Legislature(2013 - 2014)
04/20/2014 04:37 PM Senate FIN
| Audio | Topic |
|---|---|
| Start | |
| HB306 | |
| HB287 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 287(RLS) am
"An Act relating to the determination of the royalty
received by the state on oil production refined or
processed in the state; providing tax credits for
qualified infrastructure expenditures for in-state
refineries and hydrocarbon processing facilities;
approving and ratifying the sale of royalty oil by the
State of Alaska to Tesoro Corporation and Tesoro
Refining and Marketing Company LLC; and providing for
an effective date."
7:32:38 PM
Co-Chair Kelly MOVED to ADOPT Amendment 1(copy on file).
Page 1, line 3:
Delete "and hydrocarbon processing facilities"
Page 3, lines 11-12:
Delete "or hydrocarbon processing facility"
Page 3, lines 12-13:
Delete "Except as provided in (b) of this
section, a"
Insert "A"
Page 3, line 13:
Delete "or hydrocarbon processing facility"
Page 3, lines 14-15:
Delete "or processed hydrocarbon products"
Page 3, line 20-21:
Delete "or hydrocarbon processing facility"
Page 3, lines 22-27:
Delete all material
Reletter the following subsections accordingly.
Page 4, line 12:
Delete "(e)"
Insert "(d)"
Page 4, line 19:
Delete "or hydrocarbon processing facility"
Page 4, line 26:
Delete "or hydrocarbon processing facility"
Page 4, lines 29-30
Delete "or hydrocarbon processing facility"
Page 5, line 2:
Delete "or hydrocarbon processing facility"
Page 5, lines 3-4:
Delete "or hydrocarbon processing facility"
Page 5, lines 12-14:
Delete all material
Renumber the following paragraphs accordingly.
Page 5, lines 17-18:
Delete ", petroleum-based feedstock, or processed
hydrocarbon products"
Insert "or petroleum-based feedstock"
Co-Chair Meyer OBJECTED for discussion.
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
explained Amendment 1.
Co-Chair Meyer WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 1 was ADOPTED.
7:36:28 PM
Commissioner Balash continued to discuss the bill and
stated that there was a hope to see a change in the cost of
energy for interior Alaska, with the completion of the
Interior Energy Plan to bring LNG to the Interior. He
stated that DNR had reached out to Petro Star, and wondered
if they would be the next to announce their closure. He
stated that March was the month of the year for Petro Star
to renew their crude oil purchases, so they were faced with
a big decision. He stated that the consequence of Petro
Star was of too great magnitude, because they were the
chief supplier of military grade jet fuel for Eielson Air
Force Base, Fort Wainwright, Jay Bear, and Kodiak Air
Station; and the marine grade diesel for Kodiak Air
Station. He stressed that DNR was compelled to determine
what could keep Petro Star operational. There had been
strong consideration for the sale of royalty oil at a
discounted price, but that path was not pursued. He stated
that DNR formulated a package of incentives that was first
heard and reviewed by the House, but they changed it to a
different combination for the investment incentive credit.
7:41:42 PM
Senator Dunleavy queried the sunset date of the
legislation. Commissioner Balash directed the committee's
attention to page 3, lines 17 and 18. He stated that the
effective date was after December 31, 2014 and before
January 1, 2020.
Senator Dunleavy wondered if there would be some
retroactivity. Commissioner Balash replied in the negative.
Co-Chair Meyer asked how DNR had determined five years.
Commissioner Balash responded that there were some projects
that the refineries were currently examining, so there was
a near term perspective. Some other investments that would
be applied to the refinery itself, there may be a component
of their air permitting that must be examined.
Co-Chair Meyer looked at page 4, line 8, and asked how that
provision worked. He assumed that the company would still
receive a payment if they had not applied, but were
eligible for the tax credit. Commissioner Balash responded
that the credit would be taken against a state corporate
income tax liability. If they had exhausted the liability,
but had credit remaining, the language would allow them to
request a refund similar to the credit program for the
Alaska oil and gas production tax system.
Vice-Chair inquired how Alaska would compete in the new
world of refining.
7:47:34 PM
Vice-Chair Fairclough requested that the Petro Star
representative testify again before the committee.
DOUG CHAPADOS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PETRO
STAR INC., introduced himself.
Vice-Chair Fairclough remarked that Petro Star had
indicated that the refinery was carrying a negative net
profit. She wondered if that was accurate. Mr. Chapados
replied that Petro Star had carried a negative profit in
2014.
Vice-Chair Fairclough inquired why Mr. Chapados responded
that Petro Star had taken steps to become a very efficient
operation. He reported that the quality bank had become
less solvent over the last few years.
7:51:32 PM
Vice-Chair Fairclough queried what expenditure would be
made to reduce the cost to qualify for the credit that made
Petro Star more profitable. Mr. Chapados replied that there
was a current project with the Alaska Railroad, but the
details were outlined in a nondisclosure agreement.
Vice-Chair Fairclough noted that it had been stated that
the quality bank and the cost of crude were the major
components for why Petro Star was not profitable. She
surmised that there would be a capital expenditure to
qualify for the credit, but not fix the problem. Mr.
Chapados replied that Petro Star could not control the cost
of crude and other aspects of the business. He stressed
that Petro Star worked hard to control the things that they
had some measure of influence over.
Vice-Chair Fairclough surmised that the capital expenditure
would turn a profit to maintain business for an extended
period of time. Mr. Chapados replied in the affirmative,
and furthered that the capital expenditure was just one of
many proposed projects for Petro Star.
Vice-Chair Fairclough queried if there would be an
opposition to review the credit. Mr. Chapados would be open
to a review the following year to determine if the credit
had the desired results.
Senator Bishop noted that refining was not wildly
profitable for anyone anywhere. He surmised that Petro Star
was examining many different ways to save money, and the
credit would allow the business to decrease transportation
costs. Mr. Chapados agreed.
Vice-Chair Fairclough inquired if a tax credit for bulk
storage had been created the prior legislative session.
Commissioner Balash replied that it was his understanding
that there was a storage credit, but it was for LNG.
7:57:22 PM
Vice-Chair Fairclough asked for more influence to support
the legislation. Commissioner Balash replied that there was
no intention to bring and incentive for this particular
industry. He stressed that it was an unregulated market,
which was fiercely competitive. He stressed that there was
no intention to pick winners and losers among the state's
refineries. In order for the administration and public to
fully understand the economic benefits of the refineries to
Alaska, DNR was prepared to undertake a competitiveness
review and analysis of the factors that were driving the
operations of the industry's facilities. He explained that
he was already in conversation with an economist that had
previously worked with the state regarding this issue in
the industry. He felt that the analysis could be conducted
concisely and inexpensively. The only way to ensure that
the credits were effective, would be to conduct the
analysis and review to determine a healthy refining
industry for Alaska in the long term.
Vice-Chair Fairclough wondered why a credit would be
extended beyond the one business that supplied 100 percent
of the military grade jet and marine diesel fuel, at
approximately 50 to 60 million gallons annually.
Commissioner Balash responded that DNR attempted to keep in
mind the maximum cost and the corresponding contribution
that the facilities make to the state treasury. He
explained that the state's royalty values increased and the
production tax value increased. In 2013 the total quality
bank charges paid by all TAPS refineries exceeded $112
million, and the total back to the state was in excess of
$50 million between increased royalty value and increased
production tax value.
8:04:57 PM
Vice-Chair Fairclough wondered why the credit was extended
to other businesses other than Petro Star. Commissioner
Balash replied that the liquid oil products industry was
one that was very competitive for customers at fueling
stations around Alaska. He felt that extending the credit
to other businesses would enhance that positive
competitiveness.
Vice-Chair Fairclough surmised that limiting the credit to
only one business would interfere with the market.
Commissioner Balash replied that it was a policy concern,
in not wanted to upset the existing competitive balance.
8:07:27 PM
Co-Chair Kelly stressed that the oil refinery industry was
strong. He remarked that the demand for refined products
was strong. He felt that environmental regulations
inhibited the improvement of existing refineries and the
building of new refineries. He stressed that Alaska needed
refined products, and therefore needed a strong refinery
industry.
Vice-Chair Fairclough remarked that there was an issue of
the security of a refinery to produce in Alaska and the
jobs of those that were currently employed. She wondered if
there should be an exclusion for those that were already
receiving a royalty oil sale contract. Commissioner Balash
replied that the legislation was the same legislation in
Resources, but had some added pages. He stated that DNR was
seeking the approval of a royalty sale contract to Tesoro.
Tesoro was paying a price that was higher than the state
would have received under the RIV calculation with the
producers. He felt that creating an eligibility exemption
would create a disincentive for the instate refineries to
purchase royalties from the state. The state wants the
refineries to purchase royalties, because they pay more
than what was received from the producers.
8:13:01 PM
Vice-Chair Fairclough wondered how Commissioner Balash
would respond to people that feel that credits should not
be available to those that were operating a healthy
business. Commissioner Balash noted that the refineries
were the exact type of operation that many legislators
focus upon.
Co-Chair Kelly wondered what if the company must repay the
credit, if the company shuts down. Commissioner Balash
replied in the affirmative, and explained that the
provision was on page 4, line 19.
Senator Dunleavy queried the difference between Petro Star
and Tesoro's situations. Commissioner Balash replied that
Tesoro was located on the Kenai Peninsula, and had access
to natural gas to generate their electricity. He furthered
that Tesoro had water access, and could bring in crude oil
as necessary that was not exclusive North Slope or TAPS
crude oil. He stated that Tesoro had a refined product
pipeline that ran from their facility to Anchorage, which
allowed them to deliver their products efficiently to
market. That pipeline was approaching capacity, and may
need to be looped to deliver additional product,
particularly in light of the closure of Flint Hills. He
stated that Tesoro saw many different varieties of crude
oil, so they were seeking to construct a pipeline from the
west side of Cook Inlet over to their facility on the east
side of Cook Inlet. That pipeline would allow for the
elimination of a tank and barge system that presently
operated on the west side near a volcano.
8:17:09 PM
Senator Dunleavy noted that earlier in the year, the major
producers and Tesoro were on the same page in the quality
bay. He wondered if the state was a part of that
discussion. Commissioner Balash replied that Flint Hills
had filed a complaint with the Federal Energy Regulatory
Commission (FERC), and the state intervene. Subsequently,
the state's goal was to see the system operated fairly. The
state would ensure that high quality oil would be valued
appropriately and compensated for dilution. He stressed
that DNR was not seeking to eliminate quality bank charges
paid by the TAPS refineries. He felt that they situation
must be revisited and adjusted to bring it into balance.
The quality bank system worked with a variety of components
that could tie to the products made from a crude oil
stream. Some of the components were valued on a market
basis, but some components were fixed. It would appear that
the fixing of that value caused the rest of the system to
fall out of balance. The specific complaint filed by Flint
Hills, and the specific remedy may not be agreed upon by
the state. He explained that FERC had opened their own
investigation. He stated that the Flint Hills action may
soon be dismissed by the Administrative Law Judge.
Senator Dunleavy wondered if the Valdez facility could
import oil from North Dakota and refine it at a lower cost.
Commissioner Balash deferred to Mr. Chapados, but believed
that Valdez could feasibly import and refine the oil.
Senator Dunleavy restated his question. Mr. Chapados
responded that the possibility was currently being
examined.
Co-Chair Meyer wondered how the state was protected, if the
refineries sold assets or became bankrupt. Commissioner
Balash responded that the amount of the credit claimed was
prorated over the remaining nine years. If in any one year
the facility ceases commercial operation, the remaining
amount of the credit would be reflected as an increase in
tax liability by the tax payer.
8:23:18 PM
Co-Chair Meyer wondered if it should be covered in the
legislation. Commissioner Balash replied that it may be
covered in corporate income tax.
Co-Chair Meyer asked if Mr. Fonder could respond to the
questions.
Vice-Chair Fairclough looked at page 4, line 19, and
wondered how the state would be protected.
MATT FONDER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
explained that the language was modeled after the gas
storage facility credit and the LNG storage facility
credit. The functionality was like any other tax liability.
Vice-Chair Fairclough felt that Mr. Fonder did not respond
to the question. She wondered if the state was entitled to
any reimbursement if a person received a tax credit and
invested in a piece of property that improved the asset,
then sold the property. She felt that line 20 did not allow
the state any reimbursement. Mr. Fonder responded that he
did not believe that it was specifically covered in the
language.
8:26:26 PM
AT EASE
8:33:28 PM
RECONVNED
Vice-Chair Fairclough MOVED to ADOPT a conceptual amendment
2.
Page 4, line 20
Following "operation"
Insert "or is sold"
There being NO OBJECTION, it was so ordered.
Co-Chair Meyer inquired how the amendment worked for the
commissioner. Commissioner Balash responded that DNR would
be able to involve the Department of Law (DOL) to ensure
that the right material was captured. He felt that the
conceptual amendment made it clear that there could be a
specific piece of property that was subject to the credit
in question.
Vice-Chair Fairclough agreed that it was her intent to
include the property.
Senator Olson wondered how the state was protected if the
company was bankrupt. Commissioner Balash replied that he
read, "If the facility ceases commercial operation",
related to bankruptcy.
Senator Bishop felt that Mr. Fonder alluded to that
summation.
Senator Dunleavy wondered what the state received in
royalty oil in conjunction with Petro Star. Commissioner
Balash replied that the amount of increased value the state
received for the royalty, as a consequence of the quality
bank charges by all TAPS refineries was $20.6 million in
2013.
Senator Dunleavy surmised that ANS was trading at a
premium; and Tesoro was refining oil from the west coast.
Senator Hoffman asked why there was no program to subsidize
fuel for the military. Commissioner Balash responded that a
subsidiary mechanism might work, if Petro Star had closed.
8:40:57 PM
AT EASE
8:41:40 PM
RECONVENED
Vice-Chair Fairclough MOVED to REPORT SCS CSHB 287(FIN) out
of committee as amended with individual recommendations,
the accompanying fiscal notes. There being NO OBJECTION, it
was so ordered.
SCS CSHB 287(FIN) was REPORTED out of committee as amended
with "no recommendation" and with a previously published
indeterminate fiscal note: FN2 (DNR) and a forthcoming
amended fiscal note from the Department of Revenue.
HJR 10 was SCHEDULED but not HEARD.
HB 384 am was SCHEDULED but not HEARD.
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