Legislature(2011 - 2012)BUTROVICH 205

03/25/2011 03:30 PM RESOURCES

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
Moved CSSJR 2(RES) Out of Committee
Heard & Held
Bills Previously Heard/Scheduled
        SB  85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT                                                                     
3:52:17 PM                                                                                                                    
CO-CHAIR WAGONER announced SB 85 to  be up for consideration in a                                                               
much revised  version. He  said Mr.  Pawlowski, staff  to Senator                                                               
McGuire, another  sponsor of the  bill, would co-present  the new                                                               
version with Ms. Jackson.                                                                                                       
CO-CHAIR PASKVAN moved to bring  CSSB 85( ), version 27-LS0484\E,                                                               
before the committee.                                                                                                           
CO-CHAIR WAGONER objected for discussion purposes.                                                                              
3:53:47 PM                                                                                                                    
MARY JACKSON,  staff to Senator  Wagoner, sponsor of SB  85, said                                                               
the  new committee  substitute  (CS) is  a  joint effort  between                                                               
Senator  McGuire and  Senator Wagoner.  When this  bill was  last                                                               
before the committee, Senator McGuire  expressed a willingness to                                                               
participate to expand the original  bill so that credits would be                                                               
offered  for areas  within units  subject  to certain  provisions                                                               
that she would go over in the sectional analysis.                                                                               
MIKE  PAWLOWSKI,  staff to  Senator  McGuire,  presented a  power                                                               
point and  said the  first slide showed  a Department  of Revenue                                                               
(DOR)  comparison  of  the projected  production  based  on  fall                                                               
revenue forecasts  going back for the  last 10 years and  said in                                                               
considering the  challenge facing  the state about  declining oil                                                               
production they  determined it was  important to go a  little bit                                                               
deeper than  just looking at this  graph by itself. The  next two                                                               
graphs indicated the actual forecasted  production taken from the                                                               
appendices  in the  back of  the fall  forecast, his  point being                                                               
that it  seems like  the forecasting  has a  pretty good  idea of                                                               
what the  production of Prudhoe  and Kuparuk will be,  but didn't                                                               
explain   why   there   were  some   discrepancies.   Well,   the                                                               
discrepancies  largely  come from  the  Prudhoe  Bay and  Kuparuk                                                               
satellites. This was the concern  that Senator McGuire was trying                                                               
to get to.  These pools are necessarily part of  the major field,                                                               
but are separate accumulations within the unit.                                                                                 
MR. PAWLOWSKI said  most of the North Slope  actually is unitized                                                               
at this point.  So, looking at Senator Wagoner's  goal of getting                                                               
at new  oil, Senator  McGuire felt  there was  opportunity within                                                               
the existing  units to go  after some satellite  provisions. That                                                               
is part  of the  reason for  the departure in  the CS.  The table                                                               
shows that  the percentage of  new oil rose throughout  the years                                                               
as production  in existing  units declined.  So, the  target that                                                               
Senator  Wagoner and  Senator McGuire  jointly  came together  to                                                               
focus on was really new oil.                                                                                                    
Therefore, [CS]  SB 85 adds a  new development cost credit  in AS                                                               
43.55.026 that is  based on 100 percent  of qualified development                                                               
expenditures  which  are linked  back  to  the qualified  capital                                                               
expenditures. To avoid  the problem of stacking  credits, in that                                                               
some  are monetizable  and  can  be accumulated  on  top of  each                                                               
other,   the  qualified   capital   expenditure   credit  in   AS                                                               
43.55.023(a)  and the  net operating  loss carry  forwards in  AS                                                               
43.55.023(b)  are  subtracted  from  the  100  percent  qualified                                                               
development credits. So, it's not  truly a 100 percent credit; it                                                               
ends up being  whatever is the net known (explained  in a further                                                               
slide).  The key  is that  targeting new  oil is  for undeveloped                                                               
pools within existing  units or leases or property  that have not                                                               
been  involved directly  in sustained  production as  of December                                                               
31, 2010.  That is the universe  to which the credit  is intended                                                               
to apply.                                                                                                                       
3:58:09 PM                                                                                                                    
MR. PAWLOWSKI provided  an example to demonstrate  the net effect                                                               
of the  way the  CS handles the  .026 credit. On  the left  was a                                                               
producer  with  a  tax  liability   (conceptually  he  would  not                                                               
necessarily  have  a  net  operating  loss  carry  forward  under                                                               
.023(b)) -  so conceptually  he is making  a $10  million capital                                                               
expenditure. Then they  are accumulating an .023(a)  credit of $2                                                               
million on that expenditure, which  would leave an .026 credit of                                                               
$8 million. However, a producer  with no tax liability making the                                                               
same $10 million  expenditure would get the  same .023(a) credit,                                                               
and assuming that  they had a carry forward loss  of $10 million,                                                               
a 25  percent of that  $10 million, for an  additional $2,500,000                                                               
credit, leaving the .026 credit at $5,500,000.                                                                                  
3:58:58 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  if these  credits are  taken at  the                                                               
time the expense is incurred or at the time of production.                                                                      
MR.  PAWLOWSKI answered  if  he was  talking  about the  specific                                                               
mechanics within  the Department  of Revenue  of when  the credit                                                               
certificate  application   is  received   that  he   didn't  feel                                                               
comfortable talking about it, but  said the department would talk                                                               
about that on Monday.                                                                                                           
SENATOR WIELECHOWSKI asked  if under this bill,  the credit would                                                               
be taken at the time of production.                                                                                             
MR.  PAWLOWSKI replied  that  the  credits would  be  taken as  a                                                               
certificate,  but  can't  be  used  until  the  field  goes  into                                                               
production.  That brings  them  to the  limitations  on the  .026                                                               
credit. Part of  Senator Wagoner's original goal  was to directly                                                               
link  the provision  of the  credit to  production. So,  the .026                                                               
credit  on page  2,  line 30,  through  page 3,  line  1, is  not                                                               
transferable and  may not  be used for  a person's  tax liability                                                               
under AS  43.55.011(e) below zero  - the  key being that  some of                                                               
credits (like  .023 and  .025)   can either be  sold back  to the                                                               
state or taken against one's current tax liability.                                                                             
He repeated that Senator Wagoner  wanted to make sure the credits                                                               
are  held  until  production  starts   and  a  tax  liability  is                                                               
generated. The  tax levied under  AS 43.55.011(e)  is apportioned                                                               
in the current  bill. So, the tax credit  as Senator Wielechowski                                                               
was  asking can  be  applied not  only when  the  unit goes  into                                                               
production but  only in apportion  to the actual  production from                                                               
that new  oil on which  the credit was  earned. So, if  you think                                                               
about  a unit  currently producing  100,000 barrels  a day  and a                                                               
credit  is earned  on something  that leads  to 10,000  barrels a                                                               
day,  the producer  would  only ever  be  able to  use  up to  10                                                               
percent of  their tax liability for  that unit on that  credit in                                                               
any given year. Any balance  would carry forward until the credit                                                               
is exhausted,  because it cannot  reduce the tax  liability below                                                               
MR. PAWLOWSKI  said Senator Wagoner's  core goal was to  create a                                                               
stampede similar  to the  work he  did last year  on SB  309. The                                                               
"stampede provision"  is really that the  expenditures to qualify                                                               
for this  credit have to be  within seven years, before  the year                                                               
2018 (page 2, line 1).                                                                                                          
4:01:59 PM                                                                                                                    
SENATOR STEDMAN  went to the  slide with the $10  million capital                                                               
expenditures and asked  if they would still get  to fully expense                                                               
the $10 million  CAPEX with their $2 million credit  and the .026                                                               
credit ($8 million).                                                                                                            
MR. PAWLOWSKI answered yes.                                                                                                     
SENATOR STEDMAN  asked if a model  could be done on  the rates of                                                               
return  for this  type of  investment to  compare how  the return                                                               
profile changes  when the credit is  inserted to see if  it would                                                               
be more advantageous than today's system.                                                                                       
SENATOR WAGONER  replied that  they could  ask the  Department of                                                               
Revenue to have that ready for them on Monday.                                                                                  
SENATOR STEDMAN  said if the  state has potential  investments it                                                               
would be nice to have data  so they could model how credits would                                                               
impact a project.                                                                                                               
SENATOR WAGONER replied  that he wasn't sure that  could be done,                                                               
because a lot of these projects  hadn't even started yet, but the                                                               
ones he was keen on were Great Bear, Armstrong and Brooks Range.                                                                
MR.   PAWLOWSKI  responded   that   his   point  was   incredibly                                                               
appropriate,  because  this  slide  is really  intended  just  to                                                               
demonstrate how the  credit is calculated and the  tax system has                                                               
a suite  of other incentives that  need to be evaluated.  He said                                                               
that  he had  pulled  the 2009  National  Department of  Energy's                                                               
Energy   Technology    Laboratory   assessments    on   potential                                                               
developments within the  North Slope and tried to  put together a                                                               
suite of some of the  identified undeveloped pools that DOR could                                                               
SENATOR STEDMAN  said he remembered  presentations from  both the                                                               
legislature's  and   the  governor's  consultants   on  different                                                               
aspects of  credit enhancements  and tax  incentives and  said he                                                               
thought some  of that data  should be available even  though they                                                               
don't get company X's information.                                                                                              
SENATOR WIELECHOWSKI echoed Senator  Stedman's comments and asked                                                               
if this was a credit towards the development of oil.                                                                            
MR. PAWLOWSKI  replied yes. He  noted language on  application of                                                               
the  credit on  page 2,  lines 12-17,  and that  line 13  covered                                                               
development expenditures  - that  area incurred  after completion                                                               
of the  first well that discovers  a pool. He noted  that line 15                                                               
says  "before the  state of  sustained production"  and that  the                                                               
Alaska  Oil and  Gas  Conservation Commission  (AOGA) working  in                                                               
consultation  with the  DOR would  define those  goal posts  in a                                                               
following hearing.                                                                                                              
4:07:40 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if everything  after punching the well                                                               
in  the  ground  is  considered development  and  if  that  would                                                               
include  delineation wells,  gravel roads,  ice roads  or seismic                                                               
tests. And what kind of costs are they looking at?                                                                              
MR.  PAWLOWSKI  answered  that  it  includes  "qualified  capital                                                               
expenditures"  and  a  detailed  list  of  those  gets  a  little                                                               
nuanced.  They are  continuing to  work with  the department  and                                                               
AOGCC  on the  sign  posts  to make  it  clear  to everyone  when                                                               
exploration   ends  and   development   begins   and  then   when                                                               
development  ends and  production begins;  the suite  of spending                                                               
will depend on each different field.                                                                                            
The analysis that  Senator Stedman was referring  to really needs                                                               
to happen  - the  goal is try  to narrow when  the credit  can be                                                               
used as much as possible.                                                                                                       
SENATOR  FRENCH said  two  recent developments  come  to mind  in                                                               
working with  DOR on modeling -  Nakiachuk and Oooguruk -  and it                                                               
would  be fascinating  to see  how this  bill would  impact those                                                               
SENATOR WIELECHOWSKI said the state  is picking up 100 percent of                                                               
the  development  costs and  asked  what  percent of  exploration                                                               
costs it would continue to pick up under SB 85.                                                                                 
4:10:31 PM                                                                                                                    
MR. PAWLOWSKI answered  that the goal is not to  displace or make                                                               
the developers choose  between any of the  existing credits; this                                                               
is added  to them and is  the reason for the  attempt to subtract                                                               
credits that are claimed on similar expenditures.                                                                               
SENATOR  STEDMAN remarked  that first  concept of  this bill  was                                                               
that the  credit would be "either/or,"  but the new CS  says that                                                               
the credit would be stacked.                                                                                                    
MR. PAWLOWSKI responded that was correct.                                                                                       
SENATOR STEDMAN said one concern  is that currently when you have                                                               
the immediate write  off for CAPEX ($10 million  in the example),                                                               
and  that one  would get  an additional  $8 million  off the  tax                                                               
MR. PAWLOWSKI  replied that  one would  deduct the  additional $8                                                               
million  when whatever  field the  expenditure  was made  against                                                               
comes  into  production  and only  against  the  apportioned  tax                                                               
SENATOR STEDMAN  asked for  another model of  how much  the state                                                               
and federal  governments are putting  on the table and  how close                                                               
they are to 100 percent.                                                                                                        
MR.  PAWLOWSKI  explained that  the  risk  of  this credit  to  a                                                               
developer is  that it may  never be used.   A perfect  example is                                                               
where BP built up a fairly  healthy expenditure to try to develop                                                               
the Badami  unit, which  didn't produce the  way they  thought it                                                               
would and  got shut down. So  it never generated a  tax liability                                                               
to be offset by the credit.                                                                                                     
4:15:13 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  if  this credit  would  impact  the                                                               
existing state/federal exploration credits  of 65 percent for new                                                               
entrants and 76 percent for a current entrant.                                                                                  
MR. PAWLOWSKI  replied that there  was no intent to  impact that,                                                               
but  some   cases  might  in   terms  of  the   .025  alternative                                                               
exploration credits  that they are currently  evaluating with the                                                               
help of the Department of Law.                                                                                                  
SENATOR WIELECHOWSKI recapped that the  state would be picking up                                                               
100 percent of the development costs  above the 67 and 76 percent                                                               
exploration credits.                                                                                                            
MR. PAWLOWSKI corrected that the  state would pick up 100 percent                                                               
of the development costs in a success case.                                                                                     
SENATOR  STEDMAN said  he  didn't want  the state  to  be in  the                                                               
position of  crediting over  100 percent  and was  concerned that                                                               
the CS  stacks the credits as  opposed to the original  bill that                                                               
made the producers chose between credit options.                                                                                
MR. PAWLOWSKI explained that the  capital expenditures to qualify                                                               
for these credits  have to be made before 2018.  That number came                                                               
from a presentation  by the AOGCC to the  House Finance Committee                                                               
on March 16, 2011. It is  intended to get through the development                                                               
phase into sustained production.                                                                                                
SENATOR  WIELECHOWSKI  why   asked  why  there  is   such  a  big                                                               
difference between  the Kuparuk  River melt  water 1.5  years and                                                               
some of the other fields. Was  it just the dynamics of the field?                                                               
Is there  are another way  to speed  up the development  of these                                                               
4:18:55 PM                                                                                                                    
MR. PAWLOWSKI said  he was ill equipped to  answer that question,                                                               
but  a future  section of  the bill  would help  in that  type of                                                               
He explained that the other  addition in section 4 establishes an                                                               
Oil and Gas  Competitiveness Review Board in  statute rather than                                                               
as   a  legislative   commission   (Senator  McGuire's   original                                                               
concept).  It  is  a  nine-member   board  with  members  of  the                                                               
legislature (one House and one  Senate), the commissioners of the                                                               
Department of  Natural Resources  and the Department  of Revenue,                                                               
and   five   public  members   four   of   which  have   specific                                                               
qualifications -  geologist, petroleum engineer, economist  - and                                                               
a member of an environmental or conservation group.                                                                             
The duties  of the  board are to  review historical,  current and                                                               
potential  levels  of  investment, identify  those  factors  that                                                               
might affect  investment, review the competitive  position of the                                                               
state, and make  written findings before December 1  of each year                                                               
regarding changes  to the state's regulatory  environment, fiscal                                                               
regime and  alternative means for increasing  the state's ability                                                               
to attract  and maintain investment  (which gets back  to Senator                                                               
Wielechowski's question).                                                                                                       
MR.  PAWLOWSKI  commented  on another  slide  (from  the  AOGCC's                                                               
presentation to House Finance) of  a production profile of the UK                                                               
North Sea  that has a  double peak and  then a rapid  decline and                                                               
what  the theoretical  future of  Alaska could  look like  (taken                                                               
from  the Energy  Technology Laboratory).  He  commented that  it                                                               
includes  offshore, ANWR,  the kitchen  sink and  the geologists'                                                               
best wishes, but  in looking at new oil it's  important to put on                                                               
the table what could theoretically be possible.                                                                                 
4:21:30 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if this slide  is what the U.S. DOE is                                                               
currently projecting for Alaska North Slope.                                                                                    
MR. PAWLOWSKI  replied that he  wasn't sure. ANWR isn't  in their                                                               
current projection but it is in this slide.                                                                                     
SENATOR  STEVENS  said  he  is   always  hesitant  to  give  away                                                               
authority and responsibility of the  legislature and he asked why                                                               
this board is needed and what the legislature is giving up.                                                                     
MR.  PAWLOWSKI  replied  that  the board  has  only  an  advisory                                                               
capacity  to the  state  in general.  Senator  McGuire felt  that                                                               
since oil is  so important to the state that  it would be helpful                                                               
to have a public board that  can review all of the issues related                                                               
to the legislature  on an ongoing basis  and make recommendations                                                               
to the  legislature. She  thought that was  an important  part of                                                               
doing business as the state.                                                                                                    
SENATOR STEDMAN  said he  had equal concerns  when he  first read                                                               
through this  and having  a board do  the review  might encourage                                                               
the  legislature  to get  lazy  about  getting into  the  subject                                                               
CO-CHAIR WAGONER  said this  doesn't give  away their  control of                                                               
the  state's  hydro carbons,  but  it  is  part of  developing  a                                                               
process  for the  legislature  to get  information  on a  regular                                                               
MR. PAWLOWSKI concurred, but he said it is a fair policy debate.                                                                
SENATOR STEDMAN  acquiesced that it's  not a total  abrogation of                                                               
their  duties,  but  it  would  give an  easy  way  out  for  the                                                               
legislature to  not look at the  details of how the  system works                                                               
and just take the board's  recommendations. PPT and ACES are some                                                               
examples of the complexities.                                                                                                   
SENATOR STEVENS  said he  is concerned that  the board  might not                                                               
see the enormous importance of decoupling  oil and gas as some of                                                               
his colleagues do.                                                                                                              
4:26:25 PM                                                                                                                    
MS. JACKSON  reminded them  that a number  of issues  were raised                                                               
when this bill  was first before them and summarized  that the CS                                                               
now has a  seven-year provision and it also  excludes Cook Inlet.                                                               
The  AOGCC  now  certifies  the  production,  not  the  DNR,  and                                                               
"production  in  paying  quantities"  is  defined  as  "sustained                                                               
production"  that  is  a  term  already  in  statute.  The  AOGCC                                                               
identifying  the  pool as  it  applies  to  shale is  an  ongoing                                                               
conversation that will happen in committee on Monday.                                                                           
4:28:18 PM                                                                                                                    
She began  the analysis saying the  first change is to  the title                                                               
that was  necessary to include  the new  section 4, which  is the                                                               
Oil  and  Gas Competitiveness  Review  Board.  Section 1  has  no                                                               
change. Section  2 was deleted from  the old bill and  in the new                                                               
CS makes  2018 the new date  that production has to  occur by. It                                                               
has an exclusion  for the credit in the Cook  Inlet Basin and the                                                               
Pt. Thomson Unit.  She said if the body is  willing, it could add                                                               
any  future credits  for the  development  of heavy  oil in  this                                                               
SENATOR  WIELECHOWSKI  said page  2,  lines  5,  7 and  10,  have                                                               
several references to December 31, 2010  and asked if it would be                                                               
better  to use  some other  wording like  "the effective  date of                                                               
this bill".                                                                                                                     
MS.  JACKSON  said  they  just  "grabbed  a  date"  for  drafting                                                               
purposes, but  they could  use that language.  She would  have to                                                               
check with the drafter.                                                                                                         
4:29:55 PM                                                                                                                    
SENATOR PASKVAN asked  her to explain why this does  not apply to                                                               
heavy oil.                                                                                                                      
MS. JACKSON answered  that this bill does not apply  to heavy oil                                                               
because  it has  already  been  produced. It  could  be added  as                                                               
another section if that is what they want.                                                                                      
SENATOR PASKVAN  said he wanted  to see some financial  models of                                                               
shale  oil  potential in  Alaska  because  it is  highly  capital                                                               
intensive.  It's important  to  distinguish  between the  capital                                                               
expenditures   of  Brooks   Range   and   Armstrong,  which   are                                                               
potentially  conventional new  oil and  shale oil,  which is  new                                                               
MS. JACKSON added that shale is  a real problem because the first                                                               
question  is  if  the  AOGCC   has  the  statutory  authority  to                                                               
promulgate regulations  for shale. Question  two is if  the AOGCC                                                               
can  come up  with a  definition  of a  "pool" for  shale and  is                                                               
looking at how it is being defined in other areas.                                                                              
SENATOR  PASKVAN   said  his  understanding  of   the  shale  oil                                                               
development is that once the process  is put in place, it is kind                                                               
of  an industrial  output  in the  sense that  it  is moving  the                                                               
"cookie cutter" forward  and he was trying to  understand how the                                                               
capital  expenditures would  be  differentiated in  that type  of                                                               
MR. PAWLOWSKI  replied that  it falls back  to the  definition of                                                               
"pool" that is an accumulation  and it's all about communication.                                                               
The  questions is  can he  put a  well "here"  and pull  oil from                                                               
"there"  and  is   it  related  to  each   other.  Shale  doesn't                                                               
communicate between  different sections;  so the AOGCC  itself is                                                               
struggling with  the definition of  a pool.  It is a  policy call                                                               
for the  committee if  they want  to extend  the credit  to those                                                               
things given its substantive nature.                                                                                            
CO-CHAIR WAGONER said  his office tried to research  some of this                                                               
and  talked to  an  engineer with  Whiting,  probably the  second                                                               
biggest company  in North Dakota,  who said theirs is  an acreage                                                               
allowance. If your fracing system goes  out so far, then you have                                                               
to go back that far from  where that acreage's lines goes down in                                                               
the  ground so  you don't  take  oil from  the adjacent  property                                                               
owner.  Great Bear's  holdings are  adjacent to  one another,  so                                                               
that shouldn't be a problem  if they are talking about associated                                                               
4:35:14 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if this bill wouldn't  apply to heavy                                                               
oil at all.                                                                                                                     
MR. PAWLOWSKI replied that is correct  at this point; only to new                                                               
SENATOR WIELECHOWSKI asked even if  the heavy oil were located in                                                               
a new unit?                                                                                                                     
MR.  PAWLOWSKI responded  that  could be  correct  in theory,  at                                                               
least,  but he  has been  told most  of the  heavy oil  is within                                                               
existing units.                                                                                                                 
SENATOR  WIELECHOWSKI asked  how the  bill would  apply to  Great                                                               
MS. JACKSON  said he didn't see  how it could because  they don't                                                               
have  a definition  of a  "pool" for  shale. If  members want  to                                                               
include  heavy oil,  they need  to  broaden the  horizons to  get                                                               
better  definitions for  both  heavy and  shale  oils. The  AOGCC                                                               
doesn't want  to just pull something  out of its hat.  They had a                                                               
definition of sorts from Commissioner  Seamount who defined it as                                                               
a township  and then the next  problem came from Mr.  Bullock who                                                               
said they did  not want to put an AOGCC  definition into a credit                                                               
bill  under  taxes.  Then  the  question  is  if  they  have  the                                                               
authority to  promulgate regulations  to do  the definition  of a                                                               
pool for shale.                                                                                                                 
CO-CHAIR PASKVAN  said shale oil  for purposes of  application is                                                               
an extremely  aggressive credit, because  they get to  deduct 100                                                               
percent  as well  as  getting a  100 percent  credit.  So if  the                                                               
region  is  defined  in  a   small  sense,  then  a  producer  is                                                               
perpetually getting 100 percent credit  and if it's large, it all                                                               
comes down  to where  you want  to draw  the boundaries  of where                                                               
shale oil is different from conventional.                                                                                       
MR. PAWLOWSKI added  that the dilemma with shale is  not only the                                                               
boundaries  but  what  kind  of production  it  will  be  applied                                                               
CO-CHAIR PASKVAN asked if Bakken  or Eagle Ford have credits that                                                               
apply to shale.                                                                                                                 
4:39:55 PM                                                                                                                    
MR.  PAWLOWSKI  said  he  would   get  back  to  them  with  that                                                               
CO-CHAIR WAGONER said he found no  credits for shale or any other                                                               
thing  in North  Dakota; they  have  a different  system of  10.5                                                               
percent of the gross.                                                                                                           
MS.  JACKSON said  that section  2(b) is  the "goal  post" target                                                               
that  Mr. Pawlowski  alluded  to where  the  AOGCC certifies  the                                                               
production.  New  terms  were used;  "sustained  production"  was                                                               
necessary because the  previous ones were DNR terms  and they are                                                               
now not in  the bill. Because AOGCC was put  in DNR's place, some                                                               
terms had to  be changed to conform with AOGCC.  They are working                                                               
with the Department of Revenue to get there.                                                                                    
Subsection 2(c)  talks about  how the  credits balance  against a                                                               
company's production tax liability. "If  they have $40 million in                                                               
CAPEX and only  $30 million in liability, they are  only going to                                                               
get a $30 million credit."                                                                                                      
SENATOR WIELECHOWSKI  asked how operating expenditures  are dealt                                                               
MR. PAWLOWSKI replied that operating  costs won't be counted, but                                                               
they will  be included  in the net  operating loss  credit (being                                                               
subtracted from  the .026 credit)  and actually lessen  the value                                                               
of the credit.                                                                                                                  
4:43:40 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if he  had any sense of  of operating                                                               
costs versus  CAPEX in the  development stage. He has  heard that                                                               
CAPEX is a huge amount if not all.                                                                                              
MR. PAWLOWSKI  said there are  some references in the  DOE report                                                               
that he would go over with him.                                                                                                 
CO-CHAIR PASKVAN asked  if Bakken and Eagle Ford  and other shale                                                               
developments   don't   have   a  credit   system   with   capital                                                               
expenditures, do  they even differentiate between  CAPEX and OPEX                                                               
for any substantive reason.                                                                                                     
MR.  PAWLOWSKI replied  that  the  goal of  getting  back to  the                                                               
definition of  a "qualified  development expenditure"  by linking                                                               
it back to  the AS 43.55.023 definition of  a capital expenditure                                                               
was to  bring it  into the  universe of what  the DOR  is already                                                               
issuing credits  for. These are  expenditures that  companies are                                                               
already making and filing for in .023 credits.                                                                                  
4:45:40 PM                                                                                                                    
CO-CHAIR  PASKVAN  said  he  appreciated   that,  but  right  now                                                               
conventional oil  development has a correlation  between OPEX and                                                               
CAPEX that  it is  skewed to  90 percent  CAPEX/10 OPEX,  and the                                                               
credit  is 100  percent of  CAPEX. The  impact on  the treasury's                                                               
bottom line could be "incredible" and  they want to know that the                                                               
new oil is not going to bankrupt the state.                                                                                     
4:46:31 PM                                                                                                                    
SENATOR STEDMAN said  it is hard for the  companies to manipulate                                                               
expenses, because  the IRS  classifies them  has "decades  of IRS                                                               
rulings." He also commented when  they get into other basins most                                                               
of those are regressive systems.                                                                                                
CO-CHAIR WAGONER reminded  them that the amount of  the credit is                                                               
already capped by the amount  of production; producers don't have                                                               
a free run  just throwing millions of dollars out  there and then                                                               
writing it off.                                                                                                                 
MS. JACKSON continued with the sectional analysis as follows:                                                                   
(d)  Page 2,  line 26,  restricts the  use of  the new  credit so                                                               
there aren't multiple credits.                                                                                                  
(e) Establishes  that the credit  or a  portion of the  credit is                                                               
not  transferable and  may  not reduce  the  tax liability  below                                                               
(f) Allows the Department of  Revenue to adopt regulations needed                                                               
to administer the credit.                                                                                                       
(g) Establishes  procedures so that  when the credit  is utilized                                                               
it is  applied only to  the production tax  due for the  lease or                                                               
the property that qualified for the credit.                                                                                     
(h)  Definition section  that references  existing statute  for a                                                               
"pool" with  regards to  "qualified development  expenditures" as                                                               
per  the DOR's  review; and  "sustained production"  is now  used                                                               
rather than "production in paying quantities."                                                                                  
She  explained that  "sustained  production"  was developed  last                                                               
year in SB 309 and pertained to the jack up rig.                                                                                
Section 4 establishes the Oil and Gas Competitive Review Board.                                                                 
4:49:39 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  how this would work  from a timeframe                                                               
perspective. If someone goes out  and spends five years incurring                                                               
capital costs to develop a well  and then they start producing in                                                               
year six.  Do they  only get  to collect their  costs up  to year                                                               
seven? How does that work?                                                                                                      
MR. PAWLOWSKI  answered it's only  within the timeframe  of after                                                               
discovery  up  to  sustained  production.   So,  if  you  are  in                                                               
production in  the third month  of year  six, it's only  from the                                                               
third month  of year six  back to  post discovery. Once  you pass                                                               
it, you go back into the regular 20 percent credit in .023.                                                                     
SENATOR  WIELECHOWSKI  asked  at  what period  the  .026  percent                                                               
credit lapses.                                                                                                                  
MR.  PAWLOWSKI  replied  that  it   doesn't  lapse  until  it  is                                                               
exhausted.  The  policy call  here  is  that  the tax  credit  is                                                               
applicable only to new oil and it can't go below zero.                                                                          
SENATOR  WIELECHOWSKI, as  an example,  said someone  spends $100                                                               
million and takes  the full seven years; year seven  they go into                                                               
sustained production. They put out  $20 million for the next five                                                               
years. For year  one they would get a credit  on their production                                                               
tax, so  $20 million at $100  barrel oil would give  an effective                                                               
tax rate  of 27.5 percent.  Do they  get a 100  percent deduction                                                               
off that 27.5 percent?                                                                                                          
MR.  PAWLOWSKI  replied  they would  have  accumulated  a  credit                                                               
through  their development  expenditures  during the  development                                                               
stage  ($100 million  in  Senator  Wielechowski's example).  They                                                               
have production  tax liability of  $20 million in year  one, two,                                                               
three and  four. They would  be able to  take $20 million  a year                                                               
and roll  $80 million to the  next year; take $20  million in the                                                               
next year,  roll $80 million to  the next year; take  $20 million                                                               
in the  next year  and roll  $80 million for  the third  year and                                                               
never being able to go below zero.                                                                                              
MS. JACKSON  added that the  "true up" comes when  the production                                                               
tax  liability  comes into  play.  Going  back to  the  sectional                                                               
analysis, she said a minor error in references in section 4 was                                                                 
corrected and section 6 is the immediate effective date.                                                                        
4:54:58 PM                                                                                                                    
CO-CHAIR  WAGONER removed  his objection  and finding  no further                                                               
objections  CSSB  85(  ),  version E,  was  adopted.  Finding  no                                                               
further business to  come before the committee,  he adjourned the                                                               
meeting at 4:54 p.m.                                                                                                            

Document Name Date/Time Subjects
SJR 2 Sponsor Statement.pdf SRES 3/25/2011 3:30:00 PM
CS SJR 2.1.PDF SRES 3/25/2011 3:30:00 PM
CS for Senate Bill 85 Presentation to SRES.pptx SRES 3/25/2011 3:30:00 PM
SB 85
Draft CS SB 85 Version E 3-24-11.pdf SRES 3/25/2011 3:30:00 PM
SB 85
Compare SB 85 to CS for SB 85 Version E.pdf SRES 3/25/2011 3:30:00 PM
SB 85
SA 3-25-11 draft CS SB 85 version E.pdf SRES 3/25/2011 3:30:00 PM
SB 85