Legislature(2013 - 2014)

03/12/2013 10:13 AM FIN

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10:13:26 AM Start
10:13:54 AM SB21
11:21:00 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 12, 2013                                                                                            
                        10:13 a.m.                                                                                              
10:13:26 AM                                                                                                                   
CALL TO ORDER                                                                                                                 
Co-Chair Meyer  called the Senate Finance  Committee meeting                                                                    
to order at 10:13 a.m.                                                                                                          
MEMBERS PRESENT                                                                                                               
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Donny Olson                                                                                                             
MEMBERS ABSENT                                                                                                                
Senator Lyman Hoffman                                                                                                           
ALSO PRESENT                                                                                                                  
Senator  Lesil McGuire;  Suzanne  Armstrong, Staff,  Senator                                                                    
Kevin   Meyer;   Roger    Marks,   Legislative   Consultant,                                                                    
Legislative Budget  and Audit Committee;  Michael Pawlowski,                                                                    
Advisor,  Petroleum Fiscal  Systems, Department  of Revenue;                                                                    
Joe  Balash,  Deputy  Commissioner,  Department  of  Natural                                                                    
Resources; Janak Mayer, Manager, Upstream, PFC Energy.                                                                          
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."                                                                                                             
10:13:54 AM                                                                                                                   
Co-Chair  Kelly  MOVED  to   ADOPT  the  proposed  committee                                                                    
substitute    for   SB    21,    Work   Draft    28-GS1647\P                                                                    
(Nauman/Bullock, 3/11/13).                                                                                                      
Co-Chair Meyer OBJECTED for the purpose of discussion.                                                                          
SUZANNE  ARMSTRONG, STAFF,  SENATOR  KEVIN MEYER,  presented                                                                    
the  committee  substitute  (CS) and  provided  a  sectional                                                                    
analysis. She explained a number  of changes from the Senate                                                                    
Resources version. Section 1,  Section 3, Section 5, Section                                                                    
6, Section  8, Section 14,  Section 21, Section  38, Section                                                                    
39,  and   Section  40   were  conforming   amendments  that                                                                    
correlated to changes to AS  43.05.225 found in Section 4 of                                                                    
the bill.  Section 4 amended  the statute by  decreasing the                                                                    
interest rate on  delinquent taxes to either the  lower of 3                                                                    
percentage points  above the applicable annual  federal rate                                                                    
or at  the annual  rate of 11  percent. The  amended statute                                                                    
was included as a response  to concerns raised by the Alaska                                                                    
Oil  and Gas  Association and  industry. The  combination of                                                                    
the six  year statute of  limitations coupled with  the high                                                                    
interest rate penalty and the  method of calculating the tax                                                                    
left  open the  possibility of  additional taxes  imposed by                                                                    
the  Department  of Revenue  (DOR)  on  the underpaid  taxes                                                                    
after  audit.  The interest  rate  penalty  did not  reflect                                                                    
current financial conditions. She noted  that not all of the                                                                    
sections  referenced earlier  specifically pertained  to oil                                                                    
and gas taxes;  however, the penalty or  interest rate under                                                                    
other  titles of  law  were  tied to  the  interest rate  so                                                                    
conforming changes were necessary.                                                                                              
Ms. Armstrong  continued with Section 2.  She explained that                                                                    
the Community Revenue Sharing (CRS)  fund was currently tied                                                                    
to  20  percent  of  the revenue  from  the  calculation  of                                                                    
progressivity  on  the  production tax.  The  CS  eliminated                                                                    
progressivity  and  stipulated   that  the  legislature  may                                                                    
contribute an  unspecified amount  to the  Community Revenue                                                                    
Sharing fund. The  provision did not change  the formula for                                                                    
revenue sharing  in current statute. She  mentioned that the                                                                    
$60 million  contribution limit and  the total  fund balance                                                                    
limit of $180 million remained intact.                                                                                          
Ms.  Armstrong  referenced  Section  7  that  concerned  the                                                                    
qualified oil  and gas  industry service  expenditure credit                                                                    
applicable to  the corporate income  tax. She  reported that                                                                    
the tax was not altered  from the Senate Resources Committee                                                                    
version  of  SB 21.  After  discussion  with DOR,  a  future                                                                    
amendment will  address changes to the  provision that would                                                                    
"tighten down"  the credit and  reduce the ten  year statute                                                                    
of limitations to seven years.                                                                                                  
Ms. Armstrong commented that Section  9 established the base                                                                    
rate of 30  percent for the oil and gas  production tax. She                                                                    
reported  that  no changes  were  made  to Section  10  that                                                                    
related  to gas  used in-state  outside of  Cook Inlet.  She                                                                    
noted that  Section 10 in  the CS corresponded to  Section 4                                                                    
in  the  resources version  of  SB  21. She  mentioned  that                                                                    
Sections  11  and  12  pertained  to  tax  payment  and  was                                                                    
unaltered  from the  resources version.  The only  change to                                                                    
Section  12  reflected the  30  percent  base rate  and  the                                                                    
calculation  of  the  GRE  (Gross  Revenue  Exclusion).  She                                                                    
pointed  out  that Page  10,  lines  4  to 6  addressed  the                                                                    
calculation of the  GRE. She noted that line  6 contained an                                                                    
error and the 30 percent figure should be 20 percent.                                                                           
10:22:04 AM                                                                                                                   
Ms. Armstrong  added that Section  13 addressed  the payment                                                                    
of  tax and  was  the same  as Section  7  of the  resources                                                                    
version. She  remarked that Section  15 corresponded  to tax                                                                    
credits  or  losses  on expenditures  and  limited  the  tax                                                                    
credit for qualified capital  expenditures incurred north of                                                                    
68 degrees for expenditures  incurred before January 1, 2014                                                                    
and did  not change  from the  resources version.  She noted                                                                    
that Section  16, Section  17, Section  18, Section  23, and                                                                    
Section 29  pertained to  the net  operating losses  and the                                                                    
carry forward annual loss credit.                                                                                               
ROGER MARKS, LEGISLATIVE  CONSULTANT, LEGISLATIVE BUDGET AND                                                                    
AUDIT COMMITTEE, discussed Section  17, the treatment of net                                                                    
operating losses. He suggested  that the language in Section                                                                    
17  needed  refinement.  He  explained  the  intent  of  the                                                                    
section. A net operating  loss (NOL) meant that expenditures                                                                    
were  greater  than revenue.  Under  current  law the  state                                                                    
monetized  net operating  losses in  the following  year. In                                                                    
instances when the tax floor  was zero and a producer cannot                                                                    
use all  of it's incurred  expenditures on the tax  to minus                                                                    
zero, current  law allowed converting  the loss to  a credit                                                                    
at a  rate of 30 percent.  The state "bought" the  credit in                                                                    
the following  year. The resources  CS modified  the section                                                                    
so  that  the  loss  was carried  forward  with  15  percent                                                                    
interest until the time that  the producer earned offsetting                                                                    
income. He expounded  that the finance CS  diverged from the                                                                    
previous version and  applied the provision to  the first 10                                                                    
years of the  well on the Gross Revenue  Exclusion (GRE). He                                                                    
believed that the  NOL credit provision in  the resources CS                                                                    
carried  forward for  ten years  would not  enable the  full                                                                    
benefit of  the NOL credit.  He judged that current  law was                                                                    
preferable to the resources CS;  NOL's converted to a credit                                                                    
monetizable  to the  state in  the year  they occurred.  The                                                                    
committee  wanted to  incite  expenditures  and limited  the                                                                    
NOL's  to  the amount  of  expenditures  monetized the  next                                                                    
year. Without  the spending, the  unused credit  would carry                                                                    
forward at  15 percent  interest until there  was offsetting                                                                    
Co-Chair Meyer interjected that the  intent was also to have                                                                    
the money spent in Alaska. Mr. Marks concurred.                                                                                 
Ms. Armstrong continued. She noted  that Section 18, Section                                                                    
23,  and  Section  29  would also  need  altering  with  any                                                                    
changes  to Section  17. Section  24, dealt  with the  small                                                                    
producer  tax  credit  and  was   extended  to  2022,  which                                                                    
corresponded  to Section  17 of  the resources  version. She                                                                    
reported  that Section  26 referring  to the  $5 per  barrel                                                                    
allowance was  maintained in the  finance CS.  She continued                                                                    
that  the exploration  incentive credits  in Section  27 and                                                                    
Section 28,  established in the  resources CS  were extended                                                                    
to 2022. The  three mile boundary from the bottom  hole of a                                                                    
pre-existing well drilled for oil  and gas was maintained as                                                                    
well as the  eligibility qualifiers for the  credit under AS                                                                    
Ms.  Armstrong  referred  to  Section   30  and  Section  31                                                                    
pertaining to the oil and  gas credit fund and reported that                                                                    
no changes occurred  from the resources CS.  Sections 32 and                                                                    
33  also remained  the  same. Section  34,  Section 35,  and                                                                    
Section 36 pertained to the  determination of the production                                                                    
tax value and did not change.                                                                                                   
Ms.  Armstrong  detailed  that Section  37  established  the                                                                    
qualifiers for  the GRE. The mechanisms  were different from                                                                    
the  resources version.  The CS  established that  the gross                                                                    
value at the  point of production that  met certain criteria                                                                    
was reduced by  20 percent for 10 years  from the production                                                                    
date. She listed  the criteria: oil and gas  produced from a                                                                    
well  within a  lease or  property  that did  not contain  a                                                                    
lease from within a unit on  January 1, 2003; the oil or gas                                                                    
produced   from  a   well   within   a  participating   area                                                                    
established after  December 31, 2011  that is within  a unit                                                                    
formed under AS 38.05.180(p) before  January 1, 2003 if that                                                                    
participating  area does  not contain  a reservoir  that had                                                                    
previously been in a participating  area before December 31,                                                                    
2011, and lastly;  the oil or gas produced from  a well that                                                                    
the producer  can demonstrate to  the Department  of Revenue                                                                    
(DOR)  that  drains  a  reservoir  that  the  Department  of                                                                    
Natural  Resources (DNR)  had  certified  and approved  upon                                                                    
review  of  a plan  of  development  that  the oil  was  not                                                                    
contributing to production before December 31, 2012.                                                                            
She  furthered  that  collaboration between  DNR,  DOR,  and                                                                    
Department of Law  (DOL) was ongoing on  the final criterion                                                                    
in order to ensure that  the bill's language allowed for the                                                                    
correct calculation to confirm "new oil."                                                                                       
10:31:38 AM                                                                                                                   
Ms.  Armstrong concluded  that the  remaining provisions  in                                                                    
the CS remained the same as the resources version.                                                                              
Co-Chair  Meyer interjected  that "preliminary"  discussions                                                                    
were held  with the administration regarding  the definition                                                                    
of  new  oil  from  legacy fields  and  whether  making  the                                                                    
determination  was  possible.  Ms. Armstrong  confirmed  the                                                                    
discussions and noted  the designation of new  oil was under                                                                    
Co-Chair  Meyer highlighted  the changes.  He applauded  the                                                                    
resources  version  and  mentioned the  efforts  of  Senator                                                                    
Giessel.  He noted  that very  few changes  occurred in  the                                                                    
finance CS. He offered that the  base rate was changed to 30                                                                    
percent  down  from  35  percent,  but  the  $5  per  barrel                                                                    
allowance remained.  He mentioned  the GRE was  dropped from                                                                    
30 percent  to 20  percent. The GRE  was expanded  to proven                                                                    
new oil in  the legacy fields. A ten year  time limit on the                                                                    
GRE was  added. The competitive review  board was eliminated                                                                    
from the finance CS. The CRS  was unchanged. The NOL and the                                                                    
carry forward  were changed to  reflect the intent  that the                                                                    
expenditures  would be  reinvested in  Alaska; suggested  by                                                                    
Vice-Chair  Fairclough.  The  manufacturing  credit  against                                                                    
state  income  tax,  exploration  incentive  credits,  small                                                                    
producer  credit,  elimination   of  the  qualified  capital                                                                    
credit,  and  the  effective dates  remained  the  same.  He                                                                    
offered  that the  committee repealed  progressivity because                                                                    
as the  price of oil  raised the  amount of money  the state                                                                    
collected  increased. The  committee's  goal was  to levy  a                                                                    
similar tax rate at all prices of oil.                                                                                          
Co-Chair Meyer  expressed that the  goal of  the legislation                                                                    
was  to become  competitive and  to  get more  oil into  the                                                                    
pipeline. He hoped that the CS would meet the objective.                                                                        
Senator  Dunleavy cited  Section  4, Page  2 and  questioned                                                                    
whether  the  producer  would  "always"  receive  the  lower                                                                    
interest rate.  He asked about  the percentage points  in an                                                                    
inflationary  period. He  wondered  whether  the lower  rate                                                                    
would   still  apply.   Ms.   Armstrong   answered  in   the                                                                    
Senator Olson  asked about the  Alaska Municipal  League and                                                                    
its comments on  any revenue impacts or  confusion about the                                                                    
effects  of  the  bill on  revenue  sharing.  Ms.  Armstrong                                                                    
offered to contact the league.                                                                                                  
Senator  Olson  requested  a  comparison  of  the  different                                                                    
versions  of SB  21 to  Alaska's Clear  and Equitable  Share                                                                    
(ACES).  Ms.   Armstrong  replied  that  a   comparison  was                                                                    
10:39:02 AM                                                                                                                   
Ms.  Armstrong  addressed  the  question  regarding  revenue                                                                    
sharing. She disclosed  that a new formula for  the CRS fund                                                                    
was established  in 2008  and was  tied to  progressivity in                                                                    
ACES. The  CS provision did not  tie the fund to  a specific                                                                    
funding source,  which provided  more security.  The formula                                                                    
would  work the  same way;  every year  the legislature  may                                                                    
appropriate the funding specified by the formula.                                                                               
Co-Chair  Meyer  asked  the administration  for  preliminary                                                                    
comments on the CS.                                                                                                             
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT OF  REVENUE, cited Section 17,  Page 14 regarding                                                                    
the  loss  carry  forward   provisions.  He  summarized  the                                                                    
committee's  intent  to ensure  that  a  loss carry  forward                                                                    
credit reimbursement  was balanced  by spending in  the year                                                                    
the company  was claiming the credit.  The spending occurred                                                                    
in  the  same  year  the credit  reimbursement  was  issued.                                                                    
Otherwise,  the  credit  was   carried  forward  and  offset                                                                    
against  the tax  liability as  contained  in the  resources                                                                    
version.  He  referred to Section 30, Page  24 and explained                                                                    
that  the provision  reflected a  conforming  change in  the                                                                    
governor's version. He cited AS  43.55.028 that provided the                                                                    
mechanism  for payment  of credits.  He  suggested that  the                                                                    
committee focus on  the mechanism that writes  the check for                                                                    
the  credit   instead  of  adjusting  the   credit.  Placing                                                                    
restrictions on  AS 43.55.028 and restricting  when a credit                                                                    
could be  turned in  for cash  payment would  accomplish the                                                                    
same outcome in a simpler manner.                                                                                               
Co-Chair   Meyer  restated   the   question  regarding   the                                                                    
determination  of new  oil in  legacy fields.  Mr. Pawlowski                                                                    
wanted to defer the question to DNR.                                                                                            
Co-Chair  Meyer   wished  to   better  understand   the  net                                                                    
operating   loss  and   the  tax   credits.  He   asked  for                                                                    
Mr.  Pawlowski provided  an explanation  of  the loss  carry                                                                    
forward.  He related  that the  loss carry  forward provided                                                                    
equal  treatment  for a  company  without  a tax  liability.                                                                    
Currently,  when a  company spends  money it  was deductible                                                                    
against  its taxes.  A benefit  was granted  to the  company                                                                    
based on  the tax rate. At  a 30 percent net  tax rate taxes                                                                    
decreased  by   30  cents  on   each  dollar.   Without  the                                                                    
liability,  a loss  was created  and was  not shared  by the                                                                    
state.  The  loss  carry forward  attempted  to  provide  an                                                                    
equivalent  for  the new  entrant  similar  to the  existing                                                                    
producer. The new entrant's credit  would be carried forward                                                                    
until  the point  in  time a  production  tax liability  was                                                                    
incurred.  He stated  that the  reduced GRE  and the  higher                                                                    
base rate  affected the economics  for the new  entrant. The                                                                    
CS offered  an opportunity for  a new entrant to  receive an                                                                    
"upfront"  cash payment  provided the  company continued  to                                                                    
spend in the  state. The value for the  new entrant provided                                                                    
access  to capital  to continue  its investment.  The intent                                                                    
was to "strike a balance."  The investment occurred in "many                                                                    
stages"  and money  was spent  before  production began.  He                                                                    
summarized  that the  loss carry  forward was  attempting to                                                                    
equalize   treatment   between   companies  that   had   tax                                                                    
liabilities and new entrants that do not.                                                                                       
10:49:16 AM                                                                                                                   
Co-Chair  Meyer  cited  exploration  tax  credits  or  small                                                                    
producer tax  credits as  examples of  the types  of credits                                                                    
entitled  to loss  carry forwards.  He wondered  whether the                                                                    
taxes  were "stackable."  Mr.  Pawlowski  replied that  some                                                                    
were stackable.  The small  tax credit  was non-transferable                                                                    
and  not monetizable.  A small  producer  qualified for  the                                                                    
basic  credit on  production. The  ability to  stack credits                                                                    
was more complicated for the exploration incentive credit.                                                                      
Co-Chair  Meyer asked  whether the  concept of  spending tax                                                                    
credit refunds in the state  was part of ACES. Mr. Pawlowski                                                                    
discerned that  the previous tax systems  were attempting to                                                                    
balance offsets of credits and  tax rates. The CS before the                                                                    
committee attempted  to flatten  the tax rate  system offset                                                                    
by incentives against production.  Loss carry forward's were                                                                    
based  on  lease  expenditures   and  only  the  expenditure                                                                    
Co-Chair  Meyer remarked  that he  favored targeted  capital                                                                    
tax credits for new wells.  He believed the credits provided                                                                    
relief  for  upfront  costs for  development  on  the  North                                                                    
Slope. However, the loss of  revenue to the state's treasury                                                                    
was dramatic. The committee opted instead for the GRE.                                                                          
Mr. Pawlowski  added that the targeted  tax credit liability                                                                    
to the state  grew in proportion to the  investment. Lots of                                                                    
new investment grew the liability to the state.                                                                                 
Senator  Bishop asked  whether the  NOL carry  forward could                                                                    
include  exploration   credits  that   did  not   result  in                                                                    
production. Mr.  Pawlowski answered  in the  affirmative. He                                                                    
expounded  that  how  valuable   the  credit  would  be  was                                                                    
determined by  how much  the company  continued to  spend in                                                                    
the state. The  company must spend additional  money to turn                                                                    
the credit into cash. If  production was never realized many                                                                    
credits would fall under  "non-cashable" carry forwards that                                                                    
without production became worthless.                                                                                            
JOE  BALASH,  DEPUTY  COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES, answered,  in response  to a question  by Senator                                                                    
Bishop, that  the 025 exploration credits  mandated that the                                                                    
company comply with  information requirements. Generally all                                                                    
geologic data  became public  at some  point in  the future,                                                                    
but the state obtained 025 credit data at an earlier time.                                                                      
Vice-Chair  Fairclough  recalled  that the  governor  wanted                                                                    
simplicity in a  new tax structure and was a  reason for the                                                                    
elimination   of  progressivity.   The  administration   had                                                                    
concerns  over credits  and the  impact on  the states  cash                                                                    
flow in the future. She  proposed that if the state provided                                                                    
credits and  "had skin  in the game"  then the  money should                                                                    
stay  in  Alaska and  not  migrate  to outside  fields.  She                                                                    
wanted  the  money  reinvested  in  wells  and  specifically                                                                    
support  the  smaller  producers. She  hoped  for  increased                                                                    
production. She stated that  Alaska was incentivizing future                                                                    
production with Alaskans money.                                                                                                 
Co-Chair Meyer  added that the committee  supported the idea                                                                    
but it was "still a work in progress."                                                                                          
10:58:57 AM                                                                                                                   
Mr. Balash explained  DNR's process to determine  new oil in                                                                    
legacy  fields.  The  Division   of  Oil  and  Gas  utilized                                                                    
unitization and participating  areas "mechanisms" to "count"                                                                    
new oil. He pointed out that  the resources version of SB 21                                                                    
included the  expansion of participating areas.  The finance                                                                    
version required  that the lessee  must prove to DNR  that a                                                                    
certain  volume   of  oil  was   not  counted   as  previous                                                                    
production. A producers drilling  plan must demonstrate that                                                                    
the oil was  new and would be recovered.  The producer would                                                                    
then qualify for  a GRE in the legacy unit.  He relayed that                                                                    
the department would  "refine" the definition of  new oil in                                                                    
order to clearly  specify who had the "burden  of proof" and                                                                    
that DNR approval was compulsory for the GRE.                                                                                   
Co-Chair Meyer interjected that  the industry testified that                                                                    
oil  was plentiful  in the  legacy fields,  but it  was more                                                                    
difficult to obtain. Mr. Balash  confirmed that "billions of                                                                    
barrels" of  recoverable oil remained in  the legacy fields.                                                                    
He stated that the amount  recovered was "in part a function                                                                    
of the  rate of decline." The  more work done to  reduce the                                                                    
decline  the more  of the  oil  would be  recovered. He  was                                                                    
aware  of the  industry's efforts  to find  and recover  the                                                                    
additional "pockets" of  oil. The bill placed  the burden on                                                                    
industry to demonstrate how the  new oil would be identified                                                                    
and recovered. He thought the  state should help incentivize                                                                    
the production of new oil under those circumstances.                                                                            
Co-Chair Meyer  mentioned Norway's tax credit  to incite new                                                                    
oil production and the desire  to circumvent new capital tax                                                                    
credits, which  lead to  using the GRE  as an  incentive for                                                                    
new  oil  production  in  legacy  fields.  He  requested  an                                                                    
explanation of the GRE.                                                                                                         
Mr. Pawlowski  explained that  a tax  credit was  an upfront                                                                    
payment but  the GRE was  a reduction in the  taxable value.                                                                    
He added that 20 percent of  the gross value of eligible new                                                                    
oil  was subtracted  from the  production tax  value or  net                                                                    
profit, subsequently;  the 30 percent tax  rate was applied.                                                                    
The GRE  reduced the corporation's  total tax  liability. An                                                                    
upfront  payment  was  not required  with  credits.  The  CS                                                                    
limited the GRE  to ten years per well. The  GRE concept was                                                                    
introduced, because  of auditing complications in  trying to                                                                    
attribute specific  costs to specific  projects. Calculating                                                                    
gross values  at the  point of  production was  a relatively                                                                    
simple calculation; number of  barrels times gross value. He                                                                    
summarized that 20 percent of  the value of approved new oil                                                                    
was  an additional  deduction on  the overall  corporate tax                                                                    
Co-Chair Meyer  emphasized that the  tax reduction  was only                                                                    
available  for  the production  of  new  oil. Mr.  Pawlowski                                                                    
Co-Chair Meyer requested comments on  the GRE's 10 year time                                                                    
limit.   He   expressed   concern  that   production   would                                                                    
accelerate. Mr. Pawlowski replied  that analysis was ongoing                                                                    
and advised that comments would be better deferred.                                                                             
11:07:23 AM                                                                                                                   
Senator Dunleavy  asked about a credit  for manufacturing in                                                                    
the  state.  Mr. Pawlowski  responded  that  the credit  was                                                                    
retained in  the CS and  found on Section  7, Pages 3  to 4,                                                                    
beginning on line 15.                                                                                                           
Vice-Chair Fairclough  responded to the GRE  time limit. She                                                                    
postulated that  all oil became gross  oil revenue exclusion                                                                    
recipient  with time  if  not limited  in  some manner.  She                                                                    
thought that  it depended  on the type,  size, and  the life                                                                    
cycle of  the project. She  wanted to see the  modeling done                                                                    
by  the consultants  and the  administration to  determine a                                                                    
"sweet  spot" to  best utilize  the GRE  and establish  fair                                                                    
time limits  for the  producer and  the state.  She believed                                                                    
that the calculation was a "complicated" policy decision.                                                                       
11:11:39 AM                                                                                                                   
Senator    Bishop   appreciated    Vice-Chair   Fairclough's                                                                    
comments.  He  hoped  for   detailed  modeling  and  further                                                                    
discussions on various scenarios.                                                                                               
Mr.   Pawlowski  pointed   out  that   in  determining   the                                                                    
committee's intent  regarding the amount of  production that                                                                    
qualified for  the GRE helped  the department  determine how                                                                    
much production did not qualify for the GRE.                                                                                    
Senator Olson  wondered whether other  tax regimes  used the                                                                    
GRE and how successful it  was to incite new production. Mr.                                                                    
Pawlowski recalled that the GRE  was discussed last session.                                                                    
He  recommended that  PFC Energy  address the  effectiveness                                                                    
JANAK  MAYER, MANAGER,  UPSTREAM, PFC  ENERGY, offered  that                                                                    
the  GRE  was discussed  in  the  committee last  year  when                                                                    
examining  ways to  differentiate between  existing and  new                                                                    
production.  The overall  tax  system calculated  production                                                                    
and costs  on a  companywide level.  Differentiating between                                                                    
different streams  of production was more  complicated.  The                                                                    
GRE was simpler  and provided a tax benefit  based solely on                                                                    
the  revenue side.  Similar approaches  were taken  in other                                                                    
regimes,  specifically the  Brown  Field  Allowance used  in                                                                    
Great Britain.  He noted that  the GRE's impact from  the CS                                                                    
reduced government take from approximately  63 percent to 60                                                                    
11:17:00 AM                                                                                                                   
Senator Olson restated his question  about other tax regimes                                                                    
in the world  employing the GRE and its  impact on increased                                                                    
production. He was  looking for a clear  measure of success.                                                                    
Mr. Mayer responded  that the Brown Field  Allowance was the                                                                    
most comparable tax. Presently,  new production could not be                                                                    
attributed  to the  allowance but  increased investment  was                                                                    
Senator  Kelly asked  when the  allowance  was enacted.  Mr.                                                                    
Mayer replied that enactment occurred within the last year.                                                                     
Senator  Dunleavy  asked  whether  the  investment  activity                                                                    
increased immediately.  Mr. Mayer replied that  the response                                                                    
within the legacy fields was swift.                                                                                             
Co-Chair  Meyer  asked  whether  the  CS  improved  Alaska's                                                                    
competitiveness on  a global basis. Mr.  Mayer answered that                                                                    
the  taxes made  Alaska  more competitive  when compared  to                                                                    
other "peer jurisdictions."                                                                                                     
Co-Chair  Meyer thought  that some  elements of  ACES worked                                                                    
such as the capital tax  credits, but that progressivity was                                                                    
not competitive.                                                                                                                
Senator  Bishop  remembered   that  industry  committed  $45                                                                    
billion  for new  projects with  and additional  increase of                                                                    
$100  billion  with the  Brown  Field  Allowance. Mr.  Mayer                                                                    
understood   that  the   figures  included   decommissioning                                                                    
existing fields, which did not create new oil.                                                                                  
SB  21  was   HEARD  and  HELD  in   committee  for  further                                                                    
11:21:00 AM                                                                                                                   
The meeting was adjourned at 11:21 a.m.                                                                                         

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