Legislature(2017 - 2018)BARNES 124

02/03/2017 01:00 PM RESOURCES

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Audio Topic
01:01:15 PM Start
01:02:55 PM Presentation(s): Update: Status of the Oil and Gas Tax Regime
03:10:24 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Update: Status of the Oil & Gas Tax Regime in TELECONFERENCED
AK: HB 280 (2010), SB 21 (2013), HB 247 (2016)
Presentation: Petroleum Revenues & the Budget
Deficit by Robin O. Brena, Oil & Gas Attorney
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        February 3, 2017                                                                                        
                           1:01 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Andy Josephson, Co-Chair                                                                                         
Representative Geran Tarr, Co-Chair                                                                                             
Representative Dean Westlake, Vice Chair                                                                                        
Representative Harriet Drummond                                                                                                 
Representative Justin Parish                                                                                                    
Representative Chris Birch                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative George Rauscher                                                                                                  
Representative David Talerico                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Chris Tuck (alternate)                                                                                           
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Mike Chenault                                                                                                    
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                                 
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ROBIN OLIVER BRENA, Attorney/Owner                                                                                              
Brena, Bell & Clarkson, P.C.                                                                                                    
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided a PowerPoint presentation entitled                                                              
"(Alaskans' Fair Share)" dated 2/3/17, and answered questions.                                                                  
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:01:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee meeting  to order at  1:01 p.m.   Representatives Tarr,                                                               
Birch,  Parish,   Talerico,  Rauscher,  Drummond,   Johnson,  and                                                               
Josephson  were present  at the  call to  order.   Representative                                                               
Westlake arrived  as the meeting  was in progress.   Also present                                                               
was Representative Chenault.                                                                                                    
                                                                                                                                
^PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                                
                                                                                                                                
PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                             
                                                                                                                                
1:02:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR announced that the only order of business would be                                                                
a presentation by Mr. Robin Brena on the status of the oil and                                                                  
gas tax regime in Alaska.                                                                                                       
                                                                                                                                
CO-CHAIR  TARR  provided  brief  background  information  on  Mr.                                                               
Brena.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  BIRCH  asked  Mr.   Brena  if  he  was  currently                                                               
involved in any litigation that involves suing the state.                                                                       
                                                                                                                                
1:06:11 PM                                                                                                                    
                                                                                                                                
ROBIN  OLIVER  BRENA,  Attorney/Owner, Brena,  Bell  &  Clarkson,                                                               
P.C., said,  "I believe that  right now,  for the most  part, I'm                                                               
aligned, I'm aligned with the state."                                                                                           
                                                                                                                                
REPRESENTATIVE  BIRCH  further  inquired  as  to  any  litigation                                                               
involving the state's industry partners.                                                                                        
                                                                                                                                
MR.  BRENA said  yes.   He added  that he  represents independent                                                               
shippers and independent producers  throughout Alaska against the                                                               
majors.   He said  he would  discuss the history  of some  of the                                                               
litigation during his presentation.                                                                                             
                                                                                                                                
REPRESENTATIVE BIRCH asked whether  an opportunity for equal time                                                               
for testimony would be afforded to others.                                                                                      
                                                                                                                                
CO-CHAIR  TARR  said there  were  four  hours of  testimony  from                                                               
industry  at  the  meetings  on  2/1/17.    In  addition,  during                                                               
hearings  of   forthcoming  legislation,  there  will   be  ample                                                               
opportunity for invited and public testimony.                                                                                   
                                                                                                                                
MR. BRENA provided a brief  personal background and noted that he                                                               
has  represented every  drilling company  in the  state, multiple                                                               
independent producers  and shippers, and the  largest refinery in                                                               
the state.   As  an oil  and gas attorney  for three  decades, he                                                               
expressed  his  respect  for  the industry;  however,  he  is  an                                                               
Alaskan  first, and  the  current situation  is  "out of  balance                                                               
...."    Mr.  Brena  described three  representative  samples  of                                                               
previous  legal cases.     He advised  that the  committee has  a                                                               
constitutional duty  to distinguish when the  interests of Alaska                                                               
and the major oil producers are aligned, and when they are not.                                                                 
                                                                                                                                
1:12:00 PM                                                                                                                    
                                                                                                                                
MR.   BRENA   provided   a  PowerPoint   presentation   entitled,                                                               
"(Alaskans' Fair  Share)" and stated the  presentation represents                                                               
his personal  opinions and  he was  not representing  any client,                                                               
was  not being  paid  to  testify, and  has  no direct  financial                                                               
interest in whether the legislature  adopts or does not adopt his                                                               
recommendations.                                                                                                                
                                                                                                                                
REPRESENTATIVE  RAUSCHER pointed  out  that  slide 1  incorrectly                                                               
identifies   Article  8,   Section   2,  of   the  Alaska   State                                                               
Constitution.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  JOHNSON  asked   whether  Mr.  Brena's  political                                                               
action committee (PAC) is still  in existence, and whether he has                                                               
any other economic associations to disclose.                                                                                    
                                                                                                                                
MR. BRENA said  no.  Directing attention to  his presentation, he                                                               
said Alaska  is not  getting enough for  its resource  (slide 4).                                                               
The   concept   of  Alaskans'   Fair   Share   begins  with   the                                                               
constitutional  requirement  and  duty   to  the  legislature  to                                                               
provide for  the maximum benefit  of the people of  Alaska (slide                                                               
6).    He provided a quote from former  Governor Jay Hammond, and                                                               
said  the  original division  of  the  revenue from  the  state's                                                               
resources was one-third to the  state, one-third to oil, and one-                                                               
third to the federal government (slide 7).                                                                                      
                                                                                                                                
REPRESENTATIVE BIRCH  referred to a slide  provided during recent                                                               
testimony   that  indicated   the   state's   current  share   is                                                               
approaching 46  percent, well exceeding a  one-third share [slide                                                               
not provided].   He pointed  out that  at [oil] prices  below $45                                                               
[per barrel of  oil] the state's share is well  in excess of that                                                               
of the industry.                                                                                                                
                                                                                                                                
CO-CHAIR  TARR noted  the aforementioned  slide includes  royalty                                                               
and is not reflective of the production tax.                                                                                    
                                                                                                                                
1:16:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PARISH  added that the referenced  slide indicated                                                               
net cash flow.                                                                                                                  
                                                                                                                                
MR. BRENA clarified that former  Governor Hammond referred to the                                                               
state's take as  a percentage of gross market  revenues; in 2004,                                                               
state revenues  were 27 percent  of gross market  revenues (slide                                                               
8).  Further, former Governor  Hammond said that the state should                                                               
begin with  a 99 percent  severance tax,  and lower it  until the                                                               
desired behavior was achieved in  order encourage development and                                                               
meet the state's  constitutional mandate (slide 9).   He stressed                                                               
that one-third share is an  overall concept, not field- by-field,                                                               
because some  fields are challenged  and need support  and others                                                               
produce massive  amounts of profits  (slide 10).   Further, there                                                               
are many  factors of market  conditions:  when prices  are lower,                                                               
state  share should  be reduced,  when prices  are higher,  state                                                               
share should  be increased,  which would average  out to  be one-                                                               
third of  gross revenues  (slide 11).   He directed  attention to                                                               
slide  16  that  was  provided  at  an  earlier  hearing  by  the                                                               
Department  of Revenue  (DOR) indicating  - depending  on whether                                                               
the market value of Alaska oil  is focused on either Alaska North                                                               
Slope (ANS) West  Coast (WC) price or wellhead value  - the state                                                               
has generally collected between 27 percent and 35 percent.                                                                      
                                                                                                                                
REPRESENTATIVE TALERICO observed  that the constitutional mandate                                                               
for  maximum benefit  includes  all of  Alaska's  resources.   He                                                               
expressed his  concern for the  fair share of  future generations                                                               
of   Alaskans,  and   reminded   the   committee  that   previous                                                               
legislators   have  had   concerns  about   the  potential   from                                                               
exploration  and   development,  and   not  just   about  revenue                                                               
collected in  the next  few years.   He  asked whether  the state                                                               
should also consider its future and continue development.                                                                       
                                                                                                                                
MR.  BRENA agreed  that should  be the  state's goal.   Regarding                                                               
Alaska's  fair policy,  with  their  two-thirds share,  producers                                                               
have an  opportunity to realize  substantial profits  (slide 13).                                                               
He  emphasized  the  need for  competitive  entry  into  Alaska's                                                               
basins because  market power  is held by  a few  major companies.                                                               
The  state  does  not  attract  independent  producers  for  many                                                               
reasons  such  as  the  high  cost  environment  and  significant                                                               
barriers  to entry  regarding  field facilities,  transportation,                                                               
and  tankers.   Another major  barrier  to entry  is the  state's                                                               
failure to  work with the  industry to foster  competition (slide                                                               
14).                                                                                                                            
                                                                                                                                
1:23:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  stated  previous testimony  has  indicated                                                               
that  tax credits  are  bringing new  business  and investors  to                                                               
Alaska,  and questioned  whether vetoed  tax credits  that remain                                                               
unpaid  would  "dampen  the  enthusiasm  of  this  investment  in                                                               
Alaska."                                                                                                                        
                                                                                                                                
MR.  BRENA agreed,  and  also expressed  concern  that the  state                                                               
cannot pay  the tax credits  in a  timely manner, thus  the state                                                               
needs to get revenue from the  fields that can afford it and give                                                               
support  to  challenged fields.    However,  Mr. Brena  cautioned                                                               
against incenting behavior  that is legally required  or that the                                                               
market would otherwise  create.  He agreed  that independents are                                                               
"being  hung out  to  dry because  they rely  on  ... credits  to                                                               
continue  drilling."   As  an  aside,  he  gave 10  reasons  that                                                               
production  tax  reform  is  needed:    the  industry  says  it's                                                               
working; information  is not forthcoming; no  one understands the                                                               
tax calculations except  the tax director; dissimilar  to that of                                                               
other states;  production tax is  no longer blamed for  job cuts;                                                               
raising production is not discussed;  unbalanced reporting of its                                                               
impacts;  tax incentives  for a  field that  required litigation;                                                               
projects are  the result of  two-year-old tax system;  state pays                                                               
for oil to  be produced.  He returned attention  to slides 15 and                                                               
16  that  indicated declines  in  revenue:  total production  tax                                                               
revenues  are down  98  percent and  total  net [production  tax]                                                               
revenues  are down  109 percent,  and he  concluded that  for the                                                               
first  time, through  production  tax, the  state  is paying  the                                                               
producers  to produce  its oil.    Further, there  is not  enough                                                               
revenue to pay  the petroleum credits incurred,  and Alaskans are                                                               
getting less  for their petroleum  resources than at any  time in                                                               
the state's history (slide 17).                                                                                                 
                                                                                                                                
REPRESENTATIVE BIRCH recalled testimony  stating that Senate Bill                                                               
21 [passed in  the 28th Alaska State  Legislature] generates more                                                               
revenue than  the previous  tax system; he  asked whether  any of                                                               
the loss of revenue could be  attributed to the fall of the price                                                               
of oil.                                                                                                                         
                                                                                                                                
MR. BRENA  said yes.  He  explained that one-half of  the decline                                                               
in  revenue is  attributable to  the price  of oil  and about  $4                                                               
billion  is a  result of  the change  in tax  rate.   He provided                                                               
graphs   that  illustrated   production  tax   revenue  and   net                                                               
production tax revenue from 2012 to  2016 (slides 19 and 20).  He                                                               
questioned how a production tax can "turn negative."                                                                            
                                                                                                                                
1:30:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  reminded  the   committee  there  was  a                                                               
referendum for change  [Ballot Measure 1, a  referendum to repeal                                                               
SB 21,  failed to pass  on 8/19/14] that  did not pass,  thus the                                                               
current tax system was affirmed by Alaskans.                                                                                    
                                                                                                                                
MR.  BRENA opined  the referendum  narrowly [lost]  in a  primary                                                               
election  and would  have [passed]  in  a general  election.   He                                                               
returned to  the presentation and  said the decline in  the price                                                               
of  oil  does  not  explain  the decline  in  the  percentage  of                                                               
production tax  (slide 21).  A  comparison of Senate Bill  21 and                                                               
Alaska's Clear  and Equitable  Share (ACES)  [passed in  the 25th                                                               
Alaska  State  Legislature]  is unproductive  because  both  fail                                                               
under current  market conditions  (slide 22).   Additional graphs                                                               
on slides  23 and 24 illustrate  that if Senate Bill  21 had been                                                               
in effect  during the period  of the  ACES tax system,  the state                                                               
would have  under-recovered $11 billion,  and would not  have had                                                               
savings sufficient for the last five years.                                                                                     
                                                                                                                                
REPRESENTATIVE BIRCH pointed out as  owner, the state derives its                                                               
one-eighth portion,  and questioned  whether [royalty]  is viewed                                                               
as a part of its one-third fair share.                                                                                          
                                                                                                                                
MR. BRENA  said yes.  He  restated that the cause  of the state's                                                               
fiscal problem is that the  petroleum production tax failed.  The                                                               
first solution  to the problem  is for  the state to  recover its                                                               
share of  the resource  under all circumstances,  which is  not a                                                               
partisan issue.   The  problem is also  not caused  by government                                                               
wasteful  spending.   He provided  a quote  from former  Governor                                                               
Hammond (slides  26 and 27).   The  second solution is  to reduce                                                               
spending and  ensure that  government runs  efficiently, although                                                               
further  cuts may  have  recessionary impacts  (slide  28).   The                                                               
third solution  is to spend  savings only for the  public benefit                                                               
and to refill  savings accounts (slide 29).   Further, the Alaska                                                               
Permanent  Fund  (permanent  fund)  was intended  to  permit  the                                                               
state's transition  from a petroleum  to a  non-petroleum economy                                                               
when Alaska's petroleum resources  are exhausted; to achieve this                                                               
goal the  permanent fund  needs to grow  double its  present size                                                               
(slide 31).                                                                                                                     
                                                                                                                                
1:41:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  inquired  as  to  whether  Mr.  Brena  has                                                               
proposed that the earnings from  the permanent fund would support                                                               
government once the fund has doubled in size.                                                                                   
                                                                                                                                
MR. BRENA opined  in order for the permanent fund  to achieve its                                                               
purpose, it  will have  to grow  to twice its  current size.   In                                                               
further  response  to  Representative   Birch,  he  restated  the                                                               
purpose  of  the  permanent  fund   is  to  allow  the  state  to                                                               
transition from  a petroleum to  a non-petroleum  economy without                                                               
significant economic  disruption.   He said he  was not  making a                                                               
comment on the distribution of the permanent fund.                                                                              
                                                                                                                                
REPRESENTATIVE RAUSCHER  asked for  clarification of  Mr. Brena's                                                               
opinion on the purpose of the permanent fund.                                                                                   
                                                                                                                                
MR. BRENA restated the purpose as  shown on slide 31.  In further                                                               
response to  Representative Rauscher, he said  the permanent fund                                                               
was  designed  to help  answer  the  question of  sustaining  the                                                               
state's economy after the oil is gone.                                                                                          
                                                                                                                                
REPRESENTATIVE  TALERICO stated  that  the  University of  Alaska                                                               
Anchorage  (UAA),  Institute  of  Social  and  Economic  Research                                                               
(ISER)  has  identified transitional  ways  to  use the  earnings                                                               
reserve of the permanent fund.                                                                                                  
                                                                                                                                
MR.  BRENA opined  all of  the financial  resources of  the state                                                               
should  be  used; in  fact,  some  money  should go  to  building                                                               
infrastructure and investment in Alaska.                                                                                        
                                                                                                                                
REPRESENTATIVE  TALERICO  surmised  some of  the  permanent  fund                                                               
earnings reserve could be made available.                                                                                       
                                                                                                                                
MR.  BRENA  agreed there  are  many  "levers  you can  pull"  but                                                               
restated the goal  is to ensure that the state  receives its one-                                                               
third  share of  petroleum revenues  based on  the market  share.                                                               
In further  response to Representative  Talerico, he said  he did                                                               
not think permanent  fund earnings should be spent  to ensure the                                                               
profitability of the producers.                                                                                                 
                                                                                                                                
1:45:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON expressed his  concern that the state operates                                                               
under a profit system, but  the information presented is based on                                                               
[a  gross tax  system].    Not using  the  earnings reserve  when                                                               
industry is profitable  may send a message to "hold  out ... [in]                                                               
a game  of chicken."   He said the  state may  have to go  to the                                                               
permanent fund earnings.                                                                                                        
                                                                                                                                
1:46:58 PM                                                                                                                    
                                                                                                                                
MR. BRENA advised  even if the state garners  one-third share, it                                                               
will still be short of revenue;  thus getting a fair share is the                                                               
first solution,  and then using  the permanent fund "makes  a lot                                                               
of sense."   The permanent fund structure was  adopted to protect                                                               
it  from  politicians;  therefore,  the permanent  fund  and  the                                                               
Permanent  Fund   Dividends  (PFDs)  are  the   last  alternative                                                               
solution (slides 32 and 33).                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH advised  that Alaska  is trying  to attract                                                               
oil industry investment  and inquired as to  how the "recommended                                                               
changes" will achieve more investment.                                                                                          
                                                                                                                                
MR. BRENA stated that providing $8  billion or $9 billion to gain                                                               
$1  billion or  $2  billion  in investment  is  not sound  public                                                               
policy; in fact,  independents are not working  in Alaska because                                                               
of barriers to entry, market  power, and a high-cost environment.                                                               
He stressed  the importance  of a  competitive marketplace  and a                                                               
free market.                                                                                                                    
                                                                                                                                
1:50:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH   asked  whether  the   administration  has                                                               
reviewed and supports Mr. Brena's tax changes and revisions.                                                                    
                                                                                                                                
MR. BRENA said,  "I wouldn't characterize that either  way, I was                                                               
invited down to express my opinions and that's what I'm doing."                                                                 
                                                                                                                                
CO-CHAIR  TARR  said  there  has been  no  coordination  in  that                                                               
regard.                                                                                                                         
                                                                                                                                
MR. BRENA explained he used DOR  slides so that the committee can                                                               
be assured  of the  facts presented and  to avoid  arguments over                                                               
models and technicalities.  He  continued to other solutions, and                                                               
pointed out  that the state's tax  system is a hybrid  of a gross                                                               
and a net tax, but no  one present has the sufficient information                                                               
to properly administer  a net system.  The  industry's profits in                                                               
Alaska  - its  actual  costs and  profits -  are  unknown to  the                                                               
legislature  due to  the complexity  of the  system.   Complexity                                                               
works  against  the state  because  the  taxpayers are  far  more                                                               
sophisticated than  the state.   For example,  much of  the audit                                                               
information  is confidential,  and audits  are five  years behind                                                               
schedule.    Therefore, the  state  must  be diligent  about  all                                                               
deductions,  carry forwards,  new oil,  credits, and  minimum tax                                                               
and  interest,  as  all  of these  complexities  can  be  "gamed"                                                               
(slides 34 and  35).  [All] other states have  gross systems, and                                                               
governments  in other  countries with  net systems  receive 70-80                                                               
percent  of the  profit from  a certain  point.   In 2020,  North                                                               
Slope  gas  will convert  to  a  gross  system  (slide 36).    In                                                               
summary, a gross  system is a better approach  in its simplicity:                                                               
base  on market  prices  for ANS  crude on  the  West Coast;  set                                                               
revenue  to  one-third  share; adjust  for  field  economics  and                                                               
market conditions  (slide 37).   Directing attention  to Alaska's                                                               
hybrid tax  system, he provided  two DOR slides  that illustrated                                                               
statewide  tax credits  and unrestricted  petroleum revenue,  and                                                               
statewide tax credits  and production tax, from  fiscal year 2007                                                               
(FY 07) through  FY 25 (slides 39  and 40).  Also  provided was a                                                               
DOR slide  that listed concerns  with the current tax  and credit                                                               
system  including the  impact of  a large  discovery, eliminating                                                               
exceptions  to the  minimum tax,  equity between  major producers                                                               
and new explorers, and a  volatile and complex minimum tax (slide                                                               
41).                                                                                                                            
                                                                                                                                
1:59:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON  asked Mr.  Brena to  reconcile his  stance on                                                               
tax credits,  which is aligned  with that of  the administration,                                                               
and  his  published opinions  in  support  of independent,  small                                                               
producers.                                                                                                                      
                                                                                                                                
MR. BRENA cautioned  that without enough revenue  the state can't                                                               
create   a  balance   between  fields   in   order  to   optimize                                                               
development.  He  opined the state should  help the independents,                                                               
work  to open  markets, and  pay the  credits that  are due  with                                                               
revenue  from profitable  fields.   Although under  a net  system                                                               
there is  no tax without profit,  he said the oil  industry bases                                                               
investment on  long-term profitability, not on  price spikes, and                                                               
has made a lot  of money over the long term.    He questioned why                                                               
the state  has invested  $15 billion  in the  last three  to four                                                               
years  so  that  the  major producers  can  avoid  losing  money.                                                               
Further, the legislature cannot  manage extreme market conditions                                                               
through its tax  structure (slide 43).  Alaska  should not ensure                                                               
producer profits, pay a statewide  tax, not collect its one-third                                                               
share, or convert  the permanent fund to  ensure producer profits                                                               
(slide 44).    He stressed that Alaska is  in a business position                                                               
with a partner that withholds financial information (slide 45).                                                                 
                                                                                                                                
REPRESENTATIVE   BIRCH  said   it   would  be   helpful  if   the                                                               
administration  could indicate  whether it  supports Mr.  Brena's                                                               
proposals at this point.                                                                                                        
                                                                                                                                
CO-CHAIR  TARR  pointed  out  that  Mr.  Brena  is  offering  his                                                               
independent  opinions and  there is  no proposal  presently under                                                               
consideration by the committee.                                                                                                 
                                                                                                                                
2:06:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON  recalled  an   earlier  question  asked  and                                                               
answered that  Mr. Brena was  before the committee at  the behest                                                               
of the  co-chairs.  He  then pointed  out that DOR  estimates the                                                               
industry's  cost  to produce  oil  is  between  $41 and  $45  per                                                               
barrel.                                                                                                                         
                                                                                                                                
REPRESENTATIVE RAUSCHER  questioned whether the  presentation was                                                               
based on a model.                                                                                                               
                                                                                                                                
MR.  BRENA  said  no.   In  further  response  to  Representative                                                               
Rauscher, he said he has not  provided his presentation to any of                                                               
the major oil producers, although  they have made their positions                                                               
known to him.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  PARISH  compared the  current  tax  system to  an                                                               
example  of  a taxpayer  who  underreports  income and  withholds                                                               
proprietary information,  intending to settle an  audit favorably                                                               
in the future.                                                                                                                  
                                                                                                                                
MR. BRENA  stated the aforementioned  "is the system you  have in                                                               
place."  Returning to the topic  of information under the net tax                                                               
system, he opined the system  should be more transparent in order                                                               
for  Alaskans  and  the  legislature to  know  more  about  their                                                               
business partners in developing  the state's resources; ignorance                                                               
is not conducive to creating sound tax policy.                                                                                  
                                                                                                                                
CO-CHAIR TARR  relayed that there  is forthcoming  legislation in                                                               
this regard  and urged the  committee to research House  Bill 247                                                               
[passed  in  the  29th  Alaska  State  Legislature]  for  related                                                               
background information.                                                                                                         
                                                                                                                                
2:12:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   JOHNSON   recalled   previous   testimony   that                                                               
producers pay  46 percent, and  asked for more information.   She                                                               
expressed her concern  about seeking one-third fair  share with a                                                               
disregard for  the market and  impacts to the industry;  in fact,                                                               
the  foregoing  discussion  relates  to the  budget  and  how  to                                                               
balance  the  budget   by  changing  the  tax   structure.    She                                                               
characterized the discussion as mixing  up the budget deficit and                                                               
sound policies, and  questioned whether there is  any "good news"                                                               
ahead for Alaska.                                                                                                               
                                                                                                                                
MR. BRENA  responded that  Alaska's one-third  share is  just the                                                               
first  step   to  a  solution   that  does   include  incentives.                                                               
Secondly, Alaska should incentivize, as  he will discuss later in                                                               
the   presentation,  but   the  concept   is  the   state  cannot                                                               
incentivize   through  a   paid  credit   system  without   first                                                               
collecting revenue,  which is why  the budget and  sound policies                                                               
do  mesh.    Regarding  good  news, he  said  there  are  amazing                                                               
petroleum reserves in the state awaiting proper management.                                                                     
                                                                                                                                
REPRESENTATIVE  BIRCH  asked how  the  evaluation  of the  Trans-                                                               
Alaska Pipeline System (TAPS) changed  after it was reassessed by                                                               
the court.                                                                                                                      
                                                                                                                                
MR. BRENA  answered that at one  time the assessed value  of TAPS                                                               
was  between $3  billion  and $4  billion,  the State  Assessment                                                               
Review  Board  (SARB)  value  was $4.3  billion,  and  the  court                                                               
decisions   ranged  between   $10   billion   and  $12   billion;                                                               
ultimately, the case was settled  through an arrangement with the                                                               
owners at a "complicated" $8 billion.                                                                                           
                                                                                                                                
REPRESENTATIVE  BIRCH surmised  that at  $8 billion,  and with  a                                                               
flat 20  [mill rate]  property tax rebated  to some  cities along                                                               
the route, there is an  addition of approximately $160 million to                                                               
the tariff component.                                                                                                           
                                                                                                                                
MR. BRENA  further explained that  one issue associated  with the                                                               
legal  case  that  is  still  outstanding  are  $377  million  in                                                               
supplemental  assessments that  were  disallowed  by the  Federal                                                               
Energy Regulatory Commission  (FERC) and are not  included in the                                                               
current rate.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  BIRCH questioned  whether  the  cost of  property                                                               
taxes along  TAPS does not get  calculated as a part  of the cost                                                               
of transporting oil.                                                                                                            
                                                                                                                                
2:18:59 PM                                                                                                                    
                                                                                                                                
MR. BRENA responded:                                                                                                            
                                                                                                                                
     ... You don't  get to go backwards when  you ... under-                                                                    
     recover,  and collect  from  future  shippers what  you                                                                    
     didn't collect from the  prior shippers. ... Ratemaking                                                                    
     is  projective in  nature, so  when you  put a  rate in                                                                    
     effect you're  estimating costs going into  the future.                                                                    
     ... And  that's the  way it  works, and  if there  is a                                                                    
     rate element  that you think  there is  uncertainty in,                                                                    
     ...  then  you  have  to  come  forward  and  put  your                                                                    
     shippers  on  notice  that that  isn't  your  permanent                                                                    
     rate, that that  rate element may vary,  and engage the                                                                    
     regulator in that  process so it could  be adjusted out                                                                    
     so  that  you're charging  the  right  shipper for  the                                                                    
     right  movement.   So, it  was held  that they  didn't,                                                                    
     they decided  to roll  the dice  and gamble,  and their                                                                    
     taxes  went up  and  they didn't  take the  appropriate                                                                    
     steps to ensure that they would be included in rates.                                                                      
                                                                                                                                
REPRESENTATIVE  WESTLAKE  returned  attention to  slide  46,  and                                                               
observed that municipalities are struggling  for money.  He asked                                                               
whether all states have a nondisclosure clause in this regard.                                                                  
                                                                                                                                
MR. BRENA said he was not  qualified to respond to that question.                                                               
He opined that if one is  in business with an industry one should                                                               
be  informed, and  there is  no barrier  to the  state [providing                                                               
taxpayer  information to  municipalities] legally.   Leaving  the                                                               
topic  of  information  in  the  net tax  system,  he  turned  to                                                               
different kinds of  deductions, such as field,  for operating and                                                               
capital, transportation, for pipeline  and marine, and loss carry                                                               
forward  (slide 48).   As  previously  discussed, deductions  are                                                               
shielded  through confidentiality  designations  and  are on  the                                                               
rise  because of  the net  tax system.   His  experience suggests                                                               
that the  state should be diligent  in its audits and  he gave an                                                               
example of tariff  overcharges on TAPS (slide 49).   Further, for                                                               
an  integrated major  producer, cost  centers are  profit centers                                                               
because  the  major  producers  make money  on  TAPS  and  tanker                                                               
transportation, yet  deduct these  as costs from  production tax.                                                               
He  stressed  that  the  aforementioned  strategy  is  known  and                                                               
explains how  the early  recovery of  TAPS tariffs  lagged behind                                                               
because of the over-collections of  TAPS transportation rate.  In                                                               
addition,  the owners  of  TAPS have  collected  and earned  $4.5                                                               
billion to cover their $2.5  billion obligation to dismantle TAPS                                                               
at  the end  of its  useful life:   an  over-collection of  their                                                               
demolition,  removal,  and  restoration  (DR&R)  estimate  by  $2                                                               
billion.  If  refunded, over $0.5 billion of the  DR&R fund would                                                               
go to  the state.   Mr.  Brena pointed out  that the  owners have                                                               
drained their  capital investment  from TAPS  due to  their over-                                                               
collection in  early years  and the DR&R  fund, yet  under common                                                               
rate  principles, the  state is  unable  to capture  either.   He                                                               
dismissed the idea  that the owners of TAPS will  leave the state                                                               
because they  can continue to  operate TAPS and produce  from the                                                               
fields, but if they  go out of business they will  "have to pay a                                                               
massive amount of money, and it's  the value of that money that's                                                               
going to  keep them  operating even  in the  negative."   He then                                                               
provided two  DOR slides illustrating  increases to  marine costs                                                               
and the  TAPS tariff  (slides DOR  Tax Division,  Revenue Sources                                                               
Book (RSB) Fall 2016, pages 109 and 110).                                                                                       
                                                                                                                                
2:28:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR asked whether any  of these particular matters have                                                               
been litigated, for example, the over-collection of tariff.                                                                     
                                                                                                                                
MR. BRENA stated  FERC requires the owners to  maintain a running                                                               
total  of  DR&R  collections  and   earnings  at  their  pipeline                                                               
regulated utility  rate.   He said  the owners  have unrestricted                                                               
access to  the DR&R fund,  and their return  on equity is  two or                                                               
three times  that of a  utility, thus  the DR&R "pot"  provides a                                                               
"massive  economic   benefit".    He  restated   that  costs  are                                                               
sometimes profit centers due to over-collection (slide 52).                                                                     
                                                                                                                                
CO-CHAIR  TARR asked  for supporting  documents  related to  this                                                               
topic that will then be made available to the committee.                                                                        
                                                                                                                                
CO-CHAIR  JOSEPHSON  questioned  whether  the  remedy  for  over-                                                               
collection is found in Congress or Juneau.                                                                                      
                                                                                                                                
MR. BRENA  responded that FERC  delayed DR&R refunds to  "the end                                                               
of the  line" and the state  was opposed to refunds  "and its own                                                               
financial  interest, as  it often  has been  in these  cases" and                                                               
provided an example.  He  questioned why the state has instigated                                                               
a net  tax system with one  of the highest cost  operators in the                                                               
world.  The  effect of the aforementioned deductions  has been to                                                               
reduce  production  tax  and  thereby  reduce  the  size  of  the                                                               
permanent fund  (slides 52  and 53).   Mr. Brena  said he  is not                                                               
suggesting raising taxes on the  entire North Slope, but only for                                                               
the fields of Prudhoe and  Kuparuk, two profitable legacy fields,                                                               
and  he provided  information that  illustrated  producing oil  -                                                               
under  2016  price   conditions  -  from  the   Prudhoe  Unit  is                                                               
profitable (slide  54).  He  concluded that collecting  "a little                                                               
extra"  from   Prudhoe  and  Kuparuk   will  provide   the  state                                                               
sufficient   revenue  to   support  government   and  to   create                                                               
incentives  for  the  marginally  challenged fields.    Slide  55                                                               
illustrated the costs of production  using a production tax of 33                                                               
percent  of gross  from the  Prudhoe Unit.   However,  he offered                                                               
that slide  55 creates a  controversial issue because  he revised                                                               
the pipeline tariff to $0.63  due to litigation that is currently                                                               
underway, and that the variable shipping  cost of a barrel of oil                                                               
through TAPS  is 7  percent of  the tariff,  but the  owners have                                                               
already recovered their investment and capital.                                                                                 
                                                                                                                                
2:38:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH asked to review the "Stickel Report."                                                                      
                                                                                                                                
MR. BRENA  offered to provide  any source materials.   Turning to                                                               
the  topic of  new  oil,  he questioned  why  the state  provided                                                               
incentives to  a company to develop  a field that it  was legally                                                               
compelled to  develop:   Point Thomson  should not  be designated                                                               
new oil (slide 56).  Further,  the minimum tax should be hardened                                                               
for  all  fields,  and  raised on  Prudhoe  and  Kuparuk  because                                                               
greater Prudhoe  Bay production  is 281,000  barrels per  day and                                                               
Kuparuk production is  103,000 barrels, of which  22,000 are from                                                               
the satellites,  totaling about 74  percent of  total production.                                                               
A 1  percent change in the  minimum tax results in  an additional                                                               
$75  million in  revenue,  and  an increase  on  Prudhoe Bay  and                                                               
Kuparuk  would represent  74 percent  of the  additional benefit;                                                               
therefore,  the  minimum tax  should  be  raised on  Prudhoe  and                                                               
Kuparuk  for  revenues to  pay  the  unpaid  tax credits  to  the                                                               
independents (slide  57).   Turning to the  topic of  credits, he                                                               
advised  that credits  should  be  paid in  a  timely manner  and                                                               
independents  should  have  economic parity.    Further,  credits                                                               
should be reduced  unless demonstrated as necessary  to develop a                                                               
marginal field, not  because required by law, or if  likely to be                                                               
achieved  by  the  marketplace  (slide  58).   On  the  topic  of                                                               
interest  on   underpaid  revenues,  he  said   the  current  tax                                                               
structure is  a system that encourages  gamesmanship, underpaying                                                               
and  litigation;  in addition,  audits  should  be resourced  and                                                               
completed  within  one  year,  and   the  interest  on  underpaid                                                               
revenues should be raised (slide 59).                                                                                           
                                                                                                                                
2:43:42 PM                                                                                                                    
                                                                                                                                
MR. BRENA provided  a summary of his recommendations  under a net                                                               
tax  system:     require  public   reporting  on   the  financial                                                               
performance  of  the  producers;  simplify the  net  tax  system;                                                               
resource  and  require  timely  audits;  amortize  capital  field                                                               
expenses  over   depreciation  life   and  not  each   year;  fix                                                               
transportation  deductions to  prevent  litigation; eliminate  or                                                               
reduce loss carry-forwards; eliminate  or reduce production under                                                               
the  new oil  designation,  including Point  Thomson; harden  the                                                               
minimum  tax   and  raise  it   for  Prudhoe  and   Kuparuk;  pay                                                               
outstanding credits  to ensure economic parity  for independents,                                                               
but  withhold  incentives  when  behavior  is  otherwise  legally                                                               
required;  adjust  interest   structure  on  underpaid  petroleum                                                               
revenues (slides  60 and 61).   Mr. Brena urged the  committee to                                                               
help Alaskans  get a  fair share  in a  sustainable and  fair way                                                               
(slide 62).                                                                                                                     
                                                                                                                                
CO-CHAIR TARR pointed out that  source information is included on                                                               
slide 64.                                                                                                                       
                                                                                                                                
REPRESENTATIVE PARISH  inquired as  to whether  there would  be a                                                               
standard  to  determine   at  what  point  a   field  becomes  an                                                               
elephantine field such as Prudhoe.                                                                                              
                                                                                                                                
MR. BRENA said there is no  question that Prudhoe and Kuparuk are                                                               
massive fields.   In further  response to  Representative Parish,                                                               
he estimated the  value to the state of lawsuits  in which he has                                                               
participated to be greater than $10 billion.                                                                                    
                                                                                                                                
2:49:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH   read  a   quote  he  attributed   to  the                                                               
commissioner  of   the  Department   of  Revenue   [document  not                                                               
provided].   He asked for  a response  from the witness  and also                                                               
that  the   committee  formally  request  a   response  from  the                                                               
administration on the proposals put forth before the committee.                                                                 
                                                                                                                                
MR. BRENA restated  that his proposition is this:   in periods of                                                               
low oil  prices, the  state can  take less  revenue if,  when oil                                                               
prices increase,  state revenue also  increases.  The  concept is                                                               
one-third over  time, not one-third  at any  point in time.   The                                                               
present  system under-collects  in good  and bad  times; however,                                                               
under the ACES system, the  state accumulated wealth during times                                                               
of high prices.                                                                                                                 
                                                                                                                                
CO-CHAIR TARR,  in response to  Representative Birch,  noted that                                                               
the  request for  a  response from  the  administration could  be                                                               
submitted through  her office,  or through  his, and  shared with                                                               
the committee.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  BIRCH  restated  his   interest  in  hearing  the                                                               
administration's stance on the foregoing recommendations.                                                                       
                                                                                                                                
CO-CHAIR  JOSEPHSON  directed  attention  to DOR  slide  page  16                                                               
[presentation  slide  12],  pointed  out since  1978  Alaska  has                                                               
received $403  billion at the  wellhead -  which is 35  percent -                                                               
and inquired as to whether this is the one-third amount sought.                                                                 
                                                                                                                                
MR. BRENA  said no.  He clarified that  the one-third  share that                                                               
should be the  goal of the legislature is one-third  of the gross                                                               
market  [value].    Wellhead  value  is  after  [producers]  take                                                               
deductions  for  marine  and transportation,  which  in  economic                                                               
terms are inflated costs.                                                                                                       
                                                                                                                                
CO-CHAIR JOSEPHSON recalled that in  2009 and 2010, the state got                                                               
at least  a 40  percent to  70 percent share,  which may  be "the                                                               
nature of this  profit beast."  If prices were  high, there would                                                               
be  debate by  legislators  comparing ACES  and  Senate Bill  21;                                                               
however, there is no debate because prices are not high.                                                                        
                                                                                                                                
2:55:08 PM                                                                                                                    
                                                                                                                                
MR.  BRENA observed  that  the state  is in  a  recession and  is                                                               
under-collecting revenue to  which it is entitled.   He cautioned                                                               
against  living on  savings  and the  permanent  fund instead  of                                                               
actual income, and  urged the committee to act  by increasing the                                                               
petroleum tax.  He said, "There  has never been a period in which                                                               
we have so under-recovered our petroleum tax ...."                                                                              
                                                                                                                                
CO-CHAIR JOSEPHSON  asked whether  any other  states use  a gross                                                               
system that includes stair step progressivity.                                                                                  
                                                                                                                                
MR. BRENA said he would provide that information.                                                                               
                                                                                                                                
CO-CHAIR JOSEPHSON questioned whether  the state should require a                                                               
plan of  approval so DNR could  look at financing, the  play, and                                                               
the viability of a prospective development.                                                                                     
                                                                                                                                
MR. BRENA  opined a plan  should also be public  information; for                                                               
example, at Prudhoe  Bay there is no opportunity  for real damage                                                               
to commercial  interests, but still  there is secrecy.   Further,                                                               
public funds should not be spent on hidden information.                                                                         
                                                                                                                                
CO-CHAIR JOSEPHSON stated Mr. Brena  has previously spoken of two                                                               
systems that  assessed a gross  tax in  the legacy fields,  and a                                                               
net tax, with assistance in newer fields.                                                                                       
                                                                                                                                
MR.  BRENA  said  he  did  not.    Although  a  gross  system  is                                                               
preferable,  he surmised  that cannot  be  achieved; however,  to                                                               
improve  the   existing  system,   he  recommended   raising  the                                                               
minimums, which has the effect  of creating a gross system during                                                               
periods of low prices.                                                                                                          
                                                                                                                                
2:59:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TALERICO stated  Mr. Brena  has recently  written                                                               
that  the  current  tax  rate   is  insufficient  for  harvesting                                                               
behavior and  production.    Of course,  evidence has  shown that                                                               
there  is a  recent  increase  in production  after  a 14  years;                                                               
further,  along with  an increase  in production,  there are  new                                                               
discoveries at  Smith Bay, Pikka, and  Willow.  He asked  "Do you                                                               
see any  upside in this,  with these, our  ability to go  out and                                                               
explore and find  these major fields and  increase our production                                                               
after a 14 or 15 year slide ...?                                                                                                
                                                                                                                                
MR.  BRENA  said yes,  there  is  positive news,  and  questioned                                                               
whether  it is  causable-related to  state policies.   He  opined                                                               
that finds are decades in the  making and cannot be credited to a                                                               
two-year-old tax program;   the 3 percent  "uptick" was predicted                                                               
based  on market  conditions, along  with a  production level  of                                                               
between 500,000  and 550,000 barrels  of oil.   These predictions                                                               
were based on information available  before the passage of Senate                                                               
Bill 21.   Mr.  Brena noted  that the finds  were there,  but the                                                               
companies "in our  basin" are harvesters, and what  is needed are                                                               
independent companies that  explore and drill.   In the lifecycle                                                               
of  a petroleum  basin, the  first companies  working there  make                                                               
major  investments and  a lot  of money;  the following  industry                                                               
needs support  to be  successful.  Finally,  he advised  that the                                                               
production from  elephantine fields levels out  and continues for                                                               
decades, as in, for example, Prudhoe and Kuparuk.                                                                               
                                                                                                                                
REPRESENTATIVE TALERICO  asked whether the  drop in the  price of                                                               
oil was predicted.                                                                                                              
                                                                                                                                
MR. BRENA said no.                                                                                                              
                                                                                                                                
REPRESENTATIVE  JOHNSON  inquired  as   to  the  purpose  of  the                                                               
presentation  and supported  Representative  Birch's request  for                                                               
testimony  from the  administration  in this  regard.   She  also                                                               
requested a  copy of  Mr. Brena's  source "Diapering  the Devil."                                                               
Further, she asked whether a bill is forthcoming.                                                                               
                                                                                                                                
CO-CHAIR TARR  responded that testimony  today and  during recent                                                               
meetings "was an educational exercise"  to aid new legislators in                                                               
their understanding of an oil and gas bill.                                                                                     
                                                                                                                                
REPRESENTATIVE  JOHNSON  stated  her  interest  in  hearing  more                                                               
presentations from different perspectives.                                                                                      
                                                                                                                                
CO-CHAIR TARR  assured the committee  that any  forthcoming bills                                                               
will be heard  fully, and encouraged members of  the committee to                                                               
request  additional   testimony  from  others.     She  said  the                                                               
committee would  hear from the administration  and cautioned that                                                               
some invited testifiers charge fees.                                                                                            
                                                                                                                                
CO-CHAIR JOSEPHSON  added that the  Legislative Budget  and Audit                                                               
Committee has hired consultants.                                                                                                
                                                                                                                                
3:10:24 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 3:10 p.m.