Legislature(2017 - 2018)BARNES 124

05/03/2017 01:00 PM House RESOURCES

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01:01:53 PM Start
01:02:33 PM HB238
01:37:15 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                          May 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 Mike Chenault (alternate)                                                                                        
Representative Chris Tuck (alternate)                                                                                           
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 238                                                                                                              
"An Act relating to the payment of rents and royalties from oil                                                                 
shale leases; and relating to royalties for certain areas in the                                                                
Cook Inlet sedimentary basin."                                                                                                  
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 238                                                                                                                  
SHORT TITLE: REPEAL ROYALTY RELIEF: SHALE; COOK INLET                                                                           
SPONSOR(s): REPRESENTATIVE(s) GUTTENBERG                                                                                        
04/24/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/24/17       (H)       RES, FIN                                                                                               
05/03/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
WITNESS REGISTER                                                                                                              
REPRESENTATIVE DAVID GUTTENBERG                                                                                                 
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Speaking as  the sponsor, presented  HB 238                                                             
and answered questions.                                                                                                         
ED KING, Special Assistant                                                                                                      
Office of the Commissioner                                                                                                      
Department of Natural Resources                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions  during the hearing of HB
ACTION NARRATIVE                                                                                                              
1:01:53 PM                                                                                                                    
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee meeting  to order at  1:01 p.m.   Representatives Tarr,                                                               
Birch,  Parish,   Talerico,  Drummond,  Johnson,   Westlake,  and                                                               
Josephson  were present  at the  call to  order.   Representative                                                               
Rauscher arrived as the meeting was in progress.                                                                                
        HB 238-REPEAL ROYALTY RELIEF: SHALE; COOK INLET                                                                     
1:02:33 PM                                                                                                                    
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE BILL NO. 238, "An Act  relating to the payment of rents and                                                               
royalties from  oil shale leases;  and relating to  royalties for                                                               
certain areas in the Cook Inlet sedimentary basin."                                                                             
1:04:06 PM                                                                                                                    
REPRESENTATIVE  DAVID   GUTTENBERG,  Alaska   State  Legislature,                                                               
sponsor of HB 238, informed  the committee in 2014 Representative                                                               
Thompson  proposed   a  bill  to   explore  all   the  [indirect]                                                               
expenditures  and  tax  credits  that are  not  included  in  the                                                               
budget.     Representative  Guttenberg   referred  to   a  report                                                               
entitled,  "Evaluating  Indirect  Expenditures:    Tax  Credits,"                                                               
issued by Legislative Finance  Division, Legislative Agencies and                                                               
Offices,  and  said  members of  the  [Natural  Resources  Budget                                                               
Subcommittee,  implemented by  the  House  Finance Committee  and                                                               
chaired by Representative Guttenberg]  reviewed the Department of                                                               
Natural  Resources (DNR)  expenditures  to  determine if  certain                                                               
expenditures   warranted    further   review.       Subsequently,                                                               
Representative  Guttenberg's staff  reviewed  all questioned  DNR                                                               
expenditures,  and  in  certain   instances  royalty  relief  was                                                               
identified  by  Legislative   Finance  Division  as  expenditures                                                               
warranting action  "because they didn't  see what was  going on."                                                               
Representative Guttenberg advised royalty  relief directed by the                                                               
commissioner  [of DNR]  would not  have  gone before  Legislative                                                               
Finance  Division  and  [the   bill]  identifies  three  specific                                                               
expenditures  and   tax  credits.     On   5/2/17  Representative                                                               
Guttenberg  was  told  by a  representative  of  Furie  Operating                                                               
Alaska (Furie) -  a member of the Alaska Oil  and Gas Association                                                               
(AOGA) - that two of the  expenditures identified in the bill are                                                               
of value [to  the producers].  Therefore, two items  in section 2                                                               
were removed from  the bill, and the bill now  only addresses the                                                               
issue identified in  section 1, which is a tax  credit enacted in                                                               
1959 that has had no activity  for the last five years.  Further,                                                               
Legislative Finance  Division informed  Representative Guttenberg                                                               
that although the program is  not meeting its legislative intent,                                                               
the division recommended  the statute remain because  there is no                                                               
cost  to administer  the program,  and it  could be  used in  the                                                               
future.  He remarked:                                                                                                           
     ... I  wanted to put  that in  front of you,  that this                                                                    
     has been a  process of trying to determine  what is the                                                                    
     most  important thing  to do  with these  expenditures:                                                                    
     Are they,  have they been  used?  Are they  relevant to                                                                    
     the state?   And  [the bill  is] rendered  down through                                                                    
     all  of them  to this  section  1, this  one by  itself                                                                    
     which doesn't cost anything, and nobody uses.                                                                              
1:07:26 PM                                                                                                                    
CO-CHAIR  JOSEPHSON asked  Representative Guttenberg  to identify                                                               
the information provided by Legislative Finance Division.                                                                       
REPRESENTATIVE GUTTENBERG  said the documents he  referred to are                                                               
from the DNR portion of  the Indirect Expenditure Book (IE Book),                                                               
wherein DNR waived rent and royalty  for shale oil [pages 109 and                                                               
110, included in the committee packet].                                                                                         
CO-CHAIR JOSEPHSON  asked if the  notification by Furie  that two                                                               
of the credits are in use  means "we should abandon section 2 and                                                               
just focus on section 1."                                                                                                       
REPRESENTATIVE GUTTENBERG  related Furie  desires the  credits in                                                               
section 2 to be modified so they  can be used by Furie.  He added                                                               
instead of  repealing the statutes,  the legislature may  want to                                                               
amend what  is in existing  statute, and he  recommended deleting                                                               
section 2 prior to moving the bill out of committee.                                                                            
1:09:01 PM                                                                                                                    
CO-CHAIR TARR  directed attention  to the analysis  portion [page                                                               
2]  of Fiscal  Note  Identifier:   HB238-DNR-DOG-04-28-17,  which                                                               
read [original punctuation provided]:                                                                                           
     This bill  removes the Department of  Natural Resources                                                                    
     (DNR)  Commissioner's discretion  to  waive payment  of                                                                    
     royalty and  rental during the  first five years  of an                                                                    
     oil shale  lease under AS 38.05.160(b).  DNR is unaware                                                                    
     of any  oil shale  leases or activities  ever occurring                                                                    
     in Alaska  since this  statute was  enacted in  1959 or                                                                    
     planning to  be conducted  in the  future. Accordingly,                                                                    
     DNR  does not  anticipate a  fiscal impact  to removing                                                                    
     the language in AS 38.05.160(b).                                                                                           
     This legislation also  repeals AS 38.05.180(f)(5). This                                                                    
     is  the  10-year  royalty  reduction   to  5%  for  six                                                                    
     specific fields  in Cook  Inlet that  were historically                                                                    
     shut in  or undeveloped between 1988  and 1997.The last                                                                    
     royalty relief under this  provision expired in FY2012.                                                                    
     Since this  provision is no  longer applicable  and the                                                                    
     last  royalty  relief   has  expired,  terminating  the                                                                    
     royalty  relief in  38.05.180(f)(5) will  not have  any                                                                    
     fiscal impact.                                                                                                             
     Finally,  this legislation  repeals AS  38.05.180(f)(6)                                                                    
     for leases  that are entered  after the  effective date                                                                    
     of  this bill.  Companies  currently receiving  royalty                                                                    
     relief under  this provision  will continue  to receive                                                                    
     that  relief.  As such,  DNR  does  not anticipate  any                                                                    
     fiscal  impact  by  removing  this  provision  for  new                                                                    
     For  completeness,  the   provisions  AS  31.05.030(i),                                                                    
     31.05.030(k), and 38.05.180(dd)  also being repealed by                                                                    
     this   bill   are   no    longer   relevant   once   AS                                                                    
     38.05.180(f)(5) and (6) are repealed.                                                                                      
CO-CHAIR TARR  concluded the provision  [identified in  the bill]                                                               
is an unused provision and the  bill does not eliminate a program                                                               
in use,  but seeks to  clean up statutes  related to oil  and gas                                                               
tax provisions.                                                                                                                 
REPRESENTATIVE  BIRCH asked  what  is the  motivation behind  the                                                               
REPRESENTATIVE GUTTENBERG  informed the committee  the motivation                                                               
is to  review the credits  and expenditures to confirm  that they                                                               
are meeting legislative intent;  all the credits and expenditures                                                               
related  to DNR  were  reviewed, and  many are  in  use, and  the                                                               
sponsor did not address those in use.   The three found not to be                                                               
in  use   were  included   in  HB  238,   and  he   restated  the                                                               
representative  from  Furie  said  provisions in  section  2  are                                                               
valid.  Thus, the bill is rendered  down to section 1, which is a                                                               
credit established in  1959 and that has remained  unused for the                                                               
last five  years.  He clarified  the bill is not  about the value                                                               
of the  tax credits, but the  purpose was to follow  through with                                                               
the intent of the indirect expenditure report.                                                                                  
CO-CHAIR   JOSEPHSON  expressed   his   understanding  that   the                                                               
committee  is not  to delve  into  the merits  of the  [indirect]                                                               
expenditures  used by  Furie, but  is to  consider repealing  the                                                               
provisions not in use.                                                                                                          
1:13:04 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG related  Furie would  like to  see the                                                               
credits in section  2 modified to fit the needs  of the industry.                                                               
However, that  is not the  intent of HB  238, which is  to review                                                               
the [indirect] expenditures relevant to DNR.                                                                                    
CO-CHAIR TARR further explained section  2 would have repealed AS                                                               
38.05.180(f)(5),  which  is a  ten-year  royalty  reduction to  5                                                               
percent  for  six  specific  fields  in  Cook  Inlet  shut-in  or                                                               
undeveloped  between 1988-1997.   She  suggested industry  may be                                                               
interested in this and related provisions.                                                                                      
REPRESENTATIVE  JOHNSON asked  the sponsor  whether there  is any                                                               
opposition to the bill.                                                                                                         
REPRESENTATIVE  GUTTENBERG   restated  he  was  contacted   by  a                                                               
representative from Furie  who seeks to amend  and expand section                                                               
2.   He  pointed out  the intent  of the  bill is  not to  repeal                                                               
provisions that are in use by industry.                                                                                         
1:16:20 PM                                                                                                                    
ED  KING, Special  Assistant, Office  of  the Commissioner,  DNR,                                                               
stated DNR  is largely indifferent  as to whether  the provisions                                                               
in  the bill  are repealed  or not.   He  clarified Furie  is not                                                               
using  the  current  royalty  relief  provisions,  but  seeks  an                                                               
amendment  to  the current  provisions  so  that Furie  would  be                                                               
eligible to receive [benefits] from the current provisions.                                                                     
CO-CHAIR JOSEPHSON asked why Furie is currently ineligible.                                                                     
MR. KING  explained the provision  within AS  38.05.180(f)(5) was                                                               
enacted  in 1988  for  fields  not in  production  at that  time.                                                               
Furie is currently producing gas  from the Kitchen Lights Unit in                                                               
central Cook Inlet  which was developed around  2006.  Subsequent                                                               
legislation,   AS  38.05.180(dd),   placed  a   restriction  that                                                               
production  must   have  been   in  place   prior  to   2004  for                                                               
eligibility,  thus  Furie  is  not  eligible.    Furthermore,  AS                                                               
38.05.180 (f)(6)  is directed at  oil production from  Cook Inlet                                                               
platforms, so Furie is not eligible under that provision either.                                                                
CO-CHAIR JOSEPHSON  acknowledged a difference of  opinion between                                                               
the House  and Senate related to  [House Bill 111, passed  in the                                                               
Second   Special   Session   of  the   Thirtieth   Alaska   State                                                               
Legislature]  and  asked  if  Furie  seeks  to  lift  the  sunset                                                               
[provision], what that action would cost the state.                                                                             
CO-CHAIR TARR asked Mr. King  to direct his response more broadly                                                               
to the  industry and not to  the economic impact on  one specific                                                               
MR. KING clarified  he was not speaking on behalf  of a member of                                                               
the  industry;  however,  [Furie]  would  not  meet  the  current                                                               
definitions   of   the   current   law,  and   he   suggested   a                                                               
representative from  Furie may  want to  submit testimony  on the                                                               
CO-CHAIR JOSEPHSON stated he was unclear as to Furie's position.                                                                
REPRESENTATIVE GUTTENBERG expressed  his understanding that Furie                                                               
seeks to expand and amend the  statute, so they would be eligible                                                               
for royalty  relief, because  they are looking  for a  gas supply                                                               
for the Interior.                                                                                                               
1:21:19 PM                                                                                                                    
CO-CHAIR TARR read from AS 38.05.180(dd) as follows:                                                                            
     A lessee is eligible for the royalty relief in (f)(5)                                                                      
      ... only if production of oil or gas for sale begins                                                                      
     from the eligible field before 1/1/2004.                                                                                   
MR. KING said correct, and pointed  out that the field from which                                                               
Furie  is   producing  is  not  enumerated   within  (f)(5),  and                                                               
therefore is not eligible for that reason also.                                                                                 
REPRESENTATIVE  PARISH  questioned  if the  statute  is  changed,                                                               
would  [Furie]  receive royalty  relief  on  a field  already  in                                                               
MR.  KING,   in  response  to   Co-Chair  Tarr's   caution  about                                                               
references  to a  specific operator,  stated all  the information                                                               
related  to payments  of  royalties is  public  and available  at                                                               
DNR's web  site, thus he  can speak  about the amount  of royalty                                                               
paid by  an individual  company.   In response  to Representative                                                               
Parish, he  said Furie  is currently  producing from  the Kitchen                                                               
Lights Unit  and if certain  changes are made to  eligibility for                                                               
royalty relief,  Furie's royalty  payments would be  reduced from                                                               
12.5 percent.                                                                                                                   
REPRESENTATIVE   GUTTENBERG,   in  response   to   Representative                                                               
Parish's  question as  to why  the  state would  make changes  to                                                               
decrease  royalty  payments,  explained  in  order  to  make  gas                                                               
affordable in the  Interior, royalty relief is  needed, and "that                                                               
would be one of the reasons why we might want to do that."                                                                      
REPRESENTATIVE PARISH  observed if the state  wished to subsidize                                                               
the cost of  energy for its citizens, there are  other ways to do                                                               
so without giving money to the producer.                                                                                        
1:24:49 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  pointed out  the bill would  only keep                                                               
existing  statutes "on  the books"  and allow  further discussion                                                               
between the legislature, industry, and the commissioner of DNR.                                                                 
MR.  KING  informed  the committee  AS  38.05.180(j)  grants  the                                                               
authority to  the commissioner to  offer or allow  a modification                                                               
or  reduction in  royalties,  following a  process  in which  the                                                               
commissioner determines it  is in the best interest  of the state                                                               
to do so for the purposes  of putting a field into production, or                                                               
maintaining production at  the end of field life,  thus a company                                                               
can petition  the commissioner of  DNR for royalty relief  due to                                                               
economics.  He  stressed the provisions in (f)(5)  and (f)(6) are                                                               
direct royalty relief  made by the legislature, not  by the [DNR]                                                               
1:26:12 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
1:26:28 PM                                                                                                                    
CO-CHAIR JOSEPHSON posited  if a company does not  qualify due to                                                               
the  location of  the field  or that  the lease  has sunset,  but                                                               
still  seeks  to expand  geographic  and  time limitations,  that                                                               
would  require a  new bill.   He  questioned why  the legislature                                                               
would not repeal provisions that are not being used.                                                                            
REPRESENTATIVE GUTTENBERG  stated the  bill before  the committee                                                               
does  not include  credits and  tax credits  that are  in use  by                                                               
industry;  in  fact,  an earlier  response  from  industry  would                                                               
probably have led to withdrawal of the bill.                                                                                    
CO-CHAIR  JOSEPHSON recalled  previous legislation  gave him  the                                                               
view that [indirect] expenditures are  "things for which we don't                                                               
receive  funds, and  in  fact,  we spend  money  that  is at  our                                                               
discretion."    Furthermore,  regarding  legislative  policy,  he                                                               
pointed  out  the  House  Finance  Committee  co-chair  expressed                                                               
interest in  searching for [indirect] expenditures  that could be                                                               
eliminated and to save money.                                                                                                   
1:29:07 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  stressed the bill has  no cost without                                                               
further legislation authorizing changes  to statute.  In response                                                               
to  Co-Chair  Josephson, he  said  [AS  43.05.095(d)] defines  an                                                               
indirect expenditure as follows:                                                                                                
     (d) In  this section,  "indirect expenditure"  means an                                                                    
     express  provision   of  state  law  that   results  in                                                                    
     foregone revenue for the state by providing                                                                                
          (1) a tax credit or other credit;                                                                                     
          (2)  an exemption,  but does  not include  federal                                                                    
     tax exemptions adopted by reference in AS 43.20.021;                                                                       
          (3) a discount;                                                                                                       
          (4)  a  deduction,  but  does  not  include  costs                                                                    
     incurred in  the ordinary course  of business  that are                                                                    
     deducted in the  calculation of a tax  under this title                                                                    
     or in the calculation of  a royalty or net profit share                                                                    
     payment for a lease issued under AS 38;                                                                                    
          (5) a differential allowance.                                                                                         
REPRESENTATIVE    GUTTENBERG     further    explained    indirect                                                               
expenditures "go  all through our  tax policy" and  are evaluated                                                               
on an annual basis.                                                                                                             
REPRESENTATIVE  TALERICO  clarified  Alaska Statutes  cover  many                                                               
different  operations  such  as non-conventional  gas  plays  and                                                               
traditional  reservoirs; the  bill  specifically  relates to  oil                                                               
shale plays and  thereby is "limited to just  that one particular                                                               
form of  development, and ...  a traditional  reservoir wouldn't,                                                               
wouldn't have an application here."                                                                                             
REPRESENTATIVE GUTTENBERG  suggested during  subsequent hearings,                                                               
HB 238 may be  modified or amended, "to make sure  it works for a                                                               
variety of people."                                                                                                             
1:32:10 PM                                                                                                                    
MR. KING  further clarified  the provision  within section  1, AS                                                               
38.05.160(b), is  a mining  provision, not an  oil and  gas lease                                                               
provision;  for example,  the leasing  activities  of Great  Bear                                                               
Petroleum are not  impacted by the repeal of said  provision.  He                                                               
described the process  of oil development from  mining oil shales                                                               
source rock, which  is a process developed in the  1950s that was                                                               
thought to  be the next  breakthrough technology in energy.   Mr.                                                               
King cautioned against  confusing oil shale mining  of rock, with                                                               
shale  oil   production,  which  is   now  known  as   tight  oil                                                               
production, as seen  in [the Bakken Formation,  North Dakota] and                                                               
other places.   In response  to Co-Chair Josephson,  he confirmed                                                               
oil shale does not equal shale oil.                                                                                             
CO-CHAIR TARR  asked Representative Guttenberg to  provide copies                                                               
of an email [document not provided].                                                                                            
1:34:17 PM                                                                                                                    
MR.  KING  informed  the  committee DNR  is  indifferent  to  the                                                               
removal or  retention of the  provision in section 1  because the                                                               
provision has  never been used  and is  not expected to  be used.                                                               
Similarly, DNR is also indifferent  to AS 38.05.180 (f)(5), which                                                               
provisions have  largely expired;  however, the provisions  in AS                                                               
38.05.180(f)(6) are  being utilized,  but because  the transition                                                               
language in the  bill holds harmless any affected  leases, DNR is                                                               
CO-CHAIR TARR  noted Mr. King was  referring to the bill  on page                                                               
2, lines 3-5, which read:                                                                                                       
             TRANSITION.   AS  38.05.160(b),  as amended  by                                                                    
     sec. 1 of this Act,  and the repeal of AS 31.05.030(i),                                                                    
     31.05.030(k), AS  38.05.180(f)(5), 38.05.180(f)(6), and                                                                    
     38.05.180(dd) by sec.  2 of this Act, apply  to a lease                                                                    
     entered into  on or  after the  effective date  of this                                                                    
CO-CHAIR JOSEPHSON asked for DNR's stance on the bill if section                                                                
2 were enacted with the transition language.                                                                                    
MR. KING stated as the bill is written, with the transition                                                                     
language in place, there is no impact on DNR or on the industry.                                                                
REPRESENTATIVE GUTTENBERG remarked:                                                                                             
        As it's still being used, we would not see it in                                                                        
     statute, we would not know it was being used, so that                                                                      
     would be a consideration for you to have.                                                                                  
1:36:54 PM                                                                                                                    
[HB 238 was held over.]                                                                                                         
1:37:15 PM                                                                                                                    
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 1:37 p.m.                                                                 

Document Name Date/Time Subjects
HB238 Sponsor Statement 4.28.17.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Version A 4.24.17.PDF HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Fiscal Note DNR-DOG 4.28.17.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Additional Documents-Waived Rent and Royalty for Shale Oil IE.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Additional Documents-Royalty Relief for Cook Inlet Small Discoveries IE.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Additional Documents-Royalty Relief for Cook Inlet Platforms IE.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Additional Documents-Relevant Statutes.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Additional Documents-Exploration Incentive Credits for Oil and Gas Activities IE.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB238 Additional Documents-Examples of Independent Expenditures Not Recommended for Elimination.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238
HB 238 Additional Documents Sec 38 05 180_dd 5.3.17.pdf HRES 5/3/2017 1:00:00 PM
HRES 5/5/2017 1:00:00 PM
HB 238