Legislature(2013 - 2014)BUTROVICH 205

02/11/2013 03:30 PM RESOURCES

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03:31:21 PM Start
03:32:11 PM SB21
05:53:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference <Invitation Only> --
Heard & Held
Dept. of Revenue and Dept. of Natural Resources
and Consultants
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
3:32:11 PM                                                                                                                    
CHAIR GIESSEL announced SB 21 to be up for consideration.                                                                       
3:32:38 PM                                                                                                                    
SENATOR BISHOP joined the committee.                                                                                            
BRYAN  BUTCHER,   Commissioner,  Department  of   Revenue  (DOR),                                                               
Juneau, Alaska, introduced himself.                                                                                             
3:33:07 PM                                                                                                                    
DAN  SULLIVAN,  Commissioner,  Department  of  Natural  Resources                                                               
(DNR), Juneau, Alaska, introduced himself.                                                                                      
COMMISSIONER SULLIVAN  began the  first part of  the presentation                                                               
saying that  throughput decline is  the most urgent  issue facing                                                               
the economic future  of Alaska and his goal today  was to provide                                                               
a little  bit of background  on the Trans Alaska  Pipeline System                                                               
(TAPS)  throughput  and describe  the  challenge  in the  broader                                                               
context of  what is  going on  in the  country and  globally with                                                               
energy developments and  underscore the fact that  the decline is                                                               
not inevitable. There are many  examples where the state can look                                                               
at  how  other  basins  have  turned  around  serious  production                                                               
declines and Alaska can do that, too!                                                                                           
3:35:04 PM                                                                                                                    
He said  TAPS is a critical  state and national energy  asset and                                                               
having  the  federal  government  as a  partner  is  critical  in                                                               
turning  the decline  around, but  he hadn't  seen much  interest                                                               
from  them. TAPS  used to  represent  25 percent  of US  domestic                                                               
production and  he said  the administration  sees the  decline as                                                               
the  "ultimate giveaway."  Bloomberg reported  about a  month ago                                                               
that it lost 40,000 barrels a  day from December 2011 to December                                                               
2012;  at $100/barrel  that is  about  $1.5 billion  that is  not                                                               
circulating through  either state coffers or  the Alaska economy.                                                               
That revenue  is gone and  he stated  that is the  ultimate give-                                                               
away to future generations of Alaskans.                                                                                         
3:37:46 PM                                                                                                                    
COMMISSIONER SULLIVAN said the North  Slope is a mature basin but                                                               
the state as  well as the United States  Geological Survey (USGS)                                                               
believe  that it  still has  enormous opportunity,  but there  is                                                               
some urgency he said recalling  a TAPS shutdown that happened two                                                               
years  ago in  40  below zero  weather. If  you  talk to  Admiral                                                               
Barrett or the  folks at Alyeska, getting it back  up and running                                                               
was not  a sure thing. The  lower output TAPS has  each year, the                                                               
more  risk  there is  of  it  shutting  down. Companies  will  be                                                               
required  to spend  more on  maintaining existing  infrastructure                                                               
and that  also has  an impact  with regard  to how  new explorers                                                               
view the  state and on  the revenues  the state will  be getting.                                                               
The  best  way  to  address  these  challenges  is  to  turn  the                                                               
throughput around.                                                                                                              
3:39:58 PM                                                                                                                    
COMMISSIONER  SULLIVAN said  many  positive things  are going  on                                                               
that  are  providing  Alaska  the  wherewithal  to  address  this                                                               
challenge. A huge resource basin  still exists on the North Slope                                                               
and its next  phase of development includes  huge fields, smaller                                                               
conventional fields,  unconventional oil  and the fact  that much                                                               
of its  area is  still relatively  unexplored, enough  to sustain                                                               
Alaskans for decades.                                                                                                           
3:41:08 PM                                                                                                                    
SENATOR DYSON joined the committee.                                                                                             
3:41:32 PM                                                                                                                    
COMMISSIONER SULLIVAN  said the  other positive  development that                                                               
has happened in the last couple  of years is the very significant                                                               
renaissance of energy  production in the US  and the Organization                                                               
for Economic  Co-operation and Development (OECD)  countries; the                                                               
International  Energy  Agency (IEA)  has  predicted  the US  will                                                               
become the world's  largest global oil and gas  producer by 2020,                                                               
overtaking  Saudi Arabia  and Russia.  This monumental  shift has                                                               
all kinds of positive implications.  The Financial Times reported                                                               
an estimated  $600 billion was spent  in 2012 in the  US and OECD                                                               
and  that was  projected to  increase  to $650  billion in  2013;                                                               
unfortunately he estimated  that only about half of  1 percent of                                                               
that  $600  billion went  to  Alaska  in  2012.  He said  it  was                                                               
important  for  this committee  to  realize  that the  US  energy                                                               
renaissance is  happening and  that Alaska  should be  leading it                                                               
not dragging  it down. The  industry investment is out  there for                                                               
Alaska to get.                                                                                                                  
3:44:52 PM                                                                                                                    
COMMISSIONER SULLIVAN said  most other basins had or  were in the                                                               
process of turning around their  production declines; that Alaska                                                               
clearly has better  geology companies agree, but it  still is not                                                               
getting any of that investment.  One Internet article said the UK                                                               
was turning its  North Sea production around with  tax reform and                                                               
reductions  and  that area  is  mature  and  in many  other  ways                                                               
analogous to Alaska.                                                                                                            
3:46:26 PM                                                                                                                    
COMMISSIONER  SULLIVAN  said  Apache  had also  turned  around  a                                                               
declining  field   by  using  technology  here   in  Alaska.  So,                                                               
facilitating the next phases of  North Slope development in terms                                                               
of unconventionals or smaller pools  of conventionals is not just                                                               
about tax reform.  He said the DNR went to  Houston last week and                                                               
set  up a  booth meeting  with  dozens of  companies that  talked                                                               
about Alaska and its resource  basin, but a continuing theme from                                                               
those companies was that while  they recognized the resource base                                                               
they also  recognized the costs  around developing them;  one was                                                               
Alaska's high production taxes particularly at high prices.                                                                     
3:48:52 PM                                                                                                                    
SENATOR FRENCH ask  how Alaskans would know this  bill is working                                                               
if it passes. When throughput goes up?                                                                                          
COMMISSIONER  SULLIVAN  replied  yes;  they are  focused  on  the                                                               
throughput  decline   number,  although   it  would  not   go  up                                                               
overnight. And  they would start  to see increased  investment on                                                               
the North Slope.                                                                                                                
3:49:54 PM                                                                                                                    
COMMISSIONER  BUTCHER   said  the   governor's  oil   tax  reform                                                               
principles were under a base  of getting Alaska more competitive.                                                               
If  you look  at the  investment and  job increases  going on  in                                                               
other jurisdictions  you see that  Alaska is lagging.  Alaska has                                                               
the highest oil taxes in North  America in the current high price                                                               
environment; in  fact it  is second to  Norway among  OECD states                                                               
and  countries and  they don't  have to  go much  higher to  pass                                                               
Norway. Taxes  are not the  only thing that companies  base their                                                               
decisions  on, but  it's a  big  piece. Combining  that with  how                                                               
expensive it  is to  do business  on the North  Slope, it  is not                                                               
surprising that Alaska  is not seeing what is going  on in almost                                                               
every other oil producing jurisdiction.                                                                                         
He outlined the governor's four tax reform principles. It must:                                                                 
-be fair to Alaskans.                                                                                                           
-encourage new production in new and legacy fields                                                                              
-be simple so that it restores balance to the system                                                                            
     The  state takes  a disproportionately  large chunk  of                                                                    
     revenue at  high ends and  at low  ends we take  a very                                                                    
     minimal piece of  it. In a way at low  prices you would                                                                    
     hope to have a higher  percentage coming in and we have                                                                    
     very little;  at high prices  when potentially  we have                                                                    
     enough  coming in  that we  don't need  to take  a huge                                                                    
     piece and we  are taking a large piece. We  have one of                                                                    
     among  the  most  complex tax  systems  in  the  world;                                                                    
     companies struggle with understanding it.                                                                                  
-be durable for the long-term                                                                                                   
3:53:53 PM                                                                                                                    
COMMISSIONER  BUTCHER  explained  that  companies  view  our  tax                                                               
system  as being  very complicated  to explain  to board  members                                                               
making the  return on investment  equation hard to  calculate. It                                                               
has to do  with how progressivity works at  any particular dollar                                                               
amount,  how the  tax  credit system  works and  with  how it  is                                                               
calculated on a monthly basis rather than annually.                                                                             
The tax  reform must be  durable for the long-term.  Alaska's oil                                                               
tax structure has changed too many  times over the last few years                                                               
and if  you think of  being a company  and looking at  some areas                                                               
around the  world that  don't change very  often, they  know what                                                               
they are going to  get 10 years out. They look  at Alaska and see                                                               
it changing  every couple  of years  and in  the years  it's not,                                                               
change is seriously being talked about.                                                                                         
3:55:10 PM                                                                                                                    
He  said that  the  DNR  and DOR  had  been  working closer  than                                                               
previously  and  had  brought  on  a  new  consultant,  Econ  One                                                               
Research   with   Barry  Pulliam,   who   has   worked  for   the                                                               
administration and the legislature before.                                                                                      
3:55:47 PM                                                                                                                    
CHAIR GIESSEL  asked what he meant  by tax reform "being  fair to                                                               
Alaskans." Is there a particular way to divvy that up, 60/40?                                                                   
3:56:12 PM                                                                                                                    
COMMISSIONER BUTCHER  replied that is  one issue that  makes this                                                               
topic so  difficult. They  started out  looking at  Jay Hammond's                                                               
one-third/one-third/one-third concept, but  of course, it doesn't                                                               
work out that way; the state  government takes much larger than a                                                               
third share  and the federal  government takes  less. Ultimately,                                                               
Alaskans can define  what makes a lot of sense  to the state, but                                                               
if it's  not getting  any new development  or new  production, it                                                               
needs to take a fresh view.                                                                                                     
COMMISSIONER  SULLIVAN commented  that  he  thinks that  fairness                                                               
also goes to future generations  of Alaskans and that the decline                                                               
status quo approach is unfair now as well as into the future.                                                                   
3:58:22 PM                                                                                                                    
COMMISSIONER BUTCHER  said the tax reform  team reviewed previous                                                               
work by the legislature and  the administration, work done during                                                               
the  past  two  years,  work  done  during  ACES,  PPT,  ELF  and                                                               
identified problems with the current tax system as follows:                                                                     
-declining production of 6 percent per year                                                                                     
-competitive environment                                                                                                        
     It's  difficult piece  to compare  to other  areas that                                                                    
     don't have it  or have it in a very  simple way such as                                                                    
     North Dakota that has 8.5  percent up to $50/barrel and                                                                    
     11  percent   after  that,  which   is  very   easy  to                                                                    
     calculate. Their  tax department  has one  person doing                                                                    
     its oil taxes as opposed to Alaska's Army.                                                                                 
-tax credits                                                                                                                    
      (Which ones are working and which ones need tweaking                                                                      
     to be a little more effective)                                                                                             
SENATOR  FAIRCLOUGH  asked  for  a better  explanation  of  North                                                               
Dakota progressivity.                                                                                                           
COMMISSIONER BUTCHER explained  that they use a  gross tax, which                                                               
is much  simpler (although  he wasn't  suggesting going  to that)                                                               
and it's  two-tiered; up to  $50 is taxed  at a flat  percent and                                                               
over $50 is taxed at a  higher percentage. It doesn't go back and                                                               
pick up the entire barrel like  Alaska does. It is progressive in                                                               
that they take  a little bit higher percentage when  the price of                                                               
oil  is higher,  but it  doesn't lead  to the  high marginal  tax                                                               
rates of  80 to  90 percent that  Alaska's progressivity  has for                                                               
its government take.                                                                                                            
SENATOR FAIRCLOUGH said  she wanted it to be clear  that it isn't                                                               
really progressivity as the state of Alaska has defined it.                                                                     
COMMISSIONER  BUTCHER agreed  and  said he  wasn't  aware of  any                                                               
jurisdiction that had progressivity  like Alaska's. Very few have                                                               
it and the ones that do tend to do it bracketed.                                                                                
SENATOR  DYSON asked  if he  was inferring  they should  go to  a                                                               
gross tax as opposed to a net profit tax on new oil.                                                                            
COMMISSIONER BUTCHER answered no,  just the opposite. The benefit                                                               
of  net  is  that  it  takes into  consideration  a  higher  cost                                                               
development compared to  gross. But it is much  more difficult to                                                               
4:02:33 PM                                                                                                                    
SENATOR DYSON said they had  heard testimony that our net profits                                                               
tax removes the incentive for  the producers to reduce their cost                                                               
of drilling allowing  a way to hide some of  their resources from                                                               
taxes  and he  hoped  the commissioner  would  help them  rethink                                                               
COMMISSIONER BUTCHER  said they would in  future discussion about                                                               
taxes and credits.                                                                                                              
SENATOR DYSON asked if he  was suggesting that credits reduce the                                                               
impediments to more efficient production.                                                                                       
COMMISSIONER BUTCHER  answered yes;  tax credits  can be  used to                                                               
spend down  one's tax liability  under progressivity and  all the                                                               
credits in  this bill  were weighed  separately on  how effective                                                               
they have been.                                                                                                                 
SENATOR  DYSON  said he  would  come  back  to that  question  at                                                               
another time.                                                                                                                   
4:04:09 PM                                                                                                                    
COMMISSIONER  BUTCHER  said there  was  a  coordinated effort  to                                                               
understand  the  impacts  of  production   decline  on  not  just                                                               
revenues  but  on  TAPS.  Slide   15  compared  the  largest  oil                                                               
producing jurisdictions in North  America of North Dakota, Texas,                                                               
Alaska and  Alberta after  the 2003/04/05  price spike.  They all                                                               
started with  very slow but  steady production over  many decades                                                               
until  the price  of oil  spiked. Then  oil shale  played a  huge                                                               
factor  in  North  Dakota  passing  Alaska  as  a  producer.  New                                                               
technology allowed  this to happen, but  the price of oil  had to                                                               
be at $70 in order for  that technology to become economic. So at                                                               
$40 or $50 a barrel it  wouldn't have happened. Alberta was faced                                                               
with the same situation.                                                                                                        
Most interesting,  however, was the comparison  between Texas and                                                               
Alaska, because  Texas had been  producing oil a lot  longer than                                                               
Alaska. In  the mid-70s they were  in a decline when  Alaska shot                                                               
up  with Prudhoe  Bay. After  Prudhoe Bay  peaked in  the mid-80s                                                               
Texas and  Alaska had the same  decline curve until the  price of                                                               
oil spiked  up. Then  Texas turned around  and Alaska  stayed the                                                               
COMMISSIONER  BUTCHER  said  everyone  knows that  shale  oil  is                                                               
occurring  in Texas  just like  it is  in North  Dakota, but  the                                                               
interesting  things about  Texas was  told  to him  by the  Texas                                                               
Railroad Commission - that the  Texas turn-around was done almost                                                               
entirely  on conventional  oil and  only the  last two  years was                                                               
from shale oil.                                                                                                                 
4:08:19 PM                                                                                                                    
SENATOR MICCICHE  asked if  it was all  conventional in  2006 and                                                               
2007 when Alaska and Texas started separating on the graph.                                                                     
COMMISSIONER BUTCHER replied yes; for  Texas it was a combination                                                               
of going into  new fields and going back to  old fields that were                                                               
more economical  to produce  at $100/barrel  than they  were when                                                               
they had stopped producing at $30/barrel.                                                                                       
4:09:00 PM                                                                                                                    
Slide 16  compared Alaska to  other opportunities  using detailed                                                               
models  and analyzing  a  variety of  metrics.  It showed  Alaska                                                               
being more competitive at lower  oil prices, but less competitive                                                               
at higher  prices. Unfortunately,  companies lose money  when the                                                               
price goes  low and it's  at the high  prices where they  hope to                                                               
recoup that loss.  But in Alaska that is where  the state takes a                                                               
lot higher piece.                                                                                                               
4:11:01 PM                                                                                                                    
SENATOR FAIRCLOUGH asked why he pulled  a slide of West Coast ANS                                                               
prices from the TTP Committee presentation.                                                                                     
MIKE   PAWLOWSKI,   Advisor,   Petroleum  and   Fiscal   Systems,                                                               
Department of Revenue (DOR), Juneau,  Alaska, explained that that                                                               
slide  evolves  continually  as the  administration's  consultant                                                               
runs the numbers, which he does on a regular basis.                                                                             
SENATOR  FAIRCLOUGH  again  asked   why  they  were  not  showing                                                               
$70/barrel that had some negative numbers.                                                                                      
MR. PAWLOWSKI replied  that there was no specific  reason, but it                                                               
does  go   negative  in   certain  circumstances   for  different                                                               
4:12:22 PM                                                                                                                    
COMMISSIONER  BUTCHER  said   progressivity  is  complicated  and                                                               
unpredictable both for the state  and investors. Having to factor                                                               
in the  rate dollar by  dollar makes forecasting where  the price                                                               
of oil is  going and how it will affect  a particular development                                                               
more complicated.  Having to calculate  it monthly also  makes it                                                               
more difficult;  and at high  marginal tax rates,  the government                                                               
can take 80 percent plus on each increasing dollar.                                                                             
4:14:01 PM                                                                                                                    
Slide  18 showed  a  graph  on how  production  tax credits  were                                                               
applied against  production tax liability as  refunded tax credit                                                               
certificates.  The commissioner  said they  started with  a five-                                                               
year look back, but there was  very little information on how tax                                                               
credits were  working and there wasn't  a break down on  what the                                                               
spending was  on even by the  time he came into  office two years                                                               
ago.  He  explained that  the  DNR  and  the  DOR had  spent  the                                                               
previous years  trying to  implement and  administer over  70 new                                                               
regulations  for ACES,  which  took the  vast  majority of  their                                                               
time. As a result  they didn't have as good of  a picture of what                                                               
tax credits  were doing  on the  North Slope  as they  would have                                                               
liked. But  2013 will be the  first year in which  companies will                                                               
provide a  much more  detailed breakdown and  they expect  at the                                                               
close of calendar year 2013 to  have a much more detailed view of                                                               
what is going on up there.                                                                                                      
4:15:55 PM                                                                                                                    
SENATOR DYSON asked if the Y axis represented billions.                                                                         
COMMISSIONER BUTCHER  answered that  it represented  millions. He                                                               
said the  state had  paid out  a little under  $6 billion  in tax                                                               
credits so far  and an estimated $800 million plus  would be paid                                                               
out in FY14.  The state paid out almost $1  billion in credits to                                                               
companies that  have no production yet  - and at high  oil prices                                                               
with a lot of revenue coming  in, that number doesn't jump out as                                                               
much as  it does when there  are low oil prices  and less revenue                                                               
coming in. If the price of oil  drops into the $70s, $80s or $90s                                                               
the  state budget  would be  billions of  dollars in  deficit, he                                                               
said and  the state would still  be on the hook  for the credits.                                                               
The current tax  system really gets into difficulties  if we were                                                               
able to  get the  kind of  investment we  want, like  $20 billion                                                               
over two or three  years because we would also see  the $8 to $12                                                               
billion going out  in tax credits to pay for  that investment. We                                                               
may not  even have the  reserves to get us  to the point  of that                                                               
potential  production,  because  we  were  too  good  at  getting                                                               
companies to  come here.  And that  is a  pretty upside  down tax                                                               
4:18:51 PM                                                                                                                    
COMMISSIONER   SULLIVAN  added   that   situation  would   happen                                                               
particularly at low oil prices.                                                                                                 
COMMISSIONER BUTCHER said  the reason it was set up  that way was                                                               
because one  company used to be  able to sell its  tax credits to                                                               
another  company, but  it was  discovered they  would have  to be                                                               
sold at  a discount. That was  changed so that now  companies can                                                               
come to the state for a check.                                                                                                  
SENATOR  MICCICHE said  he would  like to  know if  the state  is                                                               
paying out more  than it is bringing in and  which were the right                                                               
COMMISSIONER  BUTCHER said  they would  get that  information for                                                               
him, but  basically, the companies  that are producing  in Alaska                                                               
are paying  for all the  tax credits. As the  department analyzed                                                               
what the  state was  getting for the  $5.85 billion,  they didn't                                                               
see a  direct connection  over these years  to any  production in                                                               
the future. That  isn't to say there isn't a  connection, but the                                                               
DOR couldn't see that with the information it has.                                                                              
4:21:26 PM                                                                                                                    
COMMISSIONER  SULLIVAN said  one of  the reform  proposals is  to                                                               
significantly   tighten  up   the  nexus   between  credits   and                                                               
SENATOR FAIRCLOUGH  asked if they were  establishing criterion in                                                               
regulations  for   credentials  of  people  applying   to  become                                                               
wildcatters  or  explorers   on  the  North  Slope   -  or  could                                                               
Fairclough and Company  come in and receive  millions of dollars'                                                               
worth of credit to try and dig a hole and then go back home.                                                                    
COMMISSIONER BUTCHER answered  if your company does  the work and                                                               
submits the information, you would qualify for the tax credit.                                                                  
SENATOR FAIRCLOUGH  said that  was her  point; Fairclough  has no                                                               
experience  in  oil  exploration  and   she  was  asking  if  the                                                               
department  had  considered  criteria  so  they  know  a  company                                                               
actually  has  exploration  ability and  experience  for  getting                                                               
those credits.                                                                                                                  
COMMISSIONER  BUTCHER said  they  hadn't spent  any time  talking                                                               
about it, but they could.                                                                                                       
SENATOR FAIRCLOUGH asked  if she would have any skin  in the game                                                               
if she was able to do that.                                                                                                     
COMMISSIONER BUTCHER answered yes. The  state would not be paying                                                               
for 100 percent of  what she was doing, but it  would be a fairly                                                               
high percentage depending on the credits she qualified for.                                                                     
SENATOR FAIRCLOUGH asked an outside  number for how much skin she                                                               
would  have in  the game  in order  to qualify  for Alaska's  tax                                                               
4:24:25 PM                                                                                                                    
COMMISSIONER BUTCHER  replied that  the department  has generally                                                               
considered that state participation is 40 to 60 percent.                                                                        
He said  there was  growing concern  that their  revenue modeling                                                               
didn't link throughput with tariff  rates or capture any CAPEX or                                                               
OPEX for low  throughput mitigation measures and  how those costs                                                               
may  affect  the   state  of  Alaska's  bottom   line.  Low  flow                                                               
mitigation CAPEX  and OPEX could  increase tariffs by as  much as                                                               
$1/barrel by  2019 and as  much as  $2.50/barrel by 2022.  If you                                                               
assume the price  of production and the tariff  that was provided                                                               
in the  fall 2012  Revenue Sources  Book, a  $1 increase  in TAPS                                                               
tariff would decrease state oil and  gas revenue by an average of                                                               
about $110 million a year.                                                                                                      
4:26:46 PM                                                                                                                    
COMMISSIONER SULLIVAN  said it's  hard to attract  new investment                                                               
with those kinds of TAPS tariff issues.                                                                                         
4:27:33 PM                                                                                                                    
COMMISSIONER BUTCHER said the proposal has the following pieces:                                                                
-eliminates  progressivity  and  qualified  capital  expenditures                                                               
(QCE) credits  of 20  percent. Exploration  tax credits  would be                                                               
kept the same                                                                                                                   
-reforms remaining  credits to be  carried forward to  when there                                                               
is production (up  to 10 years) to subtract  it from, eliminating                                                               
checks going out from the State Treasury                                                                                        
-establish a  Gross Revenue Exclusion  (GRE) for newer  units and                                                               
new Participating Agreements (PAs) in existing units                                                                            
-holds Cook Inlet and Middle Earth harmless                                                                                     
4:29:24 PM                                                                                                                    
SENATOR DYSON asked what "gross  revenue exclusion" means and how                                                               
it applies.                                                                                                                     
COMMISSIONER  BUTCHER  replied  in  this case  it  would  mean  a                                                               
certain amount of  barrels. If you were to  start production from                                                               
a new field - 100,000 barrels a  day for instance - 20 percent of                                                               
those  would  be  excluded  from the  tax  equation.  So,  80,000                                                               
barrels would  be taxed. It  accomplishes what they  were already                                                               
working on - making the economics of a project better.                                                                          
SENATOR DYSON asked why he was  using gross instead of net on the                                                               
revenue side.                                                                                                                   
COMMISSIONER  BUTCHER explained  that  equation was  done on  the                                                               
gross and  the net would apply  to the 80 percent  not the entire                                                               
100,000 percent.                                                                                                                
4:33:34 PM                                                                                                                    
SENATOR BISHOP  asked if capital  expenditures credits  are going                                                               
COMMISSIONER BUTCHER replied yes, as of January 1, 2014.                                                                        
SENATOR  BISHOP said  he  was concerned  that  some new  drilling                                                               
technology  that might  advance  and  further enhance  production                                                               
from the existing  fields wouldn't qualify and he  wanted that to                                                               
be a deduction. Is that eliminated in the proposal?                                                                             
COMMISSIONER BUTCHER  said he  had a  presentation that  dug into                                                               
that in  detail that he  would be happy to  show him. He  said no                                                               
changes would  be made to  Cook Inlet  and Middle Earth  and that                                                               
this  change would  only affect  68 degrees  North latitude  (the                                                               
North Slope).                                                                                                                   
4:35:05 PM                                                                                                                    
Slide 21  compared the current tax  rate with the proposal  in SB
21.  The 25  percent base  rate would  stay the  same. Under  the                                                               
proposal,  progressivity  and  the   QCE  tax  credits  would  be                                                               
eliminated and the proposal would add the GRE for new oil.                                                                      
Under current  law, they expect  progressivity in FY14  to amount                                                               
to approximately  $1.5 billion and  the tax credits to  amount to                                                               
$1 billion. So  there is a much more modest  number in the fiscal                                                               
note as a result of that balance.                                                                                               
4:37:52 PM                                                                                                                    
SENATOR FRENCH asked  if he would consider the bill  a failure if                                                               
it's adopted and production doesn't goes up.                                                                                    
COMMISSIONER BUTCHER replied that he  would consider it a failure                                                               
if  it  doesn't  lead  to   new  investment  that  leads  to  new                                                               
production.  If  it  goes  from  a  6  percent  decline  rate  to                                                               
flattening out  and not  turning around,  he would  consider that                                                               
the first step.                                                                                                                 
COMMISSIONER SULLIVAN  added the state  is looking for  levers it                                                               
can  pull, but  it doesn't  have all  the levers.  They might  do                                                               
everything right,  but wished the  federal government would  be a                                                               
little bit  more motivated to  help us  and help the  country put                                                               
more oil in it.                                                                                                                 
COMMISSIONER BUTCHER said they could  see when Econ One testifies                                                               
if this bill passes how the state will become more competitive.                                                                 
4:40:41 PM                                                                                                                    
SENATOR  DYSON said  he didn't  want to  appear negative,  but he                                                               
really wanted  to see  what the  state's oil  and gas  people say                                                               
will add another  400,000 barrels a day, because  he didn't think                                                               
that  would happen  until Shell  oil comes  in from  the Beaufort                                                               
Sea.  None of  the  little fields  coming on  line  are going  to                                                               
produce  half of  what  one  well did  in  the  legacy field.  He                                                               
thought we would be lucky to just flatten the decline curve.                                                                    
COMMISSIONER  SULLIVAN  said  that  was a  good  point  and  they                                                               
realize the  1 million  barrels a  day goal in  10 years  is very                                                               
ambitious, but  it's important  to be  able to  lay out  a vision                                                               
that  people can  try to  achieve. If  they get  to only  700,000                                                               
barrels  a day  within  10  years, he  wouldn't  consider that  a                                                               
failure. They are concentrating on  a diversity of plays; there's                                                               
Shell in  the OCS and  the shale  play and that  technology could                                                               
take off  here like it did  in North Dakota and  Texas. There are                                                               
smaller pools that  folks like Repsol are focused on.   Maybe all                                                               
of them will  come together, but maybe only one  or two. So, they                                                               
have to focus  on all of them and make  the tax system attractive                                                               
to them all.                                                                                                                    
4:44:06 PM                                                                                                                    
SENATOR  MICCICHE said  he thought  flattening the  decline curve                                                               
would be an absolute victory, but  reducing it to 3 percent would                                                               
kick the sustainability foot out there  quite a ways and give the                                                               
state a  chance to diversify  the rest  of the economy.  Texas, a                                                               
tired 100-year  old producing economy,  turned itself  around and                                                               
he wanted to capture some of those philosophies.                                                                                
COMMISSIONER SULLIVAN  explained that the  spike in the  price of                                                               
oil  made  things  become  economic  in  Texas,  but  Alaska  has                                                               
progressivity which the others don't  and companies can't get the                                                               
same return on investment they can in Texas or elsewhere.                                                                       
4:46:20 PM                                                                                                                    
SENATOR FRENCH  said he had asked  why there was a  difference in                                                               
the  spring revenue  forecast that  had a  2 percent  decline for                                                               
Prudhoe  Bay over  the next  10  years whereas  the fall  Revenue                                                               
Sources  Book a  much steeper  decline and  he wondered  how that                                                               
answer was coming along.                                                                                                        
COMMISSIONER BUTCHER said  he had just signed off on  that and he                                                               
should get it tomorrow.                                                                                                         
CHAIR  GIESSEL thanked  them  and  said they  would  next get  an                                                               
overview of SB 21 from the Department of Revenue (DOR).                                                                         
4:47:24 PM                                                                                                                    
MICHAEL  PAWLOWSKI,  Oil &  Gas  Project  Manager, Department  of                                                               
Revenue,  Anchorage,  Alaska,  stated  that  he  would  walk  the                                                               
committee  through  SB  21  so that  they  could  understand  the                                                               
language and  locations of  the provisions in  the bill.  He said                                                               
the principles in SB 21 were:                                                                                                   
   · Tax reform must be fair to Alaskans                                                                                        
   · Encourage new production                                                                                                   
   · Simple so that it restores balance to the system                                                                           
   · Durable for the long term                                                                                                  
He  said  when  taken  together,  these  guiding  principles  are                                                               
intended to  create a competitive  environment that  attracts new                                                               
investment to the state and grows the economy.                                                                                  
4:51:35 PM                                                                                                                    
MR. PAWLOWSKI  explained that the  proposal is built  around four                                                               
core provisions:                                                                                                                
   · Eliminating progressivity and credits based on capital                                                                     
   · Reforming remaining credits to be carried forward to when                                                                  
     there is production                                                                                                        
   · Establishing a "Gross Revenue Exclusion" for newer units                                                                   
     and new participating areas in existing units                                                                              
   · Holding Cook Inlet and Middle Earth Harmless                                                                               
4:53:21 PM                                                                                                                    
MR.  PAWLOWSKI  explained  how  the  bill  intends  to  eliminate                                                               
progressivity  starting with  Section  26 on  page  23, line  12,                                                               
which repeals three sections of  law: AS 43.55.011(g), the actual                                                               
progressivity;   AS  43.55.023(i),   the  transition   investment                                                               
expenditure credits that  were done leading into  PPT before ACES                                                               
(that are no long being used  and this was an opportunity to take                                                               
it off  the books)  and AS  43.55.160(c), the  monthly production                                                               
tax value  that relates specifically  to the  progressivity going                                                               
away (because it was repealed).                                                                                                 
MR.  PAWLOWSKI  explained  when   progressivity  is  repealed  it                                                               
effects several  different parts of statute.  To understand those                                                               
he went to the beginning of the bill, page 1, line 12.                                                                          
4:54:55 PM                                                                                                                    
SENATOR MICCICHE asked what is  retroactive to January 1, 2013 if                                                               
this passes (page 23).                                                                                                          
MR. PAWLOWSKI said  to answer that he would have  to walk through                                                               
the different sections; section 3  is the Cook Inlet Middle Earth                                                               
provision that  was passed last  year in  SB 23 establishing  a 4                                                               
percent gross tax  for oil and gas produced  from frontier basins                                                               
essentially outside  of Cook  Inlet and not  the North  Slope for                                                               
the first  seven years immediately following  the commencement of                                                               
commercial production if it happens before January 1, 2012.                                                                     
MR. PAWLOWSKI  continued that section 7  on page 9, line  12, was                                                               
the  important  one.  He  explained  under  current  law  when  a                                                               
qualified  capital  expenditure credit  (QCE)  is  earned on  the                                                               
North Slope,  that 20  percent credit is  divided and  taken over                                                               
two years and is issued in  two certificates, 10 percent one year                                                               
and  10  percent the  next  year.  Outside  of the  North  Slope,                                                               
credits are  allowed to  be taken  in one  year. So,  because the                                                               
bill  is ending  qualified  capital expenditure  credits for  the                                                               
North Slope  after January 1,  2014, they need to  go retroactive                                                               
to 2013  and allow the  credits to  be taken in  one certificate,                                                               
cut the program off and end the obligation to the state.                                                                        
4:57:23 PM                                                                                                                    
He explained that several years  ago a fund for community revenue                                                               
sharing  was  established  and  revenue  from  progressivity  was                                                               
dedicated to  it. That revenue  was limited  to the amount  of 20                                                               
percent of  progressivity, intended to  be $60 million a  year or                                                               
up to  the amount necessary to  bring the balance of  the fund to                                                               
$180 million,  the thought being  that if revenue sharing  is $60                                                               
million a year  there would be three years of  revenue sharing in                                                               
the fund and then it could  be refreshed. The proposal (section 1                                                               
on page  1, line 12, through  page 2, line 7)  eliminates the "20                                                               
percent  of"  language and  rather  relies  strictly on  the  $60                                                               
million  and  $180  million  criteria  as  the  goal.  But  since                                                               
progressivity is  being eliminated,  a different  fund source(the                                                               
Alaska net income  tax which is corporate income  tax payments to                                                               
the state) is  designated in AS 43.20.030(c) on pages  2, line 3.                                                               
So  under this  proposal revenue  sharing  is not  linked to  one                                                               
element of  the oil  tax system but  rather the  corporate income                                                               
and  earnings of  the  diversified base  of  businesses that  pay                                                               
corporate income taxes in the state of Alaska.                                                                                  
4:58:52 PM                                                                                                                    
MR. PAWLOWSKI  said another  adjustment was  required due  to the                                                               
removal of  progressivity from the bill.  He said it is  found in                                                               
section 2 on page 2, lines  8 through 18. The language deleted is                                                               
currently in  AS 43.55.011(e), the  primary tax section.  Line 14                                                               
says that  the annual production tax  value of the oil  or gas as                                                               
it's calculated in  AS 43.55.160(a) is multiplied  by 25 percent.                                                               
Then   under   the  current   system,   that   25  percent   plus                                                               
progressivity is  where the  production tax  is defined.  In that                                                               
progressivity  is  repealed,  this  deletes (2),  the  "sum  of",                                                               
language that is  no longer necessary, because  going forward the                                                               
production tax  will be a simple  25 percent of the  net value of                                                               
the oil or gas produced from the North Slope.                                                                                   
4:59:58 PM                                                                                                                    
SENATOR DYSON asked how $30 figures into what he just said.                                                                     
MR.  PAWLOWSKI  replied   that  the  $30  is   the  trigger  that                                                               
determines  the progressivity  feature each  month that  is being                                                               
repealed.  Repealing  progressivity  means going  back  into  the                                                               
statute and  repealing every place  that it is referenced  in the                                                               
monthly installment  payments, because  now it  is 25  percent of                                                               
your production tax  value (not 25 plus 13 percent  one month and                                                               
25 plus  6 month the next),  which is all dependent  on the price                                                               
of oil,  the production of  the company and the  costs associated                                                               
with that production.                                                                                                           
5:02:28 PM                                                                                                                    
Section  4, starting  on  page  2, line  25,  is the  installment                                                               
payments for Cook Inlet and Middle  Earth that will exist for one                                                               
year before  the progressivity is  repealed to make the  law work                                                               
in the way it is referenced. Section  4 will exist for a year and                                                               
then section  5 will be the  law of the land  going forward after                                                               
January 1, 2014.                                                                                                                
Section  5  eliminates  the  "sum of"  language  again  (same  as                                                               
section 2). It  is what the monthly installment  payments will be                                                               
after  progressivity  is   repealed.  And  that  is   why  it  is                                                               
considered a conforming section.                                                                                                
5:03:51 PM                                                                                                                    
CHAIR GIESSEL noted that there are still monthly payments.                                                                      
MR.  PAWLOWSKI  said  that  was true;  there  are  still  monthly                                                               
payments in an annual true up.  What is different in the proposal                                                               
is that the tax rate won't vary on a monthly basis.                                                                             
SENATOR DYSON asked how "gross  value at the point of production"                                                               
on page 7, line 3, was used.                                                                                                    
MR. PAWLOWSKI replied that a  specific calculation determines the                                                               
gross value at point of production.                                                                                             
SENATOR DYSON  asked if production  costs were deleted  from that                                                               
MR.   PAWLOWSKI  replied   it's  the   market  price   minus  the                                                               
transportation costs.                                                                                                           
SENATOR DYSON  said he  would be interested  in knowing  why they                                                               
are doing that.                                                                                                                 
5:05:14 PM                                                                                                                    
MR. PAWLOWSKI  said section 6, on  page 8, line 25,  through page                                                               
9, line 10, was  another conforming section because progressivity                                                               
goes  away. He  explained that  several different  tax treatments                                                               
for specific  types of oil and  gas had been added  into law over                                                               
the years  and after  progressivity is  repealed, section  22, on                                                               
page 21,  line 10, is  the cleaner and clearer  categorization of                                                               
all of those tax treatments.                                                                                                    
SENATOR BISHOP asked if they are "bundling" everything now.                                                                     
MR.  PAWLOWSKI answered  no, but  rather highlighting  in statute                                                               
how oil will  be treated based on the existing  law in an orderly                                                               
list rather than  leaving them scattered around  the statute. The                                                               
point would  be that  page 21,  line 21, talks  about oil  or gas                                                               
produced  from leases  or properties  in the  state that  include                                                               
land north of  68 degrees - the  North Slope - the  area the bill                                                               
is  attempting  to  really  make  changes to  -  other  than  gas                                                               
produced  before  2022  and  used  in  state  that  gets  treated                                                               
SENATOR FRENCH asked what AS 43.55.011(p) referred to.                                                                          
MR. PAWLOWSKI replied that is  the provision that was included in                                                               
SB 23  last year that was  the specific tax treatment  for oil or                                                               
gas produced  from areas south  of 68 degrees North  latitude and                                                               
not in the Cook Inlet sedimentary  basin (Middle Earth). To put a                                                               
finer point on it he said page  22, lines 9-11, will read kind of                                                               
like the oil  or gas that essentially at this  point in time does                                                               
not exist  in the State  of Alaska. This  is oil or  gas produced                                                               
from leases or  properties that are not north of  68 degrees, not                                                               
gas used  in state,  not oil  produced from  Cook Inlet,  not gas                                                               
produced  from Cook  Inlet,  and  not oil  or  gas produced  from                                                               
Middle Earth. There  must be a catch-all statute  that says after                                                               
the limits  that were put in  other statutes expire after  2022 -                                                               
the  treatment has  to go  somewhere  and it  defaults back  into                                                               
essentially  the  flat  25  percent   severance  tax  under  this                                                               
5:09:50 PM                                                                                                                    
The  North Slope  qualified  capital  expenditure credits  (QCE),                                                               
section 8, on  page 9, line 30  through page 10, line  18 has new                                                               
language that a credit for QCE  incurred for those areas north of                                                               
68 degrees may only be  taken if the expenditures occurred before                                                               
January 1, 2014. So, until January  1, 2014 the QCE credit on the                                                               
North Slope  will qualify for  the 20 percent credit;  after that                                                               
it will not.                                                                                                                    
5:10:50 PM                                                                                                                    
SENATOR  MICCICHE asked  if that  was adequate  time for  smaller                                                               
investors to wean off of the old system.                                                                                        
MR. PAWLOWSKI  said that  is an  important conversation  to have,                                                               
but he would  have to defer to testimony from  the companies. The                                                               
administration's consultants  have shown  the improvement  in the                                                               
economics of the life cycle  of the project should actually drive                                                               
the  ability  to  move  past  the credits  and  into  the  actual                                                               
investment and taking  too long could cause the  problem the bill                                                               
is attempting to address.                                                                                                       
5:12:05 PM                                                                                                                    
Section 7  was another conforming  section that talked  about the                                                               
retroactive  appeals. That  was followed  up with  section 11  on                                                               
page 11,  line 4, that  talks about two credit  certificates that                                                               
are  divided  up. The  conforming  change  on  page 11,  line  8,                                                               
substitutes "certificate" for "certificates"  because they are no                                                               
longer  two certificates  but rather  a  single certificate.  The                                                               
associated language on  lines 21-28 that is  deleted also relates                                                               
to that division of certificates.                                                                                               
The important piece here is  the conforming language later on the                                                               
North  Slope QCE  credits that  had to  be divided  into the  two                                                               
certificates. However,  a separate provision -  AS 43.55.023(m) -                                                               
said a credit can  be taken in a single year if it  is not on the                                                               
North  Slope. The  problem in  trying to  simplify the  system is                                                               
that  AS 43.55.023(d)  said credits  had to  be divided  into two                                                               
certificates and then  AS 43.55.023(m) came along  later and said                                                               
"except for  anywhere other  than the  North Slope";  an investor                                                               
could read  that and  misinterpret it by  not reading  the other.                                                               
This language  is trying to  be transparent by saying  that these                                                               
credits  can  be  retained  and  already  can  be  taken  in  one                                                               
5:13:52 PM                                                                                                                    
Section  12 on  page  11,  line 29  is  conforming language  that                                                               
conforms "except for the tax  credits incurred after December 31,                                                               
2013." It's  just being clear  that the issuance  of transferable                                                               
and  redeemable  tax  credit  certificates  cannot  be  done  for                                                               
qualified  capital expenditure  credits that  occur on  the North                                                               
Slope after that date.                                                                                                          
5:14:35 PM                                                                                                                    
Section 9  changes the  North Slope  net operating  loss credits.                                                               
The  current system  has a  20 percent  capital credit  and a  25                                                               
percent credit of the losses that  are incurred by a company that                                                               
might have  no production but  is spending and  has a loss  on an                                                               
annual  basis on  the North  Slope. Twenty-five  percent of  that                                                               
loss can be turned into the  state for a credit certificate which                                                               
is  redeemable by  a  cash  payment from  the  state  or sold  to                                                               
another company.  Under the governor's  proposal that  25 percent                                                               
loss credit  would no longer be  allowed for an area  north of 68                                                               
degrees North latitude.  Instead they are subject  to language on                                                               
page 10,  line 24, the  new (p)-(u)  sections of AS  43.55.023. A                                                               
loss carry forward  credit on the North Slope will  be subject to                                                               
a host  of new requirements in  section 15, which begins  on page                                                               
13, line 15.                                                                                                                    
SENATOR BISHOP asked for clarification.                                                                                         
MR. PAWLOWSKI replied  (p) through (u) relates only  to the loss-                                                               
carry forward  credit and  in order to  qualify for  a loss-carry                                                               
forward  credit  you  have  to  have   a  loss.  So  it  is  hard                                                               
functionally to see a situation  where this would apply on legacy                                                               
Subsection  (p) on  page 13,  line  20, limits  application of  a                                                               
North Slope carried-forward  loss credit to tax  liability two or                                                               
more calendar  years after the  expenditures on which  the credit                                                               
is based were incurred. Since  the credit isn't applied for until                                                               
the  second year  after the  loss is  why there  is the  two-year                                                               
issue. Then  they can come to  the state and get  a certifcate if                                                               
they have complied  with the filing law. The  other limitation is                                                               
on page 13,  line 23, that says  each one of the  of these credit                                                               
certificates expires after 10 years.                                                                                            
SENATOR  BISHOP  asked if  the  credit  on  line  23 shows  as  a                                                               
liability in the state's annual budget.                                                                                         
MR.  PAWLOWSKI  responded  that  there  are  provisions  in  this                                                               
section  about coming  to  the  state so  it  can recognize  that                                                               
liability. The  importance of  the other  provisions was  to have                                                               
the certification, have reporting and  have it tracked so that it                                                               
can be included subsequently.                                                                                                   
5:19:03 PM                                                                                                                    
SENATOR  FRENCH asked  if this  is meant  to say  you can't  lose                                                               
money  for 10  years on  the  North Slope  or does  it pick  some                                                               
arbitrary date.                                                                                                                 
MR. PAWLOWSKI replied  that the function of 10  years is balanced                                                               
by  subsection (r)  on page  14,  lines 2-14.  He explained  that                                                               
under current law these credits are  given to a company as a cash                                                               
payment  from the  state, and  not  getting that  cash payment  a                                                               
company suffers  essentially a loss  of opportunity. So  there is                                                               
an opportunity cost to the company.  The credit is increased at a                                                               
rate  of 15  percent  a  year beginning  in  the  second year  to                                                               
compensate for that cost of  capital. They decided on 15 percent,                                                               
because  it was  comparable to  what  their consultant  saw as  a                                                               
reasonable level  of upstream oil  and gas opportunity -  and the                                                               
point was to protect the state from that being carried forward.                                                                 
Functionally, it is intended to allow  a company to recover a lot                                                               
of the  cost that  they put  into the  development when  they get                                                               
into the production tax payment  stage. It's complicated, but the                                                               
credit  is  based  on  25  percent of  your  losses;  15  percent                                                               
compounds  that credit  by doubling  in  five years.  So you  can                                                               
write off  50 percent  of the cost  of your  development prospect                                                               
when  you have  production tax.  This  is intended  to provide  a                                                               
balance between  how long those  costs and the obligation  to the                                                               
state are  out there with  really improving the economics  of the                                                               
life cycle, which is the goal of the bill.                                                                                      
SENATOR  FRENCH provided  a hypothetical  example: if  Fairclough                                                               
Oil and  the committee  are shareholders and  drill one  well for                                                               
$10 million and  it's a duster, then they leave  Alaska and never                                                               
come  back, that  25 percent  credit expires  after 10  years and                                                               
grows to  a magnificent number, but  since they had no  profit to                                                               
show, it just expires and goes  away. They can't sell it or trade                                                               
SENATOR  FAIRCLOUGH asked  if  that credit  is  also intended  to                                                               
increase production.                                                                                                            
MR. PAWLOWSKI answered yes, because  the value of the credit only                                                               
exists if there is production and revenues.                                                                                     
5:23:05 PM                                                                                                                    
SENATOR FRENCH asked how mergers and acquisitions are handled.                                                                  
MR. PAWLOWSKI said  a provision will allow for the  transfer of a                                                               
credit  to another  company, but  its only  valuable in  that the                                                               
purchaser of  the credit takes  the property,  creates production                                                               
from it  and then  a proxy  limits the value  of the  credit each                                                               
year  to  20   percent  of  the  gross  value   X  the  operating                                                               
percentage. The  goal is  to not  let a  company buy  a property,                                                               
produce a  very little bit of  oil and then use  a massive amount                                                               
of tax credits  bought from someone else. It is  meant to provide                                                               
a ceiling on  the use of the credit which  will let market forces                                                               
drive how that credit is actually affected.                                                                                     
SENATOR BISHOP asked if the end  result was intended to limit the                                                               
state's exposure.                                                                                                               
MR. PAWLOWSKI  answered yes.  It enforces  that point  that there                                                               
needs to be production and revenue before the credits are used.                                                                 
SENATOR  MICCICHE asked  if there  is  other text  saying if  the                                                               
remainder is  negative it is considered  to be equal to  zero for                                                               
purposes of this paragraph (page 15,  line l3) to ensure there is                                                               
no cash back.                                                                                                                   
MR. PAWLOWSKI  replied yes in  relation to this  specific credit.                                                               
One other credit  is available under current law  until 2016 that                                                               
could  be  turned  in  for   cash  specifically  limited  to  the                                                               
exploration  phase on  the  North Slope  that  have distance  and                                                               
sharing  information with  DNR requirements.  There is  a similar                                                               
concept  in the  small producer  tax credit  that is  extended as                                                               
well in Section 16 of the bill.                                                                                                 
5:26:04 PM                                                                                                                    
He said  there are  two more  important things  to say  about the                                                               
treatment of the 15 percent  increase in value for these credits:                                                               
page  13, line  25,  is  really the  "first  in/first out  rule."                                                               
Because expenditures are happening  in several years before there                                                               
is other production and the  credits are increasing in value, the                                                               
first credit earned  should be the first credit  used. The second                                                               
credit earned  the second  credit used -  as there  is production                                                               
value that comes on. That is  intended to keep the person earning                                                               
the  credits from  taking  a credit  and holding  it  for the  15                                                               
percent increase.  In fact,  to protect the  state further,  if a                                                               
company has a tax liability and  doesn't use a credit against it,                                                               
they lose the increase for that year.  The point is to not have a                                                               
company have the opportunity of  either paying their taxes with a                                                               
credit or  holding on to  the credit  and getting the  15 percent                                                               
compounded. The  credits are  earned and should  be used  to take                                                               
the tax liability to zero in any given year.                                                                                    
MR. PAWLOWSKI  said that philosophy  takes them to page  16, line                                                               
26, section 16, which is the  small producer tax credit. Like the                                                               
new version of  the loss-carry forward credit, it  is only usable                                                               
to offset  a tax liability. It  may not be transferred  or turned                                                               
into the  state for cash. This  is a basic reduction  for a small                                                               
producer in the state of Alaska.                                                                                                
5:28:01 PM                                                                                                                    
He explained  under current  statute (page 16,  line 29)  a small                                                               
producer had until  2016 to come into production  and qualify for                                                               
this credit and SB 21 extends that deadline to 2022.                                                                            
5:28:31 PM                                                                                                                    
MR.  PAWLOWSKI  said  that  brought them  to  the  Gross  Revenue                                                               
Exclusion (GRE) on page 23, line 1.                                                                                             
5:28:49 PM                                                                                                                    
SENATOR  MICCICHE asked  why 15  percent  was used  and not  some                                                               
indexed figure.                                                                                                                 
MR.   PAWLOWSKI   replied  that   the   point   was  to   provide                                                               
predictability  to an  investor and  also that  you are  creating                                                               
almost  a  proxy  for  the  cost to  be  recovered.  An  existing                                                               
producer  could write  these expenditures  off  against taxes;  a                                                               
person  without production  can't. So  the 25  percent is  giving                                                               
them credit for  that expenditure. The increase in  value of that                                                               
expenditure carry  forward is  essentially a way  to allow  for a                                                               
company to write the costs  of their investment off against their                                                               
taxes  in the  early  years  if they  have  a  tax liability.  In                                                               
working the  life-cycle economics,  15 percent  was the  one that                                                               
provided transparency and  worked. It's important to  know the 15                                                               
percent isn't occurring for 10 years  but for the 8 years because                                                               
of the two calendar years issue.                                                                                                
5:30:17 PM                                                                                                                    
JOE BALASH, Deputy Commissioner,  Department of Natural Resources                                                               
(DNR), Juneau,  Alaska, explained  that another  section, section                                                               
24, is a key component of the  bill; it is the incentive that has                                                               
been   targeted  at   new  production.   There  is   very  little                                                               
disagreement  about a  willingness  to extend  some incentive  or                                                               
share  some portion  of the  pie  with those  companies that  are                                                               
going  to bring  in new  oil to  TAPS. This  particular provision                                                               
emerged in  the waning days  of last  session. It is  a mechanism                                                               
that  takes  the gross  value  at  the  point of  production  and                                                               
reduces it  by 20 percent  before a  company starts to  apply its                                                               
costs to arrive at the  production tax value (PTV). The mechanism                                                               
itself  fits  well for  investors  who  are incumbents  and  have                                                               
legacy production  that happen to  qualify for the  gross revenue                                                               
exclusion on any new production.                                                                                                
One can qualify for the gross  revenue exclusion (GRE) one of two                                                               
ways: you  can produce barrels  from a unit formed  after January                                                               
1, 2003 or  you can produce oil or gas  from a participating area                                                               
(PA)  approved by  the DNR  after  December 31,  2011. Those  two                                                               
types of lease management units  are important and have different                                                               
dates for different  reasons. The date January 1,  2003 goes back                                                               
to  the only  two units  that are  producing today,  Oooguruk and                                                               
Nikaitchuq, that experienced a tax  change while they were in the                                                               
middle  of  having  their fields  developed.  Oooguruk  Unit  was                                                               
formed in 2003;  a sanctioned decision was made for  the field in                                                               
2006 and  while they  were doing  that, changes  were circulating                                                               
around ELF  and PPT.  By the time  they got  through construction                                                               
and first production, PPT was modified  in 2007 by ACES and their                                                               
first oil  flowed in 2008.  The Nikaitchuq field was  unitized in                                                               
2005/6 and  a similar royalty  modification was granted  in 2008,                                                               
sanctioned  and  construction  began,  and their  first  oil  was                                                               
produced in 2010.                                                                                                               
SENATOR  FRENCH asked  if both  fields would  qualify for  the 20                                                               
percent GRE.                                                                                                                    
MR. BALASH  replied yes; these  are the only two  units producing                                                               
today that would qualify under this unit threshold.                                                                             
He said the  second way in which a company  could qualify for the                                                               
GRE  is  through the  formation  of  a  new  PA approved  by  the                                                               
department after  December 31,  2011. No  PAs have  been approved                                                               
since that point in time, so  they are really talking about those                                                               
that would be approved prospectively.                                                                                           
He explained that PAs are a  management tool used by the DNR. PAs                                                               
are  a  third dimension  to  leases  and units,  two  dimensional                                                               
measures  of property.  In other  words, within  a unit  area you                                                               
have a  large column of  earth that  has multiple pockets  of oil                                                               
and gas  within it. When they  are produced they are  reported as                                                               
belonging  to   a  PA.  Those   reservoirs  that   contribute  to                                                               
production are included in the PA.                                                                                              
5:35:39 PM                                                                                                                    
If at  another horizon  in a different  formation in  a different                                                               
reservoir another pocket  or pool of oil is  found and developed,                                                               
a new  PA is formed.  You can have  multiple PAs within  the same                                                               
unit  at  varying horizons  so  that  they  may be  overlying  or                                                               
underlying one  another. The important  point here is that  a new                                                               
PA is new  oil. That is how  the GRE would apply  to oil produced                                                               
in the  legacy fields in  terms of satisfying the  "command" from                                                               
the public and the legislature that  they are going to reward new                                                               
CHAIR  GIESSEL  asked  what  if  there is  a  provision  for  new                                                               
technology finding more oil in an existing PA that is producing.                                                                
MR.  BALASH answered  no, but  that  isn't to  say they  couldn't                                                               
account for it.  He said expanding that provision  could be done,                                                               
but it  wouldn't be easy and  some policy calls would  have to be                                                               
SENATOR FRENCH asked where Pt. Thomson falls in this scheme.                                                                    
MR. BALASH  replied that Pt. Thomson  doesn't have a PA.  If they                                                               
are   successful  in   meeting   their   obligations  under   the                                                               
settlement, a PA would be  formed once they achieve production in                                                               
2016, and they would qualify for  the GRE. But with other changes                                                               
being   made,   certain   incentives  and   benefits   that   the                                                               
leaseholders  at  Pt. Thomson  would  receive  under the  current                                                               
system would  no longer  be available  to them,  particularly the                                                               
QCE credit  and the benefits  of deducting their  expenditures as                                                               
they proceed to production.                                                                                                     
5:39:19 PM                                                                                                                    
SENATOR FRENCH  said new fields  had been produced  from Kuparuk,                                                               
for example Tarn and Tabasco, and asked if those are new PAs.                                                                   
MR. BALASH replied yes, both are separate PAs.                                                                                  
SENATOR  FRENCH said  that enhanced  oil recovery  (EOR) was  not                                                               
envisioned here.                                                                                                                
MR. BALASH said that was right.                                                                                                 
5:40:48 PM                                                                                                                    
MR. PAWLOWSKI  said one policy  call had  to be made  to preserve                                                               
the Cook  Inlet and Middle  Earth sections that had  separate tax                                                               
treatments for  oil and gas.  It was  reflected on page  2, lines                                                               
19-24. He explained that prior to  the passage of SB 23 last year                                                               
gas  produced in  state  and used  in state  was  subject to  the                                                               
equivalent of the "Cook Inlet  treatment." With passage of SB 23,                                                               
gas  produced in  the Middle  Earth and  used in  state was  left                                                               
unclear and subject to  a 4 percent.  So they  went with the most                                                               
recent  action by  the legislature  around the  tax treatment  of                                                               
that gas  or oil produced  from that  area. That was  really done                                                               
largely  because  of the  complexity  of  trying to  do  separate                                                               
accounting for  the potential producers  within the  Middle Earth                                                               
for one  stream of oil  and one stream  of gas under  a different                                                               
tax system  while they are both  coming out of the  ground in the                                                               
same  well. So,  they went  with the  most recent  action by  the                                                               
legislature, which  means gas produced  in Middle Earth  and used                                                               
in state would  be subject to (up  to) the 4 percent  cap for the                                                               
first seven years.                                                                                                              
5:43:24 PM                                                                                                                    
MR. PAWLOWSKI explained that section 4  on page 2, line 25, was a                                                               
conforming section  so that  now instead of  having to  divvy out                                                               
all  the  different sections  for  a  calendar  year in  which  a                                                               
producer is  subject to tax  under AS 43.55.011(e)-(i) or  (p) it                                                               
just says AS 43.55.011.                                                                                                         
Section 13  on page 12, line  19, was the provision  dealing with                                                               
the credit split  (AS 43.55.123(m)); it now says  a credit issued                                                               
under (d)  (which was the former  (m) that was deleted).  This is                                                               
about the  two-year to  one-year certificates  and being  able to                                                               
turn  them into  the state  for a  transferable tax  certificate.                                                               
There is  no reason to  have duplicative sections, which  is what                                                               
you see through sections 13, 14,  and 17. Section 18, on page 17,                                                               
inserts  "former"  to recognize  that  there  was a  time  period                                                               
before  where credits  were issued  under  (m) and  (d). This  is                                                               
related  to the  purchase  of  certificates by  the  state in  AS                                                               
43.55.028(g) and recognizes if a  tax credit was issued under (m)                                                               
at one point and someone waited a  few years to turn it in to the                                                               
state, that at one point (m)  was an actual statute that a credit                                                               
was validly issued under.                                                                                                       
Section  21  on  page  19,  line  5,  talks  about  the  way  the                                                               
production tax (AS 43.55.160) value  is calculated. This is clean                                                               
up  language related  to all  the different  types of  production                                                               
that  are in  statute and  is for  the period  of one  year while                                                               
there  still is  progressivity. This  inserts a  reference to  AS                                                               
43.55.011(p) that  was missed in the  passage of SB 23  last year                                                               
so there  isn't a  mistake in the  calculation of  production tax                                                               
value.  After  next  year  this  section  will  be  repealed  and                                                               
replaced  with  the  clean  section   that  lists  each  type  of                                                               
production and tax treatment.                                                                                                   
5:48:00 PM                                                                                                                    
Finally,  he said  Section 25  on page  23, line  11, repeals  AS                                                               
43.55.023(m), which  he reminded  them was  for areas  outside of                                                               
the  North  Slope where  a  credit  doesn't  have to  be  divided                                                               
between two certificates and can be issued as one certificate.                                                                  
MR. PAWLOWSKI wrapped up his  presentation saying that his intent                                                               
today  was to  make it  easier for  people to  find the  relevant                                                               
5:49:03 PM                                                                                                                    
SENATOR  DYSON said  under ACES  discussions, Governor  Palin had                                                               
reluctantly  said  that companies  should  be  allowed to  deduct                                                               
their expenses  under a net  profits tax, because they  needed to                                                               
incentivize development. Pedro van Meurs  and at least one of the                                                               
producers in the last two weeks  said that incentive was gone. If                                                               
that was  true, was there  any way to  help? His other  point was                                                               
that  they should  be careful  about raising  folks' expectations                                                               
that they  were going to  get 1  million barrels of  throughput a                                                               
day  in the  TAPS, because  that sets  them up  for looking  like                                                               
failure. He  agreed with Senator Micciche  flattening the decline                                                               
by half that would be a  victory. The million barrels is probably                                                               
subject  to  the  unconventional  and heavy  oil  production  and                                                               
probably Shell bringing their oil on shore.                                                                                     
CHAIR  GIESSEL thanked  Mr. Pawlowski  for  his presentation  and                                                               
held SB 21 in committee.                                                                                                        

Document Name Date/Time Subjects
SB 21 vs A SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Transmittal Letter SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Sectional Analysis DOR-TAX SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Overview Sullivan and Butcher SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 OTR Sectional Analysis SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Intent Letter TAPS Throughput SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Fiscal Note DOR-TAX SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Fiscal Note DNR-DOG SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 Econ One Presentation TAPS Throughput SRES 2013.02.11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 DOR Response to Sen. Gardner's questions 2-7-13. in SRES 2013 02 11.pdf SRES 2/11/2013 3:30:00 PM
SB 21
SB 21 SRES packet addition from STTP Feb 7 meeting