Legislature(2013 - 2014)HOUSE FINANCE 519

04/05/2013 09:00 AM FINANCE


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09:08:12 AM Start
09:08:20 AM SB21
10:24:54 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 5, 2013                                                                                            
                         9:08 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:08:12 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 9:08 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lindsey Holmes                                                                                                   
Representative Scott Kawasaki, Alternate                                                                                        
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative David Guttenberg                                                                                                 
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Daniel   Sullivan,  Commissioner,   Department  of   Natural                                                                    
Resources;  Senator  Micciche; Michael  Pawlowski,  Advisor,                                                                    
Petroleum  Fiscal   Systems,  Department  of   Revenue;  Joe                                                                    
Balash,   Deputy   Commissioner,   Department   of   Natural                                                                    
Resources.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
CSSB  21 (FIN) am(efd fld)                                                                                                      
          OIL AND GAS PRODUCTION TAX                                                                                            
                                                                                                                                
          SB 21 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)                                                                                    
     "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;                                                                    
     providing a  tax credit against the  corporation income                                                                    
     tax  for   qualified  oil  and  gas   service  industry                                                                    
     expenditures; relating  to the  oil and  gas production                                                                    
     tax rate; relating  to gas used in  the state; relating                                                                    
     to  monthly installment  payments  of the  oil and  gas                                                                    
     production tax; relating to oil  and gas production tax                                                                    
     credits for  certain losses and  expenditures; relating                                                                    
     to  oil and  gas  production  tax credit  certificates;                                                                    
     relating  to  nontransferable   tax  credits  based  on                                                                    
     production;  relating to  the  oil and  gas tax  credit                                                                    
     fund; relating  to annual  statements by  producers and                                                                    
     explorers;    establishing    the     Oil    and    Gas                                                                    
     Competitiveness  Review  Board; and  making  conforming                                                                    
     amendments."                                                                                                               
                                                                                                                                
9:08:20 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze explained  that the  legislation would  be                                                                    
presented by  the Department of Natural  Resources (DNR) who                                                                    
represented the sponsor.                                                                                                        
                                                                                                                                
DANIEL   SULLIVAN,  COMMISSIONER,   DEPARTMENT  OF   NATURAL                                                                    
RESOURCES,  presented  the  PowerPoint  "Oil  Tax  Reform  -                                                                    
Arresting  TAPS  Throughput  Decline."  He  appreciated  the                                                                    
opportunity  to  present  a broad  overview  of  the  issues                                                                    
related to oil  tax reform and the  House Finance Committee.                                                                    
He  intended  to provide  a  straightforward  agenda with  a                                                                    
focus on three important topics.                                                                                                
                                                                                                                                
9:12:49 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan discussed slide 2: "Outline."                                                                             
                                                                                                                                
     Part I: current Context - Opportunities and Challenges                                                                     
                                                                                                                                
     Part  II:  Is  the   Current  Tax  System  Working  for                                                                    
     Alaskans?                                                                                                                  
                                                                                                                                
     Part III: Production, Production, Production                                                                               
                                                                                                                                
Commissioner  Sullivan discussed  slide 3:  "Part 1  Current                                                                    
Context  Opportunities  and  Challenges." He  noted  that  a                                                                    
common  argument  seen  by DNR  throughout  the  oil  reform                                                                    
debate was that "everything was  fine" with the oil business                                                                    
and tax system  in Alaska. The department  argued with those                                                                    
sentiments  that the  tax system  was functioning  well. The                                                                    
department  did not  believe that  business was  booming. He                                                                    
hoped  to  compare  production   from  Alaska  to  worldwide                                                                    
production. He wished to  address the significant challenges                                                                    
faced by the state.                                                                                                             
                                                                                                                                
9:15:09 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan  referred to  various slides  as "good                                                                    
or  bad  news."  The  state  must come  to  grips  with  the                                                                    
significant  challenges and  opportunities.  He stated  that                                                                    
comparisons  with past  performance, production  and pricing                                                                    
were  not always  accurate,  so  he hoped  to  focus on  the                                                                    
present  day.  He  stressed  that   the  United  States  was                                                                    
experiencing   a   hydrocarbon   boom  in   investment   and                                                                    
production.   He   opined   that  the   country's   greatest                                                                    
hydrocarbon   basin,   Alaska,   was  observing   from   the                                                                    
sidelines.                                                                                                                      
                                                                                                                                
9:16:59 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stoltze  referred  to   a  poll  regarding  public                                                                    
opinion about  the oil industry's contribution  to the state                                                                    
budget  and  oil  flow  through  the  Trans-Alaska  Pipeline                                                                    
System (TAPS).  He opined  that additional  information from                                                                    
the department could better educate Alaskans.                                                                                   
                                                                                                                                
9:17:45 AM                                                                                                                    
                                                                                                                                
Department of  Natural Resources discussed slide  4: "TAPS -                                                                    
A Critical State and National Energy Asset."                                                                                    
                                                                                                                                
   · TAPS has transported over 16.3 billion barrels of oil                                                                      
     and natural gas liquids  since June of 1977. Production                                                                    
     peaked  at 2.2  million  barrels per  day  in the  late                                                                    
     1980s,  representing   25  percent  of   U.S.  domestic                                                                    
     production                                                                                                                 
   · Since its peak, however, throughput has steadily                                                                           
     declined; today, TAPS is 2/3 empty and declining at an                                                                     
     average of 6 percent per year                                                                                              
   · TAPS throughput decline threatens economic disruption                                                                      
     and the very existence of our pipeline                                                                                     
  · 90 percent of state revenues come from oil production                                                                       
   · We must encourage industry to invest in exploration                                                                        
     and development of conventional and unconventional                                                                         
     resources on state and federal land, onshore and                                                                           
     offshore                                                                                                                   
  · TAPS has plenty of capacity for increased throughput                                                                        
   · Most near-term critical economic issue facing the                                                                          
     state                                                                                                                      
   · Most urgent issue facing the state - two and half                                                                          
     years of studies                                                                                                           
                                                                                                                                
9:21:30 AM                                                                                                                    
                                                                                                                                
Commissioner   Sullivan  discussed   slide  5:   "Production                                                                    
History." He  stated that the slide  represented a declining                                                                    
oil  field,  which  he  compared to  a  dried-up  basin.  He                                                                    
discussed the rig count number  for various states. The rigs                                                                    
in Alaska were much larger  than those used in other states.                                                                    
He concluded that business was not booming in Alaska.                                                                           
                                                                                                                                
     2013 Rig Count:                                                                                                            
         · Texas = 830 active rigs                                                                                              
         · Oklahoma = 183 active rigs                                                                                           
         · North Dakota = 174 active rigs                                                                                       
         · Pennsylvania = 80 active rigs                                                                                        
         · Alaska = 8 active rigs                                                                                               
                                                                                                                                
9:22:57 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan discussed slide 6: "Massive Resource                                                                      
Base."                                                                                                                          
                                                                                                                                
   · USGS estimates that Alaska's North Slope has more oil                                                                      
     than any other Arctic nation                                                                                               
        o Oil: Est. 40 billion barrels of conventional oil                                                                      
          (USGS & BOEMRE)                                                                                                       
        o Gas: Est. over 200 trillion cubic feet of                                                                             
          conventional natural gas (USGS)                                                                                       
   · Alaska has world-class unconventional resources,                                                                           
     including  tens of  billions of  barrels of  heavy oil,                                                                    
     shale oil,  and viscous oil, and  hundreds of trillions                                                                    
     of  cubic  feet  of  shale  gas,  tight  gas,  and  gas                                                                    
     hydrates                                                                                                                   
   · Alaska's North Slope has already produced more than 16                                                                     
     billion barrels of oil to date                                                                                             
   · At year-end 2010, the Energy Information Agency (EIA)                                                                      
     (federal Department of Energy) put remaining North                                                                         
     Slope reserves at 3.7 billion barrels of oil                                                                               
   · Reforms now can create enormous future opportunities                                                                       
     and benefits                                                                                                               
   · Compared to most hydrocarbon basins, Alaska is                                                                             
     relatively underexplored, with 500 exploration wells                                                                       
     on the North Slope, compared to Wyoming's 19,000.                                                                          
                                                                                                                                
Commissioner Sullivan stated that Alaska  was on the cusp of                                                                    
enormous opportunity in the areas  of unconventional oil. He                                                                    
believed that the state's geology  compared to the shale oil                                                                    
plays in states like North  Dakota or Texas. He stressed the                                                                    
opportunities  for  exploration  on   the  North  Slope.  He                                                                    
pointed  out  that  Prudhoe   Bay  had  exceeded  production                                                                    
expectations dramatically.                                                                                                      
                                                                                                                                
9:26:35 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan  detailed slide 7: "Other  Basins have                                                                    
Turned Decline Around." He noted  that DNR and Department of                                                                    
Revenue  (DOR) worked  together  to create  a tax  proposal.                                                                    
Throughout the process, research  was performed to determine                                                                    
which  oil  basins  had  deviated  from  production  decline                                                                    
historically.  The  slide's  graph depicted  oil  production                                                                    
increases  in  Texas,  North   Dakota  and  Alberta.  Alaska                                                                    
continued to decline in oil  production during the same time                                                                    
period.  He  believed  that  Alaska's  tax  system  did  not                                                                    
incentivize production.                                                                                                         
                                                                                                                                
9:30:13 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan  stated that  the incentive  to invest                                                                    
in Alaska was less because  of the high prices of investment                                                                    
as related  to the long-term elements  of investment return.                                                                    
He noted  that the spike in  Texas was related to  shale. He                                                                    
pointed  out that  Alaska was  also  a shale  basin. If  new                                                                    
shale technology with conventional and shale plays.                                                                             
                                                                                                                                
9:31:57 AM                                                                                                                    
                                                                                                                                
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT OF REVENUE, commented on  slide 7. He stated that                                                                    
the example of Texas and  its flattened production curve was                                                                    
the result  of conventional oil development.  The ability to                                                                    
level oil production decline  was possible with conventional                                                                    
oil plays.                                                                                                                      
                                                                                                                                
Commissioner  Sullivan stressed  that the  slide was  a "bad                                                                    
news slide for Alaska." The  good news was that Alaska could                                                                    
mitigate  or  increase  decline with  the  right  investment                                                                    
environment.                                                                                                                    
                                                                                                                                
9:33:41 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan discussed slide  8: "Change in Average                                                                    
Daily Oil Production by State  2007 - 2008." He mentioned an                                                                    
energy renaissance  in the United States.  Various basins in                                                                    
the Lower 48 were  experiencing large exploration booms. The                                                                    
slide compared multiple basins along with the price of oil.                                                                     
                                                                                                                                
9:35:20 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan discussed slide  9: "Change in Average                                                                    
Daily Oil Production  by State 2008 - 2009."  He opined that                                                                    
the slide  was a "bad news  slide for the state."  He stated                                                                    
that  comparisons   with  the  rest  of   the  country  were                                                                    
essential.  He stressed  that a  competitive tax  regime was                                                                    
important and a partnership  with the federal government was                                                                    
beneficial.                                                                                                                     
                                                                                                                                
Commissioner  Sullivan   discussed  slide  10:   "Change  in                                                                    
Average Daily Oil Production by State 2009 - 2010."                                                                             
                                                                                                                                
9:36:36 AM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan   discussed  slide  13:   "Crude  Oil                                                                    
Production: Alaska North Slope  vs. U.S. and OECD Countries,                                                                    
2003 - 2012." He clarified  that the color green represented                                                                    
oil  production  in  the   United  States,  red  represented                                                                    
Organization  for  Economic   Co-operation  and  Development                                                                    
(OECD) production and blue represented Alaska.                                                                                  
                                                                                                                                
Co-Chair  Stoltze asked  about  the meaning  of the  acronym                                                                    
ODEC.                                                                                                                           
                                                                                                                                
Commissioner  Sullivan  answered Organization  for  Economic                                                                    
Community   and  Development,   which  represented   Western                                                                    
Europe,  Norway, North  America and  Canada. He  pointed out                                                                    
the  graph's illustration  of  the  significant increase  in                                                                    
United  States production.  The blue  bars clearly  depicted                                                                    
Alaska's production  and the decline  in production  by half                                                                    
of that  recorded ten years  ago. He noted that  the decline                                                                    
in  Alaska was  observed  despite the  high  prices of  oil.                                                                    
Alaska was the  only basin in the United  States that failed                                                                    
to experience the oil production boom.                                                                                          
                                                                                                                                
9:38:27 AM                                                                                                                    
                                                                                                                                
Commissioner   Sullivan   discussed   slide   14:   "Capital                                                                    
Investment and the U.S Energy Renaissance."                                                                                     
                                                                                                                                
   · Global and U.S. hydrocarbon boom                                                                                           
   · IEA World Energy Outlook 2012 - U.S. to overtake Saudi                                                                     
     Arabia and Russia to become the world's largest global                                                                     
     oil producer by the second half of this decade                                                                             
        o Congressional Research Service report found that                                                                      
          since  2007, all  increases in  U.S.  oil and  gas                                                                    
          production  occurred outside  federally controlled                                                                    
          areas,  with oil  and  gas  production on  federal                                                                    
          lands  decreasing  by  7 percent  and  33  percent                                                                    
          respectively                                                                                                          
   · Financial Times, November 12, 2012- "U.S. set to                                                                           
     become biggest oil producer"                                                                                               
   · Financial Times, December 27, 2012 -"Oil and gas - hey                                                                     
     big spenders"                                                                                                              
        o 2012 - $600 billion on exploration and production                                                                     
          in oil and gas industry                                                                                               
        o 2013 projected - $650 billion on exploration and                                                                      
          production in oil and gas industry                                                                                    
        o Alaska  one of the world's great hydrocarbon                                                                          
          basins - accounted approximately half of 1                                                                            
          percent of these expenditures in 2012                                                                                 
                                                                                                                                
9:42:37 AM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan  discussed  slide 15:  "Est.  Capital                                                                    
Spending for  Exploration and  Development." He  stated that                                                                    
the notion  that the  state did  not have  a problem  sat in                                                                    
stark  contrast  with the  data  provided  on slide  15.  He                                                                    
believed  that the  issue of  oil  production would  greatly                                                                    
affect the future of Alaskans.                                                                                                  
                                                                                                                                
9:43:13 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan introduced slide  16: "Part II, Is the                                                                    
Current Tax System Working for Alaskans?"                                                                                       
                                                                                                                                
Commissioner   Sullivan   discussed   slide   17:   "Average                                                                    
Government Take  at $100/BBL." He  noted that the  slide was                                                                    
created  by   PFC  Energy,   the  state's   consultant.  The                                                                    
government  take  was assessed  at  the  price of  $100  per                                                                    
barrel of  oil. He  pointed out that  Alaska was  the second                                                                    
highest  in  OECD   classification.  For  new  developments,                                                                    
Alaska  was higher  than Venezuela,  Russia and  Kazakhstan.                                                                    
The  high  government-take  combined  with  Alaska's  arctic                                                                    
conditions,   remote    location,   infrastructure   issues,                                                                    
permitting   systems    and   litigation    worked   against                                                                    
incentivizing  investment.  The   issue  of  government-take                                                                    
could be modified, whereas the  arctic conditions and remote                                                                    
location could not.                                                                                                             
                                                                                                                                
Commissioner  Sullivan respected  Daniel  Yergin as  saying,                                                                    
"Tax regimes are one of  the most important elements of when                                                                    
and how  oil and  gas comes  out of  the ground,  whether in                                                                    
Alaska, Russia or Central Asia."                                                                                                
                                                                                                                                
9:46:35 AM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan  discussed  the term  "giveaway."  He                                                                    
noted  slide   18:  "Current  System  is   Not  Working  for                                                                    
Alaskans."                                                                                                                      
                                                                                                                                
     Examples of the Real Giveaway                                                                                              
        · ACES has taken away most of the incentive to                                                                          
          produce more barrels and more profit at higher                                                                        
          prices                                                                                                                
             o In FY 08, North Slope oil averaged $96.51                                                                        
               per  barrel  and  the  total  production  tax                                                                    
               collected was $6.8 billion                                                                                       
             o By next fiscal year (FY 14), prices are                                                                          
               forecasted to  be $13 higher at  $109.61, but                                                                    
               the   total  production   tax  collected   is                                                                    
               estimated to be $3.8  billion - a decrease of                                                                    
               more  than   $3.8  billion   in  unrestricted                                                                    
               general fund revenue                                                                                             
        · The Ultimate Giveaway                                                                                                 
             o Comparing year-end 2011 and year-end 2012,                                                                       
               there were  ~40,000 fewer barrels of  oil per                                                                    
               day flowing through TAPS                                                                                         
             o Approximately 14.6 million barrels a year =                                                                      
               $1.46 billion  in lost economic  activity and                                                                    
               value                                                                                                            
                                                                                                                                
9:50:18 AM                                                                                                                    
                                                                                                                                
Commissioner   Sullivan  discussed   slide   17  again.   He                                                                    
mentioned Senator French  and his statement that  ACES was a                                                                    
functional system,  but the  governor's proposal  was flawed                                                                    
because  it did  not require  more  oil in  the pipeline  in                                                                    
exchange for tax reductions.                                                                                                    
                                                                                                                                
Commissioner Sullivan countered that  the current tax system                                                                    
handed out significant tax credits  and direct cash payments                                                                    
of  approximately $1  billion annually.  He stated  that the                                                                    
governor's  bill sought  to tighten  the  nexus between  tax                                                                    
benefits  and production.  He  discussed  tax returns  under                                                                    
ACES.                                                                                                                           
                                                                                                                                
9:52:48 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski  stated that  Alaska had  seen an  increase in                                                                    
the amount of companies filing  tax returns in the state. He                                                                    
had seen an increase in returns,  but not an increase in tax                                                                    
payers. Many  of the returns  were filed without  payment as                                                                    
the companies were eligible for tax credits.                                                                                    
                                                                                                                                
Co-Chair  Stoltze requested  that Mr.  Pawlowski repeat  his                                                                    
statement.                                                                                                                      
                                                                                                                                
Mr. Pawlowski repeated  that the state had  seen an increase                                                                    
in  the number  of companies  filing returns  with DOR.  The                                                                    
department  had  not  seen  an increase  in  the  amount  of                                                                    
companies  paying  taxes.  When   a  company  qualified  for                                                                    
credits, the state paid the company through the treasury.                                                                       
                                                                                                                                
Co-Chair Stoltze  clarified that  the state was  writing the                                                                    
oil companies checks.                                                                                                           
                                                                                                                                
Mr. Pawlowski concurred.                                                                                                        
                                                                                                                                
9:54:57 AM                                                                                                                    
                                                                                                                                
Commissioner Sullivan  addressed slide 19: "New  Entrants in                                                                    
Alaska's Current Tax System."                                                                                                   
                                                                                                                                
   · Secure Alaska's Future - Oil is the State's                                                                                
     comprehensive strategy to increase TAPS throughput to                                                                      
     one million barrels a day                                                                                                  
        o Enhance Alaska's global competitiveness and                                                                           
          investment climate                                                                                                    
        o Ensure the permitting process is structured and                                                                       
          efficient                                                                                                             
        o Facilitate and incentivize the next phases of                                                                         
          North Slope development                                                                                               
        o Promote    Alaska's    resources   and    positive                                                                    
          investment climate to world markets                                                                                   
   · Governor Parnell's 2013 State of the State: "Our                                                                           
     problem is not  below the ground. Our  problem is above                                                                    
     the ground."                                                                                                               
       o The missing piece is meaningful tax reform                                                                             
        o "Our state's prosperity has always rested on                                                                          
          natural resources. Tonight, that foundation is at                                                                     
          risk, not because we are running out of oil, but                                                                      
          because we are running behind the competition."                                                                       
                                                                                                                                
9:57:51 AM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan  agreed  with  Representative  Gara's                                                                    
comments  regarding the  future  of small  and medium  sized                                                                    
companies in the  state. He saw great futures  for the large                                                                    
companies and shale plays.                                                                                                      
                                                                                                                                
Co-Chair  Stoltze  asked  the commissioner  not  to  address                                                                    
individual members  of the committee.  Commissioner Sullivan                                                                    
agreed.  Co-Chair  Stoltze  believed that  the  "personality                                                                    
issue" would improve if committee  member were not addressed                                                                    
individually.                                                                                                                   
                                                                                                                                
Commissioner  Sullivan  stated  that  the  department  would                                                                    
speak at  a conference  to large  LNG companies.  He pointed                                                                    
out   the   executive   branch's   outreach   efforts.   The                                                                    
conferences  allowed  the   department  to  ascertain  other                                                                    
company's opinions about Alaska.                                                                                                
                                                                                                                                
9:59:22 AM                                                                                                                    
                                                                                                                                
Commissioner  Sullivan  noted  slide 20:  "New  Entrants  in                                                                    
Alaska's Current Tax System."                                                                                                   
                                                                                                                                
   · We came to the North Slope in 2011, after many years                                                                       
     of  reviewing numerous  opportunities and  turning them                                                                    
     down.  We   considered  the  North   Slope  to   be  an                                                                    
     especially  promising area  that has  been shown  to be                                                                    
     oil  rich and  with lower  exploratory risk  than other                                                                    
     regions.                                                                                                                   
   · Offsetting these positive aspects were the extreme                                                                         
     climate, and  a short  exploration season in  a remote,                                                                    
     expensive  and  environmentally   sensitive  area  with                                                                    
     little   established    infrastructure.   The   biggest                                                                    
     negative  factor, however,  was a  tax system  that did                                                                    
     not encourage long-term investment.                                                                                        
   · With regards to investment in onshore state lands, we                                                                      
     found  that   in  all  but  the   best  scenarios,  the                                                                    
     progressive nature of the  ACES petroleum tax structure                                                                    
     did not  allow for  returns that were  competitive with                                                                    
     opportunities in the lower  forty-eight states or other                                                                    
     parts of the world.                                                                                                        
   · This view changed in early 2011 when it appeared that                                                                      
     serious  reform  of the  ACES  tax  structure would  be                                                                    
     enacted,  we  would risk  being  lost  in the  rush  of                                                                    
     companies   to  Alaska   to  invest   in  North   Slope                                                                    
     exploration and development projects.                                                                                      
                                                                                                                                
10:01:07 AM                                                                                                                   
                                                                                                                                
Co-Chair Stoltze asked if  Commissioner Sullivan referred to                                                                    
geological structure  in his statement  that Alaska  had the                                                                    
best  oil  and  gas  structure in  the  world.  Commissioner                                                                    
Sullivan concurred.                                                                                                             
                                                                                                                                
10:02:08 AM                                                                                                                   
                                                                                                                                
Commissioner  Sullivan stressed  that  Alaska's high  costs,                                                                    
difficult permitting  processes, lawsuits  and the  issue of                                                                    
progressivity or high  taxes at high oil  prices. Those were                                                                    
the  sentiments expressed  by  companies communicating  with                                                                    
the  department during  recent oil  and gas  conferences. He                                                                    
had heard  the argument that  the Spanish oil  major, Repsol                                                                    
made a  decision to  initiate projects  in Alaska  two years                                                                    
ago, when ACES was the tax regime.                                                                                              
                                                                                                                                
Co-Chair  Stoltze noted  that Repsol  would come  before the                                                                    
committee to provide testimony.                                                                                                 
                                                                                                                                
Commissioner  Sullivan  stated   that  Repsol  reported  the                                                                    
company  initiated its  project during  a time  of potential                                                                    
tax reform.                                                                                                                     
                                                                                                                                
10:04:49 AM                                                                                                                   
                                                                                                                                
Mr. Pawlowski  added that conversations among  the executive                                                                    
and legislative  branches regarding tax reform  often led to                                                                    
an increase in interest in Alaskan investment.                                                                                  
                                                                                                                                
Co-Chair Stoltze  expressed familiarity  with the  issue. He                                                                    
reported  to the  committee rumors  that he  had killed  the                                                                    
film  industry by  introducing a  bill  addressing the  film                                                                    
industry's tax credits.                                                                                                         
                                                                                                                                
Commissioner Sullivan  relayed that the broad  issue was the                                                                    
limitation in  investment caused  by the  high tax  rate. He                                                                    
furthered that  it was unknown  how many companies  were not                                                                    
moving to the state because of the tax system.                                                                                  
                                                                                                                                
Mr. Pawlowski pointed to slide 21.                                                                                              
                                                                                                                                
   · Under ACES - by 2022 oil prices will have to rise to                                                                       
     $123.44 per barrel for unrestricted general fund oil                                                                       
     revenues to meet the forecast                                                                                              
   ·  If oil prices do not rise further or if they fall,                                                                        
     this revenue decline becomes more severe.                                                                                  
                                                                                                                                
10:07:58 AM                                                                                                                   
                                                                                                                                
Mr. Pawlowski discussed slide 22: "The Challenge."                                                                              
                                                                                                                                
    · If we do not make the changes today to encourage the                                                                      
      investment that will pay dividends tomorrow we are                                                                        
      dooming our future to deficits and decline                                                                                
    · If you are evaluating this challenge based simply on                                                                      
      the range of the fiscal note, you are missing the                                                                         
      scale of the obstacle we face in the further                                                                              
    · $1.3 billion less in revenues will require more than                                                                      
      $4,000 in new revenues per job in Alaska - those                                                                          
      revenues will have to come from somewhere                                                                                 
                                                                                                                                
10:09:35 AM                                                                                                                   
                                                                                                                                
Commissioner Sullivan  stated that slide 21  showed revenues                                                                    
declining  while  estimated  oil   prices  were  rising.  He                                                                    
mentioned that  when oil prices  declined the  revenue curve                                                                    
followed.                                                                                                                       
                                                                                                                                
Representative   Gara  noted   that  ConocoPhillips   stated                                                                    
projections  in legacy  fields  for  production declines  of                                                                    
approximately 3 percent. He wondered  if slide 21 employed a                                                                    
6 percent production decline.                                                                                                   
                                                                                                                                
Mr. Pawlowski noted  that the information was  based on data                                                                    
from the  2012 revenue sources  book. He offered  to provide                                                                    
the data underlying the chart to the committee.                                                                                 
                                                                                                                                
10:11:04 AM                                                                                                                   
                                                                                                                                
Commissioner  Sullivan  moved  to  slide  23:  "Part  III  -                                                                    
Production, Production, Production."  He recognized the need                                                                    
to  be more  competitive.  He stated  that  ACES focused  on                                                                    
incentivizing  spending while  the department  recommended a                                                                    
tighter nexus on tax reform and direct oil production.                                                                          
                                                                                                                                
Commissioner Sullivan discussed slide 24: "Oil Tax Reform."                                                                     
                                                                                                                                
   · Tax reform must be fair to Alaskans                                                                                        
   · Encourage new production                                                                                                   
   · Simple so that it restores balance to the system                                                                           
   · Durable for the long-term                                                                                                  
                                                                                                                                
10:12:54 AM                                                                                                                   
                                                                                                                                
Commissioner Sullivan discussed slide  25: "CS SB 21 (FIN)'s                                                                    
Major Components Are Focused on Incentivizing Production."                                                                      
                                                                                                                                
     Alaska's Clear and Equitable Share (ACES)                                                                                  
        · Qualified Capital Credit                                                                                              
             o Based on 20 percent of qualified capital                                                                         
               expenditures                                                                                                     
             o To generate an additional $100 million in                                                                        
               capital credits a company must spend $500                                                                        
               million                                                                                                          
             o $500 mm x 20 percent = $100 mm                                                                                   
                                                                                                                                
     CS SB21 (FIN)                                                                                                              
        · Per Barrel Credit                                                                                                     
             o Based on taxable production                                                                                      
             o To generate an additional $100 million in                                                                        
               credits a company must produce an additional                                                                     
               20 million barrels                                                                                               
             o 20 mm x $5 = $100 mm                                                                                             
        · Gross Revenue Exclusion                                                                                               
             o Tax benefit for new production                                                                                   
             o Newer units (2003 and after)                                                                                     
             o New participating areas in legacy units                                                                          
             o Expansions of participating areas in legacy                                                                      
               units                                                                                                            
                                                                                                                                
Mr.  Pawlowski discussed  the qualified  capital expenditure                                                                    
credit. He stated that a  company must spend $500 million to                                                                    
generate  an additional  $100  million  in capital  credits.                                                                    
With SB 21, the incentives moved  away from a credit tied to                                                                    
spending  and   toward  a  credit   based  on   a  company's                                                                    
production. The  qualified capital expenditure  credit would                                                                    
tax each taxable barrel produced.  With SB 21, a company was                                                                    
eligible for  the same $100  million credit  with production                                                                    
of 20 million additional barrels of oil.                                                                                        
                                                                                                                                
Mr.  Pawlowski  continued  with  secondary  incentives  tied                                                                    
directly   to   production.   Both  options   required   oil                                                                    
productions to  qualify. The  gross revenue  exclusion (GRE)                                                                    
was limited  to new production (established  after 2003) for                                                                    
new  geologically distinct  pieces within  legacy units  and                                                                    
expansions of  participating areas within the  legacy units.                                                                    
The  value of  the new  incentives  was based  on the  gross                                                                    
value of oil produced.                                                                                                          
                                                                                                                                
Representative   Wilson   asked   if  the   department   was                                                                    
discussing the  finance version or  the resource  version of                                                                    
the bill.                                                                                                                       
                                                                                                                                
Co-Chair Stoltze believed that  the department was referring                                                                    
to broader concepts and policies.                                                                                               
                                                                                                                                
10:16:51 AM                                                                                                                   
                                                                                                                                
Mr. Pawlowski apologized for the confusion.                                                                                     
                                                                                                                                
Commissioner Sullivan clarified  that incentives provided by                                                                    
SB 21 focused on production rather than spending.                                                                               
                                                                                                                                
10:17:44 AM                                                                                                                   
                                                                                                                                
Commissioner  Sullivan discussed  slide 26:  "Status Quo  of                                                                    
continued Decline is Unacceptable."                                                                                             
                                                                                                                                
   · This is about Alaskans' future present citizens and                                                                        
     future generations                                                                                                         
   · We clearly have the resource base to turn our oil                                                                          
     production decline around                                                                                                  
   · The status quo of continued decline when there is a                                                                        
     global investment boom and literally every other basin                                                                     
     in the United States is increasing production is                                                                           
     unacceptable                                                                                                               
   · ACES, although well-intentioned, is significantly                                                                          
     contributing to our production decline as well as                                                                          
     discouraging potential new entrants.                                                                                       
   · As the production continues to decline, the strain on                                                                      
     the state will only grow                                                                                                   
   · Tax reform must focus on incentivizing production                                                                          
   · "The ANSCA Regional Association is calling on state                                                                        
     leaders to continue  moving on an oil  tax reform bill.                                                                    
     Tax reform  for the oil  and gas industry  that results                                                                    
     in  increased production  will give  communities across                                                                    
     the state  access to important  economic opportunities.                                                                    
     Association members  stress the  importance of  new and                                                                    
     increased   production  with   long-term  benefits   to                                                                    
     Alaskans." -March 28, 2013                                                                                                 
                                                                                                                                
Co-Chair Stoltze  appreciated the  department's presentation                                                                    
and   presence.  He   discussed  future   finance  committee                                                                    
hearings with  consultants. He encouraged  committee members                                                                    
to  present  their  written  questions  to  his  office  for                                                                    
transmittal to the appropriate department personnel.                                                                            
                                                                                                                                
10:22:45 AM                                                                                                                   
                                                                                                                                
Representative  Gara  responded to  Commissioner  Sullivan's                                                                    
statement  that  many  legislators  were  content  with  the                                                                    
status  quo  regarding  oil production.  He  countered  that                                                                    
while  different  proposals existed,  he  was  unaware of  a                                                                    
legislator who was happy with the current tax regime.                                                                           
                                                                                                                                
Co-Chair  Stoltze  asked  both  parties  to  tone  down  the                                                                    
rhetoric.                                                                                                                       
                                                                                                                                
Representative Holmes  asked about the adoption  of HCS CSSB                                                                    
21(RES).                                                                                                                        
                                                                                                                                
Co-Chair Stoltze  replied that he intended  to introduce the                                                                    
bill  later in  the afternoon  meeting. He  wanted committee                                                                    
members  to take  time  to  read the  bill  and return  with                                                                    
questions.                                                                                                                      
                                                                                                                                
CSSB 21  (FIN) am(eld fld)  was HEARD and HELD  in committee                                                                    
for further consideration.                                                                                                      
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
10:24:54 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:25 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
SB 21_House Finance_Sullivan & Butcher Introduction_4-5-13.pdf HFIN 4/5/2013 9:00:00 AM
SB 21