Legislature(2005 - 2006)CAPITOL 106
03/10/2006 12:30 PM RESOURCES
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ALASKA STATE LEGISLATURE HOUSE RESOURCES STANDING COMMITTEE March 10, 2006 12:36 p.m. MEMBERS PRESENT Representative Jay Ramras, Co-Chair Representative Ralph Samuels, Co-Chair Representative Jim Elkins (via teleconference) Representative Gabrielle LeDoux (via teleconference) Representative Paul Seaton Representative Harry Crawford (via teleconference) Representative Mary Kapsner (via teleconference) MEMBERS ABSENT Representative Carl Gatto Representative Kurt Olson COMMITTEE CALENDAR HOUSE BILL NO. 488 "An Act repealing the oil production tax and gas production tax and providing for a production tax on the net value of oil and gas; relating to the relationship of the production tax to other taxes; relating to the dates tax payments and surcharges are due under AS 43.55; relating to interest on overpayments under AS 43.55; relating to the treatment of oil and gas production tax in a producer's settlement with the royalty owner; relating to flared gas, and to oil and gas used in the operation of a lease or property, under AS 43.55; relating to the prevailing value of oil or gas under AS 43.55; providing for tax credits against the tax due under AS 43.55 for certain expenditures, losses, and surcharges; relating to statements or other information required to be filed with or furnished to the Department of Revenue, and relating to the penalty for failure to file certain reports, under AS 43.55; relating to the powers of the Department of Revenue, and to the disclosure of certain information required to be furnished to the Department of Revenue, under AS 43.55; relating to criminal penalties for violating conditions governing access to and use of confidential information relating to the oil and gas production tax; relating to the deposit of money collected by the Department of Revenue under AS 43.55; relating to the calculation of the gross value at the point of production of oil or gas; relating to the determination of the net value of taxable oil and gas for purposes of a production tax on the net value of oil and gas; relating to the definitions of 'gas,' 'oil,' and certain other terms for purposes of AS 43.55; making conforming amendments; and providing for an effective date." - HEARD AND HELD PREVIOUS COMMITTEE ACTION BILL: HB 488 SHORT TITLE: OIL AND GAS PRODUCTION TAX SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR 02/21/06 (H) READ THE FIRST TIME - REFERRALS 02/21/06 (H) RES, FIN 02/22/06 (H) RES AT 12:30 AM HOUSE FINANCE 519 02/22/06 (H) Heard & Held 02/22/06 (H) MINUTE(RES) 02/23/06 (H) RES AT 12:30 AM HOUSE FINANCE 519 02/23/06 (H) Heard & Held 02/23/06 (H) MINUTE(RES) 02/24/06 (H) RES AT 12:30 AM HOUSE FINANCE 519 02/24/06 (H) Heard & Held 02/24/06 (H) MINUTE(RES) 02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532 02/25/06 (H) Joint with Senate Resources 02/27/06 (H) RES AT 12:30 AM CAPITOL 124 02/27/06 (H) Heard & Held 02/27/06 (H) MINUTE(RES) 02/28/06 (H) RES AT 12:30 AM CAPITOL 124 02/28/06 (H) Heard & Held 02/28/06 (H) MINUTE(RES) 03/01/06 (H) RES AT 12:30 AM CAPITOL 124 03/01/06 (H) Heard & Held 03/01/06 (H) MINUTE(RES) 03/02/06 (H) RES AT 12:00 AM CAPITOL 124 03/02/06 (H) Heard & Held 03/02/06 (H) MINUTE(RES) 03/03/06 (H) RES AT 12:30 AM CAPITOL 124 03/03/06 (H) Heard & Held 03/03/06 (H) MINUTE(RES) 03/04/06 (H) RES AT 2:00 PM HOUSE FINANCE 519 03/04/06 (H) Heard & Held 03/04/06 (H) MINUTE(RES) 03/06/06 (H) FIN AT 12:30 AM HOUSE FINANCE 519 03/06/06 (H) Presentation by Legislative Consultant 03/06/06 (H) RES AT 12:30 AM HOUSE FINANCE 519 03/06/06 (H) Testimony by legislative consultant 03/07/06 (H) RES AT 12:30 AM CAPITOL 124 03/07/06 (H) Heard & Held 03/07/06 (H) MINUTE(RES) 03/08/06 (H) RES AT 12:30 AM CAPITOL 106 03/08/06 (H) -- Meeting Canceled -- 03/09/06 (H) RES AT 12:30 AM CAPITOL 106 03/09/06 (H) -- Meeting Canceled -- 03/10/06 (H) RES AT 12:30 AM CAPITOL 106 WITNESS REGISTER ERIC DOMPELING Anchorage, Alaska POSITION STATEMENT: Testified in support of HB 488. LYNN JOHNSEN, President and Co-Founder Dowland-Bach Corporation Anchorage, Alaska POSITION STATEMENT: Testified in support of HB 488. MARK HYLEN, President Kakivic Asset Management Anchorage, Alaska POSITION STATEMENT: Testified in support of HB 488. DAVE HAUGEN, Vice President Lynden Inc. Anchorage, Alaska POSITION STATEMENT: Testified in support of HB 488. RANDY BRAND Great Northwest Inc. Anchorage, Alaska POSITION STATEMENT: Testified in support of HB 488. GEORGE BERRY Fairbanks, Alaska POSITION STATEMENT: Testified in opposition to many provisions of HB 488. MERRICK PIERCE Fairbanks, Alaska POSITION STATEMENT: Testified in opposition to many provisions of HB 488. TIM BECK North Pole, Alaska POSITION STATEMENT: Testified in opposition to many provisions of HB 488. MIKE KOY Anchorage, Alaska POSITION STATEMENT: Testified in opposition to many provisions of HB 488. JANE HAIGH Fairbanks, Alaska POSITION STATEMENT: Testified in opposition to many provisions of HB 488. ACTION NARRATIVE CO-CHAIR RALPH SAMUELS called the House Resources Standing Committee meeting to order at 12:36:08 PM. Representatives Samuels, Seaton and Ramras were present at the call to order. Representative LeDoux, Elkins, Crawford and Kapsner were on teleconference. Representative Kerttula was also present and Representative Gara was on teleconference. HB 488-OIL AND GAS PRODUCTION TAX CO-CHAIR SAMUELS announced that the only order of business would be HOUSE BILL NO. 488, "An Act repealing the oil production tax and gas production tax and providing for a production tax on the net value of oil and gas; relating to the relationship of the production tax to other taxes; relating to the dates tax payments and surcharges are due under AS 43.55; relating to interest on overpayments under AS 43.55; relating to the treatment of oil and gas production tax in a producer's settlement with the royalty owner; relating to flared gas, and to oil and gas used in the operation of a lease or property, under AS 43.55; relating to the prevailing value of oil or gas under AS 43.55; providing for tax credits against the tax due under AS 43.55 for certain expenditures, losses, and surcharges; relating to statements or other information required to be filed with or furnished to the Department of Revenue, and relating to the penalty for failure to file certain reports, under AS 43.55; relating to the powers of the Department of Revenue, and to the disclosure of certain information required to be furnished to the Department of Revenue, under AS 43.55; relating to criminal penalties for violating conditions governing access to and use of confidential information relating to the oil and gas production tax; relating to the deposit of money collected by the Department of Revenue under AS 43.55; relating to the calculation of the gross value at the point of production of oil or gas; relating to the determination of the net value of taxable oil and gas for purposes of a production tax on the net value of oil and gas; relating to the definitions of 'gas,' 'oil,' and certain other terms for purposes of AS 43.55; making conforming amendments; and providing for an effective date." 12:37:11 PM ERIC DOMPELING, Anchorage, said he is employed in the oil and gas industry and he understand the critical role that continued investment by the industry plays in Alaska's economy. He said the tax credits and annual allowance contained in HB 488 will achieve their goal of continued development of fields under production and of stimulating increased development by current and new investors in Alaska. The legislation may be a necessary step in providing fiscal stability the companies will need to build a multi-million dollar gas project. He said he is concerned about the significant tax increase to an industry that already provides roughly 90 percent of Alaska's state revenues. He said it may have a negative impact on attracting future investment. He spoke of global competition. It was not that long ago that Alaska experienced a down swing from low oil prices, he added. The down cycle will be repeated in the future. He said getting a fair share of oil profits means growing the size of state government. He urged the committee to consider how the bill will affect the growth of Alaska's economy and getting a fair share of private sector jobs that will only come from new oil and gas investments. 12:39:09 PM LYNN JOHNSEN, President and Co-Founder, Dowland-Bach Corporation, said he is a past president of the Alaska Support Industry Alliance and he is concerned about the ramifications of any additional tweaking of HB 488. The additional revenue to Alaska is close to $1 billion, above and beyond the current revenue. He said he heard no mention of the yield to the state from encouraging investments, which is possible if taxation is competitive with other oil producing areas. He said oil producers will react to the incentives over the next 30 to 40 years. These are additional revenues to businesses like his, and employees of those businesses pay property taxes, buy groceries and automobiles, and send their kids to college. The proposed profit-based petroleum production tax (PPT) increases the effective tax rate to between 14.5 and 15 percent, and the risk of raising that rate may cause the industry goose that lays the golden eggs to fly away. 12:41:41 PM MARK HYLEN, President, Kakivic Asset Management, said his firm provides inspection and engineering services to the oil and gas industry. He noted that he employs nearly 200 people, and 100 percent of his company's revenues are derived from the oil and gas industry. He said he has been actively involved in the oil industry for ten years and has seen significant reduction in oil production with oil prices from $8 to $65 a barrel. He said he sees an ever-increasing need to be efficient and competitive as a contractor. He noted a significant improvement in safety and technology, such as directional drilling, which minimizes the impacts on the environment. He said the oil companies have been respectful of Alaskans' concerns, "and I believe it is time we showed them the same respect." He said HB 488 increases taxes. There has been a tremendous amount of new jobs that have been created in the oil and gas industry this last year, and he is concerned about the impact higher taxes will have on future Alaskan jobs. The new tax is the first step in getting to a gas pipeline, he opined. The oil and gas industry already funds 90 percent of state government, and he is disappointed in the ability of the state to create a long-term fiscal plan. He asked what would be achieved by adding more money to the state treasury. He said that in an effort of getting Alaska's fair share, there could be a loss of future jobs for Alaskans. He said he supports the bill because it is a stepping-stone for investors to build a multi-billion dollar gas project, but he encouraged the committee to consider the ramifications that changing the bill would have on jobs. 12:44:14 PM CO-CHAIR SAMUELS said creating a long-term fiscal plan should be done now, when the state doesn't need money. It will be the perfect opportunity to look at how the state will handle things over a wide range of prices, including $20 a barrel oil. 12:44:54 PM DAVE HAUGEN, Vice President, Lynden Inc, said he supports HB 488. He said his company is a transportation and logistics company and knows the importance of fair taxes and their relation to investment decisions. Lynden supports the 20 percent tax rate, which will raise over $1 billion in revenue and double severance tax revenues overnight. He said Lynden staff believe that the administration has considered all the factors for the bill and has done an excellent job in balancing revenue, future development, and other long-term effects on Alaska. "We need to keep in mind that the final objective we are all striving for is a gas pipeline project that will require an investment in excess of $20 billion." The investment required to produce undeveloped resources will require an additional $100 billion beyond the pipeline investment, he added. He said all of the investments will certainly impact Lynden's business. He said Lynden is concerned about the lack of a state fiscal plan for managing surpluses in high price environments and for balancing budgets when revenues are low. He said the state budget may go as high as $3.8 billion in two years. He added that the PPT will add an additional $1 billion on top of the projected surplus. The state needs to be very careful in determining the right strategy to ensure a long-term healthy economy, he opined. High oil prices have hidden the impact of low production. He said Alaska should encourage large investments in new and expanded production and the construction of a gas pipeline. 12:48:15 PM RANDY BRAND, Great Northwest Inc, said he was representing his company and the Oil Support Industry Alliance. He said any tax increase can be a disincentive to investment. He asked what the state will do with the current surplus. "Are we just building the hungry elephant? How will we get by when prices are low or when the petroleum is gone?" He asked if the state will price itself out of the market. 12:50:00 PM GEORGE BERRY, Fairbanks, said this is the most important tax legislation since statehood. He requested taking a similar tack "as our 55 constitutional delegates did some 50 years ago and to look for what is best for Alaska overall." He said to consider the oil tax legislation by itself and not allow the producers and governor to sway the legislature's commitment to uphold the state constitution as it applies to natural resources, which must be managed for the maximum benefit of all Alaskans. He recommended a documentary called "The Forty-Ninth Star," which could help the legislature feel the energy the 55 Alaskans brought to the table to do what was best for all Alaskans and not just one segment of the state. MR. BERRY said the 25/20 [tax/credit ratio] is a better approach for HB 488. Exemptions, credits and deductions should be kept to a minimum and include only those expenses that occurred in the state. He said that farming out work across the globe should not be billable as tax deductions in Alaska. He said separate accounting was "lobbied away." Separate accounting gave a fair tax on the industry, he added. He said Alaska's path with the producers is only parallel, with many items in common, but the interest of the producer's shareholders should not be above the citizens of Alaska. "We own the resource," he stated. "You can bargain from a position of strength if you decide to do so. The people of this state will support you on this issue." He said the state lost five percent by one phone call in one afternoon. "I hope the governor will let the answering machine take the next call." MR. BERRY said, having worked in the industry for almost 30 years, it can be a sound relationship but should be negotiated from a position of strength. "Will you be remembered as the legislature that buckled to the governor and the secret negotiations on the gasline, or the one that stood tall with the support of the fellow Alaskans to protect our common interest on our natural resources as our state constitution mandates?" 12:54:25 PM CO-CHAIR RAMRAS asked why he is suggesting a 25/20 ratio. MR. BERRY said it is fair. If he were a legislator he would be pushing for 30 percent and negotiate down. He noted that the overall tax burden on the industry in Alaska put it at the bottom of the barrel across the globe. He stated that he is not against credits and some of the incentives, but at least a 25 percent [tax rate] is appropriate. CO-CHAIR RAMRAS said the state is trying to balance a lot of things and stay competitive. He wants to attract companies to get the last barrel of oil--not just the next barrel. 12:56:19 PM MERRICK PIERCE, Fairbanks, said he appreciated that the legislature has resisted the administration and industry's desire to fast track HB 488. He encouraged the committee's process and asked for more public input, "and you're likely to get a lot of input from a lot of really bright Alaskans on this issue." He said HB 488 is a disaster and should be scrapped. It appears to have been written or influenced by "those who view Alaska as a simple colony to be raped and pillaged." MR. PIERCE said the tax is not progressive, and all eventualities must be addressed, including times of high oil prices. He noted that if oil went up to $100 per barrel, Alaska citizens will suffer immense hardships from the high cost of fuel, while the oil companies would enjoy windfall profits. And yet, he noted, there is no progressivity built into the proposal. The effective date is wrong, "even industry partisans have acknowledged that we have lost billions by not revising oil tax structures years ago." Why should we deliberately lose additional hundreds of millions by going with the July 1 date? he asked. "It just adds insult to injury." MR. PIERCE said his third concern is big. The legislation is highly complex, and he would like to see alternative methods of taxation presented with more simplicity. He said Governor Murkowski is unconcerned with the complexities that have cost the state hundreds of millions of dollars in numerous litigation settlements over the past few decades. He said tax incentives should try and address forces that may be at work to manipulate the price of North Slope crude. He noted an article from the Fairbanks News Miner about antitrust litigation between the port authority, BP and ExxonMobil Corporation. He read from the article about allegations of mergers and acquisitions by two oil companies conspiring to restrict development on the North Slope to keep the price of natural gas at record highs. The article also accuses the companies of boycotting the authorities and other groups' proposals to build a gas pipeline. "What if these allegations are true? If there is a conspiracy at work involved in natural gas, does it reasonably follow that similar arrangements might be at work with regard to oil production and pricing?" he asked. If that is the case, he suggested that an oil reserve tax might be better than various tax credits. He said he would like to see it discussed. He said the effective tax rates are too low, and the state will lose money when the price of oil is below $27 a barrel. "This legislation does not address all future eventualities acceptably." He noted that the governor told the legislature that it must pass HB 488 in order to get a gas pipeline, but he won't tell the body or the public what the key details are. If this is the deal that Alaskans must accept to get a gas pipeline, forget it-we don't need it, he said. He promoted passing a gas reserves tax, like HB 223, because then the state will be negotiating from a position of strength to make sure it gets maximum benefit. 1:01:00 PM CO-CHAIR RAMRAS said he just got a copy of the News Miner article. He said he is working on the issues that Mr. Pierce addressed. 1:01:41 PM TIM BECK, North Pole, said he is speaking for himself, but he is on the Fairbanks Northstar Borough Assembly. He said he is concerned with HB 488 given the all-time high oil prices. He said oil is only half the equation. "Do not pass this legislation without seeing the other piece of the puzzle which is the gasline contract." He said he has asked how much money the oil companies have taken out of Alaska compared to their investments, but the oil industry has continued to say that is proprietary information. The industry is probably already counting their money, he said. 1:03:09 PM CO-CHAIR RAMRAS asked how Mr. Beck thinks the process is going after three weeks of working on HB 488, and if he thinks the legislature is giving it a good look. MR. BECK said if the bill passed without the gasline contract being disclosed, there will be a lot of people looking for Representative Ramras's seat this fall. CO-CHAIR RAMRAS said he wants to make sure this legislation stands on its own. MR. BECK said the governor has made it very clear that these two pieces, the contract and the oil tax change, are integral and one supports the other. He said he likes to see the whole picture before approving half of it. He said the legislature should see the entire proposal, "because what you may gain in this oil tax change, you may well lose in your gasline proposal." CO-CHAIR RAMRAS said he doesn't work for the governor; he works for District 10 and Alaskans. This legislation needs to stand on its own, and the state is sorely in need of a revision of the ELF program, he stated. "I have tried to consider this as if there is no gasline rather than to try to look to see the other piece of the equation." An overhaul of our severance tax which is old and sagging is the way he is approaching HB 488. "I assure you it has been dismissed by myself and many of our colleagues that this is connected to a gasline." 1:06:05 PM MR. BECK said he appreciates that, and he is concerned that the industry had a private council with the governor and they gained five percent from one afternoon. "I would love to be able to do that when I'm negotiating a contract." He said that indicates to him that somebody got a good deal. 1:06:35 PM CO-CHAIR RAMRAS noted that he has seen the borough "do that with the governor." He said, "We've got to be careful not to run the industry out of the state of Alaska by taxing them to the nth degree." He said he is not saying that the governor's proposal is the right one. He said his economics class in high school taught him that there is no such thing as a free lunch, and people need to learn how to live in the real world. He said given a choice of shooting low or shooting high [on taxation], he would rather shoot low and lose some state money and leave the vibrant oil industry intact. That will be his take, he said. 1:07:48 PM MR. BECK said he applauds Representative Ramras for his efforts. It is clear to the industry they are working with comparative safety on the North Slope without anyone shooting at them. "If they are not willing to give us a fair price for our product...leave it in the ground and let our kids develop it." He added, "Let's not sell ourselves short. This contract has some strong implications with regard to the proposed gas line contract, and to disconnect those two, I think would be irresponsible." 1:08:43 PM CO-CHAIR RAMRAS said the oil companies are the engine of Alaska. He said the option of leaving the resource in the ground implies there is no urgency, and that is not an approach Alaska can take. He said the state can't posture belligerently, and it must be mindful of the global economy and the need to get our hydrocarbons to market. He noted that 89 percent of Alaska's economy is derived from hydrocarbons. He wants to ensure that future Alaskans won't pay a state sales or income tax. 1:10:48 PM MIKE KOY, Anchorage, said he has worked for BP for over 11 years in various capacities, including business development, which includes strategy and economic evaluation of gas sales from the North Slope. He has also worked on mergers, acquisitions and finance. He noted that he is on a leave of absence and is free to speak with "all the knowledge and perspective of someone from within the industry without any of the associated limitations or constraints." He said most oil companies use fixed prices when making investment decisions, and those prices have tended to be in the $20 to $30 per barrel range. Within this price range is where the tax regime needs to look attractive relative to other places in the world in order to attract investment, he said, and what happens outside of that range is important, but largely immaterial in making investment decisions. This, coupled with the state's objectives, is important in determining a tax structure. He added that he believes the basis for HB488 is reasonable, and basing the tax on profits is a good thing. But he said it misses the mark because it increases the risk to the state by reducing the aggressive nature of the current tax without sufficiently allowing the state to participate in the upside. He opined that the legislature should implement a graduated profit tax structure that increases the state's proportional share as the price goes up. He said it should kick in at a price high enough not to impact investment decisions, and he thinks it should kick in at $30 per barrel. Secondly, the 20 percent tax incentive is reasonable in and of itself, he stated. Most oil companies use fixed prices to make investment decisions, and providing a tax incentive outside of this investment range is a concession by the state without any outstanding benefit. High oil price is incentive enough, and the state should consider tapering off the tax incentive as prices increase, he said. He suggested allowing a higher tax incentive on viscous oil to bring it on line faster. The claw back is a negotiating ploy by the oil companies, and should be removed, he stated. Finally, he said oil fiscal terms have no bearing on the economics of a gas pipeline; they are not related at all except for negotiating. He said it is important to consider oil tax legislation apart from a gas pipeline and ensure oil fiscal terms are not included in a gas contract. 1:16:18 PM REPRESENTATIVE SEATON asked what Mr. Koy would suggest for a more aggressive tax when oil was low-priced. MR. KOY said he would suggest a tax basis that isn't necessarily tied as much to oil price. The current severance tax is tied to revenues, and it can be set to have a fixed component, such as a minimum severance tax rate that is in place no matter what oil prices are, and that will provide cover to the state if prices go down, and then as the price of oil goes up, there should be a graduated system to get more and more as prices go up. 1:17:43 PM REPRESENTATIVE SEATON said testimony from economists suggested keeping the ELF system when prices are low so taxes don't drop off as fast. MR. KOY said yes, there are other systems that are more appropriate, and what he would consider would be starting from the current structure with a minimal severance tax rate for a fixed lower boundary when prices are low. When prices are high, create an excess rent tax or windfall tax to allow the state to capture more and more rent. That would preserve the low side and allow the state to participate in the high side. It would create a band where the tax structure still attracts investors. The committee took an at-ease from 1:19:26 PM to 1:31:00 PM. The committee took an at-ease from 1:31:47 PM to 1:34:40 PM. JANE HAIGH, Fairbanks, said she has recently read about Soapy Smith, the famous con man of Skagway, Alaska. She said the negotiations resemble a shell game. "If you believe that these oil companies have set up this shell game so that you can win in a basically blind negotiation, I think you should go back and study your history of con men." She said she objects to the process that the legislature has been given by Governor Murkowski and the oil companies. She noted that the new tax could be in force for the next 20 to 40 years, and the legislature is not given the information on the gasline. She suggested the legislature wait for another opportunity to negotiate a gasline and oil tax in an open process. 1:36:38 PM CO-CHAIR RAMRAS said he would recommend the book "100 Years of Solitude" because "if we continue to press this point that is what Alaska will be experiencing." He said the objective is to work with the oil companies, and it is not a shell game. It is complex and serious he stated. MS. HAIGH said it is serious and needs to have an open process. She said it could never be open when the decision on the oil tax must be done before seeing the deal with the gas line. She noted that the resources will be there and are not going away, "whether we get them in time to build our dream houses or whether the resources are developed for our children, I think it is important for us to get a fair deal." 1:38:32 PM CO-CHAIR RAMRAS said the legislature had a caucus, which Ms. Haigh probably considers to be a secret caucus. The caucus went over the future budget of Alaska, and there are many parts, particularly in health, education and social services, that are growing at such an enormous rate that they will swamp the current surplus in the near future. He said that it has been ginned up in the press and by the governor that HB 488 is tied to the gasline deal. He stated that HB 488 is a stand-alone piece of legislation. The ELF is no longer working and the legislature has an opportunity to fix it, he opined. He said there have been meetings that have been attended by 24 house members out of 40, and the legislature has been meeting nonstop with everything else nearly grinding to a halt. He said that whether Alaska gets a gasline or not, this is an opportunity for the open process of reviewing oil taxation. He said the state may or may not get a gasline deal, and the legislature does not have the luxury of waiting. He said the state can't tax the oil companies to death. 1:41:21 PM MS. HAIGH said she agrees it is an amazing opportunity to redo the oil taxes, but it is important to keep them separate. There is an overtone that it better be something that oil companies like. She said she saw PR ads on television from the oil companies suggesting that this is part of the debate. The committee took an at-ease from 1:42:57 PM to 2:29:22 PM. [HB 488 was held over] ADJOURNMENT There being no further business before the committee, the House Resources Standing Committee meeting was adjourned at 2:29 PM.