Legislature(2013 - 2014)SENATE FINANCE 532

03/01/2013 09:00 AM FINANCE

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09:05:04 AM Start
09:07:07 AM SB21
04:05:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
SENATE BILL NO. 21                                                                                                            
     "An  Act relating  to  appropriations  from taxes  paid                                                                    
     under the  Alaska Net Income  Tax Act; 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;  relating to the determination                                                                    
     of annual  oil and gas production  tax values including                                                                    
     adjustments  based on  a percentage  of gross  value at                                                                    
     the  point   of  production  from  certain   leases  or                                                                    
     properties;    making   conforming    amendments;   and                                                                    
     providing for an effective date."                                                                                          
SECTIONAL PRESENTATION                                                                                                        
9:07:07 AM                                                                                                                    
MICHEAL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,                                                                           
DEPARTMENT OF REVENUE (DOR), introduced himself.                                                                                
SUSAN POLLARD, SENIOR ASSISTANT ATTORNEY GENERAL, OIL, GAS                                                                      
AND MINING, DEPARTMENT OF LAW (DOL), introduced herself.                                                                        
MARY   HUNTER   GRAMLING,    ASSISTANT   ATTORNEY   GENERAL,                                                                    
DEPARTMENT OF LAW, introduced herself.                                                                                          
Ms. Pollard discussed the PowerPoint, "Departments of                                                                           
Revenue and Law: Sectional Review, CSSB 21(RES) 28-                                                                             
GS1647\C" (copy on file).                                                                                                       
Mr. Pawlowski shared that there was a detailed Sectional                                                                        
Analysis included in the members' packets.                                                                                      
Ms. Pollard looked at slide 2, "Main Provisions."                                                                               
     -Corporate  Tax  Credit  for   Qualified  Oil  and  Gas                                                                    
     Service Industry Expenditures                                                                                              
     -Production  Tax   Rate:  35  percent  flat   rate,  no                                                                    
     -Tax Credits                                                                                                               
          Eliminates current 20  percent capital expenditure                                                                    
          tax   credit  for   North  Slope   activities  but                                                                    
          establishes  a North  Slope tax  credit applicable                                                                    
          to production tax liabilities.                                                                                        
          Extends   the  small   producer  tax   credit  and                                                                    
          provides a $5 per barrel of oil tax credit.                                                                           
         Expands the exploration well tax credit.                                                                               
     -Gross Value Reduction                                                                                                     
          Establishes  30 percent  reduction from  the gross                                                                    
          value at the  point of production for  oil and gas                                                                    
          produced from new  units, new participating areas,                                                                    
          and expanded portions of participating areas.                                                                         
     -Oil and Gas Competitive Review Board                                                                                      
     -Hold Cook Inlet and Middle Earth harmless                                                                                 
Ms. Pollard highlighted slide 3, "Sec. 2 - Qualified Oil                                                                        
and Gas Industry Service Expenditure Tax Credit."                                                                               
     -Amends AS  43.20, the  Alaska Net  Income Tax  Act, by                                                                    
     adding a new section.                                                                                                      
     -Provides  a 10  percent tax  credit for  qualified oil                                                                    
     and gas  industry service expenditures incurred  in the                                                                    
     -A taxpayer may not apply  more than $10,000,000 in tax                                                                    
     credits under  this section for  a tax  year regardless                                                                    
     of  whether  the  taxpayer earned  the  tax  credit  or                                                                    
     received the tax credit by transfer.                                                                                       
     -Expires  if not  used against  a tax  liability within                                                                    
     seven calendar years.                                                                                                      
     -Qualified  oil and  gas  service industry  expenditure                                                                    
     must be  directly attributable to  in-state manufacture                                                                    
     or modification of tangible  personal property that has                                                                    
     a useful life of three years or more used in the                                                                           
     exploration, development, or production of oil or gas.                                                                     
Mr.  Pawlowski  emphasized that  the  direction  of the  tax                                                                    
credit was to the  modifications of the actual expenditures.                                                                    
He remarked that the tax credit  was not on the actual value                                                                    
of the asset, but rather the  value of the work performed in                                                                    
Vice-Chair  Fairclough  wondered  if  businesses  that  were                                                                    
currently  performing  in  Alaska   would  qualify  for  the                                                                    
credit,  if they  were manufacturing  for the  industry. Ms.                                                                    
Pollard replied that those businesses  would qualify for the                                                                    
Ms. Pollard discussed slide 4, "Sec. 3 - Tax Rate"                                                                              
     -AS 43.55.011(e) is amended to levy an annual flat tax                                                                     
     rate of 35 percent.                                                                                                        
     -AS 43.55.011(g), the monthly progressivity tax, is                                                                        
    -This change applies to oil and gas produced after                                                                          
     December 31, 2013.                                                                                                         
     -Effective date of January 1, 2014.                                                                                        
9:12:49 AM                                                                                                                    
Mr. Pawlowski explained that  the Senate Resources Committee                                                                    
expressed concerns  over the  regressivity of  the proposal.                                                                    
In order to develop a  progressive proposal, where the state                                                                    
took slightly  more at  the higher end  of the  price range,                                                                    
one had to start with an  increase in the base rate in order                                                                    
to  develop the  proper progressive  line. He  stressed that                                                                    
the  slide represented  the first  step  in developing  that                                                                    
Co-Chair Meyer surmised that the  base rate was raised to 35                                                                    
percent, and was offset by  the $5 per barrel production tax                                                                    
credit proposal.  Mr. Pawlowski  agreed, and added  that the                                                                    
presentation would  later highlight  the location of  the $5                                                                    
per barrel credit as written in the bill.                                                                                       
Ms. Pollard  displayed slide 5,  "Sec. 1-  Community Revenue                                                                    
Sharing Fund."                                                                                                                  
     -Amends  AS  29.60.850(b)  to   change  the  source  of                                                                    
     revenue that  funds the community revenue  sharing fund                                                                    
     to  AS 43.20.030(c),  the Alaska  Net  Income Tax  Act,                                                                    
     from progressivity  under AS 43.55.011(g)  (repealed in                                                                    
     this bill).                                                                                                                
     -Effective date of January 1, 2014                                                                                         
Mr. Pawlowski  that the slide  represented a  provision that                                                                    
was included  in the governor's  bill, which  was maintained                                                                    
by the  Senate Resources  Committee. He remarked  that there                                                                    
was a substantive  change from current line on  page 2, line                                                                    
4, where the  brackets point out that the  language that was                                                                    
being  removed was  an amount  equal  to 20  percent of  the                                                                    
money  received. That  limitation  was put  on the  original                                                                    
state, which limited the  amount available for appropriation                                                                    
to a maximum of 20 percent of the progressivity revenues.                                                                       
9:16:13 AM                                                                                                                    
Ms.  Pollard  highlighted  slide  6,  "Sec.  8  -  Qualified                                                                    
Capital Expenditure Tax Credit."                                                                                                
     -AS 43.55.023(a)(3) is a new  provision limiting the 20                                                                    
     percent  qualified capital  expenditure tax  credit for                                                                    
     expenditures  incurred  to  explore  for,  develop,  or                                                                    
     produce  oil and  gas deposits  on the  North Slope  to                                                                    
     expenditures incurred before January 1, 2014.                                                                              
     -Tax credits for expenditures  incurred to explore for,                                                                    
     develop, or produce  oil and gas deposits  south of the                                                                    
     North Slope are not impacted.                                                                                              
     -The full  amount of  a tax  credit certificate  may be                                                                    
     issued in a single year.                                                                                                   
Mr.  Pawlowski  furthered that  the  effect  of this  change                                                                    
would   be   to   limit  the   qualifications   of   capital                                                                    
expenditures, at  68 degrees north  latitude, which  was the                                                                    
dividing  line for  the North  Slope. He  remarked that  the                                                                    
provision only applied to expenditures  that occurred on the                                                                    
North Slope.                                                                                                                    
Co-Chair Meyer remarked that companies  could be stressed if                                                                    
they were  counting on that  20 percent capital  credit. Mr.                                                                    
Pawlowski replied that there would  be a situation regarding                                                                    
how  much obligation  the additional  investment creates  in                                                                    
liability and  exposure to the  state. He stressed  that the                                                                    
longer  the  credits are  carried  forward,  the longer  the                                                                    
state was susceptible to that impact.                                                                                           
9:21:18 AM                                                                                                                    
Vice-Chair Fairclough  requested a  model from Econ  One and                                                                    
PFC Energy  that put this  particular provision  against the                                                                    
gross  revenue  exclusion   at  different  companies'  price                                                                    
points and production points benefit.  She remarked that the                                                                    
$5  per  barrel  would   impact  the  calculation  regarding                                                                    
industry  profit  and the  expansion  of  the gross  revenue                                                                    
exclusion. Mr. Pawlowski agreed to provide that information                                                                     
Senator  Hoffman wondered  what the  new section  would cost                                                                    
the  state compared  to the  anticipated $1  billion in  the                                                                    
current  year. Mr.  Pawlowski responded  that the  repeal of                                                                    
the credit  was a revenue  generator, because the  state was                                                                    
no   longer  paying   the  credits.   He  shared   that  the                                                                    
administration found  that there was a  difference in timing                                                                    
of  obligation to  the state.  He  stated that  expenditures                                                                    
occurred  in the  development of  the field,  and production                                                                    
occurred  later.  As  the  production  on  the  North  Slope                                                                    
declined, the ability of the  state to manage the increasing                                                                    
obligations as  more money was  spent was a  central balance                                                                    
of the bill.  He explained that the impact was  found in the                                                                    
fiscal note.                                                                                                                    
Ms. Gramling highlighted slide 7,  "Sec. 9 - Carried-Forward                                                                    
Tax Credit  AS 43.55.023(b)."  She explained that  the title                                                                    
of the  slide actually referred  to Section 10,  not Section                                                                    
     -Amends AS  43.55.023(b) to retain  a tax credit  of 25                                                                    
     percent for a carried-forward  annual loss for adjusted                                                                    
     lease  expenditures  incurred   outside  of  the  North                                                                    
     -Provides a tax credit of 35 percent for a carried-                                                                        
     forward annual loss for adjusted lease expenditures                                                                        
     incurred after December 31, 2013 on the North Slope,                                                                       
     subject to the requirements in new subsections (p)-                                                                        
9:26:28 AM                                                                                                                    
Mr. Pawlowski explained that the  amendment was added in the                                                                    
Senate Resources  Committee, which  had two parts.  The base                                                                    
rate on the North Slope had  increased from 25 percent to 35                                                                    
percent, so the net-loss  carry-forward credit was increased                                                                    
for North  Slope expenditures to  match the base rate  of 35                                                                    
Co-Chair   Meyer  remarked   that  there   may  be   further                                                                    
discussion  regarding the  carry-forward credit  at a  later                                                                    
Ms. Pollard  explained that the  loss carry-forward  did not                                                                    
need to  equal the tax rate,  but there was no  legal reason                                                                    
to match the loss of the carry-forward.                                                                                         
Senator Hoffman wondered why the  North Slope was the focus,                                                                    
and did not include the  Kuparuk and Prudhoe Bay basins. Ms.                                                                    
Pollard  responded  that  the bill  included  any  areas  68                                                                    
degrees  north  latitude and  higher,  so  she assumed  that                                                                    
those areas would be included.                                                                                                  
Senator  Hoffman  remarked  that   there  was  a  difference                                                                    
between  the legacy  fields and  other fields  on the  North                                                                    
Slope. Mr.  Pawlowski clarified that  the 35  percent credit                                                                    
was meant for  a loss carry-forward, so in  order to qualify                                                                    
for the credit there would have to be a loss.                                                                                   
Ms. Gramling  highlighted slide  8, "Sec.  16 -  North Slope                                                                    
Carried-Forward Tax Credit AS 43.55.023(p) - (u)."                                                                              
     Key characteristics:                                                                                                       
          -10 year time limit on use.                                                                                           
          Must be applied on a first-earned, first used                                                                         
          -Reporting requirements to the Department of                                                                          
          -May only be used to reduce production tax                                                                            
          liability    under   AS    43.55.011(e),   limited                                                                    
         transferability, not redeemable for cash.                                                                              
          -May apply a 15 percent annual increase to the 35                                                                     
          percent tax credit base.                                                                                              
     AS 43.55.023(p)  requires producers  to file  an annual                                                                    
     statement  with the  Department  of  Revenue under  new                                                                    
     subsection AS  43.55.030(g) to use  the tax  credit two                                                                    
     years after incurring expenditures.  The tax credit may                                                                    
     not be used more than 10 calendar years later than the                                                                     
     date the expenditures were incurred.                                                                                       
9:31:45 AM                                                                                                                    
Mr. Pawlowski stated  that the purpose of  the new provision                                                                    
was to adjust  the current law. Under current  law, the loss                                                                    
carry-forward  credit  may  be  turned into  the  state  and                                                                    
converted to a cash payment  from the state. The bill states                                                                    
that the credit  was required to be carried  forward to when                                                                    
there was  a tax  liability and the  credit is  used against                                                                    
the liability.                                                                                                                  
Vice-Chair  Fairclough requested  a model  of the  annual 15                                                                    
percent increase.  She also asked  if the outline was  for a                                                                    
new explorer.  Mr. Pawlowski responded that  the outline was                                                                    
not necessarily  for a new  explorer. He stated that  it was                                                                    
for anyone that had a  "loss", or someone whose expenditures                                                                    
offset their production.                                                                                                        
Vice-Chair Fairclough  requested a model that  outlined what                                                                    
a  loss  might look  like  as  an  impact  to the  state  in                                                                    
comparison to  paying it  in cash.  Mr. Pawlowski  agreed to                                                                    
provide that information.                                                                                                       
Senator  Hoffman  suggested  that  the  model  also  include                                                                    
various  interest rates.  Mr.  Pawlowski  agreed to  include                                                                    
that in the model.                                                                                                              
Ms.  Gramling discussed  slide  9, "Sec.  16  - North  Slope                                                                    
Carried-Forward Tax Credit : AS 43.55.023(q)."                                                                                  
     -"First earned, first used" rule.                                                                                          
     -Applies to expenditures after December 31, 2014.                                                                          
     -Assures credits earned in earlier calendar years are                                                                      
     used up before later earned credits.                                                                                       
Ms.  Pollard displayed  slide  10, "Sec.  16  - North  Slope                                                                    
Carried Forward Tax Credit: AS 43.55.023(r)."                                                                                   
     -Increases at 15 percent annually if compliance with                                                                       
     new AS 43.55.030(g).                                                                                                       
     -Increase begins January 1st of the second calendar                                                                        
     year after credit earned.                                                                                                  
     -Increase stops December 31st of calendar year before                                                                      
     credit used.                                                                                                               
     -Increase has no value except as applied to 43.55                                                                          
     -2015                                              less                                                                    
     used against 2016 or 2017 taxes).                                                                                          
9:37:06 AM                                                                                                                    
Mr. Pawlowski  displayed slide  12, "Sec.  16 -  North Slope                                                                    
Carried-Forward Tax Credit: AS 43.55.023(t)."                                                                                   
Ms. Pollard discussed slide 12.                                                                                                 
     AS 43.55.023(t) provides exceptions to allow for the                                                                       
     limited transfer of the tax credit:                                                                                        
          -Transfer is limited to a person that acquires an                                                                     
          interest in the lease or property upon which the                                                                      
          credit is based.                                                                                                      
          -Transferee's use of credit subject to rules in                                                                       
          subsection (u).                                                                                                       
          -The Department of Revenue must be notified of                                                                        
          the transfer.                                                                                                         
          -Transferee subject to audit by the Department of                                                                     
Mr. Pawlowski stated that if  one company purchased property                                                                    
from another company, they could  buy the loss carry-forward                                                                    
credits  that  were  created. He  explained  that  the  bill                                                                    
limited the purchaser's use of  the credits to a function of                                                                    
the  value of  the production  that came  from the  lease or                                                                    
property. In  order for the  purchased credits  to activate,                                                                    
the  purchaser must  take the  property  into production  to                                                                    
generate production  that generates revenue.  The limitation                                                                    
is put on  the purchaser's use of the credit,  as opposed to                                                                    
the seller of the credit.                                                                                                       
Co-Chair Meyer  wondered how 20 percent  was determined. Mr.                                                                    
Pawlowski replied  that the 20 percent  was determined after                                                                    
analyzing  the overall  government take  numbers. He  stated                                                                    
that they  looked for a  number that  was low enough  to not                                                                    
exceed the actual  potential tax revenue from  the state. He                                                                    
remarked that  it was  an arbitrary  number to  some degree,                                                                    
but  one must  be  sure  there was  not  an overly  generous                                                                    
ability to apply the purchased credits.                                                                                         
Vice-Chair Fairclough  asked if the property  could transfer                                                                    
ownership  more than  once in  a ten-year  period before  it                                                                    
expired.  Ms. Pollard responded that there was no limit.                                                                        
Mr. Pollard  looked at slide  14, "Sec. 17 -  Small Producer                                                                    
Tax Credit."                                                                                                                    
     -Amends AS  43.55.024(d) to extend  the tax  credit for                                                                    
     small  producers  (under  50,000   a  day  average  BTU                                                                    
     equivalent barrels)  by six years, the  later of either                                                                    
     2022 or  the ninth  calendar year after  production for                                                                    
     production before May 1, 2022.                                                                                             
     -The  tax credit  is not  transferable  and any  unused                                                                    
     portion may not  be carried forward for use  in a later                                                                    
     calendar year.                                                                                                             
Mr.  Pawlowski stated  that the  provision was  on page  18,                                                                    
line 21. The  provision existed in current law,  but was set                                                                    
to sunset  in 2016. He  explained that the bill  included an                                                                    
extension  of  a  producer's  ability  to  qualify  for  the                                                                    
9:42:56 AM                                                                                                                    
Ms.  Pollard  stressed that  the  credit  was not  based  on                                                                    
expenditures, but was based on the amount of production.                                                                        
Ms.  Pollard discussed  slide  15,  "Sec. 19  -  $5 Per  Oil                                                                    
Barrel Tax Credit."                                                                                                             
     -Amends AS  43.55.024 by adding  a new a tax  credit of                                                                    
     $5  for each  barrel of  oil  subject to  tax under  AS                                                                    
     43.55.011(e)   applicable   to   the   producer's   tax                                                                    
     liability for the year the oil was produced.                                                                               
     -The  tax  credit  is   not  transferable,  any  unused                                                                    
     portion may not  be carried forward for use  in a later                                                                    
     calendar year and  it may not be applied  to reduce the                                                                    
     producer's tax liability to below zero.                                                                                    
Mr. Pawlowski  explained that the provision  was the balance                                                                    
that   was  struck   in  the   Senate  Resources   Committee                                                                    
Substitute to  offset the  increase in the  base rate  to 35                                                                    
percent, which  the committee heard  in a  previous meeting.                                                                    
He stressed that the provision  was based on production, was                                                                    
non-transferrable, and  could not  be used  to reduce  a tax                                                                    
payer's liability below zero.                                                                                                   
Co-Chair Meyer wondered  if the value eroded  over time, and                                                                    
whether it should be inflation  proof. Mr. Pawlowski replied                                                                    
that  the inflation  adjusting conversation  was valid,  but                                                                    
stressed  that  there  was   a  cautiousness  regarding  the                                                                    
relationship  between oil  prices and  inflation versus  the                                                                    
actual cost  and inflation. He  felt that there should  be a                                                                    
focus on  what actually  happens to the  value of  $5 during                                                                    
that time period.  He remarked that DOR was  willing to work                                                                    
with consultants to develop an inflation proof system.                                                                          
Co-Chair Meyer felt  that the law should be in  place for 10                                                                    
to 20 years, to the impact should be inflation proof.                                                                           
Senator Hoffman  wondered why 5 percent  was not considered,                                                                    
because it would  provide $5 per barrel at  $100 per barrel.                                                                    
Mr. Pawlowski replied that the  fixed dollar amount provided                                                                    
less benefit to  the producer at high  oil prices, therefore                                                                    
more benefit to the state.                                                                                                      
Senator Hoffman surmised  that the reason for the  $5 was to                                                                    
provide  less benefit  to the  oil companies.  Mr. Pawlowski                                                                    
agreed with that summation.                                                                                                     
Ms.  Pollard highlighted  slide 16,  "Sec. 20  - Alternative                                                                    
Tax Credit for Oil and Gas Exploration."                                                                                        
     -The sunset  provision in  AS 43.55.025(b)  is extended                                                                    
     from July 1, 2016 to July 1, 2022.                                                                                         
     -AS  43.55.025(c), relating  to  exploration wells,  is                                                                    
     amended  by deleting  the 3  mile distance  requirement                                                                    
     for  exploration   wells  outside  Cook  Inlet   in  AS                                                                    
     -New subsection  (q) provides expenditures  claimed for                                                                    
     a  tax  credit  under  AS 43.55.025  may  not  also  be                                                                    
     claimed for a tax credit  under AS 43.55.023 or another                                                                    
     provision of AS 43.55.025.                                                                                                 
9:47:26 AM                                                                                                                    
Mr. Pawlowski  stated that the  provision was a  change made                                                                    
in the  Senate Resources  Committee based on  testimony they                                                                    
had  received  from some  of  the  explorers. The  testimony                                                                    
stated that  the credit in  the high risk  exploration phase                                                                    
of  development were  important  for the  risky activity  of                                                                    
drilling  the  exploration  wells. While  the  governor  had                                                                    
maintained  this credit,  industry  had  expressed that  the                                                                    
three  mile limit  made  the credit  very  difficult to  use                                                                    
within the central North Slope.                                                                                                 
Ms.  Pollard  stated  that the  provision  was  outlined  in                                                                    
Section 22  of the  bill. She  stressed that  the limitation                                                                    
applied to the loss carry-forward credit.                                                                                       
Mr. Pawlowski explained that the  exploration credit was not                                                                    
based  solely  on  expenditures,   but  there  were  further                                                                    
limitations. A company must come  to DNR, and prequalify for                                                                    
the  credit. The  company  must demonstrate  that  it was  a                                                                    
reasonable new  target, and  was an  exploration expenditure                                                                    
and  well. Then  DNR receives  data on  the findings  of the                                                                    
exploration.  He stressed  that there  were benefits  to the                                                                    
state, and a gate for the credit.                                                                                               
Co-Chair  Meyer surmised  that a  company would  not receive                                                                    
the tax  credit, if they did  not share the tax  credit. Mr.                                                                    
Pawlowski  responded that  the credit  could be  turned into                                                                    
the state for reimbursement.                                                                                                    
9:52:45 AM                                                                                                                    
Ms. Gramling looked  at slide 17, " Sec. 30  - Gross Revenue                                                                    
Exclusion for North Slope Oil and Gas."                                                                                         
     -Provides  that for  the  determination  of the  annual                                                                    
     production tax value  of oil and gas  produced north of                                                                    
     68 degrees North latitude, that  the gross value at the                                                                    
     point of  production is reduced  by 30 percent  for the                                                                    
     oil or gas:                                                                                                                
          1)  Produced from  a lease  or property  that does                                                                    
          not contain a  lease that was within a  unit as of                                                                    
          January 1, 2003;                                                                                                      
          2) Produced from  a participating area established                                                                    
          after  December 31,  2011 that  was within  a unit                                                                    
          formed  under AS  38.05.180(p)  before January  1,                                                                    
          2003, if  the participating area does  not contain                                                                    
          a   reservoir   previously    established   in   a                                                                    
          participating area;                                                                                                   
          3)  Produced  from  the  expanded  acreage  of  an                                                                    
          existing participating  area that was  expanded by                                                                    
          the   Department   of  Natural   Resources   after                                                                    
          December   31,   2011    provided   the   producer                                                                    
          demonstrates  to  the  Department of  Revenue  the                                                                    
          volumes of oil and  gas produced from the expanded                                                                    
Mr. Pawlowski  stressed that  the final  point was  added in                                                                    
the  Senate Resources  Committee, and  he remarked  that DNR                                                                    
would  be  available  later  to  discuss  the  participating                                                                    
areas. He stressed that the  intent of the original bill was                                                                    
to be  careful about  the application  of the  gross revenue                                                                    
exclusion (GRE). He remarked that  the GRE should only apply                                                                    
to new oil that was not currently under development.                                                                            
Senator Bishop agreed that DNR  should explain the benchmark                                                                    
that they use to identify "new oil."                                                                                            
Vice-Chair Fairclough  wondered how long "new  oil" would be                                                                    
considered  "new  oil." She  felt  that  eventually all  oil                                                                    
would be considered  new, and all oil would  qualify for the                                                                    
GRE.  She   encouraged  the   committee  to   consider  that                                                                    
Senator  Olson looked  at  Section 1,  and  queried the  net                                                                    
effect   of  municipal   revenue   sharing.  Mr.   Pawlowski                                                                    
responded that the net effect  would potentially enable more                                                                    
money to be  added to the revenue sharing fund,  to meet the                                                                    
$60 million or $180 million.                                                                                                    
9:57:08 AM                                                                                                                    
Senator  Olson wondered  how to  ensure revenue  sharing was                                                                    
protected. He  felt that the  bill stated that one  could do                                                                    
less than 20 percent, if it  were removed, so there would be                                                                    
less money  for the communities. Mr.  Pawlowski replied that                                                                    
the appropriation was the choice  of the legislature. The 20                                                                    
percent  referred  to  a situation  that  pertained  to  low                                                                    
Ms.  Gramling stated  that  Section 1  would  only amend  AS                                                                    
Mr.   Pawlowski   discussed   slide   18,   "Oil   and   Gas                                                                    
Competitiveness Review Board AS 43.98.040-070."                                                                                 
     -AS 43.98.040 establishes a 9 member board                                                                                 
     -Governor designates chair every two years. Governor                                                                       
     may replace and remove members.                                                                                            
     -Members serve 6 year terms, may be reappointed.                                                                           
     -The Board meets four times a year to review                                                                               
     investment, fiscal systems and to identify factors                                                                         
     that affect oil and gas investment.                                                                                        
     -The Board reports annually to the Legislature with                                                                        
     -The Board sunsets December 31, 2022.                                                                                      
9:59:45 AM                                                                                                                    
1:36:32 PM                                                                                                                    
Senator Dunleavy  asked for a  fiscal analysis of the  CS at                                                                    
35  percent  to  25  percent   of  the  tax.  Mr.  Pawlowski                                                                    
indicated that he would provide that information.                                                                               
Senator Dunleavy asked for page  8 and a fiscal analysis for                                                                    
the  above  incremental  increases  instead  of  the  entire                                                                    
production. Mr.  Pawlowski indicated  that he  would provide                                                                    
that information.                                                                                                               
Senator Dunleavy queried how  the CS incentivized investment                                                                    
into  active production  of the  non-conventional oils.  Mr.                                                                    
Pawlowski  responded  that  the incentives  subject  to  the                                                                    
gross revenue solution.                                                                                                         
ECON ONE PRESENTATION                                                                                                         
1:40:54 PM                                                                                                                    
BARRY PULLIAM,  MANAGING DIRECTOR, ECON ONE  RESEARCH, INC.,                                                                    
presented  "Analysis of  Alaska's  Tax  System, North  Slope                                                                    
Investment and  The Administration's Proposal SB  21/SRES CS                                                                    
SB 21" (copy on file). He  looked at slide 1, "Econ One: Who                                                                    
We Are."                                                                                                                        
     Economic Research and Consulting Firm                                                                                      
          -We Provide Economic Analysis In Energy and Other                                                                     
     We Have Advised the State of Alaska on Petroleum                                                                           
     Related Matters For Over Two Decades                                                                                       
     We  Have  Worked  With  the  Cowper,  Hickel,  Knowles,                                                                    
     Murkowski, Palin, and Parnell Administrations                                                                              
     We Assisted  the Legislature Between  2005 and  2008 on                                                                    
     Tax and Gas Development Issues                                                                                             
     Our Energy-Related Work Outside Alaska                                                                                     
          -State Governments: Texas, Louisiana, New Mexico,                                                                     
          Oklahoma, California                                                                                                  
          -Federal Government Agencies: Department of                                                                           
          Interior, Federal Trade Commission                                                                                    
          -Energy Companies: Producers, Refiners, Mid-                                                                          
          Stream Services, Pipelines, Chemicals                                                                                 
Mr.  Pulliam   looked  at  slide  4,   "Alaska  North  Slope                                                                    
Discovered Resources by Discovery Year (1969 - 2010)."                                                                          
     -The North  Slope Has Produced 16.2  Billion Barrels to                                                                    
     -Approximately  5.6  Billion  Barrels  of  Economically                                                                    
     Recoverable Resources Remain in Known Fields                                                                               
     -Significant  Additional Resources  Still Remain  to be                                                                    
Mr.  Pulliam slide  5, "Alaska  North  Slope Production  and                                                                    
     -Many  North Slope  Fields are  Now  at Mature  Stages.                                                                    
     However, Less  Than Half of its  Potential Economic Oil                                                                    
     Resources Have Been Produced to Date                                                                                       
     -In Total,  the North  Slope Contains  Approximately 40                                                                    
     Billion  Barrels   of  Additional   Estimated  Economic                                                                    
     Recoverable Resources at Today's Prices                                                                                    
Mr.  Pulliam  discussed  slide  6,  "Estimated  Undiscovered                                                                    
Conventional  Oil  Resources  on  Alaska  North  Slope."  He                                                                    
stressed that  state property held resources  that were much                                                                    
different  than  what  had  been   discovered  to  date.  He                                                                    
explained that  Alaska production  was dominated  by several                                                                    
very  large   fields.  He   explained  that   the  remaining                                                                    
locations held  much smaller  accumulations. He  stated that                                                                    
the USGS estimated that the  typical field size that had yet                                                                    
to be discovered  on the central North Slope was  in the $30                                                                    
to $60 million barrel range.                                                                                                    
1:45:46 PM                                                                                                                    
Mr.  Pulliam  discussed   slide  7,  "Estimated  Undeveloped                                                                    
Unconventional Oil Resources on  Alaska North Slope." stated                                                                    
that much was  not yet discovered in Alaska.  He spoke about                                                                    
where the one billion barrels  located, and thought that the                                                                    
number  could  be very  different  going  forward. He  spoke                                                                    
about viscous  and heavy oil  and estimated that  15 percent                                                                    
was recoverable.                                                                                                                
Co-Chair Meyer  asked for insight  about the  possibility of                                                                    
shale oil production in Alaska.  Mr. Pulliam replied that he                                                                    
did not  have much  insight regarding shale  production, and                                                                    
suggested that DNR provide that information.                                                                                    
Mr.  Pulliam  discussed  slide  8,  "Crude  Oil  Production,                                                                    
Alaska  North Slope  vs. United  States  and OECD  Countries                                                                    
2003-2012." He  stated that  Alaskan production  declined at                                                                    
an average of 7 percent a year.                                                                                                 
1:51:47 PM                                                                                                                    
Mr. Pulliam  discussed slide 9, "Estimated  Capital Spending                                                                    
for  Exploration  and  Development Alaska  North  Slope  vs.                                                                    
United States  and Worldwide Spending 2003-2012."  He stated                                                                    
that spending  rose consistently until 2007,  while spending                                                                    
in  the rest  of the  world  trended higher.  He added  that                                                                    
spending continued to  rise in the rest of  the world, where                                                                    
Alaska  remained  flat.  The   slide  distilled  some  basic                                                                    
concerns about production and investment.                                                                                       
Vice-Chair  Fairclough  referred  to  slides 8  and  9.  She                                                                    
stated  that Alaska  compared themselves  to other  regimes,                                                                    
and wondered  what regimes were  the best to  compare Alaska                                                                    
against.  Mr.  Pulliam replied  that  the  UK was  the  best                                                                    
regime to compare against Alaska.                                                                                               
1:56:37 PM                                                                                                                    
Vice-Chair Fairclough  wondered about provinces  producing 1                                                                    
million  barrels.  She  thought  that  the  bar  charts  and                                                                    
wondered  if volume  affected the  tax  regime. Mr.  Pulliam                                                                    
agreed  that the  comparison,  and  furthered that  Alaska's                                                                    
production was  approximately 0.5  million barrels  per day.                                                                    
He explained  that Alaska's regime  was roughly the  size of                                                                    
Australia's regime.                                                                                                             
Vice-Chair   Fairclough  felt   that  there   should  be   a                                                                    
comparison  between the  United  States  and other  regimes,                                                                    
which included the  threshold of 1 million  barrels per day.                                                                    
She felt that Alaska should be included in that group.                                                                          
Mr. Pulliam continued with slide 11, "How ACES Works."                                                                          
     Tax is Calculated on "Net Value" of Taxable Production                                                                     
          -Taxable Production is Total Production Less                                                                          
          -Net Value is Gross Wellhead Value Less Cost of                                                                       
          -Costs of Production are Capital Expenses,                                                                            
          Operating Expenses and Property Tax Payments                                                                          
     Base Tax Rate of 25 percent                                                                                                
     Progressive Tax  Rate of 0.4  percent Per  $1/Barrel (4                                                                    
     percent  Per $10/Barrel)  Increase Over  $30/Barrel Net                                                                    
     Value  and 0.1  percent  Per $1/Barrel  (1 percent  Per                                                                    
    $10/Barrel) Over $92.50, Capped at 50 percent Total                                                                         
          Taxable Value = $100/Barrel "Production Tax                                                                           
          Value" Base Rate = 25 percent                                                                                         
          Progressive Rate = ($92.50 - $30) x 0.4 percent +                                                                     
          ($100 - $92.50) x 0.1 percent = 25.75 percent                                                                         
          Total Rate = 25 percent + 25.75 percent = 50.75                                                                       
     Credit of 20 percent for Capital Expenditures (Taken                                                                       
     Over 2 Years)                                                                                                              
     Small Producer Credit of $12 Million Per Year (Phased                                                                      
     Out for Production over 50 MBD)                                                                                            
     State Purchases Credits and Net Operating Losses                                                                           
     (NOLs) From Companies Without Tax Obligation                                                                               
          -Equals 45 percent of Capital Expenditures and 25                                                                     
          percent of Operating Expenditures                                                                                     
2:01:43 PM                                                                                                                    
Mr. Pulliam discussed slide 12,  "Calculation of ACES Taxes:                                                                    
Varying Prices."  He explained  the spreadsheet  and created                                                                    
comparisons regarding progressive tax.                                                                                          
Mr. Pulliam discussed  slide 13, " Calculation  of ACES Tax:                                                                    
Varying Costs $100 West Coast ANS Price."                                                                                       
Mr. Pulliam  discussed slide 14,  "Calculation of  ACES Tax:                                                                    
Varying Costs $80 West Coast ANS Price."                                                                                        
Mr. Pulliam  discussed slide 15,  "Calculation of  ACES Tax:                                                                    
Additional Capital Spending." The  graph depicted a producer                                                                    
producing  50  million barrels  per  year,  with ac  capital                                                                    
expenditure  of  $250 million.  He  pointed  out the  middle                                                                    
column  where the  tax  rate  was 37  percent  prior to  the                                                                    
expenditure and after it would be 25 percent.                                                                                   
2:08:13 PM                                                                                                                    
Mr.  Pulliam discussed  slide 16,  "Effective Tax  Rates For                                                                    
New Development  Under ACES Additional Tax  as percentage of                                                                    
Production Tax Value: Incumbent Producer."                                                                                      
     Lower Cost:  $16 Per Barrel Development  Capex; $14 Per                                                                    
     Barrel Opex;  16.67 percent Royalty  Rate; 50  MMBO New                                                                    
     Development  by  Existing  Owner With  Initial  Ongoing                                                                    
     Production   of  Approximately   100   MBD  and   Costs                                                                    
     Consistent with Prudhoe Bay/Kuparuk River Units                                                                            
     Higher Cost: $25 Per Barrel  Development Capex; $14 Per                                                                    
     Barrel Opex;  16.67 percent Royalty  Rate; 50  MMBO New                                                                    
     Development  by  Existing  Owner With  Initial  Ongoing                                                                    
     Production   of  Approximately   100   MBD  and   Costs                                                                    
     Consistent with Prudhoe Bay/Kuparuk River Units                                                                            
     Very High  Cost: $34 Per Barrel  Development Capex; $21                                                                    
     Per Barrel  Opex; 16.67 percent  Royalty Rate;  50 MMBO                                                                    
     New Development by Existing  Owner With Initial Ongoing                                                                    
     Production   of  Approximately   100   MBD  and   Costs                                                                    
     Consistent with Prudhoe Bay/Kuparuk River Units                                                                            
Mr.  Pulliam discussed  slide 17,  "The Economics  of Higher                                                                    
Cost Oil Development." He explained the graphs.                                                                                 
2:14:02 PM                                                                                                                    
Mr. Pulliam discussed slide 18,  "The Economics of Very High                                                                    
Cost Oil Development." He stated  that the slide represented                                                                    
what may occur if there were a very cost for development.                                                                       
Co-Chair Meyer suggested  that an example of  very high cost                                                                    
oil development would  be heavy oil. He felt  that the heavy                                                                    
oil  areas  would  be  locations  that  the  industry  would                                                                    
pursue,  because the  state was  picking up  so much  of the                                                                    
cost. Mr. Pulliam agreed and  noted that the development was                                                                    
difficult  with today's  technology. He  compared the  lower                                                                    
forty eight.                                                                                                                    
Co-Chair Meyer stated that ACES  incentivized heavy oil. Mr.                                                                    
Mr.  Pulliam discussed  slide 19,  "DOR  Forecast Levels  of                                                                    
Production  FY  2015-FY2022."  He stated  that  the  average                                                                    
annual decline was 6 percent.                                                                                                   
2:19:36 PM                                                                                                                    
Mr.   Pulliam   discussed   slide   20,   "Production   With                                                                    
Development  of  150 MMB  of  Reserves  Annually FY  2015-FY                                                                    
2022."  He   explained  that   different  fields   were  all                                                                    
declining, but would  balance out in the  forecast, so there                                                                    
would be an annual decline of  zero percent from FY 15 to FY                                                                    
Co-Chair Meyer asked  how much industry would  spend to stop                                                                    
the decline.  Mr. Pulliam responded  that the  assumption $3                                                                    
billion  dollar  investment.  He  noted  that  the  pace  of                                                                    
spending worldwide would show the  expense of $3 billion per                                                                    
2:21:56 PM                                                                                                                    
Mr. Pulliam discussed slide 21,  "Forecast Levels of Capital                                                                    
Credits and NOLs FY 2015 - FY 2019."                                                                                            
Mr. Pulliam  discussed slide 22:  "Capital Credits  and NOLs                                                                    
Assuming Development of  Additional 150 MMB of  Oil Per Year                                                                    
Over Forecast By New Participant."                                                                                              
Co-Chair  Meyer   encouraged  a  discussion   regarding  the                                                                    
difference between GRE versus  capital credits and which one                                                                    
was better for the state.                                                                                                       
Vice-Chair Fairclough  wished to see the  issue modeled. She                                                                    
wondered if one had a  greater advantage. Mr. Pulliam agreed                                                                    
to  model  the  comparison.  He  stated  that  both  credits                                                                    
provided forms  of incentives. He stressed  that the current                                                                    
system  was  tied  to  spending  and the  GRE  was  tied  to                                                                    
Vice-Chair  Fairclough  remarked  that  each  community  was                                                                    
unique. The Senate Resource Committee  had hoped to generate                                                                    
more viscous oil,  which presented no benefit  to the legacy                                                                    
fields. Mr. Pulliam sensed that  the intent was to offer the                                                                    
GRE to the  more challenged areas. Producers  could find out                                                                    
how barrels  could work, and  thought that the  language may                                                                    
accomplish the intent.                                                                                                          
2:27:59 PM                                                                                                                    
Mr. Pulliam  discussed slide 23,  "Capital Credits  and NOLs                                                                    
Assuming Development of  Additional 150 MMB of  Oil Per Year                                                                    
Over Forecast 50 Percent and 50 percent by Incumbent."                                                                          
Co-Chair  Kelly commented  that the  graphs were  making him                                                                    
angry. He did  not like public debate that  went without the                                                                    
vetting required.  He stated that  the lack  of professional                                                                    
curiosity  was lacking,  and ACES  was  a more  than the  $2                                                                    
million giveaway.                                                                                                               
Mr.  Pulliam  discussed  slide 25,  "Summary  of  Production                                                                    
Profiles  Examined For  Alaska and  Benchmark Developments."                                                                    
He discussed developments in the  Lower 48 and compared them                                                                    
to Alaska with a variety  of different cost ranges. He noted                                                                    
that  the $16  range along  with the  technology, and  chart                                                                    
described a production profile.                                                                                                 
Mr.  Pulliam  discussed  slide 26,  "Summary  of  Investment                                                                    
Measures  (New  Participant)."  All  Alaska  scenarios  were                                                                    
under ACES. He stated that  the first section showed the MPV                                                                    
per barrel  at $80 west  coast price. He noted  that columns                                                                    
two and  three were noted  and the economics were  worse for                                                                    
the  new participants.  Some  were $34  per  barrel mark  or                                                                    
technology not quite ready.                                                                                                     
2:40:58 PM                                                                                                                    
Mr.  Pulliam continued  with slide  26. He  stated that  the                                                                    
government takes were higher in Alaska than elsewhere.                                                                          
Co-Chair  Meyer  asked  what   could  be  applied  from  the                                                                    
information on the slide. Mr.  Pulliam responded that the UK                                                                    
GRE  and  $5  per   barrel  production  allowance  could  be                                                                    
considered.  Producers came  and  applied  for the  existing                                                                    
credit.  He explained  that producers  could also  apply for                                                                    
the allowance  to prove  that the  project was  new reserves                                                                    
and  additional  production.  The  process  would  occur  to                                                                    
qualify for a GRE. .                                                                                                            
Mr.  Pulliam  discussed  slide 27,  "Summary  of  Investment                                                                    
Measures (Incumbent  Participant)." He discussed  the spread                                                                    
sheet and  the MPV, which remained  consistent. He mentioned                                                                    
that Eagle  Ford was  better than  Alaska, with  the assumed                                                                    
best case scenario.                                                                                                             
2:46:36 PM                                                                                                                    
Mr.   Pulliam   discussed   slide  29,   "Key   Aspects   of                                                                    
Administration's Proposal (SB 21)."                                                                                             
     Establishes 25 percent Flat Net Tax Rate; No                                                                               
     Eliminates Capital Credit and State Purchase of Losses                                                                     
     Establishes 20 percent Gross Revenue Exclusion (GRE)                                                                       
     to Incent Production of New Oil                                                                                            
     Losses May be Carried Forward and Applied Against Tax                                                                      
     Obligation When Production Occurs                                                                                          
     Extends New Entrant Credits Through 2022                                                                                   
     No Change Outside of North Slope                                                                                           
Mr.   Pulliam   discussed   slide  30,   "Key   Aspects   of                                                                    
Administration's Proposal (cont'd)."                                                                                            
     Provides Balance Between State and Producers                                                                               
          -Reduction of  Tax Rates at High  Prices, Balanced                                                                    
          with Elimination of Credits                                                                                           
          -State Continues to  Receive Largest Percentage of                                                                    
          Oil Production Revenues at Any Price                                                                                  
     Simplifies Tax System and Provides Clarity for                                                                             
          -Eliminates Question  of Marginal Tax Rate  / Take                                                                    
          for Investment Planning                                                                                               
          -Eliminates Incentives  for "Gold  Plating" Caused                                                                    
          by High Marginal Rates                                                                                                
     Maintains Alignment Between State and Producer                                                                             
          -Net  Tax Allows  for Deduction  of Costs  Against                                                                    
     Provides Incentive for Development of New Resources                                                                        
     Without Taxing State Treasury                                                                                              
          -GRE  Provides Lower  Effective Tax  Rate for  New                                                                    
          -New Developers  can Recover Costs  of Development                                                                    
          Once Production Begins                                                                                                
          -Does Not Require State  to Fund Development Costs                                                                    
          Through Potentially Expensive Credit Purchases                                                                        
     Extremely Positive Message to Potential Investors                                                                          
          -Will    Encourage   Broader    Participation   in                                                                    
          Development of Alaska's North Slope                                                                                   
          -Economics   of   New   Participants   Closer   to                                                                    
Senator Bishop compared the GRE  to ACES. He appreciated the                                                                    
analogy.  He  asked if  the  state  will quit  spending  $12                                                                    
million  to  make $10  billion.  Mr.  Pulliam concurred.  He                                                                    
commented that  the credit was made  with actual production,                                                                    
rather than anticipated production.                                                                                             
Mr. Pulliam discussed slide 31, "Key Changes to SB 21 from                                                                      
Senate Resources CS."                                                                                                           
     Base Tax Rate Increased from 25 percent to 35 percent                                                                      
     $5/Bbl Production Allowance (Credit)                                                                                       
     GRE Raised to 30 percent                                                                                                   
     Allows Producers to  Apply for GRE in  Legacy Units for                                                                    
     Targeted Development of New Oil                                                                                            
    Relaxes Current Restriction on Exploration Credits                                                                          
Mr. Pulliam detailed slide 32, "Key Attributes of Senate                                                                        
Resource CS SB21."                                                                                                              
     Results   in  Slightly   Progressive  Government   Take                                                                    
     Overall     Without     Problems    Associated     with                                                                    
     Reduces Effective  Tax Rate and Government  Take at Low                                                                    
     Prices, While Increasing Tax  Rates and Government Take                                                                    
     at Higher Prices                                                                                                           
     Effect of  Fixed $/Bbl Allowance is  to Provide Support                                                                    
     at Low Prices Where Needed, Diminishing as Prices Rise                                                                     
     Provides    System    in    Competitive    Range    for                                                                    
     Provides  Simple,  Straightforward  and  Understandable                                                                    
     Tax Framework                                                                                                              
     Allows DOR/DNR  to Address Individual  Circumstances as                                                                    
     Allows  for  Significant   Investment  on  North  Slope                                                                    
     Without Taxing State Treasury                                                                                              
2:53:42 PM                                                                                                                    
Mr.  Pulliam  discussed  slide   33,  "Illustration  of  Tax                                                                    
Calculation Under Senate Resources CS  for SB 21." He stated                                                                    
that the total  tax obligation had reduced to  33 percent as                                                                    
a  result of  the tax  allowance. The  slide was  simple and                                                                    
straight forward, but noted that the relief was tapered.                                                                        
Mr.  Pulliam discussed  slide 34,  "State  Outlays Prior  to                                                                    
Production Associated With Development of 50 MMBO by Non-                                                                       
Taxpayer Under ACES and SRES  CS SB21." He stressed that the                                                                    
difference  included $379  million,  but the  right side  of                                                                    
graph showed a higher tax field.                                                                                                
Mr.  Pulliam  discussed  slide 35,  "Expected  Annual  State                                                                    
Outlays  Necessary to  Replace  Current  Production by  Non-                                                                    
Taxpayer Under  ACES and SRES  CS SB21." He pointed  out the                                                                    
lower tax rate on back end and exposure on the front end.                                                                       
2:58:48 PM                                                                                                                    
Mr. Pulliam  highlighted slide 36, "Average  Government Take                                                                    
at $100 per Barrel                                                                                                              
Mr. Pulliam  discussed slide 37:  " Average  Government Take                                                                    
ACES  v.  SB21/HB72  and  SRES  CS  SB21  for  All  Existing                                                                    
Producers (FY2015-FY2019) and Other Jurisdictions."                                                                             
Vice-Chair  Fairclough  discussed  slide 37  and  asked  for                                                                    
analysis for  the federal government take.  She specifically                                                                    
asked if production  tax was higher, would  the structure be                                                                    
affected. She  wondered if the calculation  was misinformed.                                                                    
Mr.  Pulliam  responded  that   the  analysis  included  the                                                                    
federal tax  rate, but  the federal  effective tax  rate was                                                                    
probably less, because nominal tax rate was 35 percent.                                                                         
3:04:25 PM                                                                                                                    
Vice-Chair  Fairclough  replied   that  if  companies  under                                                                    
federal  tax returns  might  show  something different.  She                                                                    
wondered  if Conoco  Phillips would  show regarding  various                                                                    
tax levels.  Mr. Pulliam responded  that tax paid  in Alaska                                                                    
was a deduction for federal taxes.                                                                                              
Co-Chair  Meyer asked  about the  red line.  or average  all                                                                    
jurisdictions per PFC. He noted  that everything between the                                                                    
green  lines  was a  small  percentage.  He noted  that  the                                                                    
numbers in the range provided an average.                                                                                       
3:11:57 PM                                                                                                                    
Mr.  Pulliam discussed  slide 38,  "Average Government  Take                                                                    
and Tax  Rate ACES vs.  SB21/HB72 and  SRES CS SB21  for All                                                                    
Existing Producers (FY 2015)."                                                                                                  
Mr.  Pulliam  discussed  slide 39,  "Summary  of  Investment                                                                    
Measures  for   New  Participant   Lower  Cost   Alaska  Oil                                                                    
Development ACES and SRES CS  SB21 vs. Benchmark Areas." The                                                                    
project became attractive with  the marginal government take                                                                    
of over 60 percent, which was competitive.                                                                                      
Mr.  Pulliam  discussed  slide 40,  "Summary  of  Investment                                                                    
Measures  for Incumbent  Lower Cost  Alaska Oil  Development                                                                    
ACES and SRES CS SB21 vs. Benchmark Areas."                                                                                     
Mr.  Pulliam  discussed  slide 41,  "Summary  of  Investment                                                                    
Measures for New Participants Higher Cost Alaska Oil."                                                                          
3:14:23 PM                                                                                                                    
Senator Bishop looked  at slide 40, and wondered  if the GRE                                                                    
would make  Alaska more competitive  than North  Dakota. Mr.                                                                    
Pulliam responded  that Alaska would look  better than North                                                                    
Dakota, on an MPV basis.                                                                                                        
Senator Bishop asked  if he would not have to  hear any more                                                                    
about North  Dakota. Mr. Pulliam  replied that  North Dakota                                                                    
would continue to be a  part of the conversation, because it                                                                    
was a large opportunity for investors in the industry.                                                                          
Co-Chair Meyer asked  if the majority of oil  to be produced                                                                    
in Alaska was higher or  lower cost oil. Mr. Pulliam replied                                                                    
that it was of the higher cost variety.                                                                                         
Co-Chair Meyer suggested recoverable  oil was heavy oil. Mr.                                                                    
Pulliam  agreed.  He  stated   that  Canadian  oil  was  too                                                                    
expensive initially,  but he had  seen advances  in drilling                                                                    
3:19:34 PM                                                                                                                    
Mr. Pulliam continued onto slide  43, "Summary of Investment                                                                    
Measures  for  New Participant  Very  High  Cost Alaska  Oil                                                                    
Development ACES and SRES CS SB21 vs. Benchmark Areas."                                                                         
Mr. Pulliam  continued with slide 46,  "Country/Area Profile                                                                    
Alaska North Slope."                                                                                                            
Vice-Chair  Fairclough   referred  to  slide   46  regarding                                                                    
capital  spending. She  was  interested in  a  2013 or  2014                                                                    
projection. Capital  spending was increasing and  she wanted                                                                    
to know why.   Mr. Pulliam stated that  DOR's forecast would                                                                    
provide the information.                                                                                                        
Vice-Chair  Fairclough  wondered   about  viewing  the  past                                                                    
year's forecast. She stated that  the chart was based on the                                                                    
DOR's revenue forecast book.                                                                                                    
Vice-Chair   Fairclough  showed   that   the  forecast   was                                                                    
published for the  general public and she  wished to acquire                                                                    
the forecast.                                                                                                                   
3:36:50 PM                                                                                                                    
FISCAL NOTES PRESENTATION                                                                                                     
DAN  STICKEL,  ASSISTANT   CHIEF  ECONOMIST,  TAX  DIVISION,                                                                    
DEPARTMENT OF REVENUE,  presented a PowerPoint presentation,                                                                    
"Fiscal Note Slide - CSSB21 (RES)."                                                                                             
Mr. Stickel discussed slide 2, "Introduction."                                                                                  
     1. 12 key provisions analyzed                                                                                              
     2. Total fiscal impact under Fall 2012 forecast                                                                            
     3. Hypothetical additional production scenarios                                                                            
Mr.  Stickel  discussed  slide 3,  "1:  Repeals  Progressive                                                                    
    -Progressive surcharge at AS 43.55.023(g) repealed                                                                          
     -Progressive surcharge is an additional tax that is                                                                        
     added to base tax                                                                                                          
     -Progressive   surcharge   increases    tax   rate   at                                                                    
    production tax values of greater than $30 / barrel                                                                          
     -Progressive surcharge may add up to 50 percent to the                                                                     
     total tax rate at very high prices for a maximum total                                                                     
     tax rate of 75 percent                                                                                                     
     -Fiscal Impact = varies by fiscal year, up to $1.8                                                                         
     billion per year under our Fall 2012 forecast                                                                              
Mr. Stickel discussed slide 4, "Impact of Progressive                                                                           
Surcharge." The provision eliminated the green part of the                                                                      
Mr. Stickel discussed slide 5, "2. Increases base                                                                               
production tax rate."                                                                                                           
     -Base tax rate increased to  35 percent from 25 percent                                                                    
     under ACES                                                                                                                 
     -Base tax rate of 35  percent applied to production tax                                                                    
     -The higher  base tax rate  increases revenue  from the                                                                    
     base tax                                                                                                                   
     -The higher  base tax rate provides  greater protection                                                                    
     to the state at low oil prices                                                                                             
     -Fiscal  Impact =  varies by  fiscal year,  up to  $1.1                                                                    
     billion per year under our Fall 2012 forecast                                                                              
Mr. Stickel discussed slide 6, "3. Limitations on Capital                                                                       
     -Production  tax  credits  under  AS  43.55.023(a)  for                                                                    
     qualified   capital   expenditures   are   limited   to                                                                    
     expenditures incurred  before January  1, 2014  for the                                                                    
     North Slope                                                                                                                
     -20 percent  capital credit eliminated for  North Slope                                                                    
     after  1/1/2014  (replaced  with  new  mechanisms  that                                                                    
     incentivize production, not spending).                                                                                     
     -ACES  provisions  are  unchanged for  Cook  Inlet  and                                                                    
     Middle Earth and they retain 20 percent capital credit                                                                     
     -Since capital  credits are taken against  liability or                                                                    
     refunded, fiscal impact is on both revenue and budget                                                                      
     -Likely fiscal impact is summarized on next slide                                                                          
Mr. Stickel discussed slide 7, "4. Changes to Net Operating                                                                     
Loss credit."                                                                                                                   
     -Companies  that  incur  net   losses  from  leases  or                                                                    
     properties on the North Slope  will earn a credit of 35                                                                    
     percent of those losses.                                                                                                   
     -May be carried forward for a 10-year maximum period.                                                                      
     -Net  loss carry-forwards  will increase  at an  annual                                                                    
     rate  of  15 percent  beginning  on  January 1  of  the                                                                    
     second calendar year following the year of the loss.                                                                       
     -Taxpayer  must have  production and  tax liability  to                                                                    
     use credit - not refundable                                                                                                
     -The revenue  impact of this provision  is confidential                                                                    
     under our forecast, however,                                                                                               
     -Impact is expected to be minimal.                                                                                         
     -In  an increased  development or  low price  scenario,                                                                    
     protects state because NOLs can't be refunded.                                                                             
Mr. Stickel discussed slide 8,  "Estimated Fiscal Impact for                                                                    
limitations  on credits  as compared  to Fall  2012 Forecast                                                                    
3:41:34 PM                                                                                                                    
Mr.  Pawlowski explained  that the  slide was  based on  the                                                                    
forecast  expenditures.  If  more development  happens  with                                                                    
additional  spending, the  fiscal  impact  of the  provision                                                                    
would  be greater,  because the  spending would  create more                                                                    
credit obligation for the state.                                                                                                
Mr. Stickel detailed slide 9,  "5. Establishes Gross Revenue                                                                    
     -Excludes a  30 percent of gross  revenue, from taxable                                                                    
     value for qualifying production                                                                                            
     -Cannot reduce tax liability below zero                                                                                    
     -Qualifying production is any of the following:                                                                            
          Land was not in a unit on 1/1/2003                                                                                    
          New PA, in units formed before 1/1/2003                                                                               
          Area added to an existing PA after 12/31/2011                                                                         
     -CSSB21  (RES)  increased GRE  from  20  percent to  30                                                                    
     percent, and added  the expansion of an  existing PA to                                                                    
     qualifying production                                                                                                      
     -Fiscal  Impact =  Indeterminate, under  $50 million  /                                                                    
     year under Fall 2012 forecast                                                                                              
     -GRE  benefit  would  apply  almost  entirely  to  "New                                                                    
     Production" not currently in our forecast                                                                                  
Mr. Stickel discussed slide 10, "6. Extends small producer                                                                      
     -The small producer credit at  AS 43.55.024 is extended                                                                    
     to the later of:                                                                                                           
          2022, or,                                                                                                             
          the ninth calendar year after the calendar year                                                                       
          that   the    producer   first    has   commercial                                                                    
     -This provision  extends the small producer  credit six                                                                    
     years from the original sunset date of 2016 to 2022.                                                                       
     -The  revenue  impact  based  on  the  current  revenue                                                                    
     forecast is minimal.                                                                                                       
Mr. Stickel discussed slide 11, "7. Eliminates requirement                                                                      
that credits be taken over two years."                                                                                          
     -Capital credits and Net  Operating Loss credits earned                                                                    
     had to be split across two years under ACES                                                                                
     -This provision allows  credits to be used  in the year                                                                    
     they were earned                                                                                                           
     -This provision aligns credit treatment on the North                                                                       
     -Slope with credit treatment in  all other parts of the                                                                    
     -Fiscal  impact is  neutral -  simply  shifts a  future                                                                    
     obligation to FY14.                                                                                                        
     -$400 million  total obligation shifted to  FY14:  $250                                                                    
     million revenue  impact; $150 million  operating budget                                                                    
Mr. Stickel discussed slide 12, "8. Changes funding for                                                                         
community revenue sharing."                                                                                                     
     -The  community  revenue  sharing fund  is  amended  to                                                                    
     allow the  legislature to make appropriations  from the                                                                    
     tax  revenue collected  under AS  43.20, as  opposed to                                                                    
     revenue collected under the  provision that is proposed                                                                    
     to be repealed - AS 43.55.011(g).                                                                                          
     -Corporate  income  tax  revenue   under  AS  43.20  is                                                                    
     adequate  to provide  the maximum  annual appropriation                                                                    
     of $60  million or the amount  to bring the fund  up to                                                                    
     $180 million.                                                                                                              
          Corporate income tax has exceeded $500 million                                                                        
          every year for the last 8 years.                                                                                      
     -Provision  substitutes eliminated  revenue source  for                                                                    
     appropriations, with another adequate source.                                                                              
Mr. Stickel detailed slide 13, "9. Establishes per oil                                                                          
barrel tax credit."                                                                                                             
     $5 credit  against tax liability  for each  taxable oil                                                                    
     barrel produced                                                                                                            
          -Ties credit to production                                                                                            
          -Cannot be saved, does not accrue interest, is                                                                        
          not transferable                                                                                                      
         -Removes regressive nature of tax system                                                                               
          -Specifies barrel of "oil"                                                                                            
     Likely fiscal impact is summarized on next slide                                                                           
Mr. Stickel discussed slide 15, "10. Creates service                                                                            
industry expenditures credit."                                                                                                  
     New  Corporate  Income  Tax  Credit  for  oil  and  gas                                                                    
     service companies                                                                                                          
     Credit   is   10   percent   of   qualifying   in-state                                                                    
          -Manufacturing of oil and gas equipment                                                                               
          -Modification of oil and gas equipment                                                                                
          -For in-state spending only                                                                                           
     Maximum   $10   million    per   taxpayer   per   year,                                                                    
     This provision was added in CSSB21 (RES)                                                                                   
     Fiscal Impact = Indeterminate                                                                                              
     Difficult to estimate due to lack of data                                                                                  
     If $500 million to $1 billion of qualifies …                                                                               
     Impact could be $50 to $100 million / year                                                                                 
3:47:55 PM                                                                                                                    
Mr.  Stickel  discussed   slide  18,  "Expanded  exploration                                                                    
credit allows additional wells to  qualify." The twenty five                                                                    
mile  range  around the  existing  units  qualified for  the                                                                    
3:54:42 PM                                                                                                                    
Mr. Pawlowski moved on to slide 21, "Production Scenarios."                                                                     
     Operators of existing units add 4 drill rigs to                                                                            
     current plans                                                                                                              
     Each rig adds 4,000 bbls/day in new production each                                                                        
          -Which each then decline at 15 percent per year                                                                       
     Does not qualify for GRE                                                                                                   
Mr.  Stickel detailed  slide 23,  "Projected revenues  under                                                                    
production  scenario -  at  $90 /  barrel  ANS." He  further                                                                    
explained the graph. He noted  that the information was more                                                                    
repressive,  and  noted  the lower  revenue  generated  from                                                                    
4:00:45 PM                                                                                                                    
Mr. Stickel  discussed slide  24, "Projected  revenues under                                                                    
production  scenarios -  at $100  / barrel  ANS." He  stated                                                                    
that 2019 displayed slightly less revenue under ACES.                                                                           
Mr.  Pawlowski  stressed that  the  ACES  did not  have  the                                                                    
assumption of new production.                                                                                                   
Mr. Stickel  discussed slide  25, "Projected  revenues under                                                                    
production scenario - at $120 / barrel ANS."                                                                                    
Mr. Pawlowski hoped to discuss  the figures which were bases                                                                    
on near  term options with.  He clarified that  the analysis                                                                    
was  from legacy  fields, and  department  wished to  remain                                                                    
Mr. Stickel  discussed slide  26, "Projected  revenues under                                                                    
production scenarios - at forecast ANS price."                                                                                  
Senator  Olson   wondered  if   DOR  anticipated   that  the                                                                    
corporate income tax would continue  to remain the same. Mr.                                                                    
Stickel replied  that it was  projected that there  would be                                                                    
over  $600 million  per year  in only  the petroleum  income                                                                    
tax.  He  furthered  that  there   would  be  an  additional                                                                    
approximately  $100  million  for the  non-petroleum  income                                                                    
SB  21  was   HEARD  and  HELD  in   committee  for  further                                                                    

Document Name Date/Time Subjects
SB 21 Corrected DOR Fiscal Note Senate Finance Mar 1 2013.pptx SFIN 3/1/2013 9:00:00 AM
SB 21
CSSB 21 RES Sectional 02 28 2013 .pdf SFIN 3/1/2013 9:00:00 AM
SB 21
CSSB RES Sectional 02 28 2013 Final.pdf SFIN 3/1/2013 9:00:00 AM
SB 21
Econ One Presentation For Senate Finance 3_1_13.pdf SFIN 3/1/2013 9:00:00 AM
SB 21