  and production, [reducing state                                                               
revenue]  by up  to $1.8  billion per  year under  the Fall  2012                                                               
Revenue Forecast.   He  said slide  4 depicts  the impact  of the                                                               
progressive surcharge  by showing the  amount of 25  percent base                                                               
tax in  red and  the amount of  expected progressivity  in green.                                                               
He noted the  figures depicted in this graph  are before credits;                                                               
thus the  graph shows the revenue  that is generated but  not the                                                               
revenue that is then paid out with the credit.                                                                                  
                                                                                                                                
2:09:32 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI discussed the second  major provision in Version B,                                                               
page  5, line  7, which  would increase  the base  production tax                                                               
rate  from 25  percent under  ACES to  35 percent  (slide 5).   A                                                               
higher base tax rate would  increase revenue through the base tax                                                               
system  and would  provide  greater protection  to  the state  at                                                               
lower oil prices.   The fiscal impact would vary  by fiscal year,                                                               
with the  increased base tax  rate generating up to  $1.1 billion                                                               
[more] under the Fall 2012 Revenue Forecast.                                                                                    
                                                                                                                                
2:10:28 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  reviewed the third  major provision in  Version B,                                                               
page  13,  lines 3-5,  which  would  put limitations  on  capital                                                               
credits  found  under  AS   43.55.023(a)  for  qualified  capital                                                               
expenditures on  North Slope  leases (slide  6).   This provision                                                               
would  remove  the  20  percent   capital  credit  for  qualified                                                               
spending [for  areas north  of 68  degrees North  latitude] after                                                               
1/1/2014.  Capital credits under  the current system are taken in                                                               
one of  two ways:   1) as a  liability against the  company's tax                                                               
liability,  or  2)  refunded.   For  credits  taken  against  the                                                               
company's tax liability,  the state does not  see actual revenues                                                               
expended out.  There is a suite  of credits that can be issued as                                                               
either a  certificate that is  transferred to another  company or                                                               
turned  into  the state  for  a  cash  payment, those  being  the                                                               
credits  that the  state refunds  to companies  that have  no tax                                                               
liability.                                                                                                                      
                                                                                                                                
2:12:27 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  displayed a chart  depicting the  estimated fiscal                                                               
impact for  the proposed  limitations on  credits as  compared to                                                               
the Fall 2012 Revenue Forecast (slide  7).  He explained that the                                                               
first line  in the chart  depicts the impact for  capital credits                                                               
that are  taken against  the tax  liability.   The effect  of the                                                               
proposal  would  begin halfway  through  fiscal  year 2014,  with                                                               
fiscal year 2015 being the first  full fiscal year of the effect.                                                               
For  fiscal year  2015, the  state would  no longer  have a  $700                                                               
million obligation  for the qualified capital  credits that would                                                               
be  taken against  the tax  liability  of taxpayers.   The  state                                                               
would also see a reduction of  $150 million in credits that would                                                               
need to be  refunded to non-taxpayers, for a  total fiscal impact                                                               
of an increase of about $850 million to the state.                                                                              
                                                                                                                                
2:13:47 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI outlined  the fourth major provision  in Version B,                                                               
page 13,  lines 10-13,  which would retain  and increase  the net                                                               
operating loss carry  forward credit for net losses  from oil and                                                               
gas operations  on the North Slope  (slide 8).  The  credit would                                                               
be increased  from 25 percent  of those  losses under ACES  to 35                                                               
percent, and would be taken in one  year as opposed to two.  This                                                               
credit, found in  AS 43.55.023(b), is targeted  to companies that                                                               
do not currently have production  and therefore no tax liability.                                                               
This  10  percent  increase  is  needed  to  make  the  economics                                                               
equivalent for a company that  does not have enough production to                                                               
write off expenses against.   This credit is transferrable or can                                                               
be refunded by  the state.  The estimated revenue  impact of this                                                               
10  percent  increase in  credit  is  a  decrement of  about  $40                                                               
million per year above the amount forecasted under ACES.                                                                        
                                                                                                                                
2:15:24 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, responding  to  Representative Seaton,  confirmed                                                               
that slide  7 depicts the impact  of only the capital  credit and                                                               
that  the impact  of  $850  million for  fiscal  year  2015 is  a                                                               
positive fiscal impact to the  state.  However, he continued, the                                                               
increase  in the  net  loss  carry forward  credit  would have  a                                                               
negative fiscal impact to the state.                                                                                            
                                                                                                                                
2:16:41 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI turned  to the fifth major provision  in Version B,                                                               
page 24,  beginning on line  20, which would establish  the gross                                                               
value  reduction  (GVR),  formerly  known as  the  gross  revenue                                                               
exclusion (GRE)  (slide 9).   He said this provision  would amend                                                               
AS 43.55.160  by adding  a new subsection  that would  provide an                                                               
additional  incentive for  "new" oil.   The  change in  Version B                                                               
from  CSSB 21(FIN)  am(efd fld)  is  a limitation  on where  this                                                               
incentive could  apply.  The  qualifying production would  be any                                                               
of the following  three things:  1)  Land that was not  in a unit                                                               
on  1/1/2003; 2)  Was not  produced within  a participating  area                                                               
(PA)  established  after  12/31/2011  in  a  unit  formed  before                                                               
1/1/2003; and 3) Acreage that was  added to an existing PA [after                                                               
12/31/12].    Regarding  the  third  qualification,  he  reminded                                                               
members that  the Department of Natural  Resources had previously                                                               
discussed that  the new participating  areas within  the existing                                                               
units  are geologically  distinct and  provable accumulations  of                                                               
oil.   Compared  to CSSB  21(FIN)  am(efd fld),  Version B  would                                                               
provide a much more narrowly  defined suite of oil that qualifies                                                               
for the GVR/GRE.   The fiscal impact is  indeterminate, but would                                                               
be  under  $50 million  per  year  under  the Fall  2012  Revenue                                                               
Forecast.                                                                                                                       
                                                                                                                                
2:18:42 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI, responding to  Representative P. Wilson, confirmed                                                               
that the  metering requirement [under  CSSB 21(FIN)  am(efd fld)]                                                               
was removed in Version B.                                                                                                       
                                                                                                                                
2:19:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON understood  the acreage  is the  physical,                                                               
top side  acreage of a PA  that is physically expanded,  but that                                                               
it does not include reservoirs underneath existing PAs.                                                                         
                                                                                                                                
MR.  PAWLOWSKI deferred  to the  Department of  Natural Resources                                                               
deputy commissioner.                                                                                                            
                                                                                                                                
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department of  Natural Resources (DNR), replied  the term acreage                                                               
is used because, by definition, a  PA is the same reservoir.  So,                                                               
when discussing property, it is  the acreage that is being talked                                                               
about - the  same leases in the  same unit - more  of the acreage                                                               
in that unit is going to become part of the PA.                                                                                 
                                                                                                                                
2:20:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON related  his understanding  that different                                                               
reservoirs that  are not  in communication  could all  be stacked                                                               
up.   He asked whether  it is the  surface acreage that  is being                                                               
talked about  or whether the acreage  is the volume of  a PA that                                                               
might be two or three balloons down.                                                                                            
                                                                                                                                
MR. BALASH  responded acreage  is just  a reference  to something                                                               
additional with regard to the land.   It is three dimensions, not                                                               
just  the two  dimensions of  the outlines  on the  surface -  it                                                               
actually  goes down  into  depth.   When  a PA  is  formed it  is                                                               
identified geologically at  both the horizontal level  as well as                                                               
the vertical  level.   So, it  is any additions  to that  PA that                                                               
might be an extension of the  same reservoir.  Twenty years ago a                                                               
given PA  was drawn  with current technology  in mind;  a company                                                               
may  now be  able  to  access additional  portions  of that  same                                                               
reservoir,  and  because  it  is  the same  reservoir  it  is  an                                                               
expansion of the  original PA or an existing PA.   Just because a                                                               
PA is  expanded does not  mean it will automatically  qualify for                                                               
the  GVR because  the  company  will have  to  count the  barrels                                                               
produced from that  expansion in order to  satisfy the Department                                                               
of Revenue and qualify for the GVR.                                                                                             
                                                                                                                                
MR. PAWLOWSKI added  the key is that in CSSB  21(FIN) am(efd fld)                                                               
it was going  into an existing reservoir and  trying to delineate                                                               
and define  new pockets  of oil  within that  existing reservoir.                                                               
It is  the expansion of  adding those  new reserves that  are not                                                               
currently  within  the  allowable  area that  is  the  difference                                                               
between CSSB 21(FIN) am(efd fld) and Version B.                                                                                 
                                                                                                                                
2:23:33 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  moved to the  sixth major provision of  Version B,                                                               
page 12,  line 16, and  page 13,  line 19, which  would eliminate                                                               
the requirement  that credits  be taken  over two  years, instead                                                               
allowing them  to be taken  in one  year (slide 10).   Currently,                                                               
capital credits  and net operating  loss credits incurred  on the                                                               
North Slope  must be split  into two certificates and  taken over                                                               
two years.  A company qualifies  for a credit based on 20 percent                                                               
of its spending  or 25 percent of its loss  carry forward and DOR                                                               
issues the  company two certificates;  the impact of  that credit                                                               
benefit  is therefore  divided  over two  years.   This  proposed                                                               
provision  would particularly  benefit the  small producers  that                                                               
have  testified  before the  committee  about  the importance  of                                                               
credits to their cash  flow.  Being able to get  that credit in a                                                               
single year  does not really  have a  fiscal impact on  the state                                                               
given that  obligation exists since  the credit has  been issued;                                                               
DOR  would issue  one certificate  rather than  two.   The fiscal                                                               
impact would be substantial in  fiscal year 2014 because the $400                                                               
million obligation for qualified  capital expenditure credit from                                                               
expenditures that happened in calendar  year 2013 would be closed                                                               
out in one year rather than spread over two years.                                                                              
                                                                                                                                
2:25:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  returned  to   the  provision  for  the  third                                                               
category of GVR.  The oil  and gas produced from acreage added to                                                               
an existing PA is clear,  he said, but the concomitant obligation                                                               
is  that  the  producer  demonstrates  to  the  department.    He                                                               
inquired how easy  that demonstration is and how easy  will it be                                                               
for  the  Department of  Natural  Resources  (DNR) to  make  that                                                               
determination.                                                                                                                  
                                                                                                                                
MR. PAWLOWSKI  answered that the  language, "demonstrates  to the                                                               
department", on  page 24,  line 30,  is a "small  d" and  in that                                                               
reference is referring to the Department  of Revenue.  He said it                                                               
goes  back to  the  previously discussed  issue of  demonstrating                                                               
where oil  comes from.   When the oil is  coming from a  lease or                                                               
acreage that is  delineated in that expansion, saying  it is easy                                                               
is  an overstatement,  but saying  it is  doable is  a reasonable                                                               
statement.  The  important tension is the balance of  the GVR and                                                               
the sliding  scale per barrel  credit, an either/or  situation in                                                               
Version  B -  the GVR  is a  lesser incentive  that is  given for                                                               
those areas  that do  not want  to go through  this hoop.   Under                                                               
CSSB 21(FIN)  am(efd fld),  the demonstration  was required  on a                                                               
well-by-well basis, but under Version  B the demonstration can be                                                               
done  on a  pad  level or  a large  development  level, which  is                                                               
easier to do than a well-by-well  level.  On a large drilling pad                                                               
with 20-40 wells,  the ability to aggregate  those wells together                                                               
and measure  from that point  becomes much easier  in application                                                               
than it does on the well-by-well basis.                                                                                         
                                                                                                                                
2:27:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER observed  the language  on [page  24, line  22]                                                               
that states  "one or  more of  the following".   He  surmised the                                                               
first  criterion is  real easy,  the second  criterion is  fairly                                                               
easily, and the third is not easy  but doable.  He asked what the                                                               
process would be for demonstrating to the Department of Revenue.                                                                
                                                                                                                                
MR.  PAWLOWSKI replied  DOR  would be  looking  for "the  similar                                                               
metering concepts" and by working  through the regulatory process                                                               
DOR would  talk with industry about  how DOR is going  to measure                                                               
that.   Currently, production  is allocated  back to  acreage and                                                               
the  technical aspects  of  how  DOR would  measure  it.   It  is                                                               
difficult to  say in specificity  what the burden of  that actual                                                               
measurement  would  be  because  of   the  nature  of  what  that                                                               
expansion might look  like.  It would probably  be very difficult                                                               
to measure from  a narrow expansion of a  participating area that                                                               
has very limited infrastructure,  something this provision is not                                                               
designed for.   This  provision is designed  more for  the larger                                                               
expansions of adding  new areas that are  bringing new production                                                               
into  the participating  area  where there  are  large pieces  of                                                               
infrastructure and  where the amount of  infrastructure needed to                                                               
actually do counting can be justified.                                                                                          
                                                                                                                                
CO-CHAIR  SADDLER  therefore  understood  it would  be  based  on                                                               
metering and then allocating back.                                                                                              
                                                                                                                                
2:29:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON inquired how  typical enhanced oil recovery                                                               
projects that  increase volume will  fit into this and  asked how                                                               
that will be measured.                                                                                                          
                                                                                                                                
MR.  PAWLOWSKI   offered  his  understanding  that   the  typical                                                               
enhanced oil  recovery project  would not fall  under any  one of                                                               
these three  areas because  the producer  is extracting  more oil                                                               
from  the  existing  participating   area,  not  actually  adding                                                               
acreage and  making the PA  bigger.   The point in  previous bill                                                               
versions   was  to   provide   this   significant  incentive   to                                                               
geologically  defined new  oil that  could be  quantified, looked                                                               
at,  and  expanded; it  is  a  narrower  benefit, but  given  the                                                               
substantiveness  of  the  benefit  that  threshold  is  a  fairly                                                               
limited one.                                                                                                                    
                                                                                                                                
2:30:49 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI resumed his discussion  of the provision that would                                                               
eliminate the  requirement that credits  be taken over  two years                                                               
(slide 10),  saying this liability  to the state would  be closed                                                               
out in fiscal year 2014.   For the credits that are taken against                                                               
a tax  liability, the projected  revenue impact is  $250 million.                                                               
For the  operating budget, the  projected revenue impact  is $150                                                               
million -  the operating budget  is additional  appropriations to                                                               
the credit  fund to pay for  the small companies that  turn their                                                               
certificates  into the  state for  reimbursement.   He reiterated                                                               
that these  are credits earned  before the bill goes  into effect                                                               
on 1/1/2014, based on projected spending in calendar year 2013.                                                                 
                                                                                                                                
2:31:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled a  previous discussion  about the                                                               
forward funding  of projects,  noting that  the credit  is earned                                                               
when the  capital is expended,  not when the project  is actually                                                               
undertaken.  He asked whether  Version B includes any controls on                                                               
frontloading expenses in 2013 to qualify for the credit.                                                                        
                                                                                                                                
MR. PAWLOWSKI deferred to a DOR audit master for an answer.                                                                     
                                                                                                                                
LENNIE DEES, Audit Master, Production  Audit Group, Tax Division,                                                               
Department  of  Revenue  (DOR),  answered  that  DOR  depends  on                                                               
accounting  rules   that  would   prevent  the   frontloading  of                                                               
expenditures  from happening.   Normally,  when a  company spends                                                               
money  upfront for  a  project,  that cost  is  not  going to  be                                                               
classified  as a  capital expenditure  at the  time the  money is                                                               
spent.   More often, work  is done before  money is spent.   Very                                                               
rarely has  he seen frontloading  of capital projects.   However,                                                               
if a company did  spend a lot of money like  that, the cost would                                                               
be  classified on  the  balance  sheet in  some  type of  prepaid                                                               
account, which  would not  qualify it  as a  capital expenditure.                                                               
In  DOR's   reviewing  of  the  requests   and  applications  for                                                               
qualified capital expenditure credit  claims, DOR would not allow                                                               
money spent in advance of work  being done on capital projects to                                                               
be qualified as a capital expenditure eligible for the credit.                                                                  
                                                                                                                                
2:34:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON posed  a scenario in which  a company plans                                                               
to replace  20 miles of  pipeline, gets an  engineering estimate,                                                               
pays that upfront,  and then the work is done.   He surmised that                                                               
DOR  would,   in  this  case,   disqualify  that  as   a  capital                                                               
expenditure at the time.                                                                                                        
                                                                                                                                
MR. DEES replied correct.  He  posed an example of a company that                                                               
knows it is going  to have a drilling program and  wants to buy a                                                               
lot of pipe  upfront and warehouse it.  As  the company purchases                                                               
the  pipe, it  would inventory  the pipe,  but at  that point  it                                                               
would not be classified as a  capital expenditure.  Only when the                                                               
pipe actually  gets delivered  to the project  and is  charged to                                                               
the  particular well,  or  in  the case  of  a  pipeline, to  the                                                               
pipeline, would it  be classified as a capital  expenditure.  So,                                                               
if a company  were to do something  like that at the  end of 2013                                                               
it would  not be classified  as capital  until 2014, and  at that                                                               
point  it  would not  qualify  for  a  credit because  DOR  would                                                               
consider the  capital expenditure  in 2014 and  at that  point it                                                               
would be too late to get the capital credit.                                                                                    
                                                                                                                                
2:36:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  clarified he  is  not  talking about  the                                                               
company itself  buying pipe  and warehousing  it, but  rather the                                                               
company hiring a  construction company to do something.   He said                                                               
these  parameters need  to  be  made clear  on  the  record.   He                                                               
surmised that  if a company  pays a construction  company upfront                                                               
to replace 20 miles of pipeline  that that would not qualify as a                                                               
capital  expenditure until  the construction  company had  put in                                                               
the pipeline.                                                                                                                   
                                                                                                                                
MR. DEES  confirmed that that is  exactly what he is  saying.  As                                                               
the  work is  performed the  project  will get  charged for  that                                                               
particular piece of  work and at that point it  would become part                                                               
of the capital project.  Prior to  then, if it was paid up front,                                                               
it would be in some type of prepaid account.                                                                                    
                                                                                                                                
2:37:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON, drawing  attention to the  last bullet                                                               
on slide  10, surmised the  $250 million in revenue  impact would                                                               
be a minus impact, as would  the $150 million in operating budget                                                               
impact.                                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  responded correct,  saying the $150  million would                                                               
be a  minus because  it would be  an additional  appropriation to                                                               
the  credit fund  through  the operating  budget  to fulfill  the                                                               
obligation of those credits.                                                                                                    
                                                                                                                                
2:38:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  noting the state is  currently in deficit                                                               
spending, inquired  what the  rational is  for changing  from two                                                               
years to  one when the  people making the capital  investment did                                                               
so knowing that it would be in two years.                                                                                       
                                                                                                                                
MR. PAWLOWSKI answered the policy  call was a balance between two                                                               
things.   First, it  was recognizing that  the program  is ending                                                               
and some  companies might  have made  plans around  those capital                                                               
expenditures and  getting credits  for them.   Allowing it  to be                                                               
taken in one year would  benefit those companies that were making                                                               
the investments.   Second, the state is going to  have to pay its                                                               
credit obligation  one way or  another.  Pushing  that additional                                                               
money off  into 2015 would spread  the fiscal impact of  the bill                                                               
out  farther, but  it would  increase the  fiscal note  in fiscal                                                               
year  2015.    There  was   a  concern  of  pushing  that  fiscal                                                               
obligation off into  the future rather than  recognizing it today                                                               
and closing out the program.                                                                                                    
                                                                                                                                
2:39:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER understood the two years  or one year is a wash.                                                               
However, he said he thinks  the intent of Representative Seaton's                                                               
question is whether there is a big  risk that there will be a lot                                                               
of  frontend loading  to take  advantage of  that capital  credit                                                               
before the end of 2014.                                                                                                         
                                                                                                                                
MR.  PAWLOWSKI  replied  that  is  one of  the  key  reasons  the                                                               
effective date needs  to be as soon  as it is in  the bill, which                                                               
is  1/1/2014.   It  is  already going  into  April  2013 and  the                                                               
administration worried  that pushing  an effective date  out into                                                               
the future  would allow  for that  type of  planning to  ramp up.                                                               
While  there might  be some,  the ability  of companies  to react                                                               
before January of this year is relatively limited.                                                                              
                                                                                                                                
CO-CHAIR SADDLER  understood, then, that waiting  another year or                                                               
two would  be a risk, but  waiting the seven months  left in this                                                               
year would not be as big a risk.                                                                                                
                                                                                                                                
2:40:57 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  resumed his  presentation, addressing  the seventh                                                               
major provision in Version B, page  2, line 8, which would change                                                               
the funding source for community  revenue sharing (slide 11).  As                                                               
introduced  by  the administration,  SB  21  recognized the  soft                                                               
dedication  of  funds  from  the  corporate  income  tax  to  the                                                               
community  revenue sharing  fund.   Funds  are  still subject  to                                                               
legislative appropriation.  The  language in Version B recognizes                                                               
that rather  than softly dedicating revenue  from the progressive                                                               
surcharge, revenue is softly dedicated  from the corporate income                                                               
tax  that  is  received  under   AS  43.20.    The  appropriation                                                               
guidelines  have not  changed, it  is  still $60  million or  the                                                               
amount necessary to  bring the community revenue  sharing fund up                                                               
to $180 million.  Acknowledging  that members had asked about the                                                               
other credits and  the work against the corporate  income tax, he                                                               
pointed  out that  the  corporate income  tax  has exceeded  $500                                                               
million every year for  the last 8 years.  The  $60 million is in                                                               
recognition of  the importance of  community revenue  sharing and                                                               
the  connection of  that  broader base  of  economic activity  to                                                               
support it.  He noted that  this provision is a major change from                                                               
CSSB 21(FIN) am(efd fld).                                                                                                       
                                                                                                                                
2:42:40 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI discussed the eighth  major provision of Version B,                                                               
page  16, line  7, which  would establish  a per  oil barrel  tax                                                               
credit (slide 12).   Under CSSB 21(FIN) am(efd  fld), this credit                                                               
was a  flat $5 per barrel,  but under Version B  this is expanded                                                               
with the addition of  a new subsection on page 16,  line 14.  For                                                               
each taxable barrel that does not  meet any of the three criteria                                                               
for the  GVR in AS 43.55.160(f),  there would be a  sliding scale                                                               
per barrel credit, as opposed to  the fixed $5 per barrel credit.                                                               
As seen  on page 16, beginning  on line 21, below  $80 per barrel                                                               
gross value  at the point of  production, the credit would  be $8                                                               
per  taxable barrel.   Between  $80 and  $90 gross  value at  the                                                               
point  of production,  the credit  would be  $7 for  each taxable                                                               
barrel,  sliding down  to a  credit of  $0 if  the average  gross                                                               
value at  the point of production  for the month is  greater than                                                               
or equal to $150 a barrel.                                                                                                      
                                                                                                                                
2:44:40 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI then  reviewed the estimated fiscal  impact for the                                                               
aforementioned credits, noting  that the numbers on  the chart on                                                               
slide 13  are decrements  in revenue.   He reminded  members that                                                               
fiscal year  2014 is for  half a  fiscal year because  the bill's                                                               
effective date is  1/1/2014 and fiscal years are  June 30 through                                                               
July  1.   Fiscal year  2015  is the  first full  year of  impact                                                               
[minus $825  million].   The value of  the impact  declines [with                                                               
each subsequent  year, going  down to minus  $675 in  fiscal year                                                               
2019] because  the forecast is  for declining production  and the                                                               
credit is linked directly to production  since it is a credit per                                                               
taxable barrel.                                                                                                                 
                                                                                                                                
2:45:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  surmised much  of the estimate  of revenue                                                               
is for  an Alaska  North Slope  (ANS) West  Coast price  range of                                                               
$110, which,  at a transportation  cost of  $10 would be  a gross                                                               
value  at  the  point  of  production  of  less  than  $100,  and                                                               
therefore most of the oil would be  at a credit of $6, $7, or $8.                                                               
While he  understood tapering  off to  a slight  progressivity at                                                               
higher  prices,  he said  this  proposal  seems  to be  a  fairly                                                               
dramatic  reverse  progressivity below  $110.    He requested  an                                                               
explanation for the  "hit on the state" at lower  prices when the                                                               
state will have less revenue and higher deficits.                                                                               
                                                                                                                                
MR. PAWLOWSKI  responded that, as  a policy call, the  concept is                                                               
first tied  directly to production.   Second, when going  from $5                                                               
to $8 versus from  $5 to $0, there is actually  more on the state                                                               
side going  up than there  is going down,  so there is  a balance                                                               
between the  upside and  the downside  that is  being considered.                                                               
Another important  point is on page  16, line 18:   "A tax credit                                                               
under this section may not  reduce a producer's tax liability for                                                               
a  calendar year  ... below  zero."   These are  nontransferable,                                                               
use-it-or-lose-it credits.   So, unlike the  capital credit which                                                               
is  based  on   spending,  there  could  be   a  situation  where                                                               
production  is   interrupted  or  production  has   declined  and                                                               
spending  is  happening and  there  is  a different  relationship                                                               
directly  to  the  state.    Under this,  the  credit  is  linked                                                               
directly to production,  so the less production  the less revenue                                                               
to the state  but also the less credits received  by the company.                                                               
As  the presentation  continues, the  committee will  be able  to                                                               
look at the balance between what  the state's exposure at the low                                                               
side is  versus how much  additional revenue the state  is taking                                                               
at the high side.  At the end  of the day it is a policy call and                                                               
a balance that legislators need to consider.                                                                                    
                                                                                                                                
2:48:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  expressed his  concern that the  $8 credit                                                               
is not only  at $80 a barrel, but everything  below $80 a barrel;                                                               
thus,  it becomes  a much  higher  and higher  proportion of  the                                                               
profitable income that  is going to be excluded if  there is time                                                               
of low oil prices.  For example,  if $8 is excluded at a price of                                                               
$45  a barrel,  and $26  is subtracted  for costs,  a very  large                                                               
portion of the profit is going to be excluded from taxation.                                                                    
                                                                                                                                
2:49:25 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  outlined the ninth  major provision of  Version B,                                                               
page 3, line  17, a provision unchanged from  CSSB 21(FIN) am(efd                                                               
fld) which  would create a  service industry  expenditures credit                                                               
(slide 14).   This credit  is limited specifically  to taxpayers,                                                               
specifically for  work that is  done within the state  of Alaska.                                                               
It is  non-transferrable, but  can be  carried forward  against a                                                               
taxpayer's  liability.   It  is a  benefit  given industry  doing                                                               
additional  work in-state  for manufacturing  or modification  of                                                               
oil and  gas equipment and is  only for the portion  spent in the                                                               
state.  The  fiscal note is indeterminate, but  [is estimated] to                                                               
be less than $25 million a year.                                                                                                
                                                                                                                                
2:50:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said this  provision concerns him  for the                                                               
ancillary  treatment  that it  has.    Alaska has  education  tax                                                               
credits -  50 percent  tax credit from  corporate income  tax for                                                               
education  and  workforce  training  up  to  $100,000,  then  100                                                               
percent  tax credit  for the  next $100,000,  and then  up to  50                                                               
percent credit  for up to  $5 million.   The total  corporate tax                                                               
paid per year for this sector  is about $10 million.  He presumed                                                               
everyone  in this  service sector  is going  to qualify  for some                                                               
credit.   For  this  entire  sector the  effect  of education  or                                                               
workforce development tax credits will  be zeroed out because all                                                               
the tax liability  from corporations is being removed,  as is the                                                               
incentive  to  use  the tax  credit  for  workforce  development,                                                               
educational institutions,  and processing  technology facilities.                                                               
He inquired whether  this has been considered or whether  it is a                                                               
discussion the committee needs to have.                                                                                         
                                                                                                                                
MR.  PAWLOWSKI answered  it has  not been  a detailed  discussion                                                               
central to  this particular section.   He drew attention  to page                                                               
4, lines  1-3, of  Version B,  noting it  attempts to  narrow the                                                               
provision  to limit  the  double-qualifying  of expenditures  for                                                               
different credits.   Thus, companies will still  need to consider                                                               
which credit is actually the most  beneficial to them.  While the                                                               
education type  credits might  be more  beneficial to  a company,                                                               
the company  will be unable to  do both on the  same expenditure.                                                               
So, there  has been  a fair  conversation, but  not one  that, to                                                               
this point, has  been a detailed conversation, other  than to say                                                               
that the concern of the committee  in the other body was to avoid                                                               
double dipping and double qualifying for multiple credits.                                                                      
                                                                                                                                
2:52:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE understood  Representative  Seaton  to have  said                                                               
that the  maximum corporate  tax revenue to  the state  from this                                                               
particular sector totals $10 million.                                                                                           
                                                                                                                                
REPRESENTATIVE SEATON confirmed $10 million  is about what it has                                                               
been.   Information from Legislative Legal  and Research Services                                                               
is that about $93 million in  taxes is paid by corporations other                                                               
than oil  and gas corporations  and this sector  represents about                                                               
10 percent of  that.  In no  year has this sector  paid more than                                                               
$10 million.  Thus, the $25 million per year is probably high.                                                                  
                                                                                                                                
2:53:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  countered that  one could also  look at  this and                                                               
say that  if these  incentives work as  believed they  will, then                                                               
the   demand   on   this  particular   service   industry   could                                                               
significantly increase and  the state could make up  far more tax                                                               
revenue  simply by  growing the  pie than  the 10  percent credit                                                               
would cost.                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON said this  is probably not possible because                                                               
this  credit is  $10  million  per company  or  10  percent of  a                                                               
company's  full  expenditures  and  the  credit  can  be  carried                                                               
forward for five  years.  The concern is not  double dipping, but                                                               
elimination  of the  corporate income  tax as  a source  that the                                                               
state  has established  for educational  tax credits  means there                                                               
will be  no source for  educational tax  credits.  The  state has                                                               
built  in a  pretty strong  incentive to  have corporations  make                                                               
educational donations  and workforce development and  this credit                                                               
will take away all of that  incentive because it will likely zero                                                               
out the corporate  income tax for this  entire sector, especially                                                               
since the  credit can be carried  forward five years.   Since the                                                               
committee  is looking  at  workforce  development, the  committee                                                               
should look  at whether this  provision is really  beneficial and                                                               
whether  it  will bring  a  lot  more work  to  the  state.   For                                                               
example, all of the pipes that  are welded on the North Slope are                                                               
done in the state.                                                                                                              
                                                                                                                                
2:56:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE said  he will need to look at  the statutes on the                                                               
educational credits,  but recalled  that the  educational credits                                                               
are written off against production tax.                                                                                         
                                                                                                                                
MR. PAWLOWSKI pointed  out that the education credit  is found in                                                               
the corporate income tax, the  production tax under AS 43.55.019,                                                               
and the property  tax under AS 43.56.018.  Thus,  there are three                                                               
duplicate  education credits  touching three  different pools  of                                                               
taxes.   If one is  diminished, there will be  revenues available                                                               
from the others.                                                                                                                
                                                                                                                                
CO-CHAIR FEIGE stated it is worth  looking at, but will deserve a                                                               
lot more development.                                                                                                           
                                                                                                                                
2:57:12 PM                                                                                                                    
                                                                                                                                
MR.   PAWLOWSKI,   responding   to  Representative   P.   Wilson,                                                               
reiterated the statute  numbers and said the  language is similar                                                               
in each one.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON pointed  out that  those companies  paying                                                               
production tax  are not the  companies that are targeted  in this                                                               
provision for the service industry.                                                                                             
                                                                                                                                
CO-CHAIR FEIGE responded education is [the target].                                                                             
                                                                                                                                
2:57:51 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI addressed  the tenth major provision  of Version B,                                                               
page 2, line  18, a provision unchanged from  CSSB 21(FIN) am(efd                                                               
fld) which  would adjust  the interest  rate on  delinquent taxes                                                               
(slide 15).   He reminded members that this  provision applies in                                                               
both  directions -  when there  is an  overpayment and  the state                                                               
must reimburse  the taxpayer  and when  there is  an underpayment                                                               
and the taxpayer must pay the  difference to the state.  Multiple                                                               
sections throughout  the bill are  related to this  interest rate                                                               
provision.  Under current law the  interest rate is the higher of                                                               
11  percent or  5  percentage  points above  the  annual rate  of                                                               
interest charged by  the [12th Federal Reserve  District].  Under                                                               
Version B  the interest rate  would be 3 percentage  points above                                                               
the annual rate of interest  charged by the [12th Federal Reserve                                                               
District].   The fiscal  impacts include  $100,000 in  the fiscal                                                               
note for operations needed at DOR  to reprogram its systems.  The                                                               
fiscal impact  is estimated to be  up to [minus] $25  million per                                                               
year,  increasing   over  time  as  more   delinquent  taxes  are                                                               
calculated under the new interest rates of this provision.                                                                      
                                                                                                                                
2:59:18 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI reviewed the eleventh  major provision, a provision                                                               
that was  added in  Version B on  page 18, lines  2, 20,  and 21,                                                               
which would  remove the  requirement that a  well be  three miles                                                               
from an  existing well to  qualify for the Middle  Earth frontier                                                               
basin credit (slide 16).   It could potentially increase costs of                                                               
operations to  the state in that  the state is paying  80 percent                                                               
through this  credit.  Anything  that can be  done to make  it as                                                               
efficient as possible  would be a benefit to the  activity.  This                                                               
credit  cannot  be taken  along  with  net operating  loss  carry                                                               
forward credit.   The fiscal  impact is already accounted  for in                                                               
the Fall  2012 Revenue Forecast, so  there is no addition  to the                                                               
fiscal note.   Responding  to Co-Chair  Feige, he  clarified this                                                               
credit is transferable and refundable.                                                                                          
                                                                                                                                
3:00:42 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, responding  to  Representative Seaton,  confirmed                                                               
that the  frontier basin credit  has a  limit of four  wells, and                                                               
added that  the reference can  be found  in Version Bon  page 18,                                                               
line  7:   "The persons  that  drill the  first four  exploration                                                               
wells in the state ...."                                                                                                        
                                                                                                                                
3:01:01 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI outlined the twelfth  major provision of Version B,                                                               
page 25, beginning on line 24,  which would establish the Oil and                                                               
Gas Competitiveness Review Board, and  is a provision that is not                                                               
modified  substantially from  that in  CSSB 21(FIN)  am(efd fld).                                                               
He explained this would be a  new state board located within DOR.                                                               
Its nine  members would  be tasked  with meeting  once a  year to                                                               
provide  an  institutional  warehouse  for  an  understanding  of                                                               
Alaska's  competitive position  and to  provide a  report to  the                                                               
legislature [every  four years -  see timestamp 3:19:57  p.m.] on                                                               
proposed  changes to  the fiscal  system.   The estimated  fiscal                                                               
impact of  $180,000 per year,  which represents costs  for travel                                                               
and use  of existing  staff, is  not included  in the  tax fiscal                                                               
note, but  in a separate fiscal  note.  A majority  of the fiscal                                                               
impact is  already included in  the operating budget  because DOR                                                               
is not adding new positions in  the fiscal note to undertake this                                                               
work, but rather is absorbing the work in-house.                                                                                
                                                                                                                                
3:02:22 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  explained the chart  on slide 18  incorporates all                                                               
of the  provisions in  Version B to  estimate the  general fiscal                                                               
impact  [as compared  to the  Fall  2012 Revenue  Forecast].   He                                                               
reviewed the fiscal impacts for  fiscal year 2015, the first full                                                               
fiscal year  after the  bill's effective  date:   Eliminating the                                                               
progressive  tax would  decrease state  revenue by  $1.5 billion;                                                               
raising the [base]  tax rate from 25 percent to  35 percent would                                                               
increase state  revenue by $1.075  billion; limiting  credits for                                                               
qualified capital expenditures on  the North Slope would increase                                                               
state revenue by $700 million;  increasing the net operating loss                                                               
carry  forward credit  to 35  percent would  result in  a revenue                                                               
impact [of minus  $40 million]; adding the  gross value reduction                                                               
(GVR)  for  oil production  in  new  units  and new  or  expanded                                                               
participating areas  would reduce  state revenue by  $25 million;                                                               
eliminating  the provision  that  credits must  be  taken over  a                                                               
period  of two  years will  have  no fiscal  impact because  that                                                               
program will be over in  fiscal year 2014; amending the community                                                               
revenue  sharing fund  would have  no fiscal  impact; adding  the                                                               
credit  of $5  per taxable  barrel and  sliding scale  credit per                                                               
taxable  barrel would  decrease  state revenue  by $825  million;                                                               
adding the credit for qualified  oil and gas industry expenditure                                                               
is indeterminate but would possibly  decrease state revenue by up                                                               
to  $25   million  annually;  reducing   the  interest   rate  is                                                               
indeterminate but would possibly decrease  state revenue by up to                                                               
$25 million annually; and removing  the three-mile limitation for                                                               
the  frontier basin  credit would  have  no fiscal  impact.   The                                                               
total revenue impact for fiscal year  2015 would be a decrease of                                                               
$575 million to $625 million.                                                                                                   
                                                                                                                                
3:04:57 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI then  reviewed the revenue impact  on the operating                                                               
budget for  fiscal year  2015.   He explained  there would  be an                                                               
additional $150 million to the  state because there would be less                                                               
credits  on the  qualified  capital expenditure  credit that  the                                                               
state would have  to pay out.  The increase  in the net operating                                                               
loss carry  forward credit would  be a reduction of  $40 million.                                                               
Therefore,  the total  fiscal impact,  which includes  changes in                                                               
revenue  and appropriations  that  have to  be  made through  the                                                               
operating budget to pay for the  credits, is a reduction in state                                                               
revenues and  expenditures of  $465 million  to $515  million for                                                               
fiscal year 2015.                                                                                                               
                                                                                                                                
3:06:01 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, responding  to Co-Chair  Saddler, clarified  that                                                               
the  per-taxable-barrel  credit  is  an  either/or  credit.    He                                                               
explained the  $5 per  barrel credit would  also qualify  for the                                                               
GVR/GRE, and the  sliding scale credit would be for  oil that did                                                               
not qualify for that  "new" oil.  He noted that  the $5 credit is                                                               
within  DOR's  fiscal  forecast  because,  when  looking  at  the                                                               
wellhead values  in the Fall  2012 Revenue Forecast, "the  oil is                                                               
going to fall within that $5 range",  which is why there is not a                                                               
different number  than the $5  number.   If prices were  to rise,                                                               
the value  of that credit would  drop and if prices  were to fall                                                               
the value of that credit would increase.                                                                                        
                                                                                                                                
3:07:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER surmised  that if the $5 credit  and the sliding                                                               
scale  credit  were broken  into  two  lines,  the line  for  the                                                               
sliding scale credit would be pretty empty.                                                                                     
                                                                                                                                
MR. PAWLOWSKI concurred.                                                                                                        
                                                                                                                                
3:07:21 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI, responding to  Representative P. Wilson, confirmed                                                               
it  is an  either/or  situation  between the  $5  credit and  the                                                               
sliding scale credit.                                                                                                           
                                                                                                                                
3:07:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  observed from the  line highlighted in  yellow on                                                               
slide 18 that the total  fiscal impact does not include potential                                                               
revenue impacts from  increases in production.   He surmised that                                                               
the areas  that have the GVR  applied to them are  not considered                                                               
here because those would all have to be areas of new production.                                                                
                                                                                                                                
MR. PAWLOWSKI  replied correct and  added that the  fiscal impact                                                               
seen  on slide  18 is  based on  if the  bill passes  and nothing                                                               
changes in  terms of prices and  production from the way  DOR has                                                               
currently forecast the next five years.                                                                                         
                                                                                                                                
3:08:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON said she  would like to see a comparison                                                               
between  slide 18  and the  price going  up and  the price  going                                                               
down, given  things could  be different than  the forecast.   She                                                               
further  asked that  the  comparison be  provided  in graph  form                                                               
rather than chart form.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI agreed to provide a comparison in graph form.                                                                     
                                                                                                                                
3:09:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON asked  whether  it would  be possible  to                                                               
model an increase  in barrels per day in steps  of 5,000, 10,000,                                                               
15,000, and  so forth to see  what the fiscal impact  would be of                                                               
adding new production.                                                                                                          
                                                                                                                                
MR. PAWLOWSKI responded  DOR has tried to do  a "scenario method"                                                               
in all  of the fiscal notes  rather than doing a  fixed amount of                                                               
production per  year.  A reason  for the scenario method  is that                                                               
production  goes  up and  then  it  comes  down, and  along  with                                                               
production comes timing  in investment.  Thus,  [in slides 19-25]                                                               
DOR has prepared graphs for three scenarios.                                                                                    
                                                                                                                                
3:10:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON commented  that  if in  2019 the  scenario                                                               
[looks like that depicted on slide  18] the bill will have been a                                                               
failure because it would not have stimulated any new production.                                                                
                                                                                                                                
MR.  PAWLOWSKI   concurred  that  if  absolutely   no  change  to                                                               
production happens the bill would  be considered a failure.  What                                                               
is seen [in slide 18] is  the natural limitation of fiscal notes.                                                               
A dilemma  of fiscal  notes is  that they are  based on  what the                                                               
revenue forecast  is going  forward and how  it moves  from that.                                                               
In  front of  the committee  is something  with a  lot of  moving                                                               
parts where  increased production  does have material  impacts on                                                               
the state in the longer term.   Thus, DOR wants to call attention                                                               
to  the fact  that this  fiscal  analysis, performed  in the  way                                                               
fiscal  notes are  typically done,  by the  nature of  the fiscal                                                               
note is not allowed to directly include increased production.                                                                   
                                                                                                                                
CO-CHAIR FEIGE remarked it is "a conservative best guess".                                                                      
                                                                                                                                
3:12:26 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER pointed  out  for  the public  that  this is  a                                                               
fiscal  note which  is based  on  assumptions and  formulas.   It                                                               
would  be nice  to have  various permutations  in production  and                                                               
price, but  that would be  tremendously awkward and  difficult to                                                               
work with.  He urged people not  take this as gospel that this is                                                               
going  to be  the result;  rather, it  is a  forecast possibility                                                               
under  certain conditions  and every  future condition  cannot be                                                               
predicted.                                                                                                                      
                                                                                                                                
CO-CHAIR FEIGE  added that not  changing too many  assumptions in                                                               
the fiscal note allows legislators  to evaluate the fiscal impact                                                               
of changes that are made to the bill.                                                                                           
                                                                                                                                
MR. PAWLOWSKI agreed and reminded  members that [slide 18] is not                                                               
a  fiscal note  per se,  but the  elements that  would go  into a                                                               
fiscal  note.   He said  DOR has  tried to  keep them  consistent                                                               
through all the  versions of the bill so comparisons  can be made                                                               
of the various fiscal analyses.                                                                                                 
                                                                                                                                
CO-CHAIR  FEIGE said  he  has asked  DOR to  provide  a full  and                                                               
complete  fiscal note  once the  committee has  reported a  final                                                               
version of the bill.                                                                                                            
                                                                                                                                
3:13:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  requested the  committee  look  at the  [three                                                               
scenarios outlined on slides 19-25].                                                                                            
                                                                                                                                
MR. PAWLOWSKI  walked the committee through  the three production                                                               
scenarios.  Scenario A (slide 19)  is the development of a new 50                                                               
million barrel  field developed by  a small producer with  no tax                                                               
liability.  The  field has a peak production of  10,000 barrels a                                                               
day, development costs  of about $500 million,  and qualifies for                                                               
the  GVR/GRE and  the net  operating loss  carry forward  credit.                                                               
Scenario B (slide  20) is the addition of four  drill rigs in the                                                               
legacy units,  each rig  drills four wells  a year,  adding 4,000                                                               
barrels a  day of new  production, and  each well declines  at 15                                                               
percent per  year, and  the production does  not qualify  for the                                                               
GVR/GRE.   Scenario C (slide 21)  is the addition of  a new drill                                                               
pad within a legacy unit, plus  the four rigs working in Scenario                                                               
B.  In  this scenario 15,000 barrels a day  are added in calendar                                                               
year 2014, increasing  to a peak rate of 90,000  barrels a day in                                                               
2018, and the  production would not qualify for the  GVR/GRE.  He                                                               
stressed  that these  are just  scenarios and  DOR is  not saying                                                               
they  are going  to happen.   They  were done  to illustrate  the                                                               
ramp-up function of production; that  production does not come on                                                               
all at once, but rather builds.                                                                                                 
                                                                                                                                
3:15:54 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, responding  to Co-Chair  Saddler, clarified  that                                                               
Scenario A  and Scenario B  are each a stand-alone  scenario, but                                                               
Scenario C is Scenario A plus Scenario B plus Scenario C.                                                                       
                                                                                                                                
3:16:19 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  explained slide 22  is the projected  revenues for                                                               
the various scenarios at an ANS price  of $90.  In the near term,                                                               
ACES generates  more revenue,  but in  the future,  as production                                                               
comes on line from those  developments, Scenario B and Scenario C                                                               
start  to exceed  ACES.   He  stated DOR  will  be providing  the                                                               
committee with the data behind this graph.                                                                                      
                                                                                                                                
3:17:16 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI noted a similar  but more pronounced effect is seen                                                               
at an ANS price of $100 a barrel  (slide 23).  He clarified the Y                                                               
axis is in millions of dollars,  so "$1,000" means $1 billion and                                                               
explained  the  comparison  is  between  the  proposed  committee                                                               
substitute, HCS CSSB 21, Version B,  and Scenarios A, B, and C to                                                               
show how much  additional production the scenarios  are adding to                                                               
existing  production.   He pointed  out Scenario  A does  not add                                                               
material production  - a small  50 million barrel field  does not                                                               
move  the needle  much.   However,  Scenarios B  and  C show  the                                                               
ability in the  near term of the additional drill  rigs and large                                                               
development pad to increase substantial  production.  He said DOR                                                               
was  careful about  saying that  multiple fields  would be  built                                                               
from scratch  within the first two  years since that would  be an                                                               
unrealistic expectation, but there is  much potential for that to                                                               
happen in three to five years.                                                                                                  
                                                                                                                                
3:18:25 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI moved to slide  24, pointing out the similar effect                                                               
in the  near term at  an ANS price of  $120 per barrel,  with the                                                               
high progressivity  of ACES exceeding  revenues under any  of the                                                               
scenarios  [for fiscal  years 2014-2016].   However,  [for fiscal                                                               
years  2018  and 2019],  the  additional  production against  the                                                               
forecasted  decline exceeds  the  revenues  forecast under  ACES,                                                               
particularly under Scenario C.                                                                                                  
                                                                                                                                
3:19:15 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI turned  to slide 25, explaining that  this graph is                                                               
at the  forecast price in  the [Fall 2012 Revenue  Forecast] from                                                               
which  the budgets  and  the planning  are done  on.   A  similar                                                               
situation is  again seen where  additional production  allows the                                                               
revenues to increase  over [ACES].  He reiterated  that these are                                                               
scenarios, not predicted projects, so  members can take a look at                                                               
the impact  of production on  the base system, something  that is                                                               
not normally  included in a  fiscal note.  When  considering this                                                               
issue, it needs to be looked  at in the context of what increased                                                               
production has an  opportunity to bring to the state  in terms of                                                               
longer-term revenues.                                                                                                           
                                                                                                                                
3:19:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  returned to slide  17 and pointed out  that under                                                               
Version  B the  Oil and  Gas Competitiveness  Review Board  would                                                               
provide  a report  to the  legislature every  four years,  not an                                                               
annual report.                                                                                                                  
                                                                                                                                
MR. PAWLOWSKI apologized for missing that.                                                                                      
                                                                                                                                
3:21:14 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
3:21:47 PM                                                                                                                    
                                                                                                                                
[CSSB 21(FIN) am(efd fld) was held over.]                                                                                       

Document Name Date/Time Subjects
HRES SB 21 Dan Donkel Testimony 4.1.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21
HRES SB 21 Testimony Packet 1 4.1.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21
HRES SB 21 Testimony Packet 2 4.1.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21
HRES HCS CSSB21 Preliminary Fiscal Impact - DOR - 4.2.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21
HRES HCSCSSB21 PFC Energy 4.2.13.pptx HRES 4/2/2013 9:00:00 AM
SB 21
HRES HCS CSSB21 EconOne 4.2.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21
HRES HCS CSSB21 RDC 4.1.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21
HRES HCS CSSB21 Walters 4.3.13.pdf HRES 4/2/2013 9:00:00 AM
SB 21