Legislature(2013 - 2014)BUTROVICH 205

02/07/2013 03:30 PM SENATE SPECIAL COMM ON TAPS THROUGHPUT


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03:36:57 PM Start
03:37:10 PM SB21
04:35:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Moved SB 21 Out of Committee
                SB 21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
3:37:10 PM                                                                                                                    
CO-CHAIR MICCICHE announced  that the purpose of  the meeting was                                                               
to offer a letter  of intent to SB 21, version  A, and to discuss                                                               
SB 21 further.  He reminded the committee  that amendments should                                                               
be specific to TAPS throughput.                                                                                                 
                                                                                                                                
SENATOR GARDNER moved to adopt Amendment 1, labeled 28-                                                                         
GS1647\A.1:                                                                                                                     
                                                                                                                                
                          AMENDMENT 1                                                                                         
                                                                                                                                
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          Delete all material.                                                                                                  
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
     Page 23, line 15:                                                                                                          
          Delete "Sections 2, 5, 6, 22 - 24, and 26"                                                                            
          Insert "Sections 2, 5, 6, 16 - 18, and 20"                                                                            
                                                                                                                                
     Page 23, line 17:                                                                                                          
          Delete "Sections 3 and 21"                                                                                            
          Insert "Sections 3 and 15 of this Act"                                                                                
                                                                                                                                
     Page 23, line 18:                                                                                                          
          Delete "Sections 7, 11, 13, 14, and 25"                                                                               
          Insert "Section 7 - 10 and 19"                                                                                        
                                                                                                                                
     Page 23, lines 20 - 21:                                                                                                    
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          Delete "Sections 3, 7, 11, 13, 14, 17, 21, and                                                                        
          25"                                                                                                                   
          Insert "Sections 3, 7 - 10, 12, 15, and 19"                                                                           
                                                                                                                                
     Page 23, line 31:                                                                                                          
          Delete "Sections 1, 2, 5, 6, 9, 10, 12, 15, 20,                                                                       
          22 - 24, and 26"                                                                                                      
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     Page 24, line 2:                                                                                                           
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SENATOR FAIRCLOUGH objected for discussion purposes.                                                                            
                                                                                                                                
SENATOR  GARDNER   stated  that  she  understood   it  was  Chair                                                               
Micciche's desire to move the Letter  of Intent, in which many of                                                               
her  concerns are  addressed.  However, she  opined  that it  was                                                               
important  to  discuss  the  bill  as a  committee  and  to  talk                                                               
specifically, on the record, about areas of improvement.                                                                        
                                                                                                                                
CO-CHAIR  MICCICHE asked  Senator Gardner  if she  would like  to                                                               
speak to her amendment.                                                                                                         
                                                                                                                                
SENATOR GARDNER  explained the purpose  of Amendment 1.  She said                                                               
the  intent   of  existing  credits   under  ACES  is   to  boost                                                               
production, create jobs  and help fill the  pipeline by rewarding                                                               
investment.  She related  that  the  Governor's proposal  removes                                                               
that  incentive,  paving the  way  for  investment elsewhere.  It                                                               
rolls back taxes enabling profits to be spent as companies wish.                                                                
                                                                                                                                
SENATOR  GARDNER  reported  that   she  received  a  response  to                                                               
questions  she  sent to  the  Department  of Revenue  that  would                                                               
further  explain  her reasoning.  She  said  the progressive  net                                                               
profits   tax  encourages   reinvestment.   She  concluded   that                                                               
eliminating  progressivity  and  the 20  percent  capital  credit                                                               
creates a "double whammy" and is a mistake.                                                                                     
                                                                                                                                
SENATOR GARDNER explained that she  is trying to show how capital                                                               
credits incentivize  capital investment  in Alaska.  She stressed                                                               
that tax credits are an important part of the tax system.                                                                       
                                                                                                                                
3:42:14 PM                                                                                                                    
MICHAEL  PAWLOWSKI,  Special  Assistant,   Oil  and  Gas  Project                                                               
Manager,  Department  of  Revenue,   explained  how  the  capital                                                               
credits  act in  SB  21. He  said the  Governor's  bill is  built                                                               
around  four  core principles.  The  capital  credits, which  are                                                               
proposed to be eliminated in the  bill, are being done to balance                                                               
the exposure  the state  has through  several systems  of growth.                                                               
Under low  price environments, as  prices drop, the  revenues the                                                               
state receives  go down. At  the same  time, the level  of credit                                                               
exposure is based purely on  the capital spending of the company.                                                               
The balance between those two falls out of balance to the state.                                                                
                                                                                                                                
He said the best example of how  that works is found on page 3 of                                                               
the  fiscal  note,  looking  at   the  relationship  between  the                                                               
revenues  that come  in and  the credits  that come  out. Line  1                                                               
shows that revenue  impacts of the elimination  of the production                                                               
tax is  subsequently balanced  by the  limitation of  the credits                                                               
for  qualified   capital  expenditures.  The   qualified  capital                                                               
expenditures credit is purely based  on capital spending. In that                                                               
process  there  is   no  ability  to  tie  it   directly  to  new                                                               
production.                                                                                                                     
                                                                                                                                
SENATOR  FAIRCLOUGH  stated that  Amendment  1  is a  complicated                                                               
amendment and a complicated  conversation about progressivity and                                                               
the  interaction  between the  credits  proposed  in SB  21.  She                                                               
pointed out  that she is very  interested in what happens  at the                                                               
intersection   between  realigning   the  credit   structure  and                                                               
progressivity. She said it remains  a consideration. She said she                                                               
cannot determine how the amendment  affects that consideration so                                                               
she will vote against the amendment.                                                                                            
                                                                                                                                
3:45:44 PM                                                                                                                    
CO-CHAIR  MICCICHE believed  that  Amendment  1 was  specifically                                                               
credit  related   and  another   proposed  amendment   was  about                                                               
progressivity.                                                                                                                  
                                                                                                                                
SENATOR  GARDNER explained  that Amendment  1 seeks  to eliminate                                                               
the portions of SB 21 that delete capital credits.                                                                              
                                                                                                                                
CO-CHAIR MICCICHE noted  that the letter of  intent requests that                                                               
the next committee  "Evaluate specific production-related credits                                                               
allowed under ACES  for inclusion in SB 21 as  a direct incentive                                                               
for  costs  that deliver  production.  Require  that credits  are                                                               
charged  against   actual  production  to   eliminate  currently-                                                               
existing negative revenue liability to the state."                                                                              
                                                                                                                                
MR.  PAWLOWSKI pointed  out  that the  Governor's  bill seeks  to                                                               
eliminate the qualified capital  expenditure credit, but maintain                                                               
the 25 percent loss carry  forward credit. However, the treatment                                                               
of the  loss carry forward credit  is changed so that  the credit                                                               
is  truly  taken  against  production   revenues.  He  said  that                                                               
Amendment 1, page 2  lines 17 - 19 - the  treatment of Section 23                                                               
-  would upend  that relationship  of tying  the credits  to when                                                               
there is tax revenue to pay for them.                                                                                           
                                                                                                                                
CO-CHAIR MICCICHE commented that there  are members that share an                                                               
interest in investigating the carry  forward credits. He believed                                                               
that would occur in the Senate Resources Committee.                                                                             
                                                                                                                                
SENATOR FAIRCLOUGH maintained her objection.                                                                                    
                                                                                                                                
A roll  call vote was  taken. Senator  Gardner voted in  favor of                                                               
the  motion  to  adopt  Amendment   1  and  Senators  Fairclough,                                                               
McGuire,  Dunleavy, and  Micciche  voted  against it.  Therefore,                                                               
Amendment 1 failed by a 1:4 vote.                                                                                               
                                                                                                                                
3:48:41 PM                                                                                                                    
                                                                                                                                
SENATOR  GARDNER   moved  to  adopt  Amendment   2,  labeled  28-                                                               
GS1647\A.4:                                                                                                                     
                                                                                                                                
                          AMENDMENT 2                                                                                         
                                                                                                                              
     Page 23, line 3, following "section,":                                                                                     
          Insert "for the first seven years immediately                                                                         
      following the commencement of production subject to                                                                       
     tax under AS 43.55.011(e),"                                                                                                
                                                                                                                                
SENATOR FAIRCLOUGH objected for discussion purposes.                                                                            
                                                                                                                                
SENATOR GARDNER  explained that she  supports having a  lower tax                                                               
rate to  encourage new production  and to help  smaller companies                                                               
"get off the  ground." She did not think the  provision needed to                                                               
pertain to  the entire lifetime of  a field, just long  enough to                                                               
enable  companies to  recover their  investments. She  proposed a                                                               
seven-year timeline for the 20 percent exclusion.                                                                               
                                                                                                                                
MR.  PAWLOWSKI said  the evolution  of  the provision  is a  good                                                               
indication of  the joint work  between the Department  of Natural                                                               
Resources and the Department of  Revenue. He requested Mr. Balash                                                               
address  the reason  for  the  long duration  of  the 20  percent                                                               
exclusion.                                                                                                                      
                                                                                                                                
3:49:41 PM                                                                                                                    
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department  of  Natural  Resources,  commented on  the  rates  of                                                               
production in  specific fields  and the  pace of  development. He                                                               
said for  a new  field like  Oooguruk or  Nikaitchuq, there  is a                                                               
small initial  amount of production  in the first  year, followed                                                               
by an  increase as  more wells are  brought into  production over                                                               
the  course of  years. He  suggested  that limiting  the time  to                                                               
seven years  would cut off  the impact and  value of the  GRE too                                                               
early in the life  of some of those wells. He  said DNR looked at                                                               
life cycle  economics and long-term incentives  and the tradeoffs                                                               
between tax  credits, tax rates,  and the  GRE. They came  to the                                                               
conclusion that  there is so  much variability in the  way fields                                                               
are  developed, that  having an  artificial cut  off for  the GRE                                                               
would affect decision making in a negative way.                                                                                 
                                                                                                                                
SENATOR FAIRCLOUGH asked why seven years was selected.                                                                          
                                                                                                                                
SENATOR  GARDNER  said it  was  modeled  after the  Middle  Earth                                                               
provision of seven years.                                                                                                       
                                                                                                                                
CO-CHAIR MICCICHE pointed  that every member of  the committee is                                                               
representing  Alaskans.  He  noted  that  the  recommendation  in                                                               
Amendment  2  is  referred  to   in  the  Letter  of  Intent  for                                                               
consideration  in Senate  Resources.  It says,  "Evaluate a  time                                                               
limit  into  the   future  for  the  20   percent  Gross  Revenue                                                               
Exclusion." He said  that the committee did not  state a specific                                                               
time  limit, but  requests that  it is  considered with  the best                                                               
number possible.                                                                                                                
                                                                                                                                
3:52:52 PM                                                                                                                    
SENATOR FAIRCLOUGH maintained her objection.                                                                                    
                                                                                                                                
A roll  call vote was  taken. Senator  Gardner voted in  favor of                                                               
Amendment  2  and  Senators Fairclough,  McGuire,  Dunleavy,  and                                                               
Micciche voted  against it.  Therefore, Amendment  2 failed  by a                                                               
1:4 vote.                                                                                                                       
                                                                                                                                
3:53:25 PM                                                                                                                    
SENATOR  GARDNER   moved  to  adopt  Amendment   3,  labeled  28-                                                               
GS1647\A.5:                                                                                                                     
                                                                                                                                
                          AMENDMENT 3                                                                                         
                                                                                                                                
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          Delete all material.                                                                                                  
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
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          Delete "sec. 11"                                                                                                      
          Insert "sec. 9"                                                                                                       
                                                                                                                                
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          Delete all material.                                                                                                  
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
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          Delete all material.                                                                                                  
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
     Page 23, line 15:                                                                                                          
          Delete "Sections 2, 5, 6, 22 - 24, and 26"                                                                            
          Insert "Sections 2, 5, 6, 18 - 20, and 22"                                                                            
                                                                                                                                
     Page 23, line 17:                                                                                                          
          Delete "Sections 3 and 21"                                                                                            
          Insert "Sections 3 and 17 of this Act"                                                                                
                                                                                                                                
     Page 23, line 18:                                                                                                          
          Delete "Sections 7, 11, 13, 14, and 25"                                                                               
          Insert "Sections 7, 9, 11, 12, and 21"                                                                                
                                                                                                                                
     Page 23, line 20:                                                                                                          
          Delete "Sections 9, 10, 12, 15, and 20 of this                                                                        
          Act apply"                                                                                                            
          Insert "Section 10 of this Act applies"                                                                               
                                                                                                                                
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          Delete "Sections 3, 7, 11, 13, 14, 17, 21, and                                                                        
          25"                                                                                                                   
          Insert "Sections 3, 7, 9, 11, 12, 14, 17, and 21"                                                                     
                                                                                                                                
     Page 23, line 31:                                                                                                          
          Delete "Sections 1, 2, 5, 6, 9, 10, 12, 15, 20,                                                                       
          22 - 24, and 26"                                                                                                      
          Insert "Sections 1, 2, 5, 6, 10, 18 - 20, and 22"                                                                     
                                                                                                                                
     Page 24, line 2:                                                                                                           
          Delete "sec. 30"                                                                                                      
          Insert "sec. 26"                                                                                                      
                                                                                                                                
SENATOR FAIRCLOUGH objected for discussion purposes.                                                                            
                                                                                                                                
SENATOR GARDNER explained that the  25 percent net operating loss                                                               
credit levels  the playing  field between  the producers  and the                                                               
small  independents still  in a  development phase.  Whereas, the                                                               
producers  can  deduct  development   costs  from  their  taxable                                                               
income,  those  still in  a  development  phase cannot.  The  net                                                               
operating loss  credit (NOL) compensates for  the discrepancy and                                                               
helps  get the  development project  off the  ground by  boosting                                                               
project economics early on before  revenue is being generated. It                                                               
is one  of the ways the  state can really help  support newcomers                                                               
to  the fields.  While some  developers have  sufficient cash  to                                                               
make it  through the costly  and risky development  phase, others                                                               
don't. The change  in SB 21 will particularly  harm those seeking                                                               
to develop costly oil and the more remote and challenged fields.                                                                
                                                                                                                                
She said, in  addition, the 15 percent interest  rate proposed in                                                               
SB 21  on the deferred  net operating  loss credits is  too high,                                                               
creating an  unnecessary liability  for Alaskans. It  will double                                                               
in  five  years with  the  15  percent compounded  interest  rate                                                               
applied - the envy of any investor.                                                                                             
                                                                                                                                
CO-CHAIR MICCICHE  said Deputy  Commissioner Bruce  Tangeman from                                                               
the Tax  Division of the  Department of Revenue was  available to                                                               
answer questions.                                                                                                               
                                                                                                                                
3:55:22 PM                                                                                                                    
MR.  PAWLOWSKI emphasized  that it  was important  to distinguish                                                               
between the  benefit given to an  investor by the net  loss carry                                                               
forward versus  the deductions available under  progressivity. He                                                               
referred to  previous presentations by  Econ One and  PFC Energy,                                                               
which  showed  that the  current  system  for  a new  entrant  is                                                               
dramatically worse in terms of  government take, internal rate of                                                               
return,  and  net present  value  than  it  is for  an  incumbent                                                               
producer. The  reason for  that is  because of  the deductibility                                                               
around  progressivity -  the extra  ability to  buy down  the tax                                                               
rate. The  net operating  loss credit,  which Amendment  3 refers                                                               
to, mimics  the base rate power  that a spending by  an incumbent                                                               
has in  the current system. Both  an incumbent and a  new entrant                                                               
each  have the  25  percent base  rate; however,  in  that a  new                                                               
entrant does  not have a  tax rate yet,  they don't get  the same                                                               
benefit  of the  25  percent deduction.  The  net operating  loss                                                               
carry forward  was created  to make an  equal playing  ground for                                                               
both the incumbent and the new entrant.                                                                                         
                                                                                                                                
He related that the Governor's treatment  of the bill is to carry                                                               
those credits  forward and  apply them  when there  is production                                                               
and the  state has the revenues  from that production to  pay for                                                               
the credit obligation.  To protect the new  entrant, the interest                                                               
or increase in  the value of the credit of  15 percent was chosen                                                               
because  it is  very  similar  to the  cost  of  capital for  the                                                               
opportunity the company  would have had under ACES,  if the state                                                               
had  just handed  them a  check. The  balance of  the 15  percent                                                               
number was chosen  because under SB 21 the state  would no longer                                                               
be writing  a check  for the credit,  but rather,  requiring that                                                               
the company carry the credit forward against production.                                                                        
                                                                                                                                
He pointed  out that Amendment  3 would de-link  the relationship                                                               
of the  proposal of taking  credits against revenues and  move it                                                               
back  to the  cash  payment.  He stated  that  the issue  Senator                                                               
Gardner  pointed out  is an  important one.  There are  instances                                                               
where  the  credit  payment  from   the  state  is  important  to                                                               
companies that  don't have  the access to  capital to  pursue the                                                               
high cost  development challenges  in Alaska. For  companies that                                                               
do have the cash, the improvement  in the life cycle economics of                                                               
SB 21  is what drives  development decisions.  The administration                                                               
saw  that  it  was  important to  improve  the  overall  economic                                                               
viability of  the project  itself so that  natural forces  in the                                                               
market place can start to work.                                                                                                 
                                                                                                                                
3:59:21 PM                                                                                                                    
CO-CHAIR  MICCICHE  inquired  if   a  company  without  financial                                                               
backing would be  as likely to stem the decline  of throughput as                                                               
a company with "pockets," with the changes proposed in SB 21.                                                                   
                                                                                                                                
MR.  PAWLOWSKI emphasized  that all  companies have  an important                                                               
role. The  administration is concerned  with small  entrants that                                                               
have  found  reasonable  reserves  of oil  and  tried  to  obtain                                                               
capital, but have not been able  to. The current credit system is                                                               
not  overcoming that  problem. The  administration is  seeking to                                                               
improve the lifecycle  economics in the life of  projects so that                                                               
small companies can  participate in their efforts  to explore and                                                               
develop  in Alaska.  He  did  not want  to  identify winners  and                                                               
losers in the conversation.                                                                                                     
                                                                                                                                
4:01:20 PM                                                                                                                    
CO-CHAIR MICCICHE  asked if the  changes were  primarily guarding                                                               
against "the check"  having a liability for a  smaller company as                                                               
opposed to enjoying  the revenue benefits of the  company that is                                                               
making it on its own.                                                                                                           
                                                                                                                                
MR. PAWLOWSKI said from the  Department of Revenue's perspective,                                                               
the point  was to match up  when the state was  giving a benefit,                                                               
to  when the  state was  receiving the  revenues to  pay for  the                                                               
benefit,  especially  when   looking  at  expansionist  spending.                                                               
Matching up the cash flows is  really important for the long term                                                               
durability of the system.                                                                                                       
                                                                                                                                
MR. BALASH emphasized  the second of the  Governor's principles -                                                               
incentives  are   geared  to  encouraging  new   production.  The                                                               
Department of Natural  Resources sees the credit  system today as                                                               
it  operates, both  through the  QCE and  the NOL  system, as  an                                                               
incentive that rewards spending. Spending  is a necessary part of                                                               
getting  to  production, but  it  is  not  the direct  link.  The                                                               
department's  treatment  of  the  NOL credit,  in  providing  the                                                               
interest mechanism  and restricting  its applicability  to future                                                               
production  tax liabilities,  ensures that  the company  can only                                                               
take advantage  of that  credit once they've  gotten to  point of                                                               
producing oil.                                                                                                                  
                                                                                                                                
CO-CHAIR MICCICHE  pointed out  that the idea  in Amendment  3 is                                                               
contained in  the Letter of  Intent. It says,  "Evaluate removing                                                               
the Net Operating Loss provision in SB 21."                                                                                     
                                                                                                                                
4:03:47 PM                                                                                                                    
SENATOR FAIRCLOUGH maintained her objection to Amendment 3.                                                                     
                                                                                                                                
A roll  call vote was  taken. Senator  Gardner voted in  favor of                                                               
Amendment  3  and  Senators Fairclough,  McGuire,  Dunleavy,  and                                                               
Micciche voted  against it.  Therefore, Amendment  3 failed  by a                                                               
1:4 vote.                                                                                                                       
                                                                                                                                
4:04:33 PM                                                                                                                    
SENATOR  GARDNER   moved  to  adopt  Amendment   4,  labeled  28-                                                               
GS1647\A.6:                                                                                                                     
                                                                                                                                
                          AMENDMENT 4                                                                                         
                                                                                                                                
     Page 1, line 2, following "rate;":                                                                                       
          Insert "relating to the minimum tax on oil and                                                                      
     gas production;"                                                                                                         
                                                                                                                                
     Page 2, following line 18:                                                                                                 
          Insert a new bill section to read:                                                                                    
        "*   Sec.  3.   AS 43.55.011(f)   is  repealed   and                                                                
     reenacted to read:                                                                                                         
          (f)  Except for oil and gas subject to (i) of                                                                         
     this section  and gas subject  to (o) of  this section,                                                                    
     the provisions of this subsection  apply to oil and gas                                                                    
     produced from each  lease or property within  a unit or                                                                    
     nonunitized  reservoir that  has cumulatively  produced                                                                    
     1,000,000,000 BTU  equivalent barrels of oil  or gas by                                                                    
     the close  of the  most recent  calendar year  and from                                                                    
     which  the average  daily oil  and gas  production from                                                                    
     the  unit  or  nonunitized reservoir  during  the  most                                                                    
     recent  calendar year  exceeded 100,000  BTU equivalent                                                                    
     barrels.  Notwithstanding  any  contrary  provision  of                                                                    
     law, a  producer may  not apply  tax credits  to reduce                                                                    
     its total tax  liability under (e) of  this section for                                                                    
     oil  and gas  produced  from all  leases or  properties                                                                    
     within  the  unit  or nonunitized  reservoir  below  10                                                                    
     percent  of  the total  gross  value  at the  point  of                                                                    
     production of  that oil and  gas. If the amount  of tax                                                                    
     calculated by multiplying  the tax rate in  (e) of this                                                                    
     section by  the total production  tax value of  the oil                                                                    
     and  gas taxable  under (e)  of  this section  produced                                                                    
     from all of the  producer's leases or properties within                                                                    
     the  unit  or nonunitized  reservoir  is  less than  10                                                                    
     percent  of  the total  gross  value  at the  point  of                                                                    
     production of that  oil and gas, the tax  levied by (e)                                                                    
     of this  section for that  oil and  gas is equal  to 10                                                                    
     percent  of  the total  gross  value  at the  point  of                                                                    
     production  of that  oil and  gas. In  this subsection,                                                                    
     "total gross  value at the  point of  production" means                                                                    
     the gross value at the  point of production as adjusted                                                                    
     by AS 43.55.160(f), if applicable."                                                                                        
                                                                                                                                
     Renumber the following bill sections accordingly.                                                                          
                                                                                                                                
     Page 5, line 27:                                                                                                           
          Delete "sec. 4"                                                                                                       
          Insert "sec. 5"                                                                                                       
                                                                                                                                
     Page 6, line 19, through page 7, line 5:                                                                                   
          Delete all material and insert:                                                                                       
               "(B) for oil and gas produced from leases or                                                                     
     properties  subject to  AS 43.55.011(f), 10  percent of                                                                
     the gross value at the  point of production of that oil                                                                
     and gas [THE GREATEST OF                                                                                               
               (i)  ZERO;                                                                                                       
               (ii)  ZERO PERCENT, ONE PERCENT, TWO                                                                             
     PERCENT,   THREE   PERCENT,   OR   FOUR   PERCENT,   AS                                                                    
     APPLICABLE,  OF  THE  GROSS   VALUE  AT  THE  POINT  OF                                                                    
     PRODUCTION OF THE OIL AND  GAS PRODUCED FROM THE LEASES                                                                    
     OR   PROPERTIES  DURING   THE  MONTH   FOR  WHICH   THE                                                                    
     INSTALLMENT PAYMENT IS CALCULATED; OR                                                                                      
               (iii)  THE SUM OF 25 PERCENT AND THE TAX                                                                         
     RATE  CALCULATED FOR  THE  MONTH UNDER  AS 43.55.011(g)                                                                    
     MULTIPLIED  BY THE  REMAINDER  OBTAINED BY  SUBTRACTING                                                                    
     1/12 OF THE PRODUCER'S  ADJUSTED LEASE EXPENDITURES FOR                                                                    
     THE CALENDAR YEAR OF  PRODUCTION UNDER AS 43.55.165 AND                                                                    
     43.55.170  THAT  ARE DEDUCTIBLE  FOR  THE  OIL AND  GAS                                                                    
     UNDER AS 43.55.160  FROM THE  GROSS VALUE AT  THE POINT                                                                    
     OF PRODUCTION  OF THE OIL  AND GAS PRODUCED  FROM THOSE                                                                    
      LEASES OR PROPERTIES DURING THE MONTH FOR WHICH THE                                                                       
     INSTALLMENT PAYMENT IS CALCULATED];"                                                                                       
                                                                                                                                
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SENATOR FAIRCLOUGH objected for discussion purposes.                                                                            
                                                                                                                                
SENATOR GARDNER opined that a goal of ACES, and also of SB 21,                                                                  
is to provide a balance between encouraging investment and                                                                      
production and protecting the interest  of the state. She related                                                               
that  Amendment [4]  provides an  alternative minimum  tax of  10                                                               
percent  of the  gross  value at  the point  of  production as  a                                                               
protection against  low oil  prices. It is  applied after  the 20                                                               
percent reduction SB  21 creates for new oil -  the gross revenue                                                               
exclusion.  It  specifies  that  producers  many  not  apply  tax                                                               
credits to  reduce their  production taxes  below the  10 percent                                                               
floor. The  floor would  apply only to  fields that  have already                                                               
produced  a  billion  barrels  of oil  and  are  still  producing                                                               
100,000 barrels  per day,  on average  - essentially  Prudhoe and                                                               
Kuparuk.  The floor  would  kick  in under  $70  per barrel.  Oil                                                               
prices have been much lower in  the past. If the state takes less                                                               
from  profits when  oil prices  are higher,  it needs  to protect                                                               
itself when oil prices are low.                                                                                                 
                                                                                                                                
CO-CHAIR  DUNLEAVY  clarified that  Amendment  4  was before  the                                                               
committee.                                                                                                                      
                                                                                                                                
SENATOR GARDNER said that was correct.                                                                                          
                                                                                                                                
4:06:27 PM                                                                                                                    
MR. PAWLOWSKI  commented that  in considering  Amendment 4  it is                                                               
important to reach  back to the Governor's  principles. There has                                                               
been some  discussion of  progressive versus  regressive systems.                                                               
Under  the Governor's  proposal, the  fairness principle  is what                                                               
Senator Gardner has  spoken to in that, at low  prices, the state                                                               
takes  a higher  share of  the  revenue. He  said that  principle                                                               
exists  under  SB 21  naturally  because  of  the repeal  of  the                                                               
credits and the  combination of the fixed base rate  that has not                                                               
been  reduced.  Amendment  4  would  move  that  regressivity  by                                                               
putting a 10 percent gross floor  in, perhaps even higher than it                                                               
would exist  under SB 21.  It would have  the effect of  taking a                                                               
bill that  is already slightly regressive  and potentially making                                                               
it more regressive.                                                                                                             
                                                                                                                                
SENATOR GARDNER  responded "with  the limited application  to the                                                               
two biggest fields in North America, only."                                                                                     
                                                                                                                                
A roll  call vote was  taken. Senator  Gardner voted in  favor of                                                               
Amendment  4  and  Senators Fairclough,  McGuire,  Dunleavy,  and                                                               
Micciche voted  against it.  Therefore, Amendment  4 failed  by a                                                               
1:4 vote.                                                                                                                       
                                                                                                                                
SENATOR GARDNER  said she  would not offer  Amendment 5,  but she                                                               
believes that progressivity needs to be retained.                                                                               
                                                                                                                                
4:08:58 PM                                                                                                                    
CO-CHAIR MICCICHE referred  to the Letter of Intent  and read the                                                               
section  that  applies  to progressivity.  It  says,  "Evaluating                                                               
employing  progressivity as  a tool  to level  the proportion  of                                                               
take for Alaskans across the  various oil price environments." He                                                               
concluded that everyone  agrees there may be a  place to "flatten                                                               
the tax."                                                                                                                       
                                                                                                                                
He asked  Senator Gardner if the  statement, "Consider bracketing                                                               
progressivity  at varying  rates  as the  price  of oil  varies,"                                                               
should be eliminated from the Letter of Intent.                                                                                 
                                                                                                                                
SENATOR GARDNER suggested amending  the statement by removing the                                                               
words "bracketing" and "at varying rates."                                                                                      
                                                                                                                                
CO-CHAIR MICCICHE asked if there  were any further amendments. He                                                               
asked if the administration wished to make closing comments.                                                                    
                                                                                                                                
MR. PAWLOWSKI voiced appreciation for the committee's work.                                                                     
                                                                                                                                
CO-CHAIR  MICCICHE  commented  that  the  administration  is  not                                                               
finished with  its work on  the bill. He praised  the departments                                                               
for  their  work.  He  said   he  appreciates  Senator  Gardner's                                                               
comments.                                                                                                                       
                                                                                                                                
SENATOR  GARDNER  appreciated   Co-Chair  Micciche's  efforts  at                                                               
keeping the dialogue open and getting questions answered.                                                                       
                                                                                                                                
SENATOR  GARDNER noted  that  she received  answers  from DOR  in                                                               
response to questions she submitted,  some of which relate to the                                                               
Letter of Intent. She read item 7 in the letter from DOR:                                                                       
                                                                                                                                
     The higher  IRR's for  ACES incumbents  result entirely                                                                    
     from  the  "buy-down'   effect.  Additional  investment                                                                    
     under ACES  allows an incumbent  to 'buy-down'  its tax                                                                    
     rate on  existing production. Under  the ACES  system a                                                                    
     producer can  earn those higher  IRR's, but only  if it                                                                    
     reinvests  in  Alaska to  buy  down  its tax  rate.  It                                                                    
     cannot earn  those returns if it  chooses to distribute                                                                    
     its   profits  to   shareholders,   which  is   vitally                                                                    
     important to management, not to mention shareholders.                                                                      
                                                                                                                                
She said this was exactly the information she wanted.                                                                           
                                                                                                                                
SENATOR GARDNER said the quote is on page 3, slide 7.                                                                           
                                                                                                                                
SENATOR  GARDNER remarked  about  how  the additional  investment                                                               
under ACES allows  the company to buy down its  existing tax rate                                                               
on  production. Under  ACES, a  producer earns  those high  IRR's                                                               
only if  it re-invests in  Alaska to buy  down its rate.  That is                                                               
exactly the intent of ACES, and SB 21 lacks this provision.                                                                     
                                                                                                                                
4:14:15 PM                                                                                                                    
MR.  PAWLOWSKI  pointed  out  that some  of  the  questions  were                                                               
specific  to  the administration's  consultant,  Econ  One.   The                                                               
consultant's opinion continues in  that sentence, "In this sense,                                                               
the profits (and associated higher  IRR's) are somewhat 'captive'                                                               
and  may  not   be  viewed  as  being  of   same  quality  (i.e.,                                                               
comparable)  to profits  earned in  other jurisdictions  where no                                                               
such  strings are  attached." He  said  the administration  looks                                                               
forward to talking through the efficiencies of the incentives.                                                                  
                                                                                                                                
CO-CHAIR  MICCICHE  thought  it  was important  to  consider  the                                                               
entire answer. It  implies that the IRR is one  factor and should                                                               
not be viewed  in isolation. He summarized  that IRR calculations                                                               
that vary greatly  from most other opportunities  should be taken                                                               
with "a grain of salt."                                                                                                         
                                                                                                                                
SENATOR FAIRCLOUGH asked  that the response from  DOR be included                                                               
in the public record.                                                                                                           
                                                                                                                                
CO-CHAIR MICCICHE expressed appreciation to the administration.                                                                 
                                                                                                                                
4:16:19 PM                                                                                                                    
SENATOR GARDNER  stated that she can't  sign on to the  Letter of                                                               
Intent at this  time, but she does not object  to the committee's                                                               
moving it forward.                                                                                                              
                                                                                                                                
4:16:43 PM                                                                                                                    
SENATOR  FAIRCLOUGH said  she appreciates  the complexity  of the                                                               
tax  structure that  both industry  and  the administration  face                                                               
every  day. She  noted that  she believes  in the  principles the                                                               
Governor has brought  forward. She stated that  she believes that                                                               
Alaska is not competitive for a  variety of reasons and the state                                                               
needs  to  make some  changes  to  make  sure that  industry  can                                                               
flourish and Alaskans can have  confidence in their tax system to                                                               
know that it is in place  to benefit all Alaskans. The process of                                                               
changing the  tax system  should be  bicameral and  bipartisan in                                                               
efforts to make sure Alaskans' future is secure.                                                                                
                                                                                                                                
She  said  she agrees  that  there  is  a correlation  between  a                                                               
regressive nature  and when progressivity  is removed.  She wants                                                               
Alaskans to share in the benefits  as the price of oil increases.                                                               
She said this committee has not  been able to see how the credits                                                               
proposals will  affect the bottom  line and she looks  forward to                                                               
that future  discussion. She wished  for a conversation  with the                                                               
administration    about   why    simplicity   is    better   than                                                               
progressivity.                                                                                                                  
                                                                                                                                
She  did not  want the  record to  reflect that  she is  in total                                                               
agreement about  progressivity, because  the current rate  is too                                                               
high. She  said she is trying  to understand the issue  on behalf                                                               
of her constituents. She spoke of  a goal to see new explorers in                                                               
Alaska,  as well  as new  exploration in  the legacy  fields. She                                                               
stated  support   for  the  committee's  Letter   of  Intent  and                                                               
appreciation  for all  positions. She  hoped that  in the  future                                                               
amendments could be viewed sooner.  She said she appreciates that                                                               
the  chair was  able to  provide an  opportunity for  Alaskans to                                                               
have a say. She also  voiced appreciation for Co-Chair Micciche's                                                               
leadership and for Senator Gardner's contributions.                                                                             
                                                                                                                                
CO-CHAIR MICCICHE  reminded the  public that this  is not  an oil                                                               
tax committee.                                                                                                                  
                                                                                                                                
CO-CHAIR DUNLEAVY  said looking  at ACES  and SB  21 has  been an                                                               
enlightening experience, as  has taking a look at  Alaska and its                                                               
future. He hoped Alaska was not at  the end of the golden age for                                                               
oil.  He  said  the  goal  is  to find  a  way  to  continue  oil                                                               
production. This process has been  one of turning over stones and                                                               
will continue  to be so.  He said  although the current  topic is                                                               
focused on oil,  it will morph from oil  into business investment                                                               
in Alaska  and personal spending  policies. He said  many non-oil                                                               
industries are watching the tax  process and Alaska's future. The                                                               
question  is  whether  Alaska  will   become  a  destination  for                                                               
investment and  job growth. Alaska's fiscal  policy will continue                                                               
to be discussed in the future.                                                                                                  
                                                                                                                                
4:23:46 PM                                                                                                                    
CO-CHAIR DUNLEAVY  moved to report SB  21, labeled [28-GS1647\A],                                                               
from   committee   with   individual  recommendations   and   the                                                               
accompanying fiscal notes.                                                                                                      
                                                                                                                                
SENATOR GARDNER objected.                                                                                                       
                                                                                                                                
A  roll  call  vote  was  taken.  Senators  Fairclough,  McGuire,                                                               
Dunleavy,  and Micciche  voted in  favor of  reporting SB  21 and                                                               
Senator  Gardner  voted  against  it. Therefore,  the  motion  to                                                               
report SB 21 was passed by a 4:1 vote.                                                                                          
                                                                                                                                
CO-CHAIR DUNLEAVY  moved to report  the Letter of Intent.  No one                                                               
stated objection.                                                                                                               
                                                                                                                                
CO-CHAIR MICCICHE read the Letter of Intent:                                                                                    
                                                                                                                                
     The Senate  Special Committee on Trans  Alaska Pipeline                                                                    
     System  (TAPS) Throughput  was  formed specifically  to                                                                    
     evaluate    solutions    designed   to    reverse    or                                                                    
     significantly  reduce  the  historical decline  in  the                                                                    
     quantity  of oil  produced  from  leases or  properties                                                                    
     north of 68 degrees  North latitude and shipped through                                                                    
     the  Trans   Alaska  Pipeline  System.   The  Committee                                                                    
     recognizes that  oil revenue is extremely  important to                                                                    
     the State of  Alaska and currently funding  over 90% of                                                                    
     Alaska's     essential     services    and     critical                                                                    
     infrastructure  including   education,  public  safety,                                                                    
     health  and social  services and  transportation.   The                                                                    
     Committee is also aware that  projected declines in the                                                                    
     Trans  Alaska Pipeline  System throughput  may compound                                                                    
     the operational  and cost issues that  could jeopardize                                                                    
     the viability  and safe operation  of the  Trans Alaska                                                                    
     Pipeline System.                                                                                                           
                                                                                                                                
     The Committee was the first  to consider SENATE BILL 21                                                                    
     "An  Act relating  to  appropriations  from taxes  paid                                                                    
     under the  Alaska Net Income  Tax Act; relating  to the                                                                    
     oil and gas  production tax rate; relating  to gas used                                                                    
     in the state; relating  to monthly installment payments                                                                    
     of the oil and gas  production tax; relating to oil and                                                                    
     gas  production  tax  credits for  certain  losses  and                                                                    
     expenditures; relating  to oil  and gas  production tax                                                                    
     credit  certificates; relating  to nontransferable  tax                                                                    
     credits based  on production; relating  to the  oil and                                                                    
     gas tax  credit fund; relating to  annual statements by                                                                    
     producers and explorers;  relating to the determination                                                                    
     of annual  oil and gas production  tax values including                                                                    
     adjustments  based on  a percentage  of gross  value at                                                                    
     the  point   of  production  from  certain   leases  or                                                                    
     properties;    making   conforming    amendments;   and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
     The  Committee held  six meetings  with  the intent  of                                                                    
     framing the discussion  around SB 21 through  a lens of                                                                    
     evaluating  direct  impacts   to  the  TAPS  production                                                                    
     decline.    The  Committee  process  was  designed  for                                                                    
     fairness  and  equal   participation  by  majority  and                                                                    
     minority  members.     The  Committee  included  expert                                                                    
     consultant,  agency, the  Alaskan  public and  industry                                                                    
     testimony in the process  through many productive hours                                                                    
     and   publicly-available    meetings   evaluating   the                                                                    
     potential positive  and negative effects  on production                                                                    
     through   revised  Alaska   oil  tax   policy.     Most                                                                    
     importantly, the Committee provided  over five hours of                                                                    
     Committee time  for public testimony from  every LIO in                                                                    
     the  state,   as  well   as  telephonically   from  any                                                                    
     location.   Every  Alaskan that  chose  to address  the                                                                    
     Committee   was   warmly   welcomed   and   given   the                                                                    
     opportunity to share their support and/or concerns.                                                                        
                                                                                                                                
     The  Committee  has  arrived at  several  key  findings                                                                    
     after completing  the process  of evaluating SB  21 and                                                                    
     the effects of oil tax on production.  They include:                                                                       
   · Regarding oil revenue that funds the vast majority of                                                                      
     governmental functions for the people of Alaska, there                                                                     
     are many factors in which the State has little                                                                             
     control, including the price of North Slope oil.                                                                           
     Total government take through oil taxation is the only                                                                     
     lever under the control of the people of Alaska.                                                                           
   · The ACES tax structure has likely contributed to                                                                           
     advancing the decline of oil production and throughput                                                                     
     in TAPS, primarily due to a lack of competitiveness                                                                        
     with other OEDC producing regions.                                                                                         
   · When evaluating with increased production as a primary                                                                     
     objective, ACES credits should have been more                                                                              
     specifically directed toward projects resulting in                                                                         
     production and less toward general spending.                                                                               
   · Specific incentives and a competitive oil tax regime                                                                       
     in Alaska will likely result in additional production-                                                                     
     related spending.                                                                                                          
   · There has been a direct correlation in other OEDC                                                                          
     producing regions between production-related spending                                                                      
     and increased production.                                                                                                  
   · Current fiscal spending policies appear to have an                                                                         
     adverse effect on the business climate and willingness                                                                     
     to invest in the State of Alaska.  Policies must                                                                           
     deliver the clear message to the business community                                                                        
     that Alaska will not continue taxing to fund                                                                               
     unsustainable levels of government spending.                                                                               
   · Although SB 21 is an adequate platform from which a                                                                        
     respectful dialogue can begin, in the current form the                                                                     
     bill may not adequately provide production credit                                                                          
     incentives and opportunities; a level revenue                                                                              
     proportion for Alaskans; and protections for Alaska                                                                        
     hire and re-investment.                                                                                                    
                                                                                                                                
     The Committee's intent  to pass the bill  to the Senate                                                                    
     Resources Committee  in the  original form  for further                                                                    
     processing is  in no  way an  expression of  support by                                                                    
     Committee members for SB 21  in current form.  In fact,                                                                    
     most members  have expressed  concern for  key concepts                                                                    
     that  would require  revision prior  to supporting  the                                                                    
     bill as it moves through the legislative process.                                                                          
                                                                                                                                
     Key concerns  being passed through this  letter with an                                                                    
     expectation  of consideration  moving  forward will  be                                                                    
     communicated in two sections.   The first section below                                                                    
     includes throughput-related Committee recommendations:                                                                     
                                                                                                                                
   · Evaluate  providing a guarantee of investment in                                                                           
     Alaska and a further incentive for stemming production                                                                     
     decline from leases or properties north of 68 degrees                                                                      
     North latitude by fixing the amount of production used                                                                     
     in determining the reasonable transportation costs to                                                                      
     determine transportation deduction costs for pipelines                                                                     
     and gas treatment plants under the Oil and Gas                                                                             
     Production Tax and Oil Surcharge, AS 43.55, so that                                                                        
     producers receive a benefit for increased oil                                                                              
     production and throughput in the Trans Alaska Pipeline                                                                     
     System but incur a corresponding limitation on                                                                             
     deductions due to throughput declines after December                                                                       
     31, 2015.                                                                                                                  
   · Evaluate expanding the application of the Gross                                                                            
     Revenue Exclusion in units formed before 2003 (Legacy                                                                      
     Areas).  The Senate Resources Committee should                                                                             
     specifically inquire about expansions of existing                                                                          
     Participating Areas, increasing recovery factors in                                                                        
     existing Participating Areas, and Participating Areas                                                                      
     that contain oil with an API gravity of 20 degrees or                                                                      
     less.                                                                                                                      
   · Evaluate specific production-related credits allowed                                                                       
     under ACES for inclusion in SB 21 as a direct                                                                              
     incentive for costs that deliver production.  Require                                                                      
     that credits are charged against actual production to                                                                      
     eliminate currently-existing negative revenue                                                                              
     liability to the State.                                                                                                    
                                                                                                                                
     The Committee  is united  in several  philosophies that                                                                    
     are  also recommendations  to be  considered in  SB 21,                                                                    
     not related to throughput, including:                                                                                      
   · Firm incentives for Alaska Hire and Alaska Purchase,                                                                       
                                                                                                                                
4:31:14 PM                                                                                                                    
CO-CHAIR MICCICHE commented that Senator Dunleavy and he are                                                                    
interested in evaluating a program for incentivizing Alaska hire                                                                
and Alaska purchase.                                                                                                            
                                                                                                                                
   · Evaluating significant and specific incentives for                                                                         
     unconventional and heavy oil,                                                                                              
   · Evaluating a production credit system for producers                                                                        
     willing to provide propane fuels for the people of                                                                         
     rural Alaska in areas unlikely to receive natural gas                                                                      
     distribution if/when a natural gas pipeline is                                                                             
     constructed, and                                                                                                           
   · Evaluating employing progressivity as a tool to level                                                                      
     the proportion of take for Alaskans across the various                                                                     
     oil price environments.                                                                                                    
                                                                                                                                
     Although  not supported  unanimously by  the Committee,                                                                    
     yet  in  the  spirit  of  fairness  for  all  Committee                                                                    
     members,  the Minority  Committee member  has requested                                                                    
     the  following considerations  to  be  passed onto  the                                                                    
     Senate Resources Committee:                                                                                                
   · Evaluate a time limit into the future for the 20%                                                                          
     Gross Revenue Exclusion.                                                                                                   
   · Evaluate removing the Net Operating Loss provision in                                                                      
     SB 21.                                                                                                                     
   · Evaluate adding a 10% minimum gross tax at the gross                                                                       
     value at the point of production.                                                                                          
   · Consider progressivity as the price of oil varies.                                                                         
                                                                                                                                
     The Senate  Special Committee on Trans  Alaska Pipeline                                                                    
     System (TAPS)  Throughput will  continue to  convene to                                                                    
     identify and  evaluate additional  mitigation solutions                                                                    
     for operational and  regulatory TAPS production-related                                                                    
     obstacles in  the future.  The  Committee looks forward                                                                    
     to the constructive  dialogue and additional processing                                                                    
     that will  occur within the  Legislature related  to SB
     21 the remainder of this session.                                                                                          
                                                                                                                                
4:32:53 PM                                                                                                                    
CO-CHAIR MICCICHE said the letter would be respectively                                                                         
submitted to the Senate Resources Committee on February 7, 2013.                                                                
                                                                                                                                
CO-CHAIR MICCICHE called for a vote on the accompanying Letter                                                                  
of Intent.                                                                                                                      
                                                                                                                                
A roll call vote was taken. Senators Fairclough, McGuire,                                                                       
Dunleavy, and Micciche voted in favor of adopting the Letter of                                                                 
Intent  and  Senator Gardner  voted  against  it. Therefore,  the                                                               
motion was passed by a 4:1 vote.                                                                                                
                                                                                                                                
CO-CHAIR MICCICHE summarized  that both the Letter  of Intent and                                                               
SB 21  have passed  from committee. He  noted that  all committee                                                               
members see  room for improvement for  SB 21 as it  moves through                                                               
the   process.     He   said  SB   21   passes  with   individual                                                               
recommendations,  attached  fiscal  notes, and  the  accompanying                                                               
Letter of Intent.                                                                                                               
                                                                                                                                
He thanked  the committee members, the  administration, and staff                                                               
for their hard work on SB 21.                                                                                                   
                                                                                                                                
SENATOR  GARDNER reiterated  that  Co-chair Micciche  has done  a                                                               
good job  leading the  committee. She said  her vote  against the                                                               
letter was due to being unfamiliar with the content.                                                                            
                                                                                                                                
CO-CHAIR    MICCICHE   stressed    that   the    most   important                                                               
accomplishment  was to  begin  a  dialogue on  a  bill that  will                                                               
require  further  hard work.  He  thanked  the public  for  their                                                               
testimony.                                                                                                                      

Document Name Date/Time Subjects
SB 21 DOR Responses to Sen. Gardner's questions 2-7-13.PDF STTP 2/7/2013 3:30:00 PM
SB 21
SB 21 amendments 2-7-13.PDF STTP 2/7/2013 3:30:00 PM
SB 21
SB 21 Letter of Intent.PDF STTP 2/7/2013 3:30:00 PM
SB 21