Legislature(2013 - 2014)SENATE FINANCE 532

03/06/2013 01:30 PM FINANCE

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01:32:45 PM Start
01:33:07 PM SB21
02:36:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Department of Natural Resources
Department of Revenue
PFC Energy
Roger Marks
Bills Previously Heard/Scheduled
                 SENATE FINANCE COMMITTEE                                                                                       
                       March 6, 2013                                                                                            
                         1:32 p.m.                                                                                              
1:32:45 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Vice-Chair Fairclough called the Senate Finance Committee                                                                       
meeting to order at 1:32 p.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
MEMBERS ABSENT                                                                                                                
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
ALSO PRESENT                                                                                                                  
Michael  Pawlowski,   Advisor,  Petroleum   Fiscal  Systems,                                                                    
Department  of Revenue;  Barry  Pulliam, Managing  Director,                                                                    
Econ One  Research, Inc.;  Joe Balash,  Deputy Commissioner,                                                                    
Department of Natural Resources; Senator Hollis French.                                                                         
SB 21     OIL AND GAS PRODUCTION TAX                                                                                            
          SB 21 was HEARD and HELD in committee for further                                                                     
SENATE BILL NO. 21                                                                                                            
     "An  Act relating  to  appropriations  from taxes  paid                                                                    
     under the  Alaska Net Income  Tax Act; relating  to the                                                                    
     oil and gas  production tax rate; relating  to gas used                                                                    
     in the state; relating  to monthly installment payments                                                                    
     of the oil and gas  production tax; relating to oil and                                                                    
     gas  production  tax  credits for  certain  losses  and                                                                    
     expenditures; relating  to oil  and gas  production tax                                                                    
     credit  certificates; relating  to nontransferable  tax                                                                    
     credits based  on production; relating  to the  oil and                                                                    
     gas tax  credit fund; relating to  annual statements by                                                                    
     producers and explorers;  relating to the determination                                                                    
     of annual  oil and gas production  tax values including                                                                    
     adjustments  based on  a percentage  of gross  value at                                                                    
     the  point   of  production  from  certain   leases  or                                                                    
     properties;    making   conforming    amendments;   and                                                                    
     providing for an effective date."                                                                                          
1:33:07 PM                                                                                                                    
Vice-Chair  Fairclough communicated  that the  meeting would                                                                    
include  invited testimony  from the  Department of  Revenue                                                                    
(DOR), Department of Natural Resources  (DNR), and Econ One.                                                                    
She  shared  that  public  testimony   would  begin  in  the                                                                    
following meeting at 3:00 p.m.                                                                                                  
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT OF  REVENUE, relayed that the  administration had                                                                    
been asked to provide responses  to initial questions on the                                                                    
legislation and  on the  relationship between  gross revenue                                                                    
exclusions (GRE) and credits in particular.                                                                                     
BARRY PULLIAM,  MANAGING DIRECTOR, ECON ONE  RESEARCH, INC.,                                                                    
provided  a  PowerPoint  presentation  titled  "Comments  to                                                                    
Senate  Finance  SB21/SRES CS  SB  21"  (copy on  file).  He                                                                    
shared that  the goal was  to address members'  questions on                                                                    
how  various  credits  would  work  and  interact  with  one                                                                    
another. He pointed to slide  2 titled "North Slope Tax Rate                                                                    
under SRES  CS SB21  with $5/bbl Production  Allowance." The                                                                    
administration had  heard some concern about  the 35 percent                                                                    
base  rate  (an  increase  over the  25  percent  rate).  He                                                                    
explained  that under  the proposed  system  the rate  would                                                                    
work in tandem with the  $5 per barrel production allowance,                                                                    
which would  lower the rate.  He stated that in  reality the                                                                    
35 percent rate would never  apply (as indicated on slide 2,                                                                    
which included  a net taxable  value scale of $0.00  to $200                                                                    
per barrel).                                                                                                                    
Co-Chair Kelly asked if the  chart showed the production tax                                                                    
or the  overall state  tax. Mr.  Pulliam responded  that the                                                                    
chart only showed production tax.                                                                                               
Co-Chair Kelly asked  for verification that slide  2 did not                                                                    
include   the   royalty.   Mr.  Pulliam   replied   in   the                                                                    
affirmative. He  elaborated that  the slide  illustrated the                                                                    
tax rate that  would apply on the production  tax at various                                                                    
prices; it  was possible to  translate the values  into West                                                                    
Coast prices by adding approximately $40 per barrel.                                                                            
1:37:00 PM                                                                                                                    
Mr. Pulliam looked  at slide 3 titled  "GRE Equivalent Value                                                                    
from  Specified Production  Allowance  (35%  Tax Rate)."  He                                                                    
addressed  that  the  various  mechanisms  (operating  at  a                                                                    
single tax rate) were designed  to achieve a system that was                                                                    
not  regressive;  a system  that  had  a slight  progressive                                                                    
component  that  countered  the  regressive  effect  of  the                                                                    
royalty. The  system could be  accomplished with a  GRE, per                                                                    
barrel  allowance,  or  capital  credit.  He  discussed  the                                                                    
relationship between  the per barrel allowance  and GRE. The                                                                    
current  CS included  a $5  per  barrel allowance  and a  30                                                                    
percent  GRE  for  new  oil. The  $5  per  barrel  allowance                                                                    
represented by the blue line on  slide 2 showed what kind of                                                                    
GRE it achieved.  He elaborated that the  allowance could be                                                                    
thought of as  a GRE; it declined as price  rose and rose as                                                                    
the price  fell because the fixed  barrel allowance remained                                                                    
the same.  For example,  under the  CS at  approximately $80                                                                    
per  barrel the  $5  allowance crossed  the  20 percent  GRE                                                                    
mark. The chart  illustrated that an allowance  level of $10                                                                    
per barrel  would be equivalent to  a 40 percent GRE  at the                                                                    
$80 per barrel price; the  allowance level at $15 per barrel                                                                    
was equivalent  to a  60 percent  GRE at  the $80  price. He                                                                    
reiterated that  the allowance  percentage would  decline as                                                                    
the  price   rose.  The  concepts  were   similar  but  were                                                                    
structured differently;  the GRE  provided a  percentage off                                                                    
of the  value of the  oil, whereas the per  barrel allowance                                                                    
provided a varying  percentage off the value of  the oil. He                                                                    
reiterated the different structures.                                                                                            
1:40:56 PM                                                                                                                    
Vice-Chair Fairclough welcomed Senator  Hollis French to the                                                                    
committee room.                                                                                                                 
Mr.  Pulliam  turned  to  slide  4  titled  "Capital  Credit                                                                    
Equivalent  Value  at  Specified Production  Allowance."  He                                                                    
relayed that  the per barrel  analysis could also  be looked                                                                    
at on a capital credit  equivalent. The slide showed the $5,                                                                    
$10, and  $15 dollar per  barrel allowances to  indicate how                                                                    
they  would  translate  into a  capital  credit.  The  slide                                                                    
indicated that at  a $10 cost in capital a  $5 allowance was                                                                    
equal  to a  50 percent  capital  credit; a  $10 per  barrel                                                                    
allowance  at  a $10  cost  in  capital  would equal  a  100                                                                    
percent capital  credit. As  capital spending  increased the                                                                    
fixed  per barrel  percentage  declined.  The allowance  was                                                                    
mechanically  different  than  a   capital  credit,  but  it                                                                    
accomplished some  of the same  things. He pointed to  a key                                                                    
difference  of the  capital  credit under  ACES  where a  20                                                                    
percent  credit was  paid  upfront;  whereas, the  allowance                                                                    
would  only be  earned as  oil was  produced. He  elaborated                                                                    
that  the items  had  a different  net  present value  (NPV)                                                                    
effect, but they worked towards the same goal.                                                                                  
1:43:06 PM                                                                                                                    
Mr. Pulliam moved  to slide 5 titled  "Annual State Revenues                                                                    
and  Producer Cash  Flows  at $100  West  Coast ANS  ($2012)                                                                    
Lower  Cost  Oil  Alaska   Development  New  Participant  in                                                                    
Alaska" illustrated  the cash flow differences  between ACES                                                                    
and the  CSSB 21(RES).  He directed  attention to  the lower                                                                    
graph showing state revenues; the  blue bars represented the                                                                    
state's cash  flows under  ACES. The  negative cash  flow as                                                                    
development on the field got  underway corresponded with the                                                                    
state's purchase  of credits and  net operating  losses from                                                                    
the  new participant;  the combination  of  the two  equaled                                                                    
approximately  45 percent  of the  development costs  in the                                                                    
early years.  As production began  later in the  fourth year                                                                    
and  into the  fifth  year, positive  revenues  began to  be                                                                    
collected  under  ACES.  The  green  bars  represented  CSSB
21(RES); there  were no outflows  from the state  given that                                                                    
it  was not  purchasing  credits. The  net operating  losses                                                                    
were  carried forward  and recovered  later against  the tax                                                                    
obligation. The tax rate was  lower under the CS; therefore,                                                                    
the green  bars shown  were lower. He  pointed out  that the                                                                    
timing of  the different  mechanisms under  ACES and  the CS                                                                    
was different;  ACES provided the credits  upfront; whereas,                                                                    
under the  CS the credits  and allowances were given  as oil                                                                    
was produced.                                                                                                                   
Mr. Pulliam moved  to slide 6 titled  "Annual State Revenues                                                                    
and  Producer Cash  Flows  at $100  West  Coast ANS  ($2012)                                                                    
Lower Cost  Oil Alaska Development Incumbent  Participant in                                                                    
Alaska." The lower graph related  to state revenues showed a                                                                    
loss under  ACES for the  first years of development  due to                                                                    
the  purchase of  credits  and  a loss  in  tax revenue.  He                                                                    
relayed  that  the  net  difference  to  the  state  for  an                                                                    
incumbent was  larger in the early  years than it was  for a                                                                    
new participant.  He explained  that an  incumbent investing                                                                    
in a  new field  would have the  ability to  deduct expenses                                                                    
against  their   tax  obligation.   He  detailed   that  the                                                                    
incumbent  would not  be  able  to buy  down  the rate,  but                                                                    
expenses would  be deducted at  the 35 percent. There  was a                                                                    
different effect on the incumbent than on a new producer.                                                                       
1:47:12 PM                                                                                                                    
Mr. Pulliam continued on slide  9 titled "Producer and State                                                                    
Economics   under   Alternative  Systems   New   Participant                                                                    
Investment  in  50  MMBO Field  $20/Bbl  Development  Capex,                                                                    
16.67%  Royalty Rate."  The slide  showed how  the different                                                                    
allowances and their duration would  affect the producer and                                                                    
the  state in  a hypothetical  development of  a 50  million                                                                    
barrel  field in  and around  the legacy  fields. The  first                                                                    
column showed  the present  value to the  producer on  a per                                                                    
barrel  basis under  the  CS  at the  35  percent base  rate                                                                    
combined  with the  $5  per barrel  allowance;  at $100  per                                                                    
barrel West  Coast ANS  price the  development would  have a                                                                    
NPV of  $3.60. Columns 2 and  3 showed the effect  of the 30                                                                    
percent GRE; the  NPV increased to $4.59 shown  in column 2,                                                                    
which  represented a  10-year period.  Column  3 showed  the                                                                    
impact  of providing  the 30  percent  GRE for  the life  of                                                                    
production;  the NPV  increased to  $4.86. He  detailed that                                                                    
the change  between columns 2 and  3 was not as  great as it                                                                    
was in the  first 10 years given that the  bulk of a field's                                                                    
oil  was produced  in the  early years  and nearer-term  was                                                                    
more  valuable on  a  NPV basis.  He  believed the  analysis                                                                    
would help  with any discussion  on how cutting off  the GRE                                                                    
or some  of the allowances  would impact various  items. The                                                                    
data  showed that  the  majority of  the  benefits would  be                                                                    
obtained by  allowing the GRE  for the  first 10 years  of a                                                                    
field's life.                                                                                                                   
Mr. Pulliam addressed what would  happen if an allowance was                                                                    
used without the GRE (slide  9). Columns 4 and 5 illustrated                                                                    
an  increase in  the  allowance  by $5  per  barrel for  new                                                                    
production. The  additional $5 allowance would  increase the                                                                    
NPV, although  not as significantly  as the 30  percent GRE.                                                                    
Columns  6 and  7  showed how  an  additional $10  allowance                                                                    
would increase  the NPV.  Columns 8  and 9  demonstrated how                                                                    
using only  a capital  credit allowance on  top of  the base                                                                    
system  would impact  the NPV.  He stated  that the  capital                                                                    
credit  was consistent  with what  was provided  under ACES;                                                                    
the credit could be claimed  immediately as opposed to being                                                                    
carried forward.                                                                                                                
1:52:32 PM                                                                                                                    
Mr.  Pulliam explained  that columns  10 and  11 on  slide 9                                                                    
showed the  NPV under  ACES and  without any  production tax                                                                    
respectively. He detailed that ACES  and a no production tax                                                                    
scenario were both used when  evaluating whether the various                                                                    
mechanisms  made  sense  economically   for  the  state.  He                                                                    
addressed  conclusions based  on the  chart. He  shared that                                                                    
the scenarios  providing a GRE  or an allowance  included in                                                                    
the CS substantially improved  producer economics unless the                                                                    
price of oil was  very low; in the $80 range  the CS did not                                                                    
improve economics relative  to ACES. He noted  that ACES had                                                                    
the highest NPV  at $1.26 (column 10);  however, the state's                                                                    
NPV was  negative and it turned  out to be a  more favorable                                                                    
system for producers. He surmised  that the scenario was not                                                                    
positive for the state.                                                                                                         
Mr. Pulliam turned  to the second section on  slide 9, which                                                                    
showed the  impact on  government take.  For example,  a new                                                                    
producer  developing a  field  with  the characteristics  on                                                                    
slide 9 and  qualifying for the GRE would  fall under column                                                                    
3; government  take would  be just below  60 percent  in the                                                                    
$100 to $120  per barrel range. An additional  $5 per barrel                                                                    
allowance  would put  government  take  at approximately  62                                                                    
percent to 63 percent (column  5). The scenario would not be                                                                    
as generous to the producer,  but it would still fall within                                                                    
a  competitive  range.  He   communicated  that  there  were                                                                    
various ways  to benefit producers'  economics with  the GRE                                                                    
and  per barrel  allowance without  providing upfront  state                                                                    
1:56:28 PM                                                                                                                    
Senator  Bishop asked  which  of the  scenarios  on slide  9                                                                    
would  provide producers  with the  best  advantage for  the                                                                    
most oil production at $100  per barrel. Mr. Pawlowski asked                                                                    
for clarification on the  question. Senator Bishop explained                                                                    
his question.                                                                                                                   
Mr. Pawlowski responded that he  would look for any scenario                                                                    
that  provided the  highest NPV;  column 11)  "no production                                                                    
tax" would  provide the highest  NPV for a producer.  Out of                                                                    
the  proposed options,  column 3  (the  lifetime 30  percent                                                                    
GRE) would provide producers with the highest NPV.                                                                              
Vice-Chair  Fairclough   remarked  that  the   response  was                                                                    
contrary to testimony from current  producers in relation to                                                                    
legacy fields.  She detailed the new  explorers were happier                                                                    
with  the  Senate Resources  Committee  CS,  but that  other                                                                    
industry  testimony  had  been  in support  of  the  capital                                                                    
credits,  despite  the  higher  NPV under  the  lifetime  30                                                                    
percent GRE shown in the Econ One presentation.                                                                                 
Mr. Pawlowski clarified that the  slide included an analysis                                                                    
for new  participants only. He  pointed out that  the Alaska                                                                    
Oil and Gas  Association (AOGA) had testified  that a system                                                                    
should avoid  the tendency  to pick  winners and  losers. He                                                                    
stressed  that the  economics shown  on  slide 9  completely                                                                    
changed for  a company with  an existing tax  liability that                                                                    
could write its expenditures  off. The incentives were about                                                                    
creating  a level  playing field  between  new entrants  and                                                                    
existing producers. He believed  that the administration had                                                                    
more work to do with the  committee on the topic of what was                                                                    
fair for legacy production.                                                                                                     
1:59:57 PM                                                                                                                    
Mr.  Pulliam turned  back  in the  presentation  to slide  7                                                                    
titled  "Producer  and  State  Economics  under  Alternative                                                                    
Systems  Incumbent  Investment  in  50  MMBO  Field  $20/Bbl                                                                    
Development  Capex,  12.5%  Royalty  Rate."  The  slide  was                                                                    
structured  the   same  as   slide  9;   however,  incumbent                                                                    
investment   had  an   existing  tax   obligation  and   any                                                                    
incremental  decisions impacted  the obligation.  He pointed                                                                    
out that  at $100 per  barrel the  NPV under ACES  was $5.98                                                                    
(shown  under column  10); the  figure was  close to  the no                                                                    
production tax scenario NPV of  $6.12. He stated that it was                                                                    
a  pretty  good   place  for  producers  to   be.  Column  1                                                                    
demonstrated that  the NPV would  be $4.57 without  the GRE,                                                                    
which was not  as favorable. He referred  to prior testimony                                                                    
that the GRE  did not apply to new oil  within legacy fields                                                                    
compared to  columns 2  and 3  where the  enhanced economics                                                                    
were applied  and the NPV  increased above the  ACES number.                                                                    
He  believed  the  testifier  had   thought  that  the  bill                                                                    
represented a  tax increase at  lower price levels  and that                                                                    
without the  GRE they were  being treated  unfairly relative                                                                    
to  new  producers/fields.  The chart  also  included  other                                                                    
credit scenarios.                                                                                                               
2:02:44 PM                                                                                                                    
Mr. Pawlowski clarified that the  discussion pertained to an                                                                    
incremental  investment and  its economics  and not  ongoing                                                                    
production  in the  legacy  fields.  The administration  had                                                                    
distinguished its  analysis between the two  systems and had                                                                    
looked at what an additional  participating area (PA) or the                                                                    
expansion of  a PA  would mean within  a legacy  field under                                                                    
the   CSSB   21(RES).   He  acknowledged   that   additional                                                                    
opportunities existed that did not meet the criteria.                                                                           
Mr. Pulliam  directed attention to slide  8 titled "Producer                                                                    
and   State   Economics   under  Alternative   Systems   New                                                                    
Participant Investment in 50  MMBO Field $20/Bbl Development                                                                    
Capex,  12.5% Royalty  Rate." The  slide showed  information                                                                    
for a new participant with  a 12.5 percent royalty. He noted                                                                    
that the  variance between the  12.5 percent and  16 percent                                                                    
royalty  made a  difference  to the  producer economics.  He                                                                    
detailed that  under the 12.5  percent royalty  a producer's                                                                    
NPV was $4.26  under the base scenario in column  1 the $100                                                                    
per barrel price; the NPV  was $3.60 under the 16.67 percent                                                                    
royalty  (slide 9).  The higher  royalty resulted  in higher                                                                    
take and lower  NPV. He elaborated that  higher the royalty,                                                                    
the  less  of  a  tax  bite a  producer  would  be  able  to                                                                    
withstand  in   order  to  maintain  similar   economics.  A                                                                    
producer looking  to develop a  new field could  always look                                                                    
for  royalty relief  with DNR  if the  economics on  a 16.67                                                                    
lease were not working.                                                                                                         
2:05:44 PM                                                                                                                    
Mr.  Pawlowski  believed it  was  important  to address  the                                                                    
various metrics  (e.g. NPV, government take,  and other) for                                                                    
the public's  understanding. He added that  it was important                                                                    
to remember  that NPV and  government take were only  two of                                                                    
the  metrics.  He  encouraged committee  members  to  review                                                                    
earlier  presentations that  had included  cash margins  and                                                                    
internal rates  of return. He referenced  testimony that had                                                                    
pointed out a  balance between all of the metrics  used by a                                                                    
company when making investment decisions.                                                                                       
Mr. Pullium  continued to address  slide 8. The  top section                                                                    
illustrated the  producer NPV and the  section that followed                                                                    
showed the government take. The  three lower sections of the                                                                    
slide pertained to the state  including the NPV of the state                                                                    
production tax, the  NPV of the total  state cash (including                                                                    
production tax, royalties, income  tax, and property taxes),                                                                    
and  the  NPV  of  the  total state  cash  where  the  state                                                                    
received  50 percent  of the  royalties  (e.g. the  National                                                                    
Petroleum  Reserve   -  Alaska  where  50   percent  of  the                                                                    
royalties went to the federal  government). He noted that in                                                                    
the three  lower sections  the investment  did not  look any                                                                    
different  from   the  producer  standpoint;   however,  the                                                                    
scenarios  were different  from the  state's standpoint.  He                                                                    
explained  that ACES  and SB  21 were  both net  tax systems                                                                    
therefore  the royalties  were not  taxable barrels  yet the                                                                    
cost of  production was  deductible. The  NPV for  the state                                                                    
was lower in the scenarios  in which the state only received                                                                    
50 percent of the royalties.                                                                                                    
2:08:32 PM                                                                                                                    
Mr. Pawlowski pointed  out that stress tests  against the no                                                                    
production tax  scenario hoped to identify  situations where                                                                    
the  state  had  materially   improved  through  its  fiscal                                                                    
system.  The administration  saw  the scenario  as a  system                                                                    
that went  too far and  could not be  justified as a  way to                                                                    
incentivize production.  Another concern related to  how the                                                                    
movement of  the GRE, credits,  and allowances  affected the                                                                    
production tax revenues. The NPV  information on slide 8 had                                                                    
been  included to  show where  the state  would win  or lose                                                                    
related to  production tax revenues. Depending  on the price                                                                    
some of  the scenarios did  not produce a  desirable outcome                                                                    
for the state.                                                                                                                  
2:09:52 PM                                                                                                                    
Mr. Pulliam looked at slide  10 titled "Impact of "Interest"                                                                    
on Loss Carry Forward 50 MMBO New Field With 16.67% Royalty                                                                     
$20/BBL Development Cost, New  Participant." The slide broke                                                                    
out  producer  and state  economics  and  showed what  would                                                                    
happen if  there were different levels  of interest; because                                                                    
it pertained  to new development  a 30 percent GRE  would be                                                                    
provided  to  the producer.  He  pointed  to column  4  that                                                                    
showed the 15  percent carry forward increase  under CSSB 21                                                                    
(RES). At  the $80  oil price  level the  producer economics                                                                    
remained  constant   at  $0.62  per  barrel   regardless  of                                                                    
different loss  carry forward rates.  He explained  that the                                                                    
carry   forward  provision   included   a  10-year   sunset;                                                                    
therefore, at very  low prices all of the losses  may not be                                                                    
used. He  noted that at  $80 per barrel the  state economics                                                                    
were $307 million regardless of  the loss carry forward rate                                                                    
because a producer would not be  able to use the entirety of                                                                    
the loss carry forward. He  detailed that the scenario would                                                                    
change at  $100 to  $120 per barrel  and the  producer would                                                                    
use the  entire loss carry  forward. He pointed out  that at                                                                    
$120 per barrel the producer  NPV with no loss carry forward                                                                    
was $8.25  compared to an $8.71  NPV with a 15  percent loss                                                                    
carry forward. Column  6 showed a system  where losses could                                                                    
be  deducted  as  expenditures   were  made.  A  35  percent                                                                    
deduction  would be  received  up front  and  the NPV  would                                                                    
equal  $9.06  at the  $120  per  barrel price.  He  compared                                                                    
columns 4 and  6 and explained that a 15  percent loss carry                                                                    
forward obtained  a similar result  as deducting  the losses                                                                    
right away.                                                                                                                     
2:14:09 PM                                                                                                                    
Mr. Pulliam  turned to slide  11 titled  "Average Government                                                                    
Take ACES  v. SB21/HB72  and SRES CS  SB21 for  All Existing                                                                    
Producers  (FY2015-FY2019)  and  Other  Jurisdictions."  The                                                                    
slide  illustrated  the  difference  between  the  take  for                                                                    
ongoing operations compared to  the take for new production.                                                                    
The graph looked at the  government take projected over a 5-                                                                    
year period (FY 15 to FY  19) from ongoing operations on the                                                                    
North Slope. He  noted that while some  new investment would                                                                    
occur, the  investment was  dominated by  ongoing production                                                                    
and legacy fields.  Under CSSB 21 (RES)  the government take                                                                    
began  at  low  prices  in  the  mid-60  percent  range  and                                                                    
approached  65 percent  as  time went  on.  He relayed  that                                                                    
government take  for new investment  was typically  lower in                                                                    
the  low-60  percent  range,  particularly  related  to  the                                                                    
allowance and GRE.  He noted that the last  couple of slides                                                                    
related  to development  and the  GRE; he  turned the  floor                                                                    
over to Mr. Pawlowski.                                                                                                          
Mr. Pawlowski  asked DNR Deputy  Commissioner Joe  Balash to                                                                    
discuss  PAs,  the GRE  under  the  CS and  time  limitation                                                                    
concept issues.                                                                                                                 
2:16:59 PM                                                                                                                    
JOE  BALASH,  DEPUTY  COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES, pointed  to a slide  from a past  Pioneer Natural                                                                    
Resources presentation  (slide 13)  and asked  the committee                                                                    
to take the  information into account if  it was considering                                                                    
the inclusion  of a  time limitation on  the GRE.  The slide                                                                    
showed an image including  the original offshore development                                                                    
(represented in  green); Pioneer  was evaluating  whether or                                                                    
not to  pursue the  Nuna development (represented  in purple                                                                    
as   a  separate   pool).  The   department  was   currently                                                                    
considering whether to  grant the company with a  PA for the                                                                    
development.  He  elaborated  that original  production  had                                                                    
begun  in 2008  or 2009.  He explained  that any  time limit                                                                    
imposed  would shorten  the time  under which  the PA  would                                                                    
qualify for a GRE or  additional dollar per barrel allowance                                                                    
associated with  the new  areas. He  urged the  committee to                                                                    
consider linking any time limitation  to a PA to ensure that                                                                    
the beginning of  the limit was tied to  the time production                                                                    
2:19:44 PM                                                                                                                    
Senator Bishop asked Mr. Balash to reiterate his testimony.                                                                     
Mr. Balash  communicated that  production at  Oooguruk began                                                                    
in 2008/2009. He  explained that if a 7-year  clock had been                                                                    
started at  the time of  the first production, it  would run                                                                    
out  in 2015.  He expounded  that any  additional production                                                                    
within  a  unit  would  be  bound by  the  clock  if  a  GRE                                                                    
limitation  were placed  at  the unit  level.  He asked  the                                                                    
committee to consider placing any  time limitation at the PA                                                                    
level. He referenced  the Pioneer slide and noted  that a 7-                                                                    
year clock would  have run out by the time  the Nuna Project                                                                    
came into production.                                                                                                           
Senator Bishop surmised  that the light blue  portion of the                                                                    
image should  not have a  time limit. Mr. Balash  replied in                                                                    
the affirmative;  that the  clock would  start over  at each                                                                    
Vice-Chair Fairclough  pointed to  the Pioneer  slide (slide                                                                    
13, but labeled  slide 6) and noted that it  could be argued                                                                    
that the Nuna development would not  qualify for a new PA if                                                                    
it were 50 percent new. She  asked how DNR would ensure that                                                                    
a  company could  not create  a  new PA  within an  existing                                                                    
field. She wondered about criteria  the department would use                                                                    
to keep subjectivity low for PA approval.                                                                                       
Mr. Balash replied  that the slide showed  a two dimensional                                                                    
representation  of  the  leases   contributing  to  a  unit;                                                                    
however, the  formations represented  on the  slide occurred                                                                    
at  depth as  well.  He elaborated  that  the green  portion                                                                    
showed  the  original sets  of  sands  that were  developed,                                                                    
which represented a portion of  the PA at Oooguruk. The Nuna                                                                    
formation  was in  a different  location and  occurred at  a                                                                    
different  depth; therefore,  DNR  was able  to measure  the                                                                    
land  by depth,  longitude,  and latitude.  He believed  the                                                                    
department  used section  lines  for the  track numbers.  He                                                                    
detailed that it  was relatively easy for  the department to                                                                    
keep  two  distinct  PAs separate.  The  slide  showed  that                                                                    
production  from  Nuna would  come  onshore  at a  different                                                                    
location  than the  original  offshore  island Oooguruk  had                                                                    
produced from. He explained that  metering would be straight                                                                    
forward and barrels could be accounted for easily.                                                                              
Mr.  Balash  discussed that  it  was  more challenging  when                                                                    
original  PAs  were  expanded  in   the  legacy  fields.  He                                                                    
explained that  under CSSB 21  (RES) the burden would  be on                                                                    
the lessees to demonstrate that  a new part of the reservoir                                                                    
would  contribute  to production;  a  portion  that had  not                                                                    
contributed previously because it  had been inaccessible due                                                                    
to old drilling  technology or other. The  producer would be                                                                    
required  to   prove  the  area  was   new  through  seismic                                                                    
information (4-D  seismic) or through  reservoir engineering                                                                    
practices looking at fluid  dynamics and pressures. Approval                                                                    
to expand  the PA  would be provided  if the  producer could                                                                    
prove the  area was new.  The second  step would be  for the                                                                    
producer to prove to DOR that  it was producing from the new                                                                    
area  and that  it could  account for  the barrels  produced                                                                    
separately  from the  original production;  if the  producer                                                                    
could  not  demonstrate  these items,  the  area  would  not                                                                    
qualify for the GRE.                                                                                                            
2:26:10 PM                                                                                                                    
Senator Bishop  surmised that there was  a clear distinction                                                                    
between the  original Oooguruk field  and the  Nuna project.                                                                    
Mr. Balash  replied in the  affirmative. He  elaborated that                                                                    
the  areas were  in different  formations and  locations and                                                                    
likely had differing geochemistries.                                                                                            
Mr. Pawlowski  addressed the  Nuna example  on slide  13. He                                                                    
relayed that  there were three  criteria related to  the GRE                                                                    
under the  CS (Sections  28 through 30).  He read  that "the                                                                    
oil or  gas is produced from  a lease or property  that does                                                                    
not contain  a lease that  was within  a unit on  January 1,                                                                    
2003" or  oil and gas that  was produced from a  PA that was                                                                    
within a  unit formed  before January  1, 2003  (Section 28,                                                                    
page  26).  Under  the  CS  any new  unit  would  receive  a                                                                    
permanent GRE; within units formed  prior to January 1, 2003                                                                    
the criteria  were either a  new PA  or an expansion  of the                                                                    
PA.  He relayed  that  modifications needed  to  be made  in                                                                    
Section 28 to the bill language  if a time limit were placed                                                                    
on  the GRE  in order  to allow  for distinguishment  in the                                                                    
future.  The  current  CS language  did  not  contemplate  a                                                                    
future situation  where a  unit would clock  out on  the GRE                                                                    
and where a new PA would not be subject to the GRE.                                                                             
Vice-Chair Fairclough  asked for  clarification on  the bill                                                                    
section. Mr. Pawlowski  pointed to page 26,  line 26 through                                                                    
page 27,  line 11 (Section  28). The particular  language of                                                                    
concern appeared on page 26, lines 29 through 31.                                                                               
2:29:12 PM                                                                                                                    
Mr. Pawlowski  turned to a  Pioneer Natural  Resources graph                                                                    
on slide 14  [last slide in the  presentation, labeled slide                                                                    
11].  The  slide  showed  a production  profile  for  a  new                                                                    
development;  the administration  believed the  slide helped                                                                    
explain the clock  related to drilling (i.e.  how many years                                                                    
it  took to  drill). He  detailed that  a 7-year  time limit                                                                    
would only  allow for  1 to  2 years  of GRE  benefits given                                                                    
that   production    would   not   actually    begin   until                                                                    
approximately year  3. Consideration should be  given to the                                                                    
time it  took to drill  out a development and  the potential                                                                    
within  the units  to have  multiple PAs  located on  top of                                                                    
each other.                                                                                                                     
Mr.  Pawlowski directed  attention to  a supplemental  slide                                                                    
titled "Production  Tax Revenue Impacts of  Various Base Tax                                                                    
Rates FY 14 - FY 19" dated  March 6, 2013 (copy on file). He                                                                    
relayed that  Senator Dunleavy had asked  the administration                                                                    
to provide  a sheet  showing the  fiscal impacts  of various                                                                    
base  rates  across  the   projected  production  and  price                                                                    
forecasts in the fall 2012  Revenue Sources Book. The top of                                                                    
the slide showed the estimated  production tax revenue under                                                                    
ACES for  FY 14  through FY  19. He  noted that  the figures                                                                    
included  the  credits paid  out  and  all other  mechanisms                                                                    
existing under current law. The  only piece not included was                                                                    
the  refunded credits  (credits paid  through the  operating                                                                    
budget  to companies  with tax  credit certificates),  which                                                                    
was ultimately an expenditure and  liability to the state as                                                                    
opposed to a revenue impact.                                                                                                    
Mr.  Pawlowski  pointed  out  the  various  base  tax  rates                                                                    
ranging  from  25  percent  to   35  percent  and  projected                                                                    
revenues based on the tax rate  for FY 14 through FY 19. For                                                                    
example, with  a 27 percent tax  rate the revenue for  FY 15                                                                    
would be $2.875  billion. He noted that the  figures did not                                                                    
include  any additional  credits or  incentives that  may be                                                                    
offered in  a bill. He  relayed that the slide  was intended                                                                    
to give committee members a  starting place to evaluate what                                                                    
a  base  rate would  generate  and  what incentives  offered                                                                    
against   the  rate.   The  lower   portion  of   the  table                                                                    
illustrated  the  delta  from the  forecast  revenues  under                                                                    
ACES. For example,  with a 27 percent base  rate the revenue                                                                    
would  be  $532 million  less  than  the ACES  forecast.  He                                                                    
reiterated that  the figures did not  include any additional                                                                    
2:33:41 PM                                                                                                                    
Vice-Chair Fairclough asked for  verification that the slide                                                                    
answered  Senator  Dunleavy's   question.  Senator  Dunleavy                                                                    
replied in the affirmative.                                                                                                     
Vice-Chair Fairclough communicated  that public testimony on                                                                    
the bill would begin at 3:00 p.m.                                                                                               
2:34:34 PM                                                                                                                    
AT EASE                                                                                                                         
2:35:52 PM                                                                                                                    
Vice-Chair  Fairclough noted  that  the  documents and  past                                                                    
presentations for SB 21 were available on BASIS.                                                                                
SB  21  was   HEARD  and  HELD  in   committee  for  further                                                                    
2:36:31 PM                                                                                                                    
The meeting was adjourned at 2:37 p.m.                                                                                          

Document Name Date/Time Subjects
SB 21 Econ One Presentation 3_6_13.pdf SFIN 3/6/2013 1:30:00 PM
SB 21
SB 21 Repsol Testimony for Senate Finance - CS SB 21Res -6 Mar 13.pdf SFIN 3/6/2013 1:30:00 PM
SB 21
SB 21 FW Constituent TestimonySB 21.msg SFIN 3/6/2013 1:30:00 PM
SB 21