Legislature(2017 - 2018)BARNES 124
05/03/2017 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB238 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 238 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
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
238.
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]:
Analysis
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
leases.
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
bill.
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
operator.
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
bill.
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
production.
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]
commissioner.
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
indifferent.
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
Act.
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
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 1:37 p.m.