Legislature(2011 - 2012)Anch LIO Rm 220

03/21/2011 01:00 PM FINANCE


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Audio Topic
01:03:39 PM Start
01:05:09 PM HB110
04:15:35 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- HELD IN ANCHORAGE --
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 21, 2011                                                                                            
                         1:03 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:03:39 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the  House Finance Committee meeting                                                                    
to order at 1:03 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Reggie Joule                                                                                                     
Representative Mark Neuman                                                                                                      
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative  Mike Hawker;  Mark  Langland, CEO,  Northrim                                                                    
Bank;  Jim Jansen,  Chief  Executive  Officer, Lynden  Inc.;                                                                    
Mark  Hylen, Owner,  Beacon Occupational  Safety; Jim  Egan,                                                                    
Executive   Director,  Commonwealth   North;  Tom   Maloney,                                                                    
Resource  Development  Council;   Kevin  Durling,  Petroleum                                                                    
Equipment  and  Services  Inc.,  Anchorage;  Peter  Macksey,                                                                    
Steelfab,  Anchorage;  Doug   Smith,  Little  Red  Services;                                                                    
Steven   Pratt,  Consumer   Energy   Alliance  Alaska;   Ben                                                                    
Cleveland,  Vice President,  Peak Oilfield  Service Company;                                                                    
Jeff  Lentfer, Midas  Alaska;  Edward  Gohr, Delta  Leasing;                                                                    
Dana  Pruhs,  President,  Pruhs Construction  Company;  Lynn                                                                    
Johnson,  Dowland-Bach  Corporation;  Dave  Hebert,  General                                                                    
Manager, Nabors  Alaska Drilling;  Keith Silver,  The Silver                                                                    
Agency,   Anchorage;   Linda   Leary,   President,   Carlile                                                                    
Transportation    Systems,    Anchorage;   Scott    Hawkins,                                                                    
President,   Advanced  Supply   Chain  International;   Lisa                                                                    
Reider,  Consulting Engineer;  Dave  Harbor, Anchorage;  Joe                                                                    
Beedle,  President,   Northrim  Bank;  Mr.   Aves  Thompson,                                                                    
Executive  Director,  Alaska Trucking  Association;  Maynard                                                                    
Tapp, Hawk Consultants.                                                                                                         
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
                                                                                                                                
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HOUSE BILL NO. 110                                                                                                            
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
1:05:09 PM                                                                                                                    
                                                                                                                                
MARK LANGLAND,  CEO, NORTHRIM BANK, stressed  the connection                                                                    
between the economy and the  banking business. He noted that                                                                    
oil was  the driving  force of  Alaska's economy.  He opined                                                                    
that the  responsibility for insuring the  prominence of the                                                                    
strong oil industry  rested with the state.  He stressed the                                                                    
leadership's  responsibility   to  ensure  that   jobs  were                                                                    
maintained  in   Alaska.  He  believed  that   oil  must  be                                                                    
discovered,  developed, and  produced. He  acknowledged that                                                                    
oil  production was  declining.  He  encouraged further  oil                                                                    
production. He  stressed budget  discipline. He  pointed out                                                                    
the billions of  dollars' worth of oil in the  ground. If $4                                                                    
billion  to  replace oil  revenue  was  replaced by  citizen                                                                    
taxation, each  individual would pay $14  thousand per year.                                                                    
He suggested a  fiscal plan that addressed  both revenue and                                                                    
budget  discipline.  He stated  that  the  Alaska Clear  and                                                                    
Equitable Share (ACES)  was harmful to the  oil industry. He                                                                    
encouraged  better  alignment  between  the  state  and  oil                                                                    
industry.  He suggested  working with  companies with  world                                                                    
class  resources  and talents.  He  urged  the committee  to                                                                    
restructure  ACES.   He  maintained   that  Alaska   was  an                                                                    
unpopular place to invest in oil.                                                                                               
                                                                                                                                
1:10:35 PM                                                                                                                    
                                                                                                                                
Representative  Gara referred  to the  "Fraser Report."  The                                                                    
study   concluded  that   76   percent   of  the   companies                                                                    
interviewed  viewed  Alaska  as  a  favorable  place  to  do                                                                    
business.  The  current oil  tax  was  not a  deterrent  for                                                                    
investors.  Mr. Langland  stated that  he had  not seen  the                                                                    
Fraser Report and thus was unable to comment.                                                                                   
                                                                                                                                
Co-Chair  Stoltze  commented  on the  subjectivity  of  some                                                                    
surveys.  Mr. Langland  highlighted studies  concluding that                                                                    
Alaska was one  of the top taxing entities in  the world. He                                                                    
noted  that various  surveys  viewing  taxes and  regulatory                                                                    
regimes regard the process in  Alaska as difficult. The cost                                                                    
of  producing   oil  has  increased  considerably   and  all                                                                    
regulatory costs  reduce the total opportunity  for profits,                                                                    
which reduce  investment. He argued  that the  situation was                                                                    
simple.  He   stressed  that  maximizing   investment  would                                                                    
maximize oil production.                                                                                                        
                                                                                                                                
1:13:01 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked if business activities  such as                                                                    
new business  and home loans  had increased or  decreased in                                                                    
the  last few  years. Mr.  Langland replied  decreased.   He                                                                    
expressed that the current loan  demand was the lowest since                                                                    
the  crisis in  the mid-1980s.  He noted  that the  national                                                                    
financial situation  played a part. Oil  taxation relates to                                                                    
future investments and the view of Alaska's economy.                                                                            
                                                                                                                                
1:14:02 PM                                                                                                                    
                                                                                                                                
Vice-chair Fairclough  asked about foreclosures  and savings                                                                    
accounts. She wondered  if Alaskans were able  to save their                                                                    
money  and   she  also  queried  capital   investments.  Mr.                                                                    
Langland  replied  that  Alaska   had  some  of  the  fewest                                                                    
foreclosures  in  the  country.   He  pointed  out  a  small                                                                    
increase in  foreclosures based on quarters.  He stated that                                                                    
the  trend was  less than  comfortable. He  cited that  both                                                                    
working  capital and  capital  investment  demand was  down,                                                                    
because of business interest.                                                                                                   
                                                                                                                                
1:15:56 PM                                                                                                                    
                                                                                                                                
Representative Neuman wondered about  changes in the oil and                                                                    
gas  industry. Mr.  Langland  shared a  story  about a  loan                                                                    
officer  who had  chosen to  invest in  in North  Dakota. He                                                                    
stated that  most risks have  increased. He stressed  that a                                                                    
long-term view led  to the greatest concern.  He pointed out                                                                    
that  Alaska  was the  only  state  with only  one  industry                                                                    
supplying all  the money  and nearly 50  percent of  jobs to                                                                    
the state.  He stressed that  Alaska needed to  look forward                                                                    
in the economy.                                                                                                                 
                                                                                                                                
1:19:24 PM                                                                                                                    
                                                                                                                                
Representative Hawker  clarified that the Fraser  Report was                                                                    
an opinion survey  of industry trade groups, and  it was not                                                                    
commissioned  by Department  of Revenue  (DOR). Participants                                                                    
in the survey are added to a drawing for a prize of $1000.                                                                      
                                                                                                                                
Representative   Doogan    relayed   the    statement   that                                                                    
"government's  appetite   for  revenue  is   unlimited."  He                                                                    
wondered  how the  Alaska Permanent  Fund factored  into the                                                                    
statement.  Mr.  Langland  was   unable  to  understand  the                                                                    
question.                                                                                                                       
                                                                                                                                
1:20:43 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  attempted  to  answer  the  question.  He                                                                    
proposed  that if  the Alaska  Permanent Fund  had not  been                                                                    
created,  then  the  money  might have  been  spent  by  the                                                                    
government. Mr.  Langland agreed that most  governments have                                                                    
an insatiable appetite.                                                                                                         
                                                                                                                                
1:21:26 PM                                                                                                                    
                                                                                                                                
JIM  JANSEN, CHIEF  EXECUTIVE OFFICER,  LYNDEN INC.,  stated                                                                    
that 20  percent of his  business was related to  oil. Since                                                                    
2007, business  for his company  in the oil sector  was flat                                                                    
to down. The downward trend  and reduced productivity of oil                                                                    
were very  concerning to him.  Other oil producing  areas in                                                                    
the  world were  booming  with  the high  price  of oil.  He                                                                    
remarked that Alaska is down,  because of the methods of oil                                                                    
taxation.  He  pointed  out  that   there  was  very  little                                                                    
engineering  and seismic  activity,  which  proved that  the                                                                    
industry  was  not  investing. He  remarked  that  companies                                                                    
would  invest in  locations with  the best  possible return.                                                                    
Oil  companies  would not  invest  in  Alaska if  the  total                                                                    
government take was in excess  of 80 percent. He stated that                                                                    
Lynden operates  a fleet of  aircraft, and the  oil activity                                                                    
for  the airplanes  was nonexistent.  He  stressed that  his                                                                    
company was  going to other  countries to  conduct business.                                                                    
He  talked  about  Lynden's current  international  projects                                                                    
that were led  by the availability of business  that did not                                                                    
exist  here  in  Alaska.  He  mentioned  the  value  of  tax                                                                    
credits.   He   stated   that  ACES   countered   meaningful                                                                    
investment opportunities. He stressed  the urgency to regain                                                                    
Alaska's reputation as a positive location for investment.                                                                      
                                                                                                                                
1:27:31 PM                                                                                                                    
                                                                                                                                
MARK HYLEN,  OWNER, BEACON OCCUPATIONAL SAFETY,  stated that                                                                    
his  company  provided  medical  and  safety  services.  His                                                                    
customers included contractors working  in the oil industry.                                                                    
He explained  that his clientele  numbers had  declined over                                                                    
the past few months, due  to limited drilling activities. He                                                                    
stated  that  new  projects   seem  virtually  obsolete.  He                                                                    
pointed   out   that   his  members   represent   suppliers,                                                                    
engineers, accountants, map  makers, hotels, lawyers, banks,                                                                    
marketing  companies,  insurance  companies and  many  other                                                                    
services  that never  directly contract  with a  producer or                                                                    
work on the  North Slope. He shared  his personal experience                                                                    
working in the North Slope.  He stressed the urgency for oil                                                                    
and gas tax reform in  Alaska. He encouraged modification of                                                                    
ACES.                                                                                                                           
                                                                                                                                
1:33:40 PM                                                                                                                    
                                                                                                                                
JIM  EGAN, EXECUTIVE  DIRECTOR,  COMMONWEALTH NORTH,  stated                                                                    
that  Commonwealth North  was a  non-partisan public  policy                                                                    
organization dedicated to  educating and informing Alaskans.                                                                    
He  stated that  the organization  supported a  reduction of                                                                    
the  oil production  tax progressivity  rate.  The board  of                                                                    
directors of  the organization established a  study group to                                                                    
examine whether Alaska's  tax structure required adjustment.                                                                    
The group  met weekly for 17  weeks of study. He  included a                                                                    
report  of   the  study  for  the   committee,  "Alaska  Oil                                                                    
Investment   Tax  Structure,   Establishing  a   Competitive                                                                    
Alaska"  (copy  on  file).  The study  was  not  a  research                                                                    
report, but  an examination of public  policy that surrounds                                                                    
issues  permeating   the  debate   over  Alaska's   oil  tax                                                                    
structure.  The study  concluded that  Alaska's economy  was                                                                    
built  primarily on  oil  production. He  noted a  deepening                                                                    
concern  among private  sector  Alaskans  regarding the  oil                                                                    
industry's ability  to stem  production declines  and retain                                                                    
jobs.  One  third  of  Alaskan   jobs  are  related  to  oil                                                                    
development and production in Alaska.                                                                                           
                                                                                                                                
1:37:59 PM                                                                                                                    
                                                                                                                                
Mr. Egan  continued to discuss  the findings of  his report.                                                                    
With  ACES, when  the price  of oil  increases revenues  for                                                                    
producers remain relatively flat.  He stressed the necessity                                                                    
to  achieve a  competitive return.  While the  progressivity                                                                    
calculation in  ACES has substantially increased  revenue to                                                                    
the state  treasury, it appears  to have  decreased Alaska's                                                                    
competitiveness  against  other domestic  and  international                                                                    
basins, thereby  creating a  disincentive for  investment in                                                                    
Alaska relative  to many of  those basins. He stated  that a                                                                    
competitive  return for  the oil  industry is  contingent on                                                                    
the amount of capital tied up in generating the return.                                                                         
                                                                                                                                
Mr.  Egan  added that  the  mentioned  study concluded  that                                                                    
increasing  the  rate of  return  for  major oil  producer's                                                                    
investment  dollars  will   make  Alaska  more  competitive.                                                                    
Another  conclusion established  that  trading some  current                                                                    
oil tax revenue for longer  term production from North Slope                                                                    
fields  was  in  the  best  interest  of  all  Alaskans.  He                                                                    
suggested that  ACES must evolve  to encourage  oil profits.                                                                    
He opined that the progressivity  rate should be reduced and                                                                    
or  capped. The  governor and  legislature must  ensure that                                                                    
oil   production  is   given  the   highest  priority.   The                                                                    
legislature  must   pass  revisions   to  ACES   this  year.                                                                    
Commonwealth  North  is  a  deliberative  organization  that                                                                    
historically does  not make "knee-jerk" responses  to policy                                                                    
issues.  He   hoped  to  offer   a  consistent   and  unique                                                                    
perspective with the report  provided. A significant portion                                                                    
of  the report  was  dedicated to  developing continuity  of                                                                    
data that was  presented to the group. The goal  of the data                                                                    
selection  was to  analyze the  sources of  information from                                                                    
study presenters  to ascertain  how information was  used to                                                                    
support  on   conclusion  or  another.  He   encouraged  the                                                                    
utilization  of the  study's appendix  to reach  conclusions                                                                    
and  educate  Alaskans.  Alaska must  restrain  the  current                                                                    
momentum of  decline in  oil production  by creating  a more                                                                    
attractive   and  competitive   environment  for   expanding                                                                    
investment and reinvestment by the oil industry.                                                                                
                                                                                                                                
1:44:14 PM                                                                                                                    
                                                                                                                                
Mr.  Egan   stated  that  the   first  step   required  when                                                                    
encouraging   investment  and   reinvestment   of  the   oil                                                                    
industry,  is lowering  the  progressivity  rate to  reflect                                                                    
Alaska's  desire   to  improve   the  potential   return  on                                                                    
investment for Alaska's producers.  He pointed out the graph                                                                    
included in the report, and  gave some examples displayed in                                                                    
the  graph. The  graph  illustrates flat  oil production  on                                                                    
Alaska's North Slope.                                                                                                           
                                                                                                                                
1:45:44 PM                                                                                                                    
                                                                                                                                
Mr. Egan  explained that the  graph reflects changes  in the                                                                    
DOR  project  forecasting  after  the passage  of  ACES.  He                                                                    
stated that ACES compared  internationally. He remarked that                                                                    
it was difficult to compare  Alaska to other states, because                                                                    
of  complicated tax  structures.  The  study eliminated  the                                                                    
inclusion  of  federal  dollars in  the  comparison  between                                                                    
states.                                                                                                                         
                                                                                                                                
Mr.  Egan  continued  pointed  out  various  tax  structures                                                                    
presented   for  consideration   by   the  legislature.   He                                                                    
encouraged  legislators  to  read  the  various  comparisons                                                                    
provided  in  the  study.  He  believed  that  the  language                                                                    
employed in the study targeted the Alaskan needs.                                                                               
                                                                                                                                
1:48:11 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze requested electronic  copies of the report.                                                                    
He  asked for  a  public  version of  the  report. Mr.  Egan                                                                    
replied   that   the   report    would   be   published   on                                                                    
www.commonwealthnorth.org.                                                                                                      
                                                                                                                                
1:49:49 PM                                                                                                                    
                                                                                                                                
TOM   MALONEY,  RESOURCE   DEVELOPMENT  COUNCIL,   expressed                                                                    
concern  with  the current  state  of  the oil  industry  in                                                                    
Alaska. He  pointed out that  the decline in  oil production                                                                    
will  lead  to continued  decline  in  the North  Slope  oil                                                                    
industry.  He  pointed  out that  the  Alaska  oil  industry                                                                    
recently   lost  one   thousand   production  related   jobs                                                                    
according to a  report published by the  Department of Labor                                                                    
and  Workforce  Development  (DOL).  He  proposed  that  the                                                                    
solution was to increase drilling.  He noted that the number                                                                    
of exploratory  wells had  decreased considerably  and those                                                                    
wells create  a significant  number of jobs.  New investment                                                                    
is required  to minimize  decline of production.  He pointed                                                                    
out that  policy must change  to reflect the  important role                                                                    
that oil  has in  Alaska's economy.  He informed  that AOGCC                                                                    
reports were used  in his analysis. He pointed  out that the                                                                    
federal  government  was not  helping  to  encourage of  oil                                                                    
production.  He  cautioned that  less  oil  in the  pipeline                                                                    
might hasten  the day that  the pipeline would be  forced to                                                                    
shut down. He spoke of forecasts and reality.                                                                                   
                                                                                                                                
1:57:43 PM                                                                                                                    
                                                                                                                                
Mr. Maloney  continued to discuss challenges  related to the                                                                    
oil industry.  He stressed that  many Alaskans  were leaving                                                                    
Alaska  after  receiving   their  education.  He  encouraged                                                                    
education incentives.  He stated  that "there  is a  need to                                                                    
drill  to pay  the bills."  He continued  that "to  keep the                                                                    
dough, we  need the oil  flow." He stressed that  Cook Inlet                                                                    
production  was  down 95  percent  from  its peak  40  years                                                                    
prior. He encouraged private  investment to encourage future                                                                    
employment.                                                                                                                     
                                                                                                                                
1:59:45 PM                                                                                                                    
                                                                                                                                
KEVIN  DURLING,  PETROLEUM   EQUIPMENT  AND  SERVICES  INC.,                                                                    
ANCHORAGE,  spoke  about  layoffs imminent  in  his  company                                                                    
which  are directly  related to  the activity  by the  major                                                                    
operators on  the North  Slope. He  stated that  he released                                                                    
over 10 percent  of his work force last year  and another 20                                                                    
percent this  year. He noted  that the top  industry leaders                                                                    
will  not  continue  to  invest  in  the  state  without  an                                                                    
overhaul  of the  current  tax regime.  He  advocated for  a                                                                    
change.                                                                                                                         
                                                                                                                                
2:02:17 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough   requested  comment   regarding  the                                                                    
argument that the  tax structure is attached  to drilling or                                                                    
production. Mr.  Durling responded that tens  of millions of                                                                    
dollars  invested  in  two drilling  rigs  were  sitting  in                                                                    
Vancouver Washington. Each rig would  apply an excess of 100                                                                    
employees.  He  believed  that an  improvement  in  the  tax                                                                    
regime  would  allow the  comfort  needed  to transport  the                                                                    
drilling  rigs to  Alaska. The  equipment is  merely waiting                                                                    
for the opportunity to drill.                                                                                                   
                                                                                                                                
2:04:12 PM                                                                                                                    
                                                                                                                                
PETER MACKSEY, STEELFAB, ANCHORAGE,  stated that the current                                                                    
tax  policy has  had a  negative effect  on his  company. He                                                                    
noted  that his  business  changes throughout  the year  and                                                                    
does not  rely entirely  on the  oil industry.  He explained                                                                    
his  business  structure and  the  benefit  of oil  industry                                                                    
investment on employment. Oil  fields provided stability for                                                                    
his  company   during  the  last  ten   years.  His  company                                                                    
constructs the barrels used to  hold the oil. He performed a                                                                    
calculation  regarding his  company and  oil production.  He                                                                    
commented on media  reports about recent gains  for the film                                                                    
industry in  Alaska. He understood  that Alaska  offered the                                                                    
greatest  tax  incentives  in  the   country  for  the  film                                                                    
industry.  He  preferred  similar  advantages  for  the  oil                                                                    
industry.                                                                                                                       
                                                                                                                                
2:09:37 PM                                                                                                                    
                                                                                                                                
DOUG SMITH,  LITTLE RED  SERVICES, spoke  to the  benefit of                                                                    
tax  credits for  oil companies.  He explained  the services                                                                    
provided by his  company, which he described  as a barometer                                                                    
of activity for oil production.  He noted that his company's                                                                    
activity  is  down since  2008.  The  lack of  activity  and                                                                    
wellwork  led  to  the  loss of  11  employees  and  benefit                                                                    
reductions.  Incremental  oil  rate improvement  provided  a                                                                    
focus  point  for  his  company. He  pointed  out  that  the                                                                    
majority  of   jobs  serving   the  oil   industry  included                                                                    
maintenance. The maintenance of  the facilities is important                                                                    
and  maintenance needs  are declining.  He compared  the two                                                                    
decisions  regarding the  tax credits.  He  advocated for  a                                                                    
competitive environment to allow  industry an opportunity to                                                                    
find middle ground. He agreed  with the testimony offered by                                                                    
Great   Bear  Petroleum.   He  sought   an  opportunity   to                                                                    
compromise with the  oil industry as the  state is dependent                                                                    
on throughput in TAPS.                                                                                                          
                                                                                                                                
2:14:39 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  explained that the committee  did not lack                                                                    
interest   in   questioning   the   testifiers,   but   time                                                                    
constraints prevented them.                                                                                                     
                                                                                                                                
2:14:55 PM                                                                                                                    
                                                                                                                                
STEVEN PRATT,  CONSUMER ENERGY ALLIANCE ALASKA,  spoke about                                                                    
his  alliance,   which  is  a  nonprofit   organization.  He                                                                    
stressed  the need  to provide  incentive to  oil companies,                                                                    
which will reinvigorate the economic  security in Alaska. He                                                                    
read  a letter  regarding the  issue. He  realized that  all                                                                    
members of  the committee  recognized the  potential effects                                                                    
on the economy of decreased  oil production. He commented on                                                                    
a resolution  passed by the Consumer  Energy Alliance Alaska                                                                    
that he was asked to  present to the legislature. Aside from                                                                    
state  revenue, over  30 percent  of Alaskans  are dependent                                                                    
upon oil  and gas development  for employment. For  the long                                                                    
term,  alliance members  are  concerned  with declining  oil                                                                    
exploration and  development in the state  and the potential                                                                    
impacts on  the economy. In  a fiscal sense,  state spending                                                                    
increases  in the  last decade  combined with  declining oil                                                                    
production  provide   additional  sources  of   concern.  He                                                                    
offered  to  provide  a  copy   of  the  resolution  to  the                                                                    
committee.  He  encouraged  the passage  of  HB  110,  which                                                                    
modifies  the   progressivity  structure  of   Alaska's  tax                                                                    
regime.                                                                                                                         
                                                                                                                                
2:18:50 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze discussed distribution of documents.                                                                           
                                                                                                                                
2:19:13 PM                                                                                                                    
                                                                                                                                
BEN  CLEVELAND,   VICE  PRESIDENT,  PEAK   OILFIELD  SERVICE                                                                    
COMPANY,  stated that  his company  is owned  by Cook  Inlet                                                                    
Regent Corporation  and Nabors Alaska Drilling.  The company                                                                    
was in  business for 24  years with  a record of  80 percent                                                                    
local hire.  He advocated  strongly for  changes in  the oil                                                                    
and gas tax  regime. He stated that ACES  reclaims a greater                                                                    
than  necessary take  for the  state. Since  the passage  of                                                                    
ACES,  Peak  Outfield  Service   experienced  a  45  percent                                                                    
decline in revenue. The oil  industry is the backbone of the                                                                    
state's economy.                                                                                                                
                                                                                                                                
2:21:14 PM                                                                                                                    
                                                                                                                                
AT EASE                                                                                                                         
                                                                                                                                
2:33:16 PM                                                                                                                    
                                                                                                                                
RECONVENED                                                                                                                      
                                                                                                                                
JEFF  LENTFER, MIDAS  ALASKA,  provided  his opinions  about                                                                    
ACES. He informed that he  was raised in Alaska and returned                                                                    
after college. He explained that  his business had no direct                                                                    
tie  to oil  companies, but  functioned downstream  from the                                                                    
oil  industry and  relied completely  on  them. He  recalled                                                                    
tough  times  resulting from  low  oil  prices in  the  late                                                                    
eighties and early  nineties. He did not wish  to see Alaska                                                                    
enter  the same  situation. He  expressed concern  about the                                                                    
lack of development  in Alaska given the high  price of oil.                                                                    
He  stressed that  the  state  must act  now  to create  the                                                                    
needed incentive.  He cited the  need for tax  incentives to                                                                    
encourage new  investment, such  as those  seen in  the film                                                                    
and cruise  ship industries. He  noted that  other companies                                                                    
are also concerned  about the current tax  laws. He expected                                                                    
limited development  if the tax  structure is  unchanged. He                                                                    
expressed confusion regarding the  $2 billion tax break that                                                                    
is  reported.  He  thought  that   without  the  tax  break,                                                                    
additional  development would  not occur.  He stressed  that                                                                    
the surplus  currently enjoyed by  the state is a  result of                                                                    
oil industry.                                                                                                                   
                                                                                                                                
2:45:59 PM                                                                                                                    
                                                                                                                                
EDWARD GOHR,  DELTA LEASING, provided  a history.  He worked                                                                    
in  the oil  industry previously.  His focus  was a  loss of                                                                    
jobs  in the  state  without  a tax  incentive  for the  oil                                                                    
industry.  Capital projects  allow  for new  hires. The  oil                                                                    
companies  have  a decision  making  process  and they  move                                                                    
their business to the areas  of less risk. The oil companies                                                                    
are  currently  choosing  other locations.  He  mentioned  a                                                                    
friend whose  kids want to  come to Alaska, but  are unable,                                                                    
because  the jobs  are  not available.  He  spoke about  the                                                                    
permitting process in North Dakota.  He noted that the drill                                                                    
rigs are limited. The forecast  lessened by six percent this                                                                    
year and  will continue to  do so  for many years  without a                                                                    
significant change  in the tax  structure. He  advocated for                                                                    
lower taxes for the oil industry and jobs for Alaskans.                                                                         
                                                                                                                                
2:51:34 PM                                                                                                                    
                                                                                                                                
DANA   PRUHS,   PRESIDENT,   PRUHS   CONSTRUCTION   COMPANY,                                                                    
discussed  his company  that employs  150  Alaskans with  an                                                                    
annual payroll  of over  $8 million.  He commented  that his                                                                    
greatest challenge  and preoccupation  was to  obtain enough                                                                    
work  to retain  the employees  that have  made his  company                                                                    
successful. He  stated that  he is  an Alaskan  business man                                                                    
without benefit from the oil  industry. He stated that he is                                                                    
unable to hire new people  as construction needs are low. He                                                                    
expressed concern  about the next generation  of Alaskans if                                                                    
changes  in  oil revenue  are  felt.  He believed  that  the                                                                    
proposed  change   in  the   tax  structure   would  provide                                                                    
incentive to oil companies  for exploration and development.                                                                    
He expressed  confusion about the lack  of urgency displayed                                                                    
by the  legislature. He supported  the passage of HB  110 or                                                                    
any   other  legislation   that  that   modified  ACES   and                                                                    
encouraged development  of non-unitized areas in  a positive                                                                    
manner.                                                                                                                         
                                                                                                                                
2:55:28 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough commented  that  a committee  process                                                                    
was in place and the  committee had worked tirelessly on the                                                                    
very important  issue. She added  that other  committees are                                                                    
also working on  the issue. The resource  committee also had                                                                    
the bill in  front of them. She understood  the urgency. She                                                                    
stated that the process was expedited.                                                                                          
                                                                                                                                
2:57:28 PM                                                                                                                    
                                                                                                                                
Mr. Pruhs  asserted that he  understood the process  and was                                                                    
not  picking  on the  committee.  He  discouraged a  special                                                                    
session to address the issue.  He expressed appreciation for                                                                    
the opportunity to testify on the issue.                                                                                        
                                                                                                                                
Co-Chair Stoltze  commented on prioritizing  the legislation                                                                    
presented to the House Finance Committee.                                                                                       
                                                                                                                                
2:58:25 PM                                                                                                                    
                                                                                                                                
LYNN JOHNSON, DOWLAND-BACH CORPORATION,  spoke in support of                                                                    
HB  110. He  informed that  his parents  owned the  business                                                                    
Alaska  Helicopters. He  recalled the  initial discovery  of                                                                    
oil  in  Prudhoe Bay  in  July  of  1968. He  supposed  that                                                                    
migration  of  workers  to  North   Dakota  might  occur  if                                                                    
exploration  in Alaska  did not  commence. He  explained his                                                                    
wish to  remain and prosper  in Alaska. He pointed  out that                                                                    
his company is  down 10 percent in employees  and 40 percent                                                                    
in revenues.  He noted  the substantial  loss of  high skill                                                                    
jobs  that were  easily transferable  to other  geographical                                                                    
areas.  The  declining  production and  throughput  of  TAPS                                                                    
might lead  to a shutdown  due to technical  problems, which                                                                    
would  lead  to further  loss  of  high skill  employees  in                                                                    
Alaska.  He pointed  out that  all Alaskans  are in  the oil                                                                    
business,  yet  the  state is  not  competitive  with  other                                                                    
basins.  Competition is  the driving  force of  business. He                                                                    
opined that  the progressivity  element in  ACES compromises                                                                    
Alaska's ability  to become competitive in  the national and                                                                    
global markets. High oil  prices combined with progressivity                                                                    
minimize investment incentive.                                                                                                  
                                                                                                                                
Mr. Johnson  commented that  Norway's taxes  remain slightly                                                                    
higher than  ours, but the  company is government  owned. He                                                                    
acknowledged that  HB 100 was  not perfect, but  he believed                                                                    
that  its  implementation  would   improve  the  economy  in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
3:04:28 PM                                                                                                                    
                                                                                                                                
MAYNARD TAPP, HAWK CONSULTANTS, spoke  in support of HB 110.                                                                    
He  believed that  ACES halted  investment. He  remembered a                                                                    
partnership  between  the oil  industry  and  the state.  He                                                                    
wished to increase production to  improve the revenue stream                                                                    
for  Alaska.  He  invited   creative  thinking  and  further                                                                    
legislation to exceed  the goals of HB 110  and maintain the                                                                    
wealth  of   the  state.  He  acknowledged   that  the  past                                                                    
investment  also  resulted  in declines  in  production.  He                                                                    
encouraged legislation to solve the problem.                                                                                    
                                                                                                                                
Co-Chair Stoltze appreciated Mr. Tapp's advocacy.                                                                               
                                                                                                                                
3:07:43 PM                                                                                                                    
                                                                                                                                
DAVE HEBERT, GENERAL MANAGER,  NABORS ALASKA DRILLING, spoke                                                                    
in  support  of HB  110.  He  explained that  Nabors  Alaska                                                                    
Drilling  provided  oil  and   gas  drilling  and  work-over                                                                    
operations  on the  North Slope  and  across Alaska.  Nabors                                                                    
Alaska  Drilling  accepts  responsibility for  drilling  the                                                                    
discovery  and confirmation  wells  in  Prudhoe Bay.  Nabors                                                                    
Alaska  Drilling  was  the largest  drilling  contractor  in                                                                    
Alaska and  Nabors Industries is  the largest  land drilling                                                                    
contractor  in the  world.  He spoke  about  the decline  in                                                                    
operating  drilling rigs  for his  company.  The decline  in                                                                    
rigs translates to decline in jobs.                                                                                             
                                                                                                                                
3:13:22 PM                                                                                                                    
                                                                                                                                
Mr. Hebert  highlighted the  decline in  infield development                                                                    
drilling and work-over operation and export work.                                                                               
                                                                                                                                
Representative Gara  asked if  Nabors Alaska  Drilling owned                                                                    
the one  exploration rig drilling  on the North Slope.   Mr.                                                                    
Hebert  replied yes  and stated  that his  company conducted                                                                    
drilling operations for Brooks Range Petroleum.                                                                                 
                                                                                                                                
Representative Gara  asked for information  about additional                                                                    
exploration  rigs. Mr.  Hebert responded  that the  drilling                                                                    
performed  by  Brooks  Range  Petroleum  provided  the  only                                                                    
activity of its kind.                                                                                                           
                                                                                                                                
Representative Gara  recalled earlier testimony  citing that                                                                    
the number  of development  wells declined.  The information                                                                    
received   from  the   Alaska  Oil   and  Gas   Conservation                                                                    
Commission  (AOGCC) stated  that  exploration well  activity                                                                    
declined,  but  development and  service  wells  are at  the                                                                    
highest  level since  2005. Mr.  Hebert  responded that  the                                                                    
overall rig  activity had declined slightly  in Prudhoe Bay.                                                                    
He thought  that more  wells might be  drilled with  a fewer                                                                    
number of rigs.                                                                                                                 
                                                                                                                                
Representative Gara  reported rumors that Mr.  Hebert opined                                                                    
that the  legislature should  unify and  act. He  noted that                                                                    
many  different ideas  exist, yet  they  are different  from                                                                    
that  of  the  governor.   He  informed  that  the  governor                                                                    
introduced  HB   110,  yet  had  not   encouraged  differing                                                                    
viewpoints from others.                                                                                                         
                                                                                                                                
3:18:08 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough acknowledged  that  the governor  had                                                                    
not  ever come  to her  office  to work  on compromise.  She                                                                    
wondered  about the  cost of  repositioning a  drilling rig.                                                                    
She  asked  if Nabors  Alaskan  Drilling  was interested  in                                                                    
repositioning assets outside of  Alaska. She asked about the                                                                    
timeframe allotted to  the state prior to  shipping rigs out                                                                    
of  state.  Mr.  Hebert  responded that  some  rigs  can  be                                                                    
repositioned,  but  rigs located  in  Prudhoe  Bay were  not                                                                    
conducive to working in other  places. He stated that Nabors                                                                    
Alaskan  Drilling  was  looking  for  every  opportunity  to                                                                    
increase the market for the  underutilized drilling rigs. He                                                                    
estimated a  transportation cost of several  million dollars                                                                    
to relocate the rigs.                                                                                                           
                                                                                                                                
Vice-chair  Fairclough  asked  about   two  rigs  that  were                                                                    
reportedly positioned in Canada.                                                                                                
                                                                                                                                
Representative  Wilson asked  how many  jobs each  rig would                                                                    
provide.  Mr.  Hebert stated  that  a  typical drilling  rig                                                                    
employed approximately 50 people.                                                                                               
                                                                                                                                
Representative  Wilson asked  where the  employees work  who                                                                    
were formerly  employed on the  inactive drilling  rigs. Mr.                                                                    
Hebert replied that some now work in the Lower 48.                                                                              
                                                                                                                                
Representative  Wilson   stated  that  employees   might  be                                                                    
difficult to get back after people leave.                                                                                       
                                                                                                                                
3:21:43 PM                                                                                                                    
                                                                                                                                
Co-Chair Thomas asked if entire  families sometimes work for                                                                    
a  particular  oil  rig  in   the  Nabors  Alaskan  Drilling                                                                    
Company.   Mr.  Hebert   replied  no.   He  furthered   that                                                                    
approximately  80 percent  of the  company's work  force was                                                                    
Alaskan  based. He  stressed  the  company's preference  for                                                                    
instate hire.                                                                                                                   
                                                                                                                                
Co-Chair Thomas  asked if  Nabors Alaskan  Drilling operated                                                                    
at the Kensington Mine. Mr.  Hebert replied that his company                                                                    
facilitated drilling not mining.                                                                                                
                                                                                                                                
3:23:07 PM                                                                                                                    
                                                                                                                                
KEITH  SILVER,  THE  SILVER   AGENCY,  ANCHORAGE,  spoke  in                                                                    
support of  HB 110. He  claimed to be  a victim of  ACES. He                                                                    
explained that  he was laid off  due to a reduction  of work                                                                    
on  the North  Slope and  a  reduction of  support staff  in                                                                    
Anchorage. He believed that Alaska  must be competitive with                                                                    
other jurisdictions in order  to attract investment dollars.                                                                    
He suggested  that ACES be  changed to Fair  and Competitive                                                                    
Tax (FACT).                                                                                                                     
                                                                                                                                
3:27:22 PM                                                                                                                    
                                                                                                                                
Representative   Gara  questioned   the   accuracy  of   the                                                                    
statement  that  high oil  prices  do  not benefit  the  oil                                                                    
companies.  He noted  that ACES  was  devised to  have a  25                                                                    
percent tax  and $30 in  profits before  progressivity kicks                                                                    
in.  Mr.  Silver disagreed.  He  believed  that if  the  oil                                                                    
companies profited under  ACES, the state would  see new oil                                                                    
exploration as a result.                                                                                                        
                                                                                                                                
LINDA  LEARY,  PRESIDENT,  CARLILE  TRANSPORTATION  SYSTEMS,                                                                    
ANCHORAGE,  testified in  support of  HB 110.  She explained                                                                    
that  she  moved  to Alaska  upon  graduation  from  college                                                                    
because  there   were  jobs   available.  She   spoke  about                                                                    
downsizing  in her  company resulting  from the  downturn in                                                                    
the economy.                                                                                                                    
                                                                                                                                
3:32:53 PM                                                                                                                    
                                                                                                                                
Ms. Leary  mentioned that her  company endured a  three year                                                                    
long wage  freeze. She informed  that she had seen  oil rigs                                                                    
moved from Alaska  to Texas. She spoke  about the prosperity                                                                    
in North  Dakota. She mentioned witnessing  65 drilling rigs                                                                    
during a  120 mile trip  in North Dakota. She  believed that                                                                    
Alaska   could   experience   the   same   prosperity.   She                                                                    
recommended altering  the viewpoint  of the oil  industry in                                                                    
Alaska. She  added that her  company would benefit  from the                                                                    
simplicity  of  retaining  their equipment  in  Alaska.  She                                                                    
encouraged a sense of urgency  regarding new legislation and                                                                    
Alaska's  tax   regime.  She  recommended   against  further                                                                    
studies  to  determine  the  effects  of  the  oil  and  gas                                                                    
industry.  She advocated  for working  with the  industry to                                                                    
promote Alaska.                                                                                                                 
                                                                                                                                
3:38:36 PM                                                                                                                    
                                                                                                                                
SCOTT    HAWKINS,   PRESIDENT,    ADVANCED   SUPPLY    CHAIN                                                                    
INTERNATIONAL,  spoke in  support  of HB  110. He  explained                                                                    
that  his company  specialized in  supply chain  management,                                                                    
procurement  and warehouse  operations in  support of  North                                                                    
Slope operators. He  expressed pride in the  jobs related to                                                                    
oil and gas  extraction. He stated that the  future of those                                                                    
jobs  was uncertain,  and the  trends were  discouraging. He                                                                    
was discouraged by the declining  investment. He pointed out                                                                    
the  consensus building  in a  diverse manner  regarding the                                                                    
tax increases  of 2007.  He opined  that the  increases were                                                                    
not working because they suppressed investment in Alaska.                                                                       
                                                                                                                                
Mr.  Hawkins  encouraged  a  sense  of  urgency.  Oil  field                                                                    
exploration  and new  investment  are required  to fill  the                                                                    
pipeline and maintain viability of the resource.                                                                                
                                                                                                                                
3:46:31 PM                                                                                                                    
                                                                                                                                
LISA REIDER,  CONSULTING ENGINEER,  testified in  support of                                                                    
HB 110. She  stated that her area of expertise  was fuel and                                                                    
fuel systems. She informed that  many employees on the North                                                                    
Slope are contractors and consultants  as opposed to British                                                                    
Petroleum   corporate  employees.   The  British   Petroleum                                                                    
employees  oversee the  work performed  by the  contractors,                                                                    
but the  majority of  the work  is performed  by independent                                                                    
contractors. She  spoke about the challenges  obtaining fuel                                                                    
for the  North Slope  fleet. She  asked questions  about the                                                                    
legislation and wondered why Prudhoe  Bay was not allowed to                                                                    
deduct costs for capital improvements.                                                                                          
                                                                                                                                
Ms.  Reider  informed that  the  North  Slope was  an  aging                                                                    
facility. The  infrastructure and the workforce  were aging.                                                                    
Approximately  40  percent  of  the work  force  is  nearing                                                                    
retirement age.  The infrastructure is approaching  35 years                                                                    
old. She  recognized the amount  of work that must  be done.                                                                    
The existing well was harvested,  but new oil exploration is                                                                    
nonexistent. She mentioned the  great expense for health and                                                                    
human  safety  on the  North  Slope.  The increment  weather                                                                    
results in  shorter work  days and  increased cost  of doing                                                                    
business.                                                                                                                       
                                                                                                                                
3:53:55 PM                                                                                                                    
                                                                                                                                
Ms.  Reider  concluded  that   the  additional  expenses  of                                                                    
operating  on   the  North  Slope  do   not  always  benefit                                                                    
production.                                                                                                                     
                                                                                                                                
DAVE  HARBOR,  ANCHORAGE,   expressed  appreciation  to  the                                                                    
committee for  their time and  patience. He spoke  at length                                                                    
about the history  of oil and gas legislation  in Alaska. He                                                                    
explained that  in 1971 he  was asked by Morris  Thompson to                                                                    
help   with  the   Alaska  Native   Claims  Settlement   Act                                                                    
Communication   Program.   He    explained   his   role   of                                                                    
communicating  the enrolment  program throughout  the world.                                                                    
Through  the process  he became  sensitive to  the needs  of                                                                    
rural Alaska. He mentioned his  opportunity to work on joint                                                                    
venture programs.                                                                                                               
                                                                                                                                
Mr.  Harbor  recalled  flying into  rural  villages  in  the                                                                    
middle  of winter  to enable  joint venture  partnerships to                                                                    
build the Kuparuk Construction Camp.                                                                                            
                                                                                                                                
Mr.  Harbor   stated  that  during  the   1970s,  the  state                                                                    
legislature  increased various  taxes  approximately once  a                                                                    
year. He  recalled the passage  of the Alaska  Native income                                                                    
tax change  that altered the  structure of  income taxation.                                                                    
The changes led to lawsuits from the oil companies.                                                                             
                                                                                                                                
3:59:14 PM                                                                                                                    
                                                                                                                                
Mr.  Harbor  referred to  the  history  of oil  taxation  in                                                                    
Alaska with bipartisan participation,  where a definition of                                                                    
"fair share"  was determined. He explained  that the process                                                                    
was  an   example  of   agreement  from   bipartisan  groups                                                                    
including Governor Hammond and  Senate President Kertula and                                                                    
House Speaker Duncan. Fair share  was defined that led to 20                                                                    
years  of  prosperity  for Alaska  and  the  elimination  of                                                                    
personal income tax.                                                                                                            
                                                                                                                                
Mr.  Harbor noted  the two  pronged challenge  faced by  the                                                                    
state, from  both state and  federal properties.  He pointed                                                                    
out  that the  actions  of the  federal  government had  not                                                                    
benefited Alaska's natural  resource development. He thought                                                                    
the best  action for  state lands  was to  allow exploration                                                                    
and production  to provide the quickest  opportunity for new                                                                    
oil flow  in the  pipeline. He supported  HB 110,  but would                                                                    
entertain other opportunities to solve the issue.                                                                               
                                                                                                                                
4:04:13 PM                                                                                                                    
                                                                                                                                
JOE BEEDLE,  PRESIDENT, NORTHRIM  BANK, spoke in  support of                                                                    
HB 110.  He encouraged an  adjustment in the ACES  tax laws.                                                                    
He   noted  that   when  ACES   passed,   there  was   great                                                                    
anticipation  for  a  gas  line   in  Alaska  and  continued                                                                    
development  of federal  and offshore  lands. He  noted that                                                                    
the  potential challenges  associated with  a gas  line have                                                                    
changed since  the inception of ACES.  The market conditions                                                                    
have therefore changed.                                                                                                         
                                                                                                                                
Mr. Beedle  mentioned tax credits.  He stated that  his bank                                                                    
exercised  its tax  credits. A  tax  credit, when  purchased                                                                    
requires  risk. An  oil  company requires  a  return on  the                                                                    
credit. Lowering the tax is  important and utilizing the tax                                                                    
credit to  modify behavior is  also important.  He requested                                                                    
that the legislature lower the overall tax rate.                                                                                
                                                                                                                                
4:09:17 PM                                                                                                                    
                                                                                                                                
MR.  AVES  THOMPSON,  EXECUTIVE  DIRECTOR,  ALASKA  TRUCKING                                                                    
ASSOCIATION, explained that  the Alaska Trucking Association                                                                    
had  200  members.  Each   year  the  association  developed                                                                    
legislative  priorities,  such   as  highway  infrastructure                                                                    
projects and highway safety issues.   The number one concern                                                                    
this  year   was  ACES.  The  association   served  the  oil                                                                    
industry, construction  industry and the auto  carriers.  He                                                                    
understood  that  many  downturns  were the  result  of  the                                                                    
national economic  crisis. He offered  anecdotal information                                                                    
that trucking business is down 10 to 25 percent.                                                                                
                                                                                                                                
4:12:46 PM                                                                                                                    
                                                                                                                                
Mr.  Thompson  agreed  that  all Alaskans  are  in  the  oil                                                                    
business. He stressed the urgency  to reduce the oil tax and                                                                    
provide  incentive  to bring  employees  back  to work.  The                                                                    
Alaska Trucking Association supported HB 110.                                                                                   
                                                                                                                                
Co-Chair Stoltze  thanked all of  the committee  members and                                                                    
participants for coming before the committee.                                                                                   
                                                                                                                                
HB  110  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 4:15 PM.                                                                                           
                                                                                                                                
4:15:35 PM                                                                                                                    
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB110 DOR Tangeman to HFC chairs 3-21-2011.pdf HFIN 3/21/2011 1:00:00 PM
HB 110
HB110 DOR Tangeman on Well Data 3-21-2011.pdf HFIN 3/21/2011 1:00:00 PM
HB 110
HB 110 Anchorage Testimony on 032111.pdf HFIN 3/21/2011 1:00:00 PM
HB 110