Legislature(2013 - 2014)BELTZ 105 (TSBldg)

01/29/2013 03:30 PM SENATE SPECIAL COMM ON TAPS THROUGHPUT


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03:32:42 PM Start
03:34:27 PM SB21
07:30:35 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
+ Presentation: Mike Pawlowski, Dept. of Revenue, TELECONFERENCED
Joe Balash, Dept. of Natural Resources
-- Public Testimony Following Presentation --
3:30 - 5:00 Bill Hearing & Presentation
Testimony in Juneau if time allows before 5 p.m.
5:00 - 5:30 p.m. Break
5:30 - 7:30 p.m. LIO Public Testimony from
Anchorage, Fairbanks, Mat-Su, Kotzebue, Nome,
Tok, Valdez, Unalaska
                SB 21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
3:34:27 PM                                                                                                                    
CO-CHAIR MICCICHE  announced that SB  21 would be the  only order                                                               
of business.                                                                                                                    
                                                                                                                                
JOE   BALASH,   Deputy   Commissioner,  Department   of   Natural                                                               
Resources, introduced himself.                                                                                                  
                                                                                                                                
MICHAEL  PAWLOWSKI,  Oil &  Gas  Project  Manager, Department  of                                                               
Revenue, stated  that he would  walk the committee through  SB 21                                                               
so that they  could understand the language and  locations of the                                                               
provisions in the bill. He  reviewed the Governor's principles of                                                               
SB 21:                                                                                                                          
                                                                                                                                
   · Tax reform must be fair to Alaskans                                                                                        
   · Encourage new production                                                                                                   
   · Simple so that it restores balance to the system                                                                           
   · Durable for the long term                                                                                                  
                                                                                                                                
He  said  when  taken  together,  these  guiding  principles  are                                                               
intended to  create a competitive  environment that  attracts new                                                               
investment to the state and grows the economy.                                                                                  
                                                                                                                                
MR. PAWLOWSKI  explained that the  proposal is built  around four                                                               
core provisions:                                                                                                                
                                                                                                                                
   · Eliminate progressivity and credits based on capital                                                                       
     expenditures                                                                                                               
   · Reform remaining credits to be carried forward to when                                                                     
     there is production                                                                                                        
   · Establish a "Gross Revenue Exclusion" for newer units and                                                                  
     new participating areas in existing units                                                                                  
   · Hold Cook Inlet and Middle Earth Harmless                                                                                  
                                                                                                                                
3:37:15 PM                                                                                                                    
MR.  PAWLOWSKI  explained  how  the  bill  intends  to  eliminate                                                               
progressivity and  the credits based on  capital expenditures. He                                                               
turned  to Section  26,  page  23, line  12  of  the bill,  which                                                               
contains the  repeal of AS 43.55.011(g),  the progressive feature                                                               
within the  current tax system,  effective January 1,  2014. When                                                               
progressivity is  appealed, other  sections of  law must  also be                                                               
addressed.                                                                                                                      
                                                                                                                                
He turned to Section 1, which  goes from page 1, line 12, through                                                               
page  2,  line 7.  In  this  section  a  fund that  provides  for                                                               
community revenue sharing  is located. The revenue  for that fund                                                               
came from progressivity  monies, therefore, a new  source must be                                                               
found to fund community revenue sharing.  On page 2, lines 1 - 7,                                                               
is an adjustment  to the funding mechanism  for community revenue                                                               
sharing that  preserves deposits into that  fund. Two substantive                                                               
changes were made  in this section. The first is  on page 2, line                                                               
2. Under current law, an amount  equal to 20 percent of the money                                                               
received under progressivity goes  into the revenue sharing fund.                                                               
The bill  removes that 20  percent cap. The actual  amounts going                                                               
into the  revenue sharing fund are  found on page 2,  line 5, and                                                               
are maintained  with current statute,  either $60 million  or the                                                               
amount that  when added  to the  fund balance on  June 30  of the                                                               
previous fiscal year, equals $180  million. He emphasized that no                                                               
change was  made to the  amount of  money going into  the revenue                                                               
sharing fund. The source of the  revenue was changed, as shown on                                                               
page  2,  line  3,  inserting   AS  43.20.030(c),  which  is  the                                                               
mechanism  through   which  income  tax  payers   in  Alaska  pay                                                               
corporate income taxes. The source  of revenue sharing moves away                                                               
from  the single  tax payer  to  the broad  corporate income  tax                                                               
statutes. The  new fund  source now  comes from  general payments                                                               
under Alaska's corporate income tax statutes.                                                                                   
                                                                                                                                
CO-CHAIR MICCICHE noted the attendance of Senator French.                                                                       
                                                                                                                                
3:41:43 PM                                                                                                                    
MR. PAWLOWSKI  said another  adjustment was  required due  to the                                                               
removal of  progressivity from the bill.  He said it is  found in                                                               
Section 2,  page 2, lines 8  through 18. The language  deleted in                                                               
the current statute  is, "the taxes are calculated as  the sum of                                                               
a base tax,  plus the progressive tax." When  the progressive tax                                                               
is  repealed,  the "sum  of"  language  is no  longer  necessary,                                                               
because it is now a simple 25 percent net tax rate.                                                                             
                                                                                                                                
CO-CHAIR  DUNLEAVY  asked  why progressivity  was  eliminated  in                                                               
total, instead of changed.                                                                                                      
                                                                                                                                
MR.  PAWLOWSKI  replied  that progressivity  creates  a  host  of                                                               
issues. The concept of decoupling  is a function of progressivity                                                               
and applies to any high cost  resource that is blended with a low                                                               
cost  resource. In  the current  system, progressivity  is highly                                                               
variable and a concern to many.  Also, one of the Governor's core                                                               
principles is to move to a simple system.                                                                                       
                                                                                                                                
3:44:26 PM                                                                                                                    
                                                                                                                                
CO-CHAIR MICCICHE asked about QCE credits.                                                                                      
                                                                                                                                
MR.  PAWLOWSKI   said  QCE  is   defined  as   qualified  capital                                                               
expenditure credits.                                                                                                            
                                                                                                                                
MR. PAWLOWSKI  turned to the  conforming sections related  to the                                                               
removal of  progressivity. Section  5 begins on  page 5,  line 27                                                               
and   runs  through   page  8,   line  25.   He  explained   that                                                               
progressivity  is calculated  monthly under  the current  system.                                                               
Section 5 eliminates "sum of" language  again. On page 7, lines 3                                                               
to  5 refer  to the  exception for  the gross  revenue exclusion.                                                               
Because progressivity  is being removed, the  associated statutes                                                               
governing how it was to be paid have to be changed.                                                                             
                                                                                                                                
He noted a similar change in  Section 6, page 8, line 25, through                                                               
page 9, line 11. Under the  current system, when there is private                                                               
royalty,  the  producers pay  the  production  tax. A  conforming                                                               
change has to be made  to recognize that that progressive feature                                                               
no longer applies.                                                                                                              
                                                                                                                                
3:46:56 PM                                                                                                                    
MR. PAWLOWSKI addressed changes in  Section 22, beginning on page                                                               
21, line 10.  He said there are exceptions  for progressivity for                                                               
different types  of resources, as shown  on line 21, such  as oil                                                               
and gas produced from leases or  properties north of 68 degrees -                                                               
the North Slope -  before 2022. On page 21, line  24, there is an                                                               
exception for oil  and gas produced in Middle Earth.  On page 21,                                                               
line 31,  there is an  exception for  oil in Cook  Inlet produced                                                               
before 2022, and  on page 22, line 2, gas  produced in Cook Inlet                                                               
is also  an exception. On  page 22,  line 5, gas  produced before                                                               
2022 from each  lease or property outside Cook Inlet  and used in                                                               
state,  other than  the gas  subject  to AS  43.55.011(p), is  an                                                               
exception. The gas treated under  AS 43.55.011(p) had a 4 percent                                                               
tax put into  effect in 2012. The final exception  is oil and gas                                                               
not yet  found. He explained  that the  base 25 percent  tax will                                                               
apply to  all resources  other than  those listed  as exceptions.                                                               
After 2022 the 25 percent will apply to all areas.                                                                              
                                                                                                                                
3:50:24 PM                                                                                                                    
He noted that Section 23 is a conforming section to Section 22.                                                                 
                                                                                                                                
3:50:47 PM                                                                                                                    
MR.  PAWLOWSKI  defined  QCE  as  qualified  capital  expenditure                                                               
credits.  He related  that Section  8  is the  main section  that                                                               
deals with  changes to North  Slope QCE credits.  The information                                                               
begins on page  9, line 30, and  extends to page 10,  line 18. He                                                               
reminded  the  committee  that  effective  January  1,  2014,  no                                                               
expenditures on  the North  Slope under SB  21 would  qualify for                                                               
QCE credits. That language is found on page 10, lines 16 to 18.                                                                 
                                                                                                                                
SENATOR  GARDNER asked  if  a lot  of  investment is  anticipated                                                               
before January 1, 2014.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  replied that  DOR has  some understanding  of what                                                               
lease expenditures might  be, in terms of  whether spending might                                                               
be accelerated. He said he does  not have an official position on                                                               
that.                                                                                                                           
                                                                                                                                
SENATOR  FAIRCLOUGH  asked  if industry  prepares  their  budgets                                                               
years in advance  and the 2014 date in the  bill allows them time                                                               
to make spending changes.                                                                                                       
                                                                                                                                
MR. PAWLOWSKI said  that is correct. He said the  date of January                                                               
1, 2014, was a compromise.                                                                                                      
                                                                                                                                
He turned to Section  7, page 9, lines 12 through  29. He said it                                                               
was important to recognize that  a current North Slope QCE credit                                                               
has to be  divided into two certificates and spread  out over two                                                               
years.  Section  7,  page  9,  lines  21  and  22,  deletes  that                                                               
requirement. Outside  of the North Slope,  under AS 43.55.023(m),                                                               
credits are  able to be taken  within a single year.  Under SB 21                                                               
credits just  for 2013 on the  North Slope can be  closed out and                                                               
taken in the first year.                                                                                                        
                                                                                                                                
3:55:01 PM                                                                                                                    
SENATOR  FAIRCLOUGH   recalled  that  under  ACES,   one  of  the                                                               
provisions  was to  acquire  knowledge  regarding oil  companies'                                                               
investment  strategies.  She  inquired   if  that  provision  was                                                               
retained under the proposal.                                                                                                    
                                                                                                                                
MR. PAWLOWSKI deferred to Mr. Balash to answer.                                                                                 
                                                                                                                                
MR. BALASH responded that those  provisions are specific requests                                                               
the department  may make  of taxpayers  on their  annual filings.                                                               
Those provisions remain fully intact in SB 21.                                                                                  
                                                                                                                                
MR. PAWLOWSKI turned to Section 11,  page 11, line 4 through line                                                               
28,  a  conforming  section.  On   page  11,  line  8,  the  word                                                               
"certificates" is changed to "certificate"  because in 2013 there                                                               
will be one certificate. Conforming  statements on page 11, lines                                                               
20  through 28,  apply to  the one  year of  capital expenditures                                                               
moving from a certificate that is  divided in two, to closing out                                                               
the obligation to the state.                                                                                                    
                                                                                                                                
He noted that in  Section 12, page 11, line 29,  to page 12, line                                                               
17, tax  credits incurred after  December 31, 2013,  are accepted                                                               
from the tax certificate section.                                                                                               
                                                                                                                                
3:57:43 PM                                                                                                                    
MR.  PAWLOWSKI turned  to Section  9 to  discuss North  Slope net                                                               
operating loss credits  beginning on page 10, line  19. Under the                                                               
current system, on the North Slope  there is a combination of the                                                               
QCE credit, which  is 20 percent of a capital  expenditure, and a                                                               
25 percent credit for a net  loss carry forward. A net loss carry                                                               
forward  is when  a  company  does not  have  revenues, or  their                                                               
spending exceeds their revenues. Under  the proposal, on page 10,                                                               
lines 19 through 29, after December  31, 2013, the new loss carry                                                               
forward credits are  the same calculation as they  were under the                                                               
existing program,  but they  are no longer  allowed to  be cashed                                                               
out. They  are subject to  new areas  of law, referenced  on page                                                               
10, line 24, and found in Section 15, beginning on page 13.                                                                     
                                                                                                                                
CO-CHAIR  MICCICHE requested  further explanation  of line  16 on                                                               
page 10,  the administration's concern  with allowing  refunds as                                                               
opposed to taking credits against tax liability.                                                                                
                                                                                                                                
MR.  PAWLOWSKI explained  that the  principles of  being fair  to                                                               
Alaskans, encouraging  new production, and being  durable for the                                                               
long   term,  recognize   that   in  the   current  system   when                                                               
expenditures are made and an  obligation to the state treasury is                                                               
created,  those credits  create an  increasing obligation  to the                                                               
state. Given that  the intent of SB  21 is to "grow  the state of                                                               
Alaska",  there  is  a  natural  tension  between  the  near-term                                                               
obligations on  the credit  side to the  state treasury  with the                                                               
long term  revenues received from  production. The balance  is to                                                               
relieve impact  on the near-term  part of the state  treasury and                                                               
carry forward  the credits  to offset a  tax liability,  so there                                                               
will  be revenue  to  pay for  the credits  when  they are  being                                                               
created.                                                                                                                        
                                                                                                                                
CO-CHAIR  MICCICHE summarized  that the  administration's concern                                                               
was,  if there  was a  year  with difficult  pricings, the  state                                                               
could  actually  have  a  liability,  as  opposed  to  production                                                               
revenue.                                                                                                                        
                                                                                                                                
MR.  PAWLOWSKI said  that was  correct. He  added that  high cost                                                               
projects with  low prices in the  end, given the degree  of state                                                               
participation  through  the credit  program,  could  lead to  the                                                               
state being "negative" in the long-term revenue of that project.                                                                
                                                                                                                                
He  stressed that  carrying  tax credits  forward  to offset  tax                                                               
revenue encourages  new production. That information  is found in                                                               
Section 15, page 13, line 15.                                                                                                   
                                                                                                                                
4:02:07 PM                                                                                                                    
He explained  that new sections of  law are found in  Section 15.                                                               
These sections  create guidelines to encourage  the carry forward                                                               
for new production.                                                                                                             
                                                                                                                                
He related  that on page 13,  line 16, subsection (p)  limits the                                                               
application of  the credit  to two or  more calendar  years later                                                               
than  which the  lease expenditures  were incurred.  On page  13,                                                               
line 23,  it limits the use  of that credit to  10 calendar years                                                               
after it was  issued. A credit issued in 2015  would expire after                                                               
2025.                                                                                                                           
                                                                                                                                
He said  that subsection  (q) creates  an important  point called                                                               
"first earned,  first used." On page  14, lines 2 through  14, it                                                               
says the  value of  the credit  will increase at  the rate  of 15                                                               
percent on an annual basis,  beginning two years after the credit                                                               
is  issued,  compounding until  the  credit  is used.  The  first                                                               
credit earned has to be used first.                                                                                             
                                                                                                                                
4:06:03 PM                                                                                                                    
He  explained that  subsection  (s) is  intended  to protect  the                                                               
state  in  the use  of  the  credits. If  a  company  with a  tax                                                               
liability chooses not to use a  credit, which is increasing by 15                                                               
percent, the  company would not  get the 15 percent  increase for                                                               
that year. He termed it a "use it or lose it" provision.                                                                        
                                                                                                                                
CO-CHAIR MICCICHE inquired if the  "first in - first used" credit                                                               
could  encourage a  greater  cost  to the  state  if the  earlier                                                               
credit was a much smaller sum than the later credit.                                                                            
                                                                                                                                
MR.  PAWLOWSKI explained  that the  first  credit is  compounding                                                               
faster at  a 15  percent rate.  The point was  to keep  the first                                                               
credit  from  generating a  larger  amount  into the  future.  He                                                               
agreed with  the idea  proposed by Co-Chair  Micciche, in  that a                                                               
larger  capital  expenditure in  year  two  might have  a  larger                                                               
credit, but it  will also have to  be used. If it is  not used to                                                               
offset a  tax liability,  the state is  further protected  by not                                                               
providing the 15  percent increase if the credit  could have been                                                               
used. A company can't just warehouse credits.                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER asked under  what circumstances a taxpayer                                                               
might forego using a credit.                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  gave an example of  a company that thought  it was                                                               
more beneficial to get the 15  percent value on the credit rather                                                               
than to use it to offset the tax liability.                                                                                     
                                                                                                                                
MR. PAWLOWSKI turned  to page 15, line 15, to  explain that under                                                               
existing law, loss  carry forward credits tax  can be transferred                                                               
to another tax  payer or turned into the state  for cash payment.                                                               
When  credits are  transferrable, a  company buys  a credit  from                                                               
another company  and then  uses it  against their  tax liability.                                                               
What they  pay for that  tax credit may not  be 100 cents  on the                                                               
dollar for  the seller. The  issue for  the state is,  whether it                                                               
reduces the tax  liability or the state pays in  cash, it has the                                                               
same  impact  to  the  treasury.  Subsection  (t)  prohibits  the                                                               
transfer  of the  credits on  a broad  basis. Companies  must now                                                               
carry the  tax credit forward  until there is production  and tax                                                               
revenue  to  pay  for  the  credit.  There  is  an  exception  in                                                               
subsection  (u),   page  16,  line   3.  Because   the  principle                                                               
underlying the  bill is  to encourage  new production,  a company                                                               
can  buy a  lease from  a  company that  accumulated credits  and                                                               
those credits  may be transferred, but  they may only be  used as                                                               
an offset for  tax liability. There is a limitation,  on page 16,                                                               
lines 3 through 25, that says  credits may only be used to offset                                                               
a tax liability  to a proportion or extent to  which the lease or                                                               
property purchased goes  into production. The state  wants to see                                                               
production before the credits can be used.                                                                                      
                                                                                                                                
4:11:02 PM                                                                                                                    
SENATOR GARDNER  asked if the  original timeline attached  to the                                                               
lease would be in place under those circumstances.                                                                              
                                                                                                                                
MR. PAWLOWSKI said yes.                                                                                                         
                                                                                                                                
He  listed  the  conforming  sections   related  to  the  changes                                                               
regarding net operating  loss credits:  Sections 10,  19, and 20.                                                               
In Section 10,  page 10, line 30,  through page 11, line  3, is a                                                               
provision that does  not allow a company to use  their credits to                                                               
reduce their  tax liability for a  calendar year below zero  to a                                                               
negative number.  Section 19  cleans up  language that  refers to                                                               
"explorers and producers" throughout the bill.                                                                                  
                                                                                                                                
MR.  PAWLOWSKI explained  Section  16, page  16,  line 26,  which                                                               
refers to the small producer  tax credits. He said small producer                                                               
tax credits cannot be transferred  or monetized; they can only be                                                               
used to offset  a tax liability. Under current  statutes they are                                                               
set to expire  for production after 2016. In SB  21, that date is                                                               
extended to 2022 and lasts for nine years.                                                                                      
                                                                                                                                
4:14:43 PM                                                                                                                    
CO-CHAIR MICCICHE commented  that the "lack of  simplicity" as it                                                               
applies to a tax code is relative.                                                                                              
                                                                                                                                
MR. PAWLOWSKI  turned to  the gross  revenue exclusion  (GRE) for                                                               
newer units  and new participating  areas in existing  units. The                                                               
information is found in Section 24,  page 23, lines 1 through 10.                                                               
The  provision  provides  an  exclusion   or  allowance  for  new                                                               
production, which is  defined on page 23, line 4,  as "the oil or                                                               
gas is  produced from a lease  or property that does  not contain                                                               
land that was  within a unit on January 1,  2003." He pointed out                                                               
that 80 percent of the value of  that new oil will be allowed the                                                               
GRE.                                                                                                                            
                                                                                                                                
CO-CHAIR  MICCICHE  stated  that  the  committee  is  focused  on                                                               
increasing  throughput  in  TAPS.  He asked  how  leveraging  the                                                               
benefits of the  GRE's are in comparison with the  tax credits in                                                               
existing law. He inquired if they would increase throughput.                                                                    
                                                                                                                                
MR.  PAWLOWSKI recalled  the presentation  by  Mr. Pulliam  which                                                               
described the  effect of the GRE  to increase the cash  flows for                                                               
new  investments,  to  decrease  government  take,  to  create  a                                                               
competitive  environment, in  order to  drive long-term  decision                                                               
making for  new production.  He believed the  GRE was  a material                                                               
step towards encouraging  new production in how  it balances with                                                               
the  loss  carry  forward  credits. The  GRE,  for  the  targeted                                                               
resources  it has  identified, makes  a very  strong step  toward                                                               
encouraging new production.                                                                                                     
                                                                                                                                
He pointed out that areas  inside existing units deserve the same                                                               
treatment  that areas  outside existing  units receive  regarding                                                               
the GRE. The provision on page  23, line 6, provides for that. He                                                               
said that  if "the oil  or gas  is produced from  a participating                                                               
area established after December 31,  2011, that was within a unit                                                               
that was formed before January 1, 2003," it qualifies for GRE.                                                                  
                                                                                                                                
4:18:36 PM                                                                                                                    
MR. BALASH explained that DNR  and specifically the Department of                                                               
Oil  and Gas,  manages  oil and  gas  properties through  leases,                                                               
units,  and a  participating  area (PA).  Both  leases and  units                                                               
define properties  in a two-dimensional way;  they are boundaries                                                               
on  a  map. A  participating  area  includes a  third  dimension.                                                               
Boundaries define ownership interests all  the way to the earth's                                                               
core because oil  and gas exist in different  horizons or depths.                                                               
A  unit  bundles  leases  together  for  purposes  of  production                                                               
management. A  PA defines which  leases contribute  to production                                                               
that  is  occurring. There  have  been  disagreements over  lease                                                               
ownership.  The department  feels  confident that  PA's in  place                                                               
today, govern and  encompass the parts of the  reservoir that are                                                               
contributing to production today.                                                                                               
                                                                                                                                
CO-CHAIR  MICCICHE  understood  that  "by  it  not  containing  a                                                               
reservoir  that  had  previously  been in  a  participating  area                                                               
established before  January 1, 2012, a  very expensive 'workover'                                                               
wouldn't qualify in an existing well bore."                                                                                     
                                                                                                                                
MR.  BALASH said  that  was  correct. In  order  for somebody  to                                                               
qualify for the GRE, the  working interest owners within the unit                                                               
would come  forward to the  department and propose  the formation                                                               
of  a  new  participating  area  and  demonstrate  through  sound                                                               
science and  geologic information that  they are, in  fact, going                                                               
to  be  drilling  to  a  new  location,  a  new  horizon,  a  new                                                               
reservoir, that will contribute new  production to the state. The                                                               
state will  be able to govern  that activity. There are  no units                                                               
that  have been  formed on  non-state  land prior  to 2003.  This                                                               
approach  allows DNR  to clearly  and  confidently tell  Alaskans                                                               
that  this  particular mechanism  is  being  applied to  new  oil                                                               
production.                                                                                                                     
                                                                                                                                
CO-CHAIR  MICCICHE   concluded  that  DNR  is   guarding  against                                                               
accelerating depletion of existing reserves.                                                                                    
                                                                                                                                
MR. BALASH  replied that is an  issue that occurs at  a number of                                                               
different levels,  but "in  essence, yes." He  noted he  would be                                                               
interested in  exploring further, through the  committee process,                                                               
to  identify ways  and  means to  improve  recovery factors  from                                                               
existing PA's. He stressed that DNR  is very confident in the new                                                               
PA approach.                                                                                                                    
                                                                                                                                
4:23:18 PM                                                                                                                    
SENATOR FAIRCLOUGH  asked if SB  21 passes, if  regulations would                                                               
define  or  constrain  criteria  for  new  PA's.  She  shared  an                                                               
experience where  she was able  to watch directional  drilling on                                                               
the North Slope that involved using  3D to watch the process. She                                                               
wondered how new PA's would be defined.                                                                                         
                                                                                                                                
MR. BALASH said  the issue is whether or not  the area is already                                                               
in a PA, or whether it is  new production. In the 3D example, the                                                               
company would have to get  a new participating area formed within                                                               
the unit itself  in order to protect the ownership  rights of the                                                               
individual  lessees.  He noted  that  the  process  to do  so  is                                                               
already in place.                                                                                                               
                                                                                                                                
SENATOR  FAIRCLOUGH concluded  that there  are existing  criteria                                                               
for  PA's  that  would  set minimums  to  help  limit  producers'                                                               
liabilities.                                                                                                                    
                                                                                                                                
MR. BALASH  said that was correct.  He added that the  PA process                                                               
allows  the state  to  "count barrels"  and  segregate them  from                                                               
legacy production.                                                                                                              
                                                                                                                                
MR. PAWLOWSKI added that the process  allows DNR to tell DOR that                                                               
a certain  production qualifies for  the GRE because it  has been                                                               
demonstrated that  it is new oil.  From the DNR's point  of view,                                                               
in counting  the barrels  and applying a  basic reduction  in the                                                               
value  of  those  barrels  to  start  the  net  calculation,  the                                                               
department  no longer  has  to think  about  cost allocation  and                                                               
auditing.  He   emphasized  that   simplicity  is   important  to                                                               
competitiveness.                                                                                                                
                                                                                                                                
4:27:45 PM                                                                                                                    
SENATOR McGUIRE  suggested writing  a committee letter  of intent                                                               
that  includes  recommendations  for increasing  throughput.  She                                                               
thought some  latitude should  be given for  the Division  of Oil                                                               
and Gas to write provisions  that could include new technology as                                                               
it develops. That could make it  possible to offer credits to new                                                               
producers who would like to expand production in a legacy field.                                                                
                                                                                                                                
MR.  PAWLOWSKI concurred.  He related  that new  production would                                                               
come from  legacy and new units.  He suggested the GRE  was about                                                               
identifying what  is truly "new production,"  whether it involves                                                               
new technology  or discrete geological  traps, which is  what the                                                               
PA approach does.                                                                                                               
                                                                                                                                
4:30:38 PM                                                                                                                    
MR. PAWLOWSKI  turned to  the subject of  differing types  of tax                                                               
treatment  for gas  and  oil production.  He  explained that  the                                                               
section in  SB 21 that  deals with  an exception to  the proposed                                                               
tax  is Section  3,  page  2, line  23.  It  resolves a  conflict                                                               
created when  the new  AS 43.55.011(p) was  passed last  year. He                                                               
read,   "For   the   seven  years   immediately   following   the                                                               
commencement  of commercial  production  of oil  or gas  produced                                                               
from leases or properties in the  state that are outside the Cook                                                               
Inlet  sedimentary basin  and that  do not  include land  located                                                               
north  of 68  degrees north  latitude." This  section applies  to                                                               
"Middle Earth."                                                                                                                 
                                                                                                                                
He  continued,  "Where  that commercial  production  began  after                                                               
December 31,  2012, and before January  1, 2022, the levy  of tax                                                               
under (e) of  this section may not exceed 4  percent of the gross                                                               
value at the point of production."  He said that language did not                                                               
distinguish  between  gas  used  in state  or  gas  produced.  He                                                               
explained  that (p)  recognizes  the legislature's  passage of  a                                                               
different tax ceiling  for oil or gas produced  from Middle Earth                                                               
for  the purposes  of  the  "gas used  in  state" provision  that                                                               
conflicts with that statute as it was passed last year.                                                                         
                                                                                                                                
4:33:51 PM                                                                                                                    
CO-CHAIR MICCICHE recognized the presence of Senator Huggins.                                                                   
                                                                                                                                
CO-CHAIR  DUNLEAVY asked  how the  bill supports  the exploration                                                               
and production of nonconventional oil.                                                                                          
                                                                                                                                
MR. PAWLOWSKI replied that the  bill works in two important ways.                                                               
The  first  is  through  the  elimination  of  progressivity.  It                                                               
returns the profitability of resources,  along with price, to the                                                               
investors and allows the state  a consistent share within the tax                                                               
system at  a base 25  percent. It also diminishes  the complexity                                                               
of  the  decoupling  issue  and  provides GRE  to  new  areas  of                                                               
unconventional  production.  It  allows additional  GRE's  to  be                                                               
created for unconventional oil. It  also provides a simple system                                                               
to accommodate new types of production.                                                                                         
                                                                                                                                
He concluded that  the intent of SB 21 sets  a basic architecture                                                               
around  which additional  opportunities can  be brought  into the                                                               
system in a  way that works for the producers  and for the state.                                                               
The base of 20  percent could apply to any of  them. He could not                                                               
speak to the  economics of shale oil which has  not been produced                                                               
at this time.                                                                                                                   
                                                                                                                                
4:37:54 PM                                                                                                                    
CO-CHAIR MICCICHE  asked about heavy  oil in Section 24.  He said                                                               
it  seems  like an  initial  investment  in  heavy oil  would  be                                                               
rewarded,  but  further investment  in  that  reservoir could  be                                                               
challenged.                                                                                                                     
                                                                                                                                
MR.  BALASH suggested  thinking about  a specific  formation, the                                                               
Ugnu Formation;  a deposit that  is present, not only  in Prudhoe                                                               
Bay but  also in Kuparuk and  parts in between. Because  Ugnu has                                                               
not  contributed to  production previously,  it is  not within  a                                                               
participating area;  therefore, it would  qualify for the  GRE if                                                               
it  were put  into production.  As  an initial  investment by  an                                                               
incumbent  producer,   they  could   deduct  the  cost   of  that                                                               
investment   against   their   production  tax   liability.   The                                                               
production of that  heavy oil would be discounted by  the GRE for                                                               
purposes of going into the  overall revenue bucket, against which                                                               
taxes are calculated.                                                                                                           
                                                                                                                                
MR.  PAWLOWSKI  noted  that  the  GRE  does  not  time  out.  The                                                               
production going  into the future  would not have to  qualify for                                                               
another  PA  within  the  Ugnu   Formation  to  qualify  for  the                                                               
additional GRE. If  the Ugnu itself was defined as  a PA, all the                                                               
production  from  that  formation   would  get  the  preferential                                                               
treatment of the GRE because it is truly new production.                                                                        
                                                                                                                                
4:40:27 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
4:48:23 PM                                                                                                                    
CO-CHAIR MICCICHE opened public testimony.                                                                                      
                                                                                                                                
SCOTT THORSON,  Network Business Solutions, testified  in support                                                               
of SB 21.                                                                                                                       
                                                                                                                                
DAVE CRUZ,  CEO, Cruz  Construction, testified  in support  of SB
21. He shared his experience  with oil production in North Dakota                                                               
and the need to be competitive.                                                                                                 
                                                                                                                                
JEANINE ST. JOHN, Vice President,  Lyndon Logistics, testified in                                                               
support of  SB 21. She termed  it good for Alaskans.  She said to                                                               
make Alaska competitive.                                                                                                        
                                                                                                                                
4:53:38 PM                                                                                                                    
ETHAN SHUTT,  Senior Vice President,  CIRI Land  and Development,                                                               
testified  in support  of SB  21. He  encouraged making  Alaska a                                                               
more attractive environment for investment.                                                                                     
                                                                                                                                
SENATOR GARDNER questioned Mr. Shutt's investment success.                                                                      
                                                                                                                                
MR. SHUTT  explained that recent  investments have not  been that                                                               
lucrative.                                                                                                                      
                                                                                                                                
4:56:14 PM                                                                                                                    
JOHN STURGEON,  Forest Products,  testified about the  decline of                                                               
the timber  industry. He  suggested the state  not allow  the oil                                                               
resource  to disappear.  Instead,  the state  should  act now  to                                                               
prevent  the  oil industry  from  disappearing.  He testified  in                                                               
support of SB 21.                                                                                                               
                                                                                                                                
CO-CHAIR DUNLEAVY asked why the timber industry disappeared.                                                                    
                                                                                                                                
MR. STURGEON said it was due to litigation.                                                                                     
                                                                                                                                
4:59:37 PM                                                                                                                    
AVES THOMPSON, Alaska Trucking  Association, testified in support                                                               
of  SB  21.  He  compared  the trucking  industry  with  the  oil                                                               
industry and  encouraged the committee  to find the  right answer                                                               
to fix the oil tax.                                                                                                             
                                                                                                                                
SENATOR GARDNER  asked about the  number of jobs in  the trucking                                                               
industry.                                                                                                                       
                                                                                                                                
MR. THOMPSON offered to provide that information.                                                                               
                                                                                                                                
5:02:03 PM                                                                                                                    
DEANTHA CROCKETT, Executive  Director, Alaska Miners Association,                                                               
testified  in support  of SB  21. She  encouraged making  the oil                                                               
investment climate more attractive.                                                                                             
                                                                                                                                
5:04:53 PM                                                                                                                    
BARBARA HUFF-TUCKNESS,  Director, Teamsters Local  959, testified                                                               
in  support of  SB  21. She  pointed out  that  the oil  industry                                                               
provides jobs  in many  other sectors  of Alaska.  New production                                                               
and Alaska hire are important to Alaska.                                                                                        
                                                                                                                                
SENATOR  GARDNER  agreed  that  Alaska  hire  is  important.  She                                                               
pointed  out that  it cannot  be  required. She  asked Ms.  Huff-                                                               
Tuckness for ideas.                                                                                                             
                                                                                                                                
MS. HUFF-TUCKNESS  suggested encouraging  Alaska hire with  a tax                                                               
incentive.                                                                                                                      
                                                                                                                                
CO-CHAIR DUNLEAVY asked for clarification on her support.                                                                       
                                                                                                                                
MS. HUFF-TUCKNESS said  the Teamsters 959 do  support the concept                                                               
of SB 21.                                                                                                                       
                                                                                                                                
CO-CHAIR MICCICHE  said he has personally  asked the Commissioner                                                               
of Labor  for ways to  incentivize Alaska hire. He  stressed that                                                               
it should  be a driving  force. He  asked how many  teamsters are                                                               
Alaska residents.                                                                                                               
                                                                                                                                
MS. HUFF-TUCKNESS said that all members are Alaska residents.                                                                   
                                                                                                                                
5:10:48 PM                                                                                                                    
CO-CHAIR MICCICHE asked if it was 100 percent compliance.                                                                       
                                                                                                                                
MS. HUFF-TUCKNESS said that was correct.                                                                                        
                                                                                                                                
5:11:50 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
5:38:04 PM                                                                                                                    
CO-CHAIR MICCICHE reconvened the meeting.                                                                                       
                                                                                                                                
JIM SCHERIEBLE,  General Manager, Kenworth Alaska  and President,                                                               
Alaska Trucking  Association, testified in  support of SB  21. He                                                               
maintained  that what  is  done  now will  set  the standard  for                                                               
business in the future.                                                                                                         
                                                                                                                                
MARTY  METIVA, Executive  Director, Mat-Su  Resource Conservation                                                               
and   Development    and   the   Alaska    Regional   Development                                                               
Organization, testified in  support of SB 21. He  likened the tax                                                               
issue to the controversy over  the bed tax. When Governor Parnell                                                               
reduced the bed  tax, the cruise industry returned.  He urged the                                                               
committee to use that model.                                                                                                    
                                                                                                                                
5:43:19 PM                                                                                                                    
JOE PASKVAN, representing himself,  testified in opposition to SB
21. He  expressed concern that  the production  tax in SB  21 may                                                               
promote a  super harvest mode  in the legacy fields.  The current                                                               
system has promoted  reconstruction of the legacy  fields for the                                                               
future.  He  voiced concern  that  the  proposed changes  in  the                                                               
production  credits might  promote a  super harvest  mode because                                                               
the cost  of operation  in the  legacy fields  will be  lower now                                                               
that the infrastructure has been rebuilt.                                                                                       
                                                                                                                                
He referred to information on  page 59 of Econ One's presentation                                                               
on January  24 to  support his  idea that  the net  present value                                                               
(NPV) to  the producer is  the same  for a new  development under                                                               
either the  current system or  the proposed changed  system, even                                                               
though the producer  is getting more gross dollars  over time. He                                                               
maintained that the credits under  the current system promote the                                                               
actual construction  of a project  by front loading a  reward for                                                               
actual  capital  spending.  Removing  capital  credits  does  not                                                               
change the NPV,  making it less likely the  project will actually                                                               
get built  and more likely  a super  harvest mode is  advanced by                                                               
the incumbent producer in legacy fields.                                                                                        
                                                                                                                                
He pointed  out that additional  major treatment  facilities were                                                               
not built under  the current tax system even  though the expenses                                                               
are both  deductible and  credits were  available. There  is less                                                               
reason  to build  major treatment  facilities under  the proposed                                                               
system  as credits  are taken  away.  This does  promote a  super                                                               
harvest mode for legacy field operation.                                                                                        
                                                                                                                                
He referred to  pages 8 and 9 of the  Econ One presentation which                                                               
states that the  decline in throughput is a  natural decline over                                                               
time.  As more  gas and  more water  needs to  be processed,  the                                                               
decline naturally  occurs, even  though the oil  resource remains                                                               
enormous.                                                                                                                       
                                                                                                                                
He concluded that SB 21 does  not help because the removal of the                                                               
credits  takes  away  Alaska's   participation  over  the  entire                                                               
spectrum of proposed oil prices.  The throughput decline began in                                                               
1989 and has nothing to do with tax policy.                                                                                     
                                                                                                                                
5:46:58 PM                                                                                                                    
SENATOR GARDNER  asked if super harvest  means harvesting without                                                               
reinvesting in facilities and other infrastructure.                                                                             
                                                                                                                                
MR. PASKVAN said yes.                                                                                                           
                                                                                                                                
5:47:23 PM                                                                                                                    
JIM  PLAQUEST,  Fairbanks   Membership  and  Events  Coordinator,                                                               
Alaska Industry Support Alliance, testified  in support of SB 21.                                                               
He  maintained that  the ACES  tax has  eliminated the  upside of                                                               
potential in investment and has stifled investment.                                                                             
                                                                                                                                
5:49:17 PM                                                                                                                    
BRAD CHASTAIN,  Vice President of  Energy and  Natural Resources,                                                               
W.  H. Pacific,  testified  in  support of  SB  21.  He said  his                                                               
company  directly  supports  the  oil and  gas  company  and  the                                                               
ability to employ  Alaskans is limited without a  vibrant oil and                                                               
gas  business  in  Alaska.  He stressed  that  other  states  are                                                               
attracting investments  while Alaska is not.  He said simplifying                                                               
the oil tax structure will lead to more investment.                                                                             
                                                                                                                                
5:52:17 PM                                                                                                                    
JOE MATHIS,  NANA Development  Corporation, testified  in support                                                               
of SB 21.  He said NANA was  one of the first  companies hired on                                                               
the North  Slope. They have  expanded to  the Gulf of  Mexico and                                                               
Australia. The  road to success  has been built  on partnerships;                                                               
however, somehow, the partnerships  in Alaska became adversarial.                                                               
He suggested fixing ACES in order to renew those partnerships.                                                                  
                                                                                                                                
5:55:17 PM                                                                                                                    
JERRY MCCUTCHEON, Alaska Oil and  Gas, testified in opposition to                                                               
SB 21. He  said ACES is promoting oil and  gas development and it                                                               
has  generous  tax  credits.  He stressed  that  ACES  should  be                                                               
allowed to run unchanged for 10 years.                                                                                          
                                                                                                                                
5:58:30 PM                                                                                                                    
STEVE  PLATT,   Executive  Director,  Consumer   Energy  Alliance                                                               
Alaska,  testified  in  support  of  SB  21.  He  said  that  oil                                                               
production is in  a free fall decline  of about 5 to  7 percent a                                                               
year.  The current  regime creates  a disincentive  to invest  in                                                               
Alaska and he argued for a more competitive tax structure.                                                                      
                                                                                                                                
6:01:13 PM                                                                                                                    
ROD MCCOY,  representing himself,  testified in opposition  to SB
21.  He  said  there  is opportunity  for  a  natural  throughput                                                               
increase. He  urged the  committee to stand  for Alaska,  not the                                                               
oil industry.                                                                                                                   
                                                                                                                                
6:04:26 PM                                                                                                                    
MICHAEL DUNSMORE,  representing himself, testified  in opposition                                                               
to SB 21. He said it would  be improper to act hastily and change                                                               
the current  tax structure. The  state is currently able  to save                                                               
money  each  year  even  though  the budget  has  been  high.  He                                                               
encouraged maintaining the status quo.                                                                                          
                                                                                                                                
6:06:31 PM                                                                                                                    
GRANT JOHNSON,  representing himself, testified in  support of SB
21.  He said  that Alaska  has  lost its  competitive edge  while                                                               
other regions are attracting huge investment.                                                                                   
                                                                                                                                
6:09:13 PM                                                                                                                    
PHILLIS  SPENCER-BELZ,  representing  herself,  said  she  is  an                                                               
educated shareholder  of the  Arctic Slope  Regional Corporation,                                                               
testifying  in opposition  to  SB 21.  She  discussed the  Native                                                               
Claims Settlement Act  and said that she had not  seen big oil do                                                               
much for Natives or the state.                                                                                                  
                                                                                                                                
6:12:12 PM                                                                                                                    
JERRY AHWINONA, representing himself,  testified in opposition to                                                               
SB 21.  He said that  progressivity reductions would  not protect                                                               
Alaskans.  Capital credits  eliminate incentives  to all  but the                                                               
big three oil companies. He urged  the committee to allow ACES to                                                               
work for a decade.                                                                                                              
                                                                                                                                
6:14:22 PM                                                                                                                    
MICHAEL JESPERSON, representing himself,  testified in support of                                                               
SB 21. He said the Governor's  bill isn't perfect but it's better                                                               
than doing nothing,  as is happening now. He said  he wants to be                                                               
able to  pay for college  for his  kids, but that's  not possible                                                               
now.  They'll have  to  move to  the  Lower 48  and  work to  get                                                               
through school.                                                                                                                 
                                                                                                                                
6:17:32 PM                                                                                                                    
ANDREA LANG, representing herself,  testified in opposition to SB
21. She said  Alaska's revenue surplus has grown  under ACES. She                                                               
questioned who the Governor and  legislature are working for when                                                               
they give oil companies billions and flat line school budgets.                                                                  
                                                                                                                                
                                                                                                                                
6:20:25 PM                                                                                                                    
THOMAS DUFFY,  representing himself,  testified in  opposition to                                                               
SB 21. He said he disagreed  with the intent if taxes are reduced                                                               
by half  or more even  if throughput is  increased. It is  a zero                                                               
sum  gain.  He  applauded  legislators   last  year  for  putting                                                               
principle before party.                                                                                                         
                                                                                                                                
6:23:31 PM                                                                                                                    
DAN  KENNEDY, representing  himself, testified  in support  of SB
21.  He disagreed  with leaving  ACES in  place for  10 years  as                                                               
previously suggested.                                                                                                           
                                                                                                                                
6:25:16 PM                                                                                                                    
MERRICK PIERCE, representing himself,  testified in opposition to                                                               
SB 21.  He said the state  isn't taking enough under  ACES. There                                                               
is   no  evidence   that  the   Governor's  bill   will  increase                                                               
production. A reasonable  discussion is what can be  done with $2                                                               
billion per year to increase revenue from the North Slope.                                                                      
                                                                                                                                
6:28:12 PM                                                                                                                    
LAURIE FAGNANI,  NSI Communications,  testified in support  of SB
21. She said she has to  be competitive and she expects the state                                                               
to be  as well. It  appears that Alaska has  lost competitiveness                                                               
in the global market.                                                                                                           
                                                                                                                                
CO-CHAIR MICCICHE said the committee  would take a break awaiting                                                               
additional testimony.                                                                                                           
                                                                                                                                
6:31:32 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
6:53:02 PM                                                                                                                    
CO-CHAIR  MICCICHE  reconvened  the meeting.  He  said  testimony                                                               
would be taken until 7:30 p.m.                                                                                                  
                                                                                                                                
6:53:46 PM                                                                                                                    
DEBORAH BROLLINE,  representing herself,  said she is  not wedded                                                               
to the Governor's bill, but it is a starting point.                                                                             
                                                                                                                                
6:55:27 PM                                                                                                                    
TARA  SWEENEY,  Senior  Vice  President,  Arctic  Slope  Regional                                                               
Corporation (ASRC), said  ASRC is currently doing  an analysis of                                                               
SB 21,  but does know that  reform is needed. The  work that ASRC                                                               
does on the  North Slope returns benefits to  shareholders and to                                                               
Alaska in general.                                                                                                              
                                                                                                                                
CO-CHAIR MICCICHE  stated that the  committee would take  a brief                                                               
break awaiting additional testimony.                                                                                            
                                                                                                                                
6:58:17 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
7:12:00 PM                                                                                                                    
CO-CHAIR MICCICHE reconvened the meeting.                                                                                       
                                                                                                                                
7:12:12 PM                                                                                                                    
ABLE BULT-HO,  representing himself,  testified in  opposition to                                                               
SB 21.  He said it  is a giveaway  to oil companies  without some                                                               
commitment that  they will increase  production. The  oil belongs                                                               
to Alaskans and should benefit Alaskans first.                                                                                  
                                                                                                                                
7:14:22 PM                                                                                                                    
LAURA MAKETA,  representing herself,  testified in support  of SB
21. She  told the committee  that she  is a small  business owner                                                               
and mother  of two. She said  there is excellent research  on the                                                               
negative impact  that ACES has  had on small businesses,  such as                                                               
hers, and  the support  industry. She urged  the committee  to be                                                               
solution focused.                                                                                                               
                                                                                                                                
SENATOR  FAIRCLOUGH  encouraged   testifiers  to  submit  written                                                               
testimony.                                                                                                                      
                                                                                                                                
SENATOR  GARDNER  described  the   testimony  as  compelling  and                                                               
articulate.                                                                                                                     
                                                                                                                                
SENATOR  FAIRCLOUGH asked  when  public testimony  would next  be                                                               
taken.                                                                                                                          
                                                                                                                                
CO-CHAIR MICCICHE stated that the  next meeting would be Thursday                                                               
and the committee would meet from 1:00 p.m. until 7:30 p.m.                                                                     
                                                                                                                                
7:20:42 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
7:28:18 PM                                                                                                                    
CO-CHAIR MICCICHE  reconvened the meeting and  stated that public                                                               
testimony was  taken from 5:30 to  7:30. There will be  a meeting                                                               
on January 31  and public testimony will be taken  from 4:30 p.m.                                                               
until 7:30 p.m.                                                                                                                 
                                                                                                                                
SENATOR McGUIRE  said Alaskans who  cannot be  physically present                                                               
at  the Legislative  Information Offices  can call  in using  the                                                               
offnet number or submit written testimony.                                                                                      
                                                                                                                                
CO-CHAIR MICCICHE held SB 21 in committee.                                                                                      

Document Name Date/Time Subjects
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
Overview of SB 21 Oil & Gas Production Tax 1-29-13.pdf STTP 1/29/2013 3:30:00 PM
SB 21