Legislature(2013 - 2014)BELTZ 105 (TSBldg)

01/22/2013 03:30 PM SENATE SPECIAL COMM ON TAPS THROUGHPUT


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03:30:21 PM Start
03:30:35 PM SB21
05:01:46 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
+ Commissioner Dan Sullivan, Department of TELECONFERENCED
Natural Resources
Commissioner Bryan Butcher, Department of Revenue
Deputy Commissioner Joe Balash, Department
of Natural Resources
Michael Pawlowski, Oil & Gas Development
Project Manager, Department of Revenue
-- Testimony <Invitation Only> --
                SB 21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
3:30:35 PM                                                                                                                    
CO-CHAIR  MICCICHE stated  that the  first order  of business  to                                                               
come before  the committee was  SB 21.  He noted the  presence of                                                               
Senator Giessel.                                                                                                                
                                                                                                                                
CO-CHAIR MICCICHE  related that  the Senate Special  Committee on                                                               
TAPS Throughput is "looking through  challenges to decreasing the                                                               
decline of North  Slope oil production." He pointed  out that the                                                               
committee is not an oil tax  committee, but rather it is designed                                                               
to arrest throughput decline.                                                                                                   
                                                                                                                                
CO-CHAIR MICCICHE  said that  the purpose of  the meeting  was to                                                               
begin  the  discussion of  SB  21,  the  Governor's oil  and  gas                                                               
production tax  bill. He introduced the  presenters: Commissioner                                                               
Butcher,   Commissioner  Sullivan,   Joe   Balash,  and   Michael                                                               
Pawlowski.                                                                                                                      
                                                                                                                                
3:32:38 PM                                                                                                                    
DAN  SULLIVAN,  Commissioner,  Department of  Natural  Resources,                                                               
began  by  thanking   the  Senate  for  the   public  service  of                                                               
establishing  a  special  committee  to   work  on  the  goal  of                                                               
decreasing throughput decline. He  emphasized that the Department                                                               
of  Natural  Resources (DNR)  believes  that  the issue  of  TAPS                                                               
throughput  decline  is  the  most   urgent  problem  facing  the                                                               
economic future  of Alaska.  He maintained  that the  more people                                                               
understand  the  problems and  the  solutions  of oil  production                                                               
decline,  the more  likely the  issue will  be addressed  for the                                                               
benefit of all  Alaskans. He said that DNR and  the Department of                                                               
Revenue (DOR) have  been working together as a team  on this goal                                                               
at the request of the Governor.                                                                                                 
                                                                                                                                
3:35:26 PM                                                                                                                    
COMMISSIONER  SULLIVAN  stated  the goals  of  the  presentation:                                                               
provide the  background of TAPS;  show some of the  challenges of                                                               
hydrocarbon  production and  investment in  Alaska, the  U.S. and                                                               
the  world; and  provide examples  to support  the idea  that oil                                                               
production decline in Alaska is not inevitable.                                                                                 
                                                                                                                                
COMMISSIONER  SULLIVAN  drew  attention to  a  handout  entitled,                                                               
"Arresting  TAPS  Throughput  Decline   &  Oil  Tax  Reform."  He                                                               
depicted TAPS as  a critical state and national  energy asset. He                                                               
reminded  the committee  that Congress  was  instrumental in  the                                                               
approval and rapid  development of TAPS and continues  to have an                                                               
important role.  The throughput issue has  federal elements, such                                                               
as  the energy  security of  the  country and  access to  federal                                                               
lands.                                                                                                                          
                                                                                                                                
He highlighted  the staggering number  of barrels  produced since                                                               
June of  1977. Production peaked  at 2.2 million barrels  per day                                                               
in  the late  1980s,  representing 25  percent  of U.S.  domestic                                                               
production. He noted how impressive  that amount was. Today, at a                                                               
little  less  than  600,000  barrels per  day,  there  is  excess                                                               
capacity and the decline threatens  America's economic future. He                                                               
said there was currently a reconfiguration of TAPS capacity.                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN  stated that  the ultimate giveaway  is the                                                               
year-after-year decline  of throughput.  He spoke of  a Bloomberg                                                               
report  from December  2011, which  showed production  of 620,000                                                               
barrels  of oil  a day  compared  to December  2012 with  582,000                                                               
barrels a day, a  loss of 40,000 barrels per day  for a year. The                                                               
value of  40,000 barrels of  oil a day in  a year is  4.7 million                                                               
barrels;  at  $100   per  barrel,  $1.5  billion   was  lost.  He                                                               
emphasized the goal to arrest and turn around that giveaway.                                                                    
                                                                                                                                
3:40:49 PM                                                                                                                    
COMMISSIONER SULLIVAN showed a graph  of Alaska North Slope (ANS)                                                               
production history,  pointing out  the dominance of  Prudhoe Bay.                                                               
He distinguished mature fields from  mature basins. He maintained                                                               
that the state  does not have a mature basin,  it has some mature                                                               
fields.                                                                                                                         
                                                                                                                                
He highlighted  the urgency of  the throughput decline  issue and                                                               
stressed  that it  was not  a scare  tactic. He  gave a  personal                                                               
example of his experience with  the January 2011 TAPS shutdown in                                                               
minus-40 weather.  He concluded  that the  lesson from  that near                                                               
disaster was  that the lower the  output, the higher the  risk of                                                               
shutdown  and  the  more  chance  for  technical  challenges.  He                                                               
discussed  the consequence  of higher  tariffs due  to companies'                                                               
costs from efforts to address such problems.                                                                                    
                                                                                                                                
CO-CHAIR MICCICHE  emphasized the  increase in  operational costs                                                               
due to lower flow rates.                                                                                                        
                                                                                                                                
COMMISSIONER SULLIVAN  agreed. He  did not  think that  there was                                                               
any  dispute  that lower  flow  rates  create  a higher  risk  of                                                               
complication.                                                                                                                   
                                                                                                                                
CO-CHAIR DUNLEAVY asked if the  state can flatten out or decrease                                                               
the decline.                                                                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN  said absolutely. He related  that there is                                                               
a large  resource base and  several basins have already  begun to                                                               
decrease the decline.                                                                                                           
                                                                                                                                
SENATOR GARDNER asked if the  future looks larger with the majors                                                               
or with new smaller investors.                                                                                                  
                                                                                                                                
COMMISSIONER SULLIVAN  replied that he believes  that all players                                                               
will  contribute;  all  investors  and the  entire  diversity  of                                                               
plays. He  spoke of the opportunities  that lie in all  plays. He                                                               
pointed out that Alaska is  unique in that conventional and shale                                                               
plays  can  exist  in  the  same field  or  basin.  The  goal  of                                                               
increasing competition in the North Slope is very important.                                                                    
                                                                                                                                
3:47:52 PM                                                                                                                    
SENATOR FAIRCLOUGH referred to the  TAPS shutdown in 2011 and the                                                               
anxiety over  that situation. She  emphasized that it was  not an                                                               
easy start  up and it was  fortunate that the pipeline  had great                                                               
employees and  attorneys to interpret  TAPS language  and prevent                                                               
outside entities from stopping the flow of oil.                                                                                 
                                                                                                                                
COMMISSIONER   SULLIVAN   agreed    with   Senator   Fairclough's                                                               
depiction.                                                                                                                      
                                                                                                                                
CO-CHAIR DUNLEAVY  requested information  on a  possible timeline                                                               
for stemming  the decline and  increasing production  in existing                                                               
wells and for the onset of new oil, given the right climate.                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN  said it was  a good question, but  hard to                                                               
predict the answer.  He agreed that infield drilling  would be an                                                               
obvious place  to begin a  turnaround. He pointed out  that there                                                               
has been  exploration outside of  the big units which  could turn                                                               
into  capable  production  within  a few  years.  He  used  Point                                                               
Thomson as an  example of a field that ExxonMobil  is starting to                                                               
build this winter  with a target three years away.  He recalled a                                                               
commitment by  Exxon a year earlier  that ran into delays  due to                                                               
federal permitting problems.                                                                                                    
                                                                                                                                
CO-CHAIR  MICCICHE suggested  that  the committee  was formed  to                                                               
streamline   legislation  related   to   the  timeframe   between                                                               
discovery and production. He noted Senator Bishop's arrival.                                                                    
                                                                                                                                
CO-CHAIR DUNLEAVY thought it was a huge issue.                                                                                  
                                                                                                                                
COMMISSIONER  SULLIVAN suggested  that  the best  way to  address                                                               
technical issues from  a shutdown is to get more  oil through the                                                               
pipeline.                                                                                                                       
                                                                                                                                
He  turned  to positive  solutions  to  address the  decline.  He                                                               
pointed  out the  most important  factor;  the huge,  world-class                                                               
basin on  the North  Slope. The  United States  Geological Survey                                                               
(USGS) estimates that Alaska's North  Slope has more oil than any                                                               
other  Arctic  nation.  It  has   about  40  billion  barrels  of                                                               
conventional  oil  (federal,  state,   and  OCS),  and  over  200                                                               
trillion cubic feet of conventional  natural gas. Alaska also has                                                               
world-class unconventional resources,  including tens of billions                                                               
of  barrels  of  heavy  oil,  shale oil,  and  viscous  oil,  and                                                               
hundreds of trillions of cubic feet  of shale gas, tight gas, and                                                               
gas hydrates.  He added that  the North Slope  remains relatively                                                               
unexplored  relative to  other hydrocarbon  basins  in the  U.S.,                                                               
another positive factor.                                                                                                        
                                                                                                                                
He spoke  of efforts  to market  oil prospects  in an  attempt to                                                               
bring more investors to the state.  One of the most common themes                                                               
heard  from potential  companies is  that though  the hydrocarbon                                                               
structure is great, the cost of doing business is too high.                                                                     
                                                                                                                                
3:57:24 PM                                                                                                                    
CO-CHAIR  MICCICHE thought  an important  piece of  educating the                                                               
public is  if people believe  there are adequate supplies  on the                                                               
North  Slope  to  increase  throughput.   He  suggested  DNR  and                                                               
industry geologists provide further information on that topic.                                                                  
                                                                                                                                
COMMISSIONER SULLIVAN said there  were geologists available to do                                                               
so.                                                                                                                             
                                                                                                                                
CO-CHAIR  DUNLEAVY  asked  if  the  "majors"  share  the  state's                                                               
optimism about  the potential to stem  throughput decline because                                                               
of the large amount of resources.                                                                                               
                                                                                                                                
COMMISSIONER  SULLIVAN  opined  that   the  majors  see  infield,                                                               
unconventional,  and  federal land  potential.  He  spoke of  the                                                               
efforts to  get companies to invest  and lease in shale  play. He                                                               
used  North  Dakota  as  an example  of  large  shale  production                                                               
increases  within  a period  of  five  years. He  predicted  that                                                               
source rock in Prudhoe Bay would have huge potential.                                                                           
                                                                                                                                
SENATOR GARDNER  understood that shale development  involves more                                                               
drilling and more wells. She inquired  if shale oil comes on line                                                               
more quickly than conventional oil.                                                                                             
                                                                                                                                
COMMISIONER SULLIVAN  related that a  task force made up  of DNR,                                                               
other agencies, and  counterparts from North Dakota  has been set                                                               
up in  order to  deal with  shale development.  He said  he would                                                               
find the answer to that question.                                                                                               
                                                                                                                                
He showed  a map of Alaska's  North Slope oil and  gas potential.                                                               
He said  he was optimistic  about the resource; however,  he said                                                               
it would cost billions to bring it to production.                                                                               
                                                                                                                                
4:01:58 PM                                                                                                                    
COMMISSIONER SULLIVAN discussed the  U.S. energy renaissance. The                                                               
International Energy Agency (IEA)  predicted in their "2012 World                                                               
Energy Outlook"  that the  U.S. would  overtake Saudi  Arabia and                                                               
Russia to become the world's  largest global oil and gas producer                                                               
by  the  second  half  of  this decade.  This  would  include  an                                                               
enormous  capital spending  boom  by the  oil  industry. In  2012                                                               
about  $600  billion  was spent  on  exploration  and  production                                                               
globally, and it is projected that  in 2013, $650 billion will be                                                               
spent. He opined  that Alaska needs to be on  the leading edge of                                                               
the  American   energy  renaissance,   rather  than   an  anchor.                                                               
Currently, a  lot of  the spending is  going to  Organisation for                                                               
Economic  Co-operation  and   Development  (OECD)  countries.  He                                                               
stated  that  Alaska  should  strive  for  more  of  that  global                                                               
spending.                                                                                                                       
                                                                                                                                
SENATOR  GARDNER  asked  how Alaska's  position  as  an  exporter                                                               
compares to the rest of the nation.                                                                                             
                                                                                                                                
COMMISSIONER SULLIVAN said  he did not think  Alaska would become                                                               
a major exporter of oil; however,  he did think it would become a                                                               
larger exporter of gas.                                                                                                         
                                                                                                                                
He  provided  examples of  how  other  basins have  turned  their                                                               
decline around,  such as in  Texas, Alberta, and North  Dakota. A                                                               
lot of  those basins involved  shale plays. The North  Sea basins                                                               
and Apache  Corporation's Forties field acquisitions  have turned                                                               
declines around as a result  of tax reform. He described Apache's                                                               
tax  reform, which  had an  impact on  production, new  jobs, and                                                               
investment.                                                                                                                     
                                                                                                                                
COMMISSIONER SULLIVAN related that  the TAPS Throughput Committee                                                               
has a  much broader  mandate than  just tax  reform. He  said the                                                               
state has been  focused on a comprehensive plan  that covers many                                                               
areas beyond  tax reform.  For the last  couple years,  the state                                                               
has examined  permitting reform,  the next  phase of  North Slope                                                               
development,  and promoting  the state's  resources by  targeting                                                               
certain companies that  would be a good fit in  Alaska. He agreed                                                               
with a statement from Governor  Parnell's 2013 State of the State                                                               
address that said the state's  problem with attracting investment                                                               
is not below ground, but above ground.                                                                                          
                                                                                                                                
COMMISSIONER  SULLIVAN discussed  the  North  Slope's recent  and                                                               
proposed   activity  for   oil  and   gas.  Recent   lease  sales                                                               
demonstrated positive  results. He  shared that DNR  has actively                                                               
sought  out new  investment  and has  seen  positive results.  He                                                               
stressed  that this  is only  the  beginning and  Alaska has  the                                                               
ability to attract new investment by all types of players.                                                                      
                                                                                                                                
4:12:06 PM                                                                                                                    
SENATOR GARDNER asked about the  role of Congress in developing a                                                               
gas pipeline.                                                                                                                   
                                                                                                                                
COMMISSIONER SULLIVAN offered to provide that information.                                                                      
                                                                                                                                
CO-CHAIR MICCICHE noted the presence of Senator Huggins.                                                                        
                                                                                                                                
4:13:33 PM                                                                                                                    
BRYAN  BUTCHER, Commissioner,  Department of  Revenue, began  the                                                               
presentation on oil tax reform.  He listed the four principles of                                                               
oil tax  reform which the  Governor recently reiterated:  the tax                                                               
reform  must  be   fair  to  Alaskans,  it   must  encourage  new                                                               
production, both  short-term and  long-term, it should  be simple                                                               
so  that it  restores balance  to the  system, and  it should  be                                                               
durable for the  long term. He gave an example  of the complexity                                                               
of Alaska's current tax system.                                                                                                 
                                                                                                                                
CO-CHAIR MICCICHE  inquired what the administration  means by "it                                                               
must be fair to Alaskans."                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER shared the  idea proposed by former-Governor                                                               
Hammond of  1/3 of profits each  going to the state,  the federal                                                               
government,  and the  companies.  He said  that,  in reality,  it                                                               
never works out  quite that way. The state's take  is much larger                                                               
than the federal government's take.                                                                                             
                                                                                                                                
COMMISSIONER  SULLIVAN  added that  it  must  be fair  to  future                                                               
generations of Alaskans.                                                                                                        
                                                                                                                                
4:19:04 PM                                                                                                                    
COMMISSIONER BUTCHER  defined "durable  for the  long term"  as a                                                               
system that is  competitive into the future. He  pointed out that                                                               
the  proposed tax  change is  the third  one in  the past  six or                                                               
seven  years. He  said  that  the administration  has  a goal  of                                                               
making the tax a "long-term answer."                                                                                            
                                                                                                                                
COMMISSIONER BUTCHER spoke of the  integrated team made up of DOR                                                               
and DNR, as well as the consulting firm Econ One Research, Inc.                                                                 
                                                                                                                                
COMMISSIONER  BUTCHER described  the process  used to  develop SB
21. The team  reviewed previous work by both  the legislature and                                                               
the administration.  It identified problems with  the current tax                                                               
system: declining production, lack  of a competitive environment,                                                               
problems with progressivity, and tax credits.                                                                                   
                                                                                                                                
CO-CHAIR  MICCICHE agreed  that  lack of  competitiveness due  to                                                               
high government take was a problem.  He asked whose role it is to                                                               
determine the  distribution of  government take  for oil  and gas                                                               
production   and  severance   taxes,  the   legislature  or   the                                                               
administration, or both. He suggested setting a number first.                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  said it comes  down to the  legislature and                                                               
the Governor  to determine what  number is competitive  and makes                                                               
the most sense in moving forward.                                                                                               
                                                                                                                                
CO-CHAIR MICCICHE  asked if there  was a place in  global average                                                               
government take where "we can  see excitement beginning to occur,                                                               
versus  a level  where there  is not  much happening  because the                                                               
take is too high."                                                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER did  not know.  He suggested  Barry Pulliam                                                               
with Econ One might have an answer.                                                                                             
                                                                                                                                
CO-CHAIR   MICCICHE   noted   that   the   committee   would   be                                                               
commissioning PFC for independent consulting work.                                                                              
                                                                                                                                
4:23:41 PM                                                                                                                    
COMMISSIONER  BUTCHER continued  to  identify  problems with  the                                                               
current tax  system. He discussed progressivity  and tax credits.                                                               
He  said  DOR  and  DNR coordinated  efforts  to  understand  the                                                               
impacts of production decline on TAPS revenues.                                                                                 
                                                                                                                                
He showed a  graph that shows how the competition  fared when oil                                                               
prices spiked.  He maintained that  other basins have  turned the                                                               
decline  around. He  compared Texas,  North  Dakota, and  Alberta                                                               
with Alaska.  He said  the biggest  takeaway compares  Texas with                                                               
Alaska to  show that Texas  flattens out and turns  around, while                                                               
Alaska  shows no  production increase  at higher  oil prices.  He                                                               
noted that  unconventional oil, not shale  oil, turned production                                                               
around. He maintained that these  examples are proof that decline                                                               
is not inevitable.                                                                                                              
                                                                                                                                
COMMISSIONER  SULLIVAN commented  that "everybody  is turning  it                                                               
around" except for Alaska.                                                                                                      
                                                                                                                                
4:30:07 PM                                                                                                                    
SENATOR  GARDNER questioned  Texas's government  take during  the                                                               
time when production was low.                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER answered that Texas's  tax rate was also low                                                               
during that  time. He did  not know  what royalties were  paid to                                                               
primarily  private land  owners.  He  speculated that  government                                                               
take was not much higher than Alaska's. He offered to find out.                                                                 
                                                                                                                                
CO-CHAIR   MICCICHE  suggested   a   theoretical  scenario   that                                                               
contained two product  lines; shale oil play during  a high price                                                               
environment and conventional  oil at a low  price environment. He                                                               
talked about  decoupling types of oil  and encouraging additional                                                               
production at lower prices, if shale does play out.                                                                             
                                                                                                                                
COMMISSIONER BUTCHER  agreed that it  could be done and  has been                                                               
considered. He  spoke of  heavy oil as  an example  and suggested                                                               
that it might be incentivized.                                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER  explained a table with  detailed models and                                                               
a variety of metrics that shows  how Alaska compares to other oil                                                               
opportunities.  The  table shows  an  example  for a  50  million                                                               
barrel development  in Alaska and comparable  developments in the                                                               
Lower 48,  Canada, Norway,  and the  United Kingdom's  North Sea.                                                               
In  PFC  Energy's analysis  last  year,  Alaska rated  second  to                                                               
Norway  when comparing  OECD sites.  At $140  per barrel,  Alaska                                                               
would surpass Norway.  He stated he could  provide comparisons in                                                               
a variety of ways.                                                                                                              
                                                                                                                                
CO-CHAIR  MICCICHE  said  he  has  seen  very  different  numbers                                                               
published in tables  that look like the  one Commissioner Butcher                                                               
presented. He questioned  why there are so many  versions and how                                                               
to know the right numbers on which to base decisions.                                                                           
                                                                                                                                
COMMISSIONER  BUTCHER explained  that it  was a  very complicated                                                               
issue. Progressivity,  price, and credits,  all have to  be taken                                                               
into account. He stated that DNR  and DOR have presented Econ One                                                               
with the most  up-to-date information on how  Alaska's tax system                                                               
works.                                                                                                                          
                                                                                                                                
CO-CHAIR MICCICHE  wished to  bring all  the groups  together and                                                               
arrive at  the real numbers  for Alaskans.  He added that  if the                                                               
departments have  spent the  time to arrive  at the  real numbers                                                               
that should be made clear.                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER  said that,  generally, all  the consultants                                                               
get together  to make sure  the input  to the models  produce the                                                               
same numbers.                                                                                                                   
                                                                                                                                
4:36:57 PM                                                                                                                    
COMMISSIONER  BUTCHER   spoke  of  the  difficulty   of  defining                                                               
progressivity.  He noted  it was  complicated and  unpredictable,                                                               
both  for  the   state  and  investors.  He   described  how  the                                                               
progressivity rate  is achieved.  He compared Alaska's  system to                                                               
North Dakota's simple tax system.                                                                                               
                                                                                                                                
SENATOR  GARDNER  thought  the   difficulty  was  in  calculating                                                               
production tax value, but that  changing progressivity and adding                                                               
different values  is just  a formula to  put into  a spreadsheet.                                                               
She opined that it might be  complicated to explain and to set up                                                               
a spreadsheet, but it's not hard after that.                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER related that  companies have complained that                                                               
they have to  run endless numbers based on the  changing price of                                                               
oil. He  described the difficulty  of the  tax system due  to its                                                               
not being a straight percentage.                                                                                                
                                                                                                                                
SENATOR  GARDNER did  not accept  that progressivity  is hard  to                                                               
calculate.                                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER  added that  Alaska's tax  calculations must                                                               
be done monthly instead of annually.                                                                                            
                                                                                                                                
4:41:05 PM                                                                                                                    
COMMISSIONER BUTCHER explained  a graph that shows  the number of                                                               
tax credit certificates refunded  and the credits applied against                                                               
production  tax  liability.   In  FY  13,  of   $800  million  in                                                               
production tax  credits, $360 million  credits were  refunded and                                                               
$440  million   were  credits  applied  against   production  tax                                                               
liability. He predicted that the  total would be about $1 billion                                                               
in  FY 14.  He  questioned  what the  state  was  getting for  $1                                                               
billion.  He said  it  was difficult  to see  what  the state  is                                                               
getting for its  investment. He noted that the  tax credit system                                                               
is incentivizing  spending, but  that it  has not  been connected                                                               
with  increases in  production. As  a result,  the administration                                                               
has approached the bill cautiously.                                                                                             
                                                                                                                                
He posed  a hypothetical situation  where the price of  oil would                                                               
drop  to $80  - $90  per barrel  over the  course of  a year  and                                                               
Alaska  would have  a deficit  in "the  billions of  dollars." He                                                               
spoke of the type of investment being sought.                                                                                   
                                                                                                                                
CO-CHAIR MICCICHE requested  clarification about pre-2009 through                                                               
2014 when the  state averaged paying out $375  million for credit                                                               
certificates that did not produce any oil.                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER  said it was  speculation on  the companies'                                                               
parts as to  what may have been produced that  wouldn't have been                                                               
produced as a result of production  tax credits. He said that DOR                                                               
was never able, in their five-year  look back, to make any direct                                                               
connections.  He added  that the  total of  $5.85 billion  is the                                                               
amount  the  state  either  took   off  the  tax  liabilities  of                                                               
companies or paid out in cash over the last 5-7 years.                                                                          
                                                                                                                                
CO-CHAIR MICCICHE asked what conditions  in 2011 made the refunds                                                               
higher than the credits applied against production.                                                                             
                                                                                                                                
COMMISSIONER  BUTCHER explained  that  the  department relies  on                                                               
company  expense reports.  That year,  more companies  spent more                                                               
money. The  department checks to  see that  the work is  done and                                                               
that the company qualifies for the refund before it pays.                                                                       
                                                                                                                                
4:46:47 PM                                                                                                                    
CO-CHAIR  DUNLEAVY  understood that  there  is  no evidence  that                                                               
production tax credits increase production.                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER said DOR does not have that information.                                                                   
                                                                                                                                
COMMISSIONER SULLIVAN  stressed the point that  the system should                                                               
be balanced and Alaska's treasury should be solid.                                                                              
                                                                                                                                
CO-CHAIR DUNLEAVY asked  if tax credits are  spending credits not                                                               
tied to production.                                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER said yes. The  company only has to show that                                                               
an expense qualifies under law.                                                                                                 
                                                                                                                                
He discussed a  growing concern of DOR and DNR  that TAPS tariffs                                                               
in  revenue modeling  did not  dynamically  link throughput  with                                                               
tariff rates or capture any added  capex or opex spending for low                                                               
throughput  mitigation measures.  He  said  that assuming  price,                                                               
production and tariff provided in  the "Fall 2012 Revenue Sources                                                               
Book," a $1  increase in the TAPS tariff will  decrease state oil                                                               
and gas revenue by an average of $110 million.                                                                                  
                                                                                                                                
4:50:30 PM                                                                                                                    
SENATOR  GARDNER  questioned  the statement,  "Current  work  not                                                               
designed  to  find the  optimal  low  flow mitigation  option  or                                                               
forecast specific  operational outcomes  and exact  tariffs." She                                                               
wondered whose current work the phrase refers to.                                                                               
                                                                                                                                
COMMISSIONER BUTCHER  explained that  it means the  department is                                                               
running models  to determine the  effect an increased  or lowered                                                               
tariff will  have, not  to determine  when oil  will run  out and                                                               
TAPS would shut down.                                                                                                           
                                                                                                                                
SENATOR GARDNER asked who is doing  that work. She assumed it was                                                               
the operators and  owners, not the department whose job  it is to                                                               
evaluate the impact on state revenues.                                                                                          
                                                                                                                                
COMMISSIONER  BUTCHER agreed.  He  added that  the  state is  not                                                               
getting involved in predicting operational outcomes.                                                                            
                                                                                                                                
CO-CHAIR MICCICHE  said that Admiral Barrett  [President, Alyeska                                                               
Pipeline Services] would be covering those issues.                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER highlighted  the  oil  tax reform  proposal                                                               
which would eliminate progressivity  and credits based on capital                                                               
expenditures -  a 20  percent capital  expenditure credit  on the                                                               
North Slope  and reform remaining  credits to be  carried forward                                                               
to when  there is  production -  tax credits  can be  taken where                                                               
there is a tax liability and  the state would no longer be paying                                                               
cash out  on a  yearly basis.  It would  also establish  a "Gross                                                               
Revenue Exclusion"  for newer units  and new  participating areas                                                               
in existing  units targeting new  oil and challenged  areas, such                                                               
as a new area that is  far from infrastructure with higher costs,                                                               
or a heavy  viscous oil area. The bill also  holds Cook Inlet and                                                               
Middle Earth harmless.                                                                                                          
                                                                                                                                
4:53:41 PM                                                                                                                    
MICHAEL  PAWLOWSKI,  Oil &  Gas  Project  Manager, Department  of                                                               
Revenue, began an overview of SB  21 - the oil and gas production                                                               
tax. He reviewed  the highlights of the bill  and locations where                                                               
that information  can be found  within the bill.  The information                                                               
regarding eliminating  progressivity can  be found in  Sections 1                                                               
and 26.  Conforming sections can  be found  in Sections 2,  5, 6,                                                               
and  22. Information  on  North Slope  credits  based on  capital                                                               
expenditures is located in Section  8. Conforming sections are 7,                                                               
11, and 12.                                                                                                                     
                                                                                                                                
CO-CHAIR DUNLEAVY questioned the contents of Section 2.                                                                         
                                                                                                                                
MR. PAWLOWSKI provided clarification. He  said that Section 2 was                                                               
also a conforming section.                                                                                                      
                                                                                                                                
SENATOR  GARDNER  asked  for  the   rationale  behind  the  "hold                                                               
harmless"  provision in  Cook Inlet,  but not  for other  smaller                                                               
developers.                                                                                                                     
                                                                                                                                
MR. PAWLOWSKI explained that the  provision applies mainly to the                                                               
tax ceiling.  The legislature has  provided for limited  taxes in                                                               
areas  south of  68 degrees.  Middle Earth  has a  4 percent  tax                                                               
based on legislative work last year.                                                                                            
                                                                                                                                
He  discussed  the  sections  in   SB  21  related  to  reforming                                                               
remaining  credits   to  be  carried   forward  until   there  is                                                               
production. He  related that the  North Slope net  operating loss                                                               
credits are found in Sections  9 and 15, with conforming sections                                                               
10, 19  and 20. Information  about small producer tax  credits is                                                               
found  in   Section  16.  The  forth   provision,  Gross  Revenue                                                               
Exclusion (GRE),  is found in  Section 24, and in  the conforming                                                               
section 5.                                                                                                                      
                                                                                                                                
MR. PAWLOWSKI stressed  that relatively few sections  of the bill                                                               
relate to the basic proposals for the North Slope system.                                                                       
                                                                                                                                
He provided locations for the  provisions dealing with Cook Inlet                                                               
and  Middle Earth.  The  hold harmless  provisions  are found  in                                                               
Sections 3  and 22, with conforming  sections 4, 13, 14,  17, 18,                                                               
21, and 25.                                                                                                                     
                                                                                                                                
He  said  he  hoped  this  guidepost  would  be  helpful  to  the                                                               
committee.                                                                                                                      
                                                                                                                                
5:00:45 PM                                                                                                                    
CO-CHAIR MICCICHE suggested extending  the meeting on Thursday to                                                               
6:00 p.m. in order to finish the presentation on SB 21.                                                                         
                                                                                                                                
CO-CHAIR MICCICHE held SB 21 in committee.                                                                                      

Document Name Date/Time Subjects
SB 21 ver A.pdf STTP 1/22/2013 3:30:00 PM
SB 21
SB 21 Sectional Analysis -DOR-TAX-01-11-13.pdf STTP 1/22/2013 3:30:00 PM
STTP 1/29/2013 3:30:00 PM
SB 21
SB 21 Fiscal Note-DOR-TAX-01-15-13.pdf STTP 1/22/2013 3:30:00 PM
SB 21
SB 21 Fiscal Note-DNR-DOG-1-14-13.pdf STTP 1/22/2013 3:30:00 PM
SB 21
SB 21 01.15.13 Huggins Oil Tax Transmittal Letter.pdf STTP 1/22/2013 3:30:00 PM
SB 21
SB 21 Revenue Overview to TAPS Spec Committee 1-22-13.pdf STTP 1/22/2013 3:30:00 PM
SB 21
Arresting TAPS Throughput Decline and Oil Tax Reform.pdf STTP 1/22/2013 3:30:00 PM
SB 21