Legislature(2013 - 2014)BUTROVICH 205

02/22/2013 03:30 PM RESOURCES


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03:35:24 PM Start
03:36:15 PM SB21
05:18:23 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Consultants
-- Testimony <Invitation Only> --
Bills Previously Heard/Scheduled
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
CHAIR GIESSEL announced SB 21 to be up for consideration.                                                                       
                                                                                                                                
3:36:15 PM                                                                                                                    
SENATOR DYSON moved to adopt  CSSB 21( ), labeled 28-GS1647\U, as                                                               
the working document.                                                                                                           
                                                                                                                                
CHAIR GIESSEL  objected for discussion  purposes and  invited her                                                               
staff,  Sharon Long,  to explain  the committee  substitute (CS),                                                               
starting with  a concept  that addresses  the government  take at                                                               
high and low prices that was labeled the "35/5 element."                                                                        
                                                                                                                                
SHARON LONG, staff to Senator  Giessel, Alaska State Legislature,                                                               
Juneau, AK, explained the provision  that flattens the government                                                               
take starts  on page  4, line  1, and changes  the base  tax rate                                                               
from 25  to 35 percent  and adds a  $5 per taxable  barrel credit                                                               
for North Slope production. That  credit is not transferrable and                                                               
cannot  be carried  forward;  it  must be  used  against the  tax                                                               
liability for  the year in which  the barrel was produced  and it                                                               
cannot be used to reduce the tax below zero in any given year.                                                                  
                                                                                                                                
3:38:41 PM                                                                                                                    
MS.  LONG said  the  chair  asked this  to  be  modeled by  their                                                               
consultant, PFC Energy and Mr. Mayer was here to present it.                                                                    
                                                                                                                                
3:39:11 PM                                                                                                                    
CHAIR GIESSEL  noted the language  saying a producer may  apply a                                                               
tax credit of  $5 for each barrel of taxable  oil produced during                                                               
a calendar year  was inserted throughout the  bill for uniformity                                                               
and was a concept brought forward by Senator Micciche.                                                                          
                                                                                                                                
3:40:57 PM                                                                                                                    
JANEK  MAYER, Project  Manager,  Upstream  Practice, PFC  Energy,                                                               
Washington, D.C.,  explained that a significant  impetus for this                                                               
CS came from  concerns that the bill, while it  is a tax decrease                                                               
at high  oil prices, has  a crossover point below  which (because                                                               
of removing the capital credit)  represents a tax increase rather                                                               
than a decrease. The point at  which that occurs depends a lot on                                                               
one's  assumptions  about  levels   of  capital  spending.  So  a                                                               
producer  with low  levels  of capital  spending  might see  that                                                               
crossover occur  only at the  $70-80 price range (looking  at the                                                               
large mature producing fields and  nothing else). But if you also                                                               
incorporate  new spending  and  use a  higher  CAPEX number,  the                                                               
price level at which this tax  increase steadily rises to is more                                                               
like $110/bbl.                                                                                                                  
                                                                                                                                
In  the  context  of overall  regime  competitiveness,  while  it                                                               
starts off  being reasonably competitive  at $60/bbl, by  $100 or                                                               
so it's already up at the average  of other regimes and up at the                                                               
average of production-sharing contract  regimes, which tend to be                                                               
some of the  highest government take contracts  around versus the                                                               
average for  royalty regimes which  is down  at $60 and  the high                                                               
$50s for  Organization of  Economic Co-operation  and Development                                                               
(OECD) countries.                                                                                                               
                                                                                                                                
MR.  MAYER  said   the  CS,  based  purely   on  base  production                                                               
assumptions  (not the  higher capital  costs that  come from  new                                                               
development), by  contrast has that  crossover at $75  or $80/bbl                                                               
and  from that  point on  down represents  a steady  reduction in                                                               
government  take, but  below  that  point it  is  in  fact a  tax                                                               
increase.                                                                                                                       
                                                                                                                                
CHAIR  GIESSEL for  clarification said  that SB  21 as  currently                                                               
written  has a  downward slope  and  then levels  off (above  the                                                               
yellow line).                                                                                                                   
                                                                                                                                
MR.  MAYER said  that  was  correct, the  yellow  line being  the                                                               
average for royalty regimes around the world.                                                                                   
                                                                                                                                
3:44:53 PM                                                                                                                    
MR. MAYER said  there are two fundamental issues  here; one being                                                               
concerns  about  the regressive  nature  of  SB  21 in  that  the                                                               
government  take  steadily  falls, particularly  earlier  in  the                                                               
price deck  and then flattens off,  and then the question  of the                                                               
crossover  and how  to address  that by  introducing a  different                                                               
form of  tax credit that  is tied  to production rather  than one                                                               
tied  to spending  and  capital development  (which  has its  own                                                               
strengths and weaknesses).                                                                                                      
                                                                                                                                
His   charts  compared   a  number   of  other   possible  regime                                                               
interventions, but  using both discounted and  undiscounted rates                                                               
for  base  production an  incumbent  producer  would have  rising                                                               
rates under  ACES and falling  government take under SB  21 (from                                                               
66 percent at $70/bbl down to 62 percent at $150/bbl).                                                                          
                                                                                                                                
Raising  the base  rate to  35 percent  and introducing  a $5/bbl                                                               
production credit  per taxable barrel produced  only claimable in                                                               
that  year [in  the  CS]  had a  much  flatter  overall level  of                                                               
[undiscounted] government take around the  65 percent mark in the                                                               
for a  base producer (of a  mature field at Prudhoe  Bay) and the                                                               
crossover point  there went from  about $75/bbl down  to $70/bbl.                                                               
He also  looked at discounted  cash flows of government  take and                                                               
found those to be fairly comparable.                                                                                            
                                                                                                                                
But, he said,  that changes when looking at a  new development on                                                               
a standalone basis (outside an  existing producing area including                                                               
the gross  revenue exclusion (GRE)). In  his model of the  CS one                                                               
saw  a slightly  higher level  of government  take with  the 35/5                                                               
element, but  the impact is  less evident because one  is looking                                                               
at  a new  development  rather than  base production.  Ultimately                                                               
what is lowering  government take in this case is  not any of the                                                               
fundamentals of  either the base  rate or the  production credit,                                                               
but overwhelming it is the impact of the GRE.                                                                                   
                                                                                                                                
MR.  MAYER noted  that one  looks at  any of  these regimes  on a                                                               
discounted basis,  there is a  crossover, ultimately,  because of                                                               
the capital credits  (which account for quite a lot  in ACES). He                                                               
added that  when evaluating  government take  cash flows  and not                                                               
treating  all time  periods  identically the  near  term is  more                                                               
valuable than  the future and any  one of the options  (for a new                                                               
development) looks  substantially better  than ACES  from $90/bbl                                                               
onwards.  That  is  because  the  credit  helps  with  the  early                                                               
negative  cash  flows  that  reduces  and  improves  the  project                                                               
economics.                                                                                                                      
                                                                                                                                
3:50:59 PM                                                                                                                    
In raising  the cost  of a (standalone)  new development  [in the                                                               
CS] from  $16/bbl to $25/bbl,  the undiscounted  government take,                                                               
because of the  GRE, is lower than ACES, but  the crossover point                                                               
moves up  to $75/bbl. However,  overall it  is a higher  level of                                                               
government take than  one sees under SB 21 because  of the higher                                                               
base rate that is compensated at  least in part by the production                                                               
credit.                                                                                                                         
                                                                                                                                
MR.  MAYER advised  that  with any  high  cost development  there                                                               
comes  a point  at  which  government take  no  longer becomes  a                                                               
meaningful metric,  because there  is no  divisible income  to go                                                               
around  (at around  the  $100/bbl  mark on  the  slide) and  that                                                               
crossover is relatively higher for ACES than it is for the CS.                                                                  
                                                                                                                                
Looking at  incremental analysis  for an incumbent  producer that                                                               
has  a  new  development  and  subtracting  one  from  the  other                                                               
resulted in the  crossover level being substantially  lower for a                                                               
$16/bbl development  in the CS.  But modeling it on  a discounted                                                               
basis,  one sees  it's  only at  very high  levels  that you  get                                                               
levels  of government  take that  are lower  than they  are under                                                               
ACES.  That is  exacerbated  further by  looking  at the  $25/bbl                                                               
field where the  crossover comes at about $85/bbl, but  a it is a                                                               
relatively  lesser tax  increase below  that point  than was  the                                                               
case under SB 21(before the CS).                                                                                                
                                                                                                                                
MR. MAYER reminded folks that  they were looking at 60-65 percent                                                               
government take as being in  the area of competitiveness. And for                                                               
base  production the  net present  value  (NPV) at  a 12  percent                                                               
discount rate  per barrel of  reserves is  significantly improved                                                               
in SB  21 with  or without  the CS (using  both a  discounted and                                                               
undiscounted basis).                                                                                                            
                                                                                                                                
3:56:50 PM                                                                                                                    
A new development  on a standalone basis including the  GRE has a                                                               
crossover point where at a  low price level economics look better                                                               
under ACES, but  for anything above that  they look substantially                                                               
better under SB 21. However,  that crossover point rises with the                                                               
CS from $75/bbl  to $85-90/bbl for a $16/bbl  new development. At                                                               
$25/bbl none  of these things  have positive NPV above  about the                                                               
$90/bbl mark.  The crossover between  ACES and the CS  rises from                                                               
being about  that $90/bbl mark  to being more  like $100-105/bbl.                                                               
That is from the impact of a  higher base rate that is being only                                                               
partially  compensated   for  by   the  $5  per   taxable  barrel                                                               
production credit.                                                                                                              
                                                                                                                                
MR.  MAYER  said when  you  look  at  base production,  the  35/5                                                               
element looks like  the perfect regime - very  flat, very neutral                                                               
and right where  a lot of people  want to go in  terms of overall                                                               
levels  of  government take.  But  when  drilling down  into  the                                                               
details  of new  developments, one  can find  further sources  of                                                               
concern over improving the way the overall picture works.                                                                       
                                                                                                                                
3:58:01 PM                                                                                                                    
He said  the crossover point  is highest on an  incremental basis                                                               
and that  is because of  some of the  things he had  discussed in                                                               
terms  of the  impacts of  buy down  and to  the extent  that one                                                               
thinks the  incremental rather than  standalone economics  is the                                                               
way to  analyze these things.  He elaborated that  ultimately one                                                               
sees a crossover  in the low $100s under SB  21 for a $16/bbl/day                                                               
new development  that has a  higher NPV on an  incremental basis,                                                               
but  that  moves  marginally  higher   under  the  CS.  Both  are                                                               
substantially higher  in terms  of the  crossover point  when one                                                               
looks at it for an expensive $25/bbl new development.                                                                           
                                                                                                                                
In summary, he said some strong  points in terms of overall level                                                               
of  government  take,  particularly  when  looking  at  the  base                                                               
portfolio, but  more sources  of concern in  terms of  looking at                                                               
some of the other economic metrics  for a new development both on                                                               
a  standalone basis  (where that  is assisted  by the  GRE for  a                                                               
completely new producing project),  but particularly when the GRE                                                               
doesn't apply (when potential sources of concern arise).                                                                        
                                                                                                                                
3:59:42 PM                                                                                                                    
MR. MAYER said  similarly when it comes to rates  of return (IRR)                                                               
the  crossover  under SB  21  becomes  higher rather  than  lower                                                               
versus  ACES; with  the  CS that  crossover  point is  relatively                                                               
higher  (both  for  the  $16/bbl   development  and  the  $25/bbl                                                               
development). All of them look  worse on an incremental basis, if                                                               
one thinks that is a good way to look at this.                                                                                  
                                                                                                                                
He explained that the very high  levels of IRR a new producer can                                                               
get under  ACES for on an  incremental basis are really  the work                                                               
of progressivity;  and one has  the counterintuitive  result that                                                               
the higher  the progressivity the higher  the IRR you can  get on                                                               
an incremental  basis for a  project that says nothing  about the                                                               
quality of  the project  or the economic  value that  it creates.                                                               
It's  simply  a  quirk  of  the  buy-down  phenomenon,  which  he                                                               
explained  by  providing  this  example:  imagine  having  a  100                                                               
percent tax rate  where you could receive nothing,  but with each                                                               
dollar of  spending could buy  down your rate. That  first dollar                                                               
of spending  that brings you  down from  100 to 99  percent would                                                               
have  infinite rate  of return.  So, it  seemed to  him that  the                                                               
question of  high rates  of return under  ACES looking  solely at                                                               
incremental analysis  is a  phenomenon of  the problems  of using                                                               
incremental  analysis not  a  fundamental benefit  of  ACES as  a                                                               
regime.                                                                                                                         
                                                                                                                                
4:01:37 PM                                                                                                                    
CHAIR GIESSEL said  the goal had been to  levelize the government                                                               
take a bit more and asked for comments.                                                                                         
                                                                                                                                
SENATOR MICCICHE  said they  heard complaints  that the  take was                                                               
too high of  a tax increase at the low  end and people, including                                                               
many senators, didn't like the  slightly regressive nature of the                                                               
original SB 21.                                                                                                                 
                                                                                                                                
CHAIR GIESSEL asked  the administration if they  had any thoughts                                                               
on this.                                                                                                                        
                                                                                                                                
SENATOR MICCICHE  added that  they also  looked at  smoothing out                                                               
the curve,  but that had its  own problems. Their concept  was to                                                               
create    a   slightly    progressive   system    without   using                                                               
progressivity, but  to preserve the simplicity  of the governor's                                                               
proposal.  This CS  achieves that  by raising  the base  rate and                                                               
offsetting it  with a per barrel  credit. Since the tax  rate was                                                               
raised they  also had to  fix the GRE with  corresponding changes                                                               
by  increasing it  to 30  percent and  increasing the  loss carry                                                               
forward  to  35  percent.  They  like  the  curve,  the  slightly                                                               
progressive nature of it and the  fact that it's a smaller fiscal                                                               
note while still retaining the  competitive level with other OECD                                                               
producing areas where Alaska wants to be.                                                                                       
                                                                                                                                
CHAIR  GIESSEL said  that they  didn't want  to create  a runaway                                                               
schedule  of   credits  that  would   incent  spending   and  not                                                               
production the administration's consultant  had modeled this also                                                               
and emphasized.                                                                                                                 
                                                                                                                                
4:04:19 PM                                                                                                                    
SENATOR FAIRCLOUGH asked if the fiscal note was in process.                                                                     
                                                                                                                                
4:05:12 PM                                                                                                                    
MIKE PAWLOWSKI,  Advisor for Petroleum Fiscal  Systems, Office of                                                               
the Commissioner,  Department of Revenue (DOR),  Juneau, AK, said                                                               
the fiscal impact of the proposed  CS is being evaluated, but the                                                               
impact of  the bill  is readily apparent  in the  government take                                                               
numbers, the inference being that  at the current range of prices                                                               
the  government  take  under  the  CS is  higher  than  what  the                                                               
governor asked for.                                                                                                             
                                                                                                                                
CHAIR GIESSEL asked if he had  any comment on this portion of the                                                               
CS.                                                                                                                             
                                                                                                                                
MR. PAWLOWSKI said they asked  their consultant, Mr. Pulliam with                                                               
Econ One, to run it through his models.                                                                                         
                                                                                                                                
4:07:09 PM                                                                                                                    
BARRY PULLIAM,  Managing Director,  Econ One Research,  Inc., Los                                                               
Angeles,  CA, said  he revised  the government  take line  from a                                                               
slide he  presented last week with  the 35 percent flat  rate and                                                               
the $5/bbl  "production allowance." Over  the period in  a fiscal                                                               
note of 2015-2019, it will  somewhat increase government take for                                                               
all  existing  producers on  the  North  Slope  from the  low  60                                                               
percent range  to a  range that approaches  65 percent  at prices                                                               
above $80 or $90/bbl and  reduces government take at prices below                                                               
$80/bbl closer to where it was under ACES.                                                                                      
                                                                                                                                
4:08:54 PM                                                                                                                    
The way it  accomplishes this is by modifying the  GRE to give an                                                               
allowance that is a percent of  the production value; in SB 21 it                                                               
was 20 percent.  That allowance, in terms of a  dollar per barrel                                                               
amount,  would  rise  with  higher prices  and  fall  with  lower                                                               
prices. Allowing a per barrel allowance  is putting in a GRE that                                                               
as a percentage  increases with lower prices  - therefore helping                                                               
out  more than  a standard  percentage-based GRE  - and  declines                                                               
with  higher prices.  So  it bends  the curve  a  little bit  and                                                               
accomplishes the  goals of  providing some  lower taxes  at lower                                                               
levels (closer  to what ACES does)  and a little bit  higher take                                                               
at higher levels  (closer to what one sees  on average throughout                                                               
the world).                                                                                                                     
                                                                                                                                
4:10:20 PM                                                                                                                    
SENATOR FAIRCLOUGH  said she  wanted the  fiscal note  to reflect                                                               
the $5 credit.                                                                                                                  
                                                                                                                                
MR. PAWLOWSKI  said they will put  it into the same  table format                                                               
as was used in SB 21.                                                                                                           
                                                                                                                                
MR. PULLIAM  proceeded to another  revised slide showing  how the                                                               
system would work  with this allowance at  different prices ($60-                                                               
$160/bbl) with  total lease expenditures  of $30/bbl.  At $60/bbl                                                               
(West  Coast) the  taxable  barrel  value would  be  $20 and  the                                                               
production  tax value  would be  $1  million. A  35 percent  rate                                                               
would be an obligation of $350  million. Then you would take your                                                               
per barrel allowance  of $5 against that (assuming  a producer of                                                               
50 million  barrels) which  would be  $250 million.  That reduces                                                               
the  tax to  $100  million  and the  effective  rate  goes to  10                                                               
percent (in his  model). That allowance, while it  stays the same                                                               
at  $5/bbl  and going  up  in  price,  its  value declines  on  a                                                               
percentage  basis.  So  the  effective tax  rate  rises  from  10                                                               
percent all  the way up  to 30 percent  at $160/bbl; and  that is                                                               
about where it would cap out.                                                                                                   
                                                                                                                                
SENATOR  MICCICHE said  they heard  through  testimony that  this                                                               
helps companies in analyzing projects.                                                                                          
                                                                                                                                
MR. PULLIAM answered that it does  and without the messiness of a                                                               
progressive net  tax, which  is important. One  of the  things he                                                               
liked about  it was that  the credit  was tied to  production and                                                               
the value of  it increases at the lower prices  and fades away at                                                               
higher prices  where it isn't  really needed. It achieves  a flat                                                               
take over most ranges and gets progressive at the lower prices.                                                                 
                                                                                                                                
4:15:07 PM                                                                                                                    
He also  looked at  the impacts  on new  projects at  $16/bbl and                                                               
$25/bbl incorporating  the 35/5 element  with the 30  percent GRE                                                               
and compared  it with SB 21  (with the GRE). That  indicated that                                                               
NPV at  all price levels  was enhanced by the  CS as were  all of                                                               
the other investment metrics; and  government take would be about                                                               
60 percent  for new investment.   While the present value  of the                                                               
project  isn't as  attractive  at the  $25/bbl  level, it's  more                                                               
attractive under the CS than SB  21. In summary it accomplishes a                                                               
lot of what they want to do in a meaningful way.                                                                                
                                                                                                                                
SENATOR  MICCICHE commented  that  he looked  forward to  hearing                                                               
from  the   stakeholders.  It  accomplishes   what  he   want  to                                                               
accomplish  - improving  economics on  the low  end at  the price                                                               
where they  hear companies evaluate  projects; he also  liked the                                                               
fact that  it's slightly progressive without  using progressivity                                                               
and has a  little more take for Alaskans, but  doesn't put us out                                                               
of   the  ballpark   on  being   competitive.   He  thanked   the                                                               
administration and Mr. Pawlowski for their work.                                                                                
                                                                                                                                
4:17:37 PM                                                                                                                    
SENATOR MCGUIRE remarked  that Senator Bishop had  worked hard on                                                               
this as well.                                                                                                                   
                                                                                                                                
SENATOR BISHOP said  the modeling showed it as being  as close to                                                               
hitting the sweet spot as possible.                                                                                             
                                                                                                                                
4:19:15 PM                                                                                                                    
CHAIR  GIESSEL asked  Ms. Long  to explain  the expansion  of the                                                               
gross  revenue  exclusion  (GRE)  to include  legacy  fields  and                                                               
enlarging the PAs.                                                                                                              
                                                                                                                                
MS. LONG explained  that section 28 on page 26,  line 26, through                                                               
page 27,  lines 3 - 11  had language that allows  expanded PAs in                                                               
existing units.  Another change  on line 3  changed January  1 to                                                               
December 31, 2011,                                                                                                              
                                                                                                                                
4:20:41 PM                                                                                                                    
She  said  Mr.  Bullock  suggested   including  a  definition  of                                                               
"participating area" on line 10.                                                                                                
                                                                                                                                
CHAIR GIESSEL highlighted that the GRE  was altered from 20 to 30                                                               
percent on page 26, line 29.                                                                                                    
                                                                                                                                
MS. LONG  added that was triggered  by the 35/5 element.  Line 30                                                               
had another small adjustment changing "land" to "lease".                                                                        
                                                                                                                                
4:21:51 PM                                                                                                                    
JOE  BALASH, Deputy  Commissioner, Department  of Revenue  (DOR),                                                               
Juneau, AK, said  that language was on page 27,  lines 3-8 and it                                                               
makes an  addition to the two  ways in which you  can qualify for                                                               
the GRE  relative to  the governor's original  bill. This  was to                                                               
include  expansions  of  a participating  area,  because  as  the                                                               
committee  has heard  in testimony  from  various operators,  new                                                               
technology is  allowing companies to  reach certain parts  of the                                                               
reservoir  that weren't  available  previously. As  that kind  of                                                               
work unfolds, it  seems expansions of those original  PAs will be                                                               
needed  and it  seems  reasonable  to apply  the  same logic  and                                                               
policy there  as in new participating  areas as long as  they are                                                               
able to track and count the barrels.                                                                                            
                                                                                                                                
4:23:23 PM                                                                                                                    
CHAIR  GIESSEL  said Bill  Barron  had  explained about  how  new                                                               
technology  had   affected  industry  and  Senator   McGuire  was                                                               
concerned about  broadening PAs. ConocoPhillips said  the GRE was                                                               
not broad  enough and that the  legacy fields need to  be part of                                                               
the GRE and that is what this change was intended to capture.                                                                   
                                                                                                                                
SENATOR MICCICHE thanked the chair  for going through the process                                                               
and  embracing  the  concepts talked  about  in  TAPS  Throughput                                                               
Committee.                                                                                                                      
                                                                                                                                
4:24:53 PM                                                                                                                    
MR.  BALASH returned  to page  26, line  30, the  first test  for                                                               
qualifying for  the GRE that the  oil and gas is  produced from a                                                               
lease or property  that does not contain a lease  that was within                                                               
a unit as on January 1,  2003. He said the original language read                                                               
"did not contain land" within  a unit, and Brooks Range testified                                                               
on Monday that  some of the leases they hold  today that are part                                                               
of the  Mustang unit on that  date were actually part  one of the                                                               
legacy units  and didn't qualify. So  they had to be  specific as                                                               
to the  lease not the land,  because in the intervening  time the                                                               
land was contracted  out of the Kuparuk River  Unit and re-leased                                                               
to Brooks  Range for  development. This  fix should  correct that                                                               
problem.                                                                                                                        
                                                                                                                                
SENATOR BISHOP  asked him to  elaborate on tracking  and counting                                                               
barrels.                                                                                                                        
                                                                                                                                
MR. BALASH  said page 27,  line 6,  referred to the  expanded PA,                                                               
saying "and the producer demonstrates  to the department that the                                                               
volume  of oil  and gas  produced  is from  an area  added to  an                                                               
existing participating area." And that  is where the taxpayer has                                                               
the  burden to  demonstrate  to the  Department  of Revenue  that                                                               
those barrels are being counted.                                                                                                
                                                                                                                                
SENATOR FAIRCLOUGH asked him to  explain how new production would                                                               
be quantified in this instance for department analysis.                                                                         
                                                                                                                                
MR. BALASH  explained the department  manages oil and  gas leases                                                               
through leases, units, and then  participating areas (PA). Leases                                                               
and units  are measured  in two  dimensions; a unit  is a  way of                                                               
managing multiple  leases that contain  an oil or  gas reservoir.                                                               
That reservoir rests  in a third dimension and  as those deposits                                                               
are shaped across the different  leases within that unit, certain                                                               
parts  of that  reservoir when  penetrated with  a well  actually                                                               
contribute to the production in  that well; reservoir engineering                                                               
and analytics is  used to determine which parts  of the reservoir                                                               
are actually  contributing to that  production in the  well bore.                                                               
It is  through that  analysis that  PAs are  then defined  in the                                                               
unit. By  identifying specifically  new participating  areas they                                                               
are  talking  about  parts  of   the  unit  that  today  are  not                                                               
contributing to  production and so,  by definition, would  be new                                                               
production. Expansion of  an existing PA is  land that previously                                                               
was  not determined  to have  been contributing  to production  -                                                               
rather new parts  of the reservoir that will in  the future to be                                                               
contributing new barrels that will help sustain TAPS.                                                                           
                                                                                                                                
4:29:42 PM                                                                                                                    
SENATOR FAIRCLOUGH  asked if  other jurisdictions  sell royalties                                                               
based on that third dimension.                                                                                                  
                                                                                                                                
MR.  BALASH  answered  that  they   had  at  times  talked  about                                                               
segregating  the state's  leases vertically,  but hadn't  done it                                                               
yet. But  even in Alaska, they  will sell the oil  and gas rights                                                               
in  the subsurface  but not  necessarily the  coal rights  or the                                                               
gold  rights.  To  a  degree  there is  a  distinction,  but  the                                                               
participating area concept is common to the industry.                                                                           
                                                                                                                                
4:30:26 PM                                                                                                                    
MS.  LONG said  Chair Giessel  had requested  language about  not                                                               
rewarding the industry for what  it would produce anyway and this                                                               
amendment [on page 27, lines 6-8]  puts the burden on industry to                                                               
prove that it is new oil.                                                                                                       
                                                                                                                                
4:31:57 PM                                                                                                                    
MS. LONG  went over details  of the Competitiveness  Review Board                                                               
that had been talked about over  a couple of legislatures on page                                                               
27, line  12, through page 29,  down to the membership,  how they                                                               
are appointed, the  information that will be provided  by it, and                                                               
a sunset provision for it.                                                                                                      
                                                                                                                                
CHAIR GIESSEL invited Senator McGuire to speak to this.                                                                         
                                                                                                                                
SENATOR MCGUIRE thanked the chair,  Mr. Pawlowski and Mr. Balash,                                                               
and   complimented  Senator   Giessel,   the   best  first   time                                                               
chairperson  she had  experienced for  driving this  bill through                                                               
the  process  in the  allotted  time  while respecting  that  the                                                               
public's wisdom and experience would  warrant at least 30 minutes                                                               
to speak  and then  for getting all  of their  ideas incorporated                                                               
into this document.                                                                                                             
                                                                                                                                
She  said the  idea  for this  board would  have  not been  right                                                               
without the proper rollback of  ACES. She said the state's budget                                                               
is  90 percent  dependent on  this particular  revenue and  if we                                                               
don't  get our  act together  quickly we're  in a  whole heap  of                                                               
trouble. It struck her that the  discussions in her 13 years here                                                               
have been so  politicized when it comes to oil  and gas taxes and                                                               
she has  thought that putting together  a board, in this  case it                                                               
would be  nine members -  the commissioners  of DNR DOR  DEC, the                                                               
chairperson   of   the   Alaska    Oil   and   Gas   Conservation                                                               
Commission(AOGCC) and  five members of  public to be  selected by                                                               
the governor including  a petroleum engineer, a  geologist and an                                                               
economist  all  with at  least  three  years' experience  in  the                                                               
field, a  person from the  Alaska Oil and Gas  Association (AOGA)                                                               
and   the  Support   Industry  Alliance   -   to  serve   without                                                               
compensation and  be eligible for  per diem and  travel expenses.                                                               
This board  would meet  at least four  times annually  and report                                                               
its recommendations to  the legislature about how  to keep Alaska                                                               
competitive - without a political agenda.                                                                                       
                                                                                                                                
They would look around the globe and  at the Lower 48 to see what                                                               
the   emerging  trends   are,  how   other  places   are  staying                                                               
competitive, and at  what kinds of things Alaska could  do in its                                                               
fiscal  regime   and  regulatory   process;  they   would  review                                                               
historical,  current  and  potential levels  of  investment,  rig                                                               
counts, factors that affect investment  in oil and gas across the                                                               
world  and make  recommendations to  the legislature  to increase                                                               
Alaska's  competitiveness. She  said  the  legislature makes  the                                                               
ultimate  decisions about  how to  change the  fiscal system,  so                                                               
they  would  not  be  delegating  anything  about  that  ultimate                                                               
control.                                                                                                                        
                                                                                                                                
SENATOR MCGUIRE  wrapped up  by relating  a personal  story about                                                               
how this idea came to her.  When she was president of the Pacific                                                               
Northwest Economic  Region, her friend, Mel  Knight, the Minister                                                               
of Energy for  the Province of Alberta, said they  went through a                                                               
very similar situation.  They had high oil prices  and the public                                                               
wanted  to capture  more of  it and  so they  adopted a  windfall                                                               
profits tax much  like ACES. The backlash was  immediate with oil                                                               
companies  "voting with  their feet"  and moving  their rigs  and                                                               
operations to Saskatchewan and British Columbia.                                                                                
                                                                                                                                
Alberta suffered immensely, because it  is their bread and butter                                                               
and  having  a  parliamentary  system, many  were  voted  out  of                                                               
office. So they put together  a competitiveness review panel that                                                               
came back with a series  of recommendations, which the parliament                                                               
put into  place and now  Alberta is  back on track  and extremely                                                               
competitive.  It  was her  hope  that  this  will  be a  part  of                                                               
Alaska's governance for  the future much like  the Permanent Fund                                                               
Board  that  sits  in  perpetuity   outside  of  the  legislative                                                               
structure.                                                                                                                      
                                                                                                                                
4:40:34 PM                                                                                                                    
CHAIR GIESSEL asked Ms. Long to discuss "cleanups."                                                                             
                                                                                                                                
MS. LONG said they start on  page 10 that combines sections 7 and                                                               
8  from the  previous  bill; that  was  suggested by  Legislative                                                               
Legal.  On page  15, they  also suggested  better phraseology  on                                                               
lines  9 and  10, 17  and 18.  The other  cleanup was  having the                                                               
definition of  participating area to  be included within  the GRE                                                               
amendment, which had already been talked about.                                                                                 
                                                                                                                                
4:42:11 PM                                                                                                                    
CHAIR GIESSEL went on to  the exploration incentive credit (EIC),                                                               
an element advocated by the AOGA and Brooks Range.                                                                              
                                                                                                                                
MARGARET  DOWLING,   staff  to  Senator  Giessel,   Alaska  State                                                               
Legislature, Juneau, AK, explained that  the EIC was discussed by                                                               
the committee;  in response a  change was  made on page  18. They                                                               
took the  current law which allows  an EIC that is  set to expire                                                               
in 2016 and  extended it to 2022. In addition,  on page 20, lines                                                               
18-20, the  three-mile restriction was eliminated  because Brooks                                                               
Range said  the distance around the  well was too tight  for them                                                               
to qualify for an additional credit.                                                                                            
                                                                                                                                
CHAIR GIESSEL  noted AOGA's recommendation for  extending the EIC                                                               
and reminded the committee that  Brooks Range showed them a slide                                                               
of the very tight three-mile  boundary around a well. She invited                                                               
DNR to speak to this portion.                                                                                                   
                                                                                                                                
4:44:31 PM                                                                                                                    
MR. BALASH explained that language on  page 20, line 8, creates a                                                               
gate for getting  this .025 exploration credit.  It requires that                                                               
the commissioner  of DNR must  make an  affirmative determination                                                               
as  to the  geological  objective  of the  well.  So this  credit                                                               
mechanism has a gate; you have  to come in and demonstrate to the                                                               
technical guys in the Division of  Oil and Gas (DOG) that in fact                                                               
something  new is  being  looked at  or looked  for  in order  to                                                               
qualify  as an  exploration  credit. Assuming  that threshold  is                                                               
met, that  is a front  end gate, then the  well is drill  and the                                                               
costs accounted for;  the information from that well  needs to be                                                               
shared with  DNR again  in order  to qualify  for the  credit and                                                               
receive it. So, there is a check  on the front end and one on the                                                               
back end that makes sure the  state gets something for a generous                                                               
credit, as  the state is  taking risk with  a company on  what is                                                               
the riskiest  part of  oil and  gas development,  the exploration                                                               
side.                                                                                                                           
                                                                                                                                
MR. BALASH  explained that in  years past, limits have  been tied                                                               
to  unit   boundaries  and  distance   from  other   wells.  This                                                               
eliminates all  of those. So  even if  they are talking  about an                                                               
exploration  well within  a  unit,  as long  as  it is  targeting                                                               
something new,  you have  the potential  to qualify.  That should                                                               
help in  taking on some  of the  opportunities that are  close to                                                               
the nearer  the existing  producing units  that they  believe are                                                               
out there and quite prevalent.                                                                                                  
                                                                                                                                
SENATOR FAIRCLOUGH asked the potential  liability to the state of                                                               
the  exploration  credit  on  a percentage  basis  and  a  dollar                                                               
amount.                                                                                                                         
                                                                                                                                
MR. BALASH  answered that this  credit is  set at 40  percent and                                                               
typically  the cheapest  winter exploration  well drilled  on the                                                               
North  Slope  costs  around  $15   million.  That  cost  goes  up                                                               
depending on  how far away  it is,  building ice roads  and maybe                                                               
setting up a temporary man-camp. So  40 percent of that is in the                                                               
range of $6 million.                                                                                                            
                                                                                                                                
4:48:24 PM                                                                                                                    
SENATOR MICCICHE  asked if  this credit has  to be  taken against                                                               
production; so the state is not exposed.                                                                                        
                                                                                                                                
MR. BALASH  answered that  these particular  credits fall  in the                                                               
category  of  those  which  are   available  for  a  transfer  or                                                               
refunding on the front end.                                                                                                     
                                                                                                                                
4:49:04 PM                                                                                                                    
SENATOR  FAIRCLOUGH, using  the  example of  Fairclough and  Co.,                                                               
asked if  there are any  qualifying criteria for  these companies                                                               
we hope will be  part of our renaissance to be  able to apply for                                                               
the  credits. So  that  people with  prospects  who can  actually                                                               
follow through on production are the ones being incentivized.                                                                   
                                                                                                                                
MR.  BALASH answered  that that  still  needs to  be spelled  out                                                               
somewhere.                                                                                                                      
                                                                                                                                
SENATOR MICCICHE said that could  be added to the existing letter                                                               
of intent. He also said that  while this definitely helps some of                                                               
the  smaller companies  for initial  exploration, the  folks that                                                               
know best all  say the most new oil likely  to arrest the decline                                                               
will  likely come  from infield  areas and  this makes  access to                                                               
those credits available to the legacy companies as well.                                                                        
                                                                                                                                
MR. BALASH said that was correct  and he emphasized that the role                                                               
for credits  to play is  to incentivize those activities  to find                                                               
the oil and then  allow the value of the oil  itself to drive the                                                               
economic  decisions makings  and  ultimately  the development  as                                                               
opposed to the credit cycle.                                                                                                    
                                                                                                                                
CHAIR GIESSEL  asked Mr.  Mayer to comment  on the  generosity of                                                               
this credit.                                                                                                                    
                                                                                                                                
MR. MAYER said  that, in general, exploration risk is  by far the                                                               
largest risk  in upstream  oil and gas  development and  the part                                                               
that  governments around  the world  usually seek  desperately to                                                               
avoid. Alaska is unusual in the  degree to which it happily takes                                                               
it  exploration risk,  particular as  it stands  as a  40 percent                                                               
exploration credit and  the 25 percent net  operating loss credit                                                               
if there  is no production. So  if Fairclough and Co.  decides to                                                               
drill up some  random moose pasture, they are  drilling with $.65                                                               
on the dollar paid for by  the state of Alaska. If Fairclough and                                                               
Co. is an existing producer using  the buy down it could get even                                                               
higher support than that.                                                                                                       
                                                                                                                                
SENATOR FAIRCLOUGH disclaimed owning an oil exploration company.                                                                
                                                                                                                                
4:55:17 PM                                                                                                                    
SENATOR BISHOP  said Mr. Mayer was  a little bit cautious  and he                                                               
felt that the  credits were a skosh generous, but  they had heard                                                               
for the  last several weeks how  much it costs to  do business in                                                               
Alaska, and he felt confident in  taking a little risk in getting                                                               
the new production going.                                                                                                       
                                                                                                                                
SENATOR  FAIRCLOUGH  thanked Mr.  Mayer  for  commuting back  and                                                               
forth from Washington D.C. to testify before the committee.                                                                     
                                                                                                                                
CHAIR  GIESSEL said  the last  element included  in this  bill is                                                               
innovative came  from the TAPS  Throughput Committee's  letter of                                                               
intent that  talked about  Alaska hire  and Alaska  purchase. She                                                               
invited Ms. Long to explain that section.                                                                                       
                                                                                                                                
4:58:13 PM                                                                                                                    
MS. LONG explained  that language on page 2, line  10, called the                                                               
corporate  income  tax break,  was  for  Alaska manufacturing.  A                                                               
primary concern in the legislature and  all over the state was to                                                               
have jobs for  Alaskans and to encourage  manufacturing here. The                                                               
Department of Law (DOL) and the  courts don't agree with a lot of                                                               
ideas, but they  came up with this one that  they think will pass                                                               
muster. It's a corporate income tax  break for oil and gas sector                                                               
goods made  or modified in the  state. It is transferable  and is                                                               
capped at $10 million per year. If  a company does not have a tax                                                               
liability that credit can be carried up to seven years.                                                                         
                                                                                                                                
4:59:36 PM                                                                                                                    
BRUCE  TANGEMAN,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR), Juneau, AK,  added that this is  for expenditures directly                                                               
attributable to instate manufacturing  or instate modification of                                                               
tangible  personal  property   in  exploration,  development  and                                                               
production of oil and gas. It's  a very targeted tax credit aimed                                                               
specifically at the  manufacturer and building of  items that are                                                               
related to the oil and gas industry.                                                                                            
                                                                                                                                
CHAIR GIESSEL  asked if  Fairclough and  Co. was  a manufacturing                                                               
company  located  in Fairbanks  and  produced  something for  the                                                               
North Slope, how this would play out for that company.                                                                          
                                                                                                                                
MR.  TANGEMAN replied  that expenditures  attributable to  an oil                                                               
and gas  depreciable item  that the company  would make  would be                                                               
allowed a 10 percent tax  credit against the expenditures that go                                                               
into that item.                                                                                                                 
                                                                                                                                
5:01:25 PM                                                                                                                    
SENATOR DYSON said he suspected  that the 10 percent credit would                                                               
then allow  that company  to bid  on a product  or services  at a                                                               
lower rate than  a competitor who may also be  bidding on it from                                                               
somewhere else.                                                                                                                 
                                                                                                                                
MR. TANGEMAN answered yes; that's the intent.                                                                                   
                                                                                                                                
CHAIR GIESSEL asked if a company  that is actually based in North                                                               
Dakota and  producing a tangible item  that is being used  on the                                                               
North Slope get this credit.                                                                                                    
                                                                                                                                
MR. TANGEMAN  answered no;  they would need  to have  a corporate                                                               
income tax or be an entity within the state of Alaska.                                                                          
                                                                                                                                
CHAIR GIESSEL  asked if  they built  a manufacturing  facility in                                                               
Fairbanks  and actually  were producing  that  product in  Alaska                                                               
would they qualify.                                                                                                             
                                                                                                                                
MR. TANGEMAN answered yes and it would go the opposite way.                                                                     
                                                                                                                                
5:03:11 PM                                                                                                                    
CHAIR  GIESSEL  said this  piece  is  aimed at  incentivizing  or                                                               
helping  our companies  that are  here  on the  ground in  Alaska                                                               
employing  Alaskans  and  helps bolster  diversification  of  our                                                               
economy.                                                                                                                        
                                                                                                                                
5:03:34 PM                                                                                                                    
SENATOR  FAIRCLOUGH asked  how this  will affect  Alaska's bottom                                                               
line. Is  it stackable on  other benefits someone  might receive?                                                               
Could a  company accumulate  up to $60  million worth  of credits                                                               
because of the carry forward and  those would enter a market at a                                                               
discounted  rate possibly  for a  larger company  that is  paying                                                               
taxes, because they are transferable?                                                                                           
                                                                                                                                
5:04:40 PM                                                                                                                    
MR. TANGEMAN  explained the intent  is that the tax  liability is                                                               
less than the  credit they would receive and  it is transferable,                                                               
but  that  should also  go  into  the  economics of  the  pricing                                                               
involved in manufacturing  of whatever they are  producing in the                                                               
state.                                                                                                                          
                                                                                                                                
5:06:26 PM                                                                                                                    
SENATOR DYSON said he was  startled that an Alaskan company could                                                               
get this credit for products going to the Outside.                                                                              
                                                                                                                                
MR. TANGEMAN  replied that it's  for the  sale of a  product that                                                               
was built in Alaska but sold to North Dakota, for instance.                                                                     
                                                                                                                                
SENATOR DYSON  said we  want jobs, but  he was  questioning about                                                               
they would pick  out this particular industry  to subsidize above                                                               
others like  the fish  boat manufacturer. He  said it  might also                                                               
have title problems  because this whole thing has to  do with oil                                                               
and gas in  the state and all  of a sudden a  section was slipped                                                               
in  talking  about  subsidizing   an  industry  that  is  selling                                                               
products outside  of the state  that has  nothing to do  with our                                                               
oil and gas.                                                                                                                    
                                                                                                                                
SENATOR  FAIRCLOUGH said  the  tax credits  have  to stay  within                                                               
Alaska, but  there are still  some dynamics  at play in  terms of                                                               
incentivizing   an  industry.   She   was   thinking  about   the                                                               
fabrication of pipe.  At one time there was  a conversation about                                                               
rounding pipe  here and  that kind of  company would  qualify for                                                               
this credit. She wanted to think the concept through.                                                                           
                                                                                                                                
MR. PAWLOWSKI  supplemented that  saying one  of the  things they                                                               
had heard  consistently is the impact  of the high cost  of doing                                                               
business in Alaska on the oil industry  in that we have a net tax                                                               
system, and  there is  a relationship  between a  vibrant service                                                               
industry and support  industry to a healthy oil  industry. One of                                                               
the attempts  here is to increase  the health of that  sector and                                                               
hopefully drive down costs.                                                                                                     
                                                                                                                                
He  said it  was focused  towards oil  and gas  specific property                                                               
considering the  relationship of the ultimate  revenues the state                                                               
gets from the  more profitable projects. The state  has a profits                                                               
based tax,  the less  expensive the property  that goes  into the                                                               
cost equation actually does have  a feedback loop to the revenues                                                               
of the state.                                                                                                                   
                                                                                                                                
5:10:27 PM                                                                                                                    
SENATOR FAIRCLOUGH said she  thought "manufacturing" was probably                                                               
defined somewhere  in code,  but it wasn't  having a  product and                                                               
adding a bolt to it and  that should be clarified for the general                                                               
public.                                                                                                                         
                                                                                                                                
MR. TANGEMAN  pointed to page  3, line 10,  where "manufacturing"                                                               
was  defined   as  "needs   to  perform   substantial  industrial                                                               
operations in the  state to transform raw  material into tangible                                                               
personal property with  a useful life of three years  or more for                                                               
use in the exploration and  development and production of oil and                                                               
gas  regardless of  whether  the oil  or gas  is  located in  the                                                               
state."                                                                                                                         
                                                                                                                                
Line 14  defined "modification"  as "an adjustment,  equipping or                                                               
other alteration to existing tangible  personal property that has                                                               
a  useful life  of three  years of  more and  is for  use in  the                                                               
exploration,   development  and   production  of   oil  and   gas                                                               
reserves."                                                                                                                      
                                                                                                                                
5:11:32 PM                                                                                                                    
MR. PAWLOWSKI  said the important  caveat in that section  was on                                                               
page 3, line 17, that  said, "modification does not include minor                                                               
product alterations or inventory  activities." He said they would                                                               
continue to work  with the committee and the  legislature on this                                                               
going forward.                                                                                                                  
                                                                                                                                
SENATOR FAIRCLOUGH asked  if they had consulted  the oil industry                                                               
or someone manufacturing somewhere  about what that product might                                                               
be and if there was an example. And why choose $10 million?                                                                     
                                                                                                                                
MR. TANGEMAN said  he had some initial  conversations, but looked                                                               
forward to hearing  more from the service sector.  It seemed they                                                               
thought it  would be  beneficial to  their business  in promoting                                                               
business growth  in Alaska. The  $10 million cap is  a threshold;                                                               
they are hoping  it will be a  boom, but they have to  see how it                                                               
works through the process.                                                                                                      
                                                                                                                                
MR. PAWLOWSKI said the sincere intent  in the bill overall was to                                                               
protect  the  state treasury  in  any  ongoing obligations.  They                                                               
heard  testimony  from PFC  that  when  there are  credits,  that                                                               
offering  transferability of  credits to  be used  against a  tax                                                               
liability is a viable mechanism to provide some protection.                                                                     
                                                                                                                                
SENATOR BISHOP commented said this  is another way to make Alaska                                                               
competitive and the more you do here the cheaper it is to do it.                                                                
                                                                                                                                
5:16:00 PM                                                                                                                    
CHAIR  GIESSEL  said that  summarized  the  committee's ideas  in                                                               
addition  to those  of the  TAPS Throughput  Committee. She  said                                                               
some amendments  were not included in  the CS and those  would be                                                               
heard on Monday.                                                                                                                
                                                                                                                                
5:18:08 PM                                                                                                                    
CHAIR GIESSEL removed  her objection and CSSB 21(  ), labeled 28-                                                               
GS1647\U, was adopted and held in committee.                                                                                    

Document Name Date/Time Subjects
CSSB 21 vs U.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB 21 Econ One Presentation Pulliam SRES 2013.02.22.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB 21 Letter DougSchwartz 2013.02.20.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB 21 Letter WilliamArmstrong 2013.02.20.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB 21 Letter RonRice 2013.02.20.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB 21 PeterStokes 2013.02.20.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB 21 Written Testiomy EricFox 2013.02.20.pdf SRES 2/22/2013 3:30:00 PM
SB 21
SB21 PFC Energy. Mayer. 35% tax plus $5 barrell & GRE elements 2013 02 22.pdf SRES 2/22/2013 3:30:00 PM
SB 21