Legislature(2013 - 2014)SENATE FINANCE 532

03/13/2013 09:00 AM FINANCE


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09:11:47 AM Start
09:13:45 AM SB21
10:37:36 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 13, 2013                                                                                            
                         9:11 a.m.                                                                                              
                                                                                                                                
9:11:47 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Meyer  called the Senate Finance  Committee meeting                                                                    
to order at 9:11 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 Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator  Burt   Stedman;  Senator  Cathy   Giessel;  Michael                                                                    
Pawlowski, Advisor, Petroleum  Fiscal Systems, Department of                                                                    
Revenue;  Dan   Stickel,  Assistant  Chief   Economist,  Tax                                                                    
Division,  Department of  Revenue;  Barry Pulliam,  Managing                                                                    
Director, Econ One Research, Inc.;                                                                                              
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB  21    OIL AND GAS PRODUCTION TAX                                                                                            
                                                                                                                                
          SB 21 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
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."                                                                                                             
                                                                                                                                
9:13:45 AM                                                                                                                    
                                                                                                                                
DAN  STICKEL,  ASSISTANT   CHIEF  ECONOMIST,  TAX  DIVISION,                                                                    
DEPARTMENT OF  REVENUE, presented the draft  fiscal analysis                                                                    
of  CS SB  21 (FIN)  (copy on  file). He  turned to  Slide 1                                                                    
titled,  "Provisions in  CSSB 21  (FIN) and  their Estimated                                                                    
Fiscal   Impact   as   compared  to   Fall   2012   Forecast                                                                    
($millions)." He  cautioned that  the fiscal analysis  was a                                                                    
draft  and the  fiscal note  could contain  differences. The                                                                    
slide  displayed  the data  from  the  fiscal note  for  the                                                                    
previous version of  the bill [CSSB 21  (RES)]. The analysis                                                                    
listed  the 12  provisions  of the  legislation  that had  a                                                                    
potential  revenue impact  and the  provisions for  refunded                                                                    
credits that impacted the operating budget.                                                                                     
                                                                                                                                
Mr.  Stickle reviewed  the  provisions.  He highlighted  the                                                                    
differences  (items  highlighted  in  grey)  in  the  Senate                                                                    
Finance  Committee Substitute  (CS) compared  to the  Senate                                                                    
Resources Committee  version of  SB 21. The  first provision                                                                    
eliminated the  progressive portion of the  tax and remained                                                                    
unchanged. The second provision  adjusted the base rate from                                                                    
35 percent  of the production  tax value down to  30 percent                                                                    
in the  finance CS.  The finance version  decreased revenues                                                                    
to the  state compared  to the resources  CS that  imposed a                                                                    
higher  base  rate  production   tax.  The  third  provision                                                                    
eliminated the qualified capital  expenditures for the North                                                                    
Slope,  and  remained  unchanged  in  the  finance  CS.  The                                                                    
finance  CS  monetized the  net  operating  loss credit  and                                                                    
increased  it to  30 percent  to  match the  base rate.  The                                                                    
department deemed that the net  operating loss (NOL) credits                                                                    
would not be  taken against tax liability;  but instead used                                                                    
by companies that  did not have a tax  liability. The change                                                                    
to the NOL credit impacted the operating budget.                                                                                
                                                                                                                                
Mr. Stickle discussed the Gross  Revenue Exclusion (GRE) for                                                                    
certain wells. The Resources CS  applied the GRE to specific                                                                    
units,  Participating  Area (PA)  or  portions  of PAs.  The                                                                    
finance CS  applied a lower  exclusion of 20  percent, which                                                                    
was applied to  any well that met  certain qualifications on                                                                    
approval by  DNR. The  range ($0  to $50  million) displayed                                                                    
assumed that  at the lower  end only new  developments would                                                                    
receive the  GRE. The higher  end of the range  assumed that                                                                    
any   production   in   "under   development"   and   "under                                                                    
evaluation"  components   of  the   department's  production                                                                    
forecast  would receive  the  exclusion.  The fiscal  impact                                                                    
would likely fall in the middle of the range.                                                                                   
                                                                                                                                
Mr.  Stickle  detailed  that  the  extension  of  the  small                                                                    
producer credit  was unchanged. The finance  CS retained the                                                                    
elimination of the mandatory two  year credit provision. The                                                                    
community revenue  sharing fund  and the  $5 per  barrel tax                                                                    
allowance were left unchanged. The  new corporate income tax                                                                    
credit  for  qualified  oil  and  gas  service  expenditures                                                                    
remained intact.                                                                                                                
                                                                                                                                
Mr.  Stickle  noted that  a  new  provision in  the  finance                                                                    
version was  included to  reduce the  interest rate  on late                                                                    
payments or  assessments for most taxes  administered by the                                                                    
Department of Revenue (DOR). He  predicted a small impact in                                                                    
revenues in the early years  and a growing impact over time.                                                                    
The  extension  of  the  exploration  extension  credit  was                                                                    
unchanged from  the prior version  of the bill.  He reported                                                                    
that the  combined impact of the  revenue provisions totaled                                                                    
$900  million to  $1.1 billion  increasing to  $1.5 to  $1.9                                                                    
billion in FY 19.                                                                                                               
                                                                                                                                
Mr. Stickle  offered that the  impact was mitigated  to some                                                                    
extent by the  impact on appropriations. The  impacts on the                                                                    
operating budget  were divided  into three items.  The first                                                                    
impact resulted from credits taken  in one versus two years.                                                                    
The provision advanced the entire  $150 million liability in                                                                    
refunded North  Slope Credits  to FY  14. The  provision was                                                                    
net  revenue  neutral.  The   limitation  to  the  Qualified                                                                    
Capital   Expenditures  (QCE)   credit  decreased   refunded                                                                    
credits by $150 million per  year for the North Slope, which                                                                    
benefitted  the operating  budget. The  finance CS  expanded                                                                    
the NOL credits  from 25 percent to 30  percent and impacted                                                                    
the operating budget by approximately $25 million per year.                                                                     
                                                                                                                                
Mr. Stickle  communicated that the  total fiscal  impact for                                                                    
both   the  state's   operating  budget   and  revenue   was                                                                    
approximately  $1  billion  to   $1.3  billion  in  FY  2014                                                                    
increasing to $1.4 billion to $1.8 billion in FY 2019.                                                                          
                                                                                                                                
9:22:11 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  questioned  the  GRE  for  wells  as                                                                    
listed on  line 5,  slide 1. She  referenced that  the range                                                                    
for  2014 was  zero to  $50 million  for certain  wells. She                                                                    
asked what  production level the  $50 million was  based on.                                                                    
Mr. Stickle  replied that the  potential $50  million impact                                                                    
in  FY   14  included   the  under  development   and  under                                                                    
evaluation  portion  of  the  forecast  and  the  number  of                                                                    
barrels for one  half of the fiscal year.  The fiscal impact                                                                    
was based on the 20  percent revenue exclusion for the total                                                                    
number of barrels.                                                                                                              
                                                                                                                                
Vice-Chair  Fairclough  asked   the  department  to  provide                                                                    
information  regarding   the  number  of  barrels   used  to                                                                    
calculate  the  analysis.  She thought  the  assumption  was                                                                    
valid  but   she  countered  that   the  barrels   were  not                                                                    
calculated  in  new dollars.  Mr.  Stickle  replied that  he                                                                    
would provide the information.                                                                                                  
                                                                                                                                
Vice-Chair Fairclough  wanted to understand the  $50 million                                                                    
figure  used in  view of  the revenue  impact. She  wondered                                                                    
what price per  barrel the revenue impact was  based on. Mr.                                                                    
Stickle stated  that the draft  analysis was  based entirely                                                                    
on the fall 2012 revenue forecast.                                                                                              
                                                                                                                                
Vice-Chair  Fairclough asked  whether the  analysis included                                                                    
new barrels. Mr.  Stickle explained that analysis  on line 5                                                                    
reflected production that was not  currently on line but was                                                                    
expected.  The production  forecast was  divided into  three                                                                    
components. The  production classified as  under development                                                                    
or  under evaluation  in the  production  forecast were  new                                                                    
wells expected to produce but not currently producing oil.                                                                      
                                                                                                                                
Vice-Chair Fairclough  asked if the wells  would qualify for                                                                    
GRE  under the  legislation.  Mr. Stickle  replied that  the                                                                    
department  provided  a  range  from  zero  to  $50  million                                                                    
because qualification  of the  wells remained  uncertain. He                                                                    
anticipated that the impact fell somewhere in the middle.                                                                       
                                                                                                                                
Senator Hoffman  remarked that the  numbers included  in the                                                                    
draft  fiscal analysis  were  "staggering."  He pointed  out                                                                    
that  the low  end estimate  of the  losses through  FY 2019                                                                    
totaled  $7.5  billion or  an  average  $1.25 billion  every                                                                    
year. He  added that the  high end of the  spectrum amounted                                                                    
to  $9.5  billion or  $1.5  billion  per year.  Without  any                                                                    
changes  to  Alaska's tax  structure,  the  state needed  to                                                                    
borrow up to  $400 million from the  state's savings account                                                                    
[in FY  2014]. He  warned that the  lost revenue  would have                                                                    
detrimental  effects to  the  state's  operating budget  and                                                                    
savings accounts. He suggested  serious consideration of the                                                                    
budgetary process.  He estimated  that $1.6  billion dollars                                                                    
withdrawn  from savings  would be  necessary to  balance the                                                                    
budget within the first year  of the enacted legislation. He                                                                    
cautioned  that  the  committee must  carefully  review  the                                                                    
numbers and  the impact that  the bill  had on the  needs of                                                                    
Alaskans.                                                                                                                       
                                                                                                                                
Co-Chair Meyer  agreed with Senator Hoffman's  concern about                                                                    
the potential loss to the  state's treasury. He reminded the                                                                    
committee that the current fiscal  year's deficit was due to                                                                    
decreased oil production. The fiscal  note could not predict                                                                    
the amount  of increased  production the state  could expect                                                                    
as  a  competitive participant  in  the  global markets.  He                                                                    
noted  his "frustration"  with the  fiscal  note and  stated                                                                    
that  if  production  was  not  expected  to  increase,  the                                                                    
committee was wasting its time with the legislation.                                                                            
                                                                                                                                
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT  OF   REVENUE  pointed  out  that   DOR  included                                                                    
"scenario analysis" comparisons  of increased new production                                                                    
predicted in the forecast.                                                                                                      
                                                                                                                                
Senator Olson  wondered how many  barrels of  new production                                                                    
were necessary  to make up  the lost revenue  anticipated in                                                                    
the  next  five  years.  Mr.  Pawlowski  reported  that  the                                                                    
information was still under analysis.                                                                                           
                                                                                                                                
Co-Chair Meyer  asked about the fiscal  note comparison with                                                                    
the Senate  Resources CS.  Mr. Stickle  replied that  he had                                                                    
not compared  the two fiscal  analyses. The  finance version                                                                    
of the bill  had a larger fiscal impact  under the forecast.                                                                    
The  Senate  Resources  version   impact  ranged  from  $800                                                                    
million  to $900  million in  FY 14  to $800  million to  $1                                                                    
billion in FY 19.                                                                                                               
                                                                                                                                
9:30:02 AM                                                                                                                    
                                                                                                                                
Mr.  Stickle addressed  Slide  2:  "Production Tax  Revenue,                                                                    
less  refunded and  carried-forward  credits." He  explained                                                                    
that the  slide depicted a  graph of production  tax revenue                                                                    
under the  Alaska Clear and  Equitable Share (ACES),  SB 21,                                                                    
CSSB 21(RES) and CSSB 21  (FIN). The graph displayed the net                                                                    
production   tax  revenue   minus  North   Slope  refundable                                                                    
credits. The  graph addressed major  provisions of  the bill                                                                    
and lacked  data for corporate  income tax  service industry                                                                    
credit,  the  expansion  of   the  exploration  credit,  the                                                                    
reduction  in   interest  rates   for  late   payments,  and                                                                    
assessments of taxes. He related  that all versions of SB 21                                                                    
provided a better  net impact to the state than  ACES at the                                                                    
lower price  ranges for oil.  The net impact was  lower than                                                                    
ACES at higher  oil prices. The net impact of  CSSB 21 (FIN)                                                                    
at  the current  price  of  oil was  higher  than the  other                                                                    
versions of the bill when compared to ACES.                                                                                     
                                                                                                                                
Mr.   Stickle  continued   with  Slide   3:  "General   Fund                                                                    
Unrestricted  Revenue,  less  refunded  and  carried-forward                                                                    
credits." He highlighted that the  blue line depicted on the                                                                    
chart represented  total unrestricted  revenue to  the state                                                                    
under  the ACES  regime compared  to each  version of  SB 21                                                                    
assuming no  changes in production  and using  fall forecast                                                                    
numbers.                                                                                                                        
                                                                                                                                
Senator Bishop  asked whether the projections  were based on                                                                    
the 2012  fall revenue  forecast. Mr. Stickle  concurred and                                                                    
clarified that the revenue analysis  was projected for FY 14                                                                    
price scenarios.                                                                                                                
                                                                                                                                
Mr. Pawlowski interjected  that FY 15 was  chosen because it                                                                    
was the first  full fiscal year the tax changes  would be in                                                                    
effect.                                                                                                                         
                                                                                                                                
Mr.  Stickle noted  that  the  following slides  illustrated                                                                    
three different production scenarios. He reviewed Slide 4:                                                                      
                                                                                                                                
 "Production Scenarios."                                                                                                        
                                                                                                                                
     Scenario A:                                                                                                                
                                                                                                                                
        · New 50 million barrel field developed by small                                                                        
           producer without tax liability                                                                                       
        · Peak production = 10,000 bbls/day                                                                                     
        · Development costs = $500,000,000                                                                                      
        · Qualifies for GRE and NOL                                                                                             
                                                                                                                                
Mr. Stickle turned to Slide 5:                                                                                                  
                                                                                                                                
 "Scenario B: Production Scenarios."                                                                                            
     Scenario B:                                                                                                                
                                                                                                                                
        · Operators of existing unit add 4 drill rigs to                                                                        
          current plans                                                                                                         
        · Each rig adds 4,000 bbls/day in new production                                                                        
          each year                                                                                                             
             o Which each then decline at 15 percent per                                                                        
               year                                                                                                             
        · Does not qualify for GRE                                                                                              
                                                                                                                                
Mr. Stickle cited Slide 6:                                                                                                      
                                                                                                                                
 "Production Scenarios."                                                                                                        
                                                                                                                                
     Scenario C:                                                                                                                
        · Operator of existing legacy unit builds new drill                                                                     
          pad                                                                                                                   
        · Development cost = $5 billion                                                                                         
        · Adds 15,000 bbls/day in 2014 increasing to peak                                                                       
          rate of 90,000 bbls in 2018                                                                                           
        · Does not qualify for GRE                                                                                              
                                                                                                                                
Mr.  Stickle addressed  Slide 7:  "Projected Revenues  under                                                                    
production scenarios - at $90  per barrel ANS." He explained                                                                    
that the  graph compared CSSB  21 (FIN) under  the different                                                                    
scenarios to ACES  under the production forecast in  FY 14 -                                                                    
FY 19.  After a  few years of  additional production  at $90                                                                    
per barrel, SB  21 yields more revenue with  scenarios b and                                                                    
c than with ACES minus  the additional production. The graph                                                                    
intended  to  provide  an estimate  of  the  revenue  change                                                                    
derived from a certain amount of production.                                                                                    
                                                                                                                                
Mr.  Stickle discussed  Slide 8:  "Projected revenues  under                                                                    
production scenarios  - at $100  / barrel ANS."  He detailed                                                                    
that scenario  b in FY  18 and  FY 19 provided  a comparable                                                                    
amount of revenue to ACES.  Scenario c provided more revenue                                                                    
under CSSB 21 (FIN) than under ACES.                                                                                            
                                                                                                                                
Mr.  Stickle discussed  Slide 9:  "Projected Revenues  under                                                                    
production  scenarios  -  at $120/barrel  ANS."  Scenario  C                                                                    
showed  closer projected  revenues compared  to ACES  at the                                                                    
$120  price of  oil. He  disclosed that  progressivity under                                                                    
ACES kicked in with a higher surcharge at $120 per barrel.                                                                      
                                                                                                                                
Mr.  Stickle examined  Slide 10:  "Projected revenues  under                                                                    
production  scenarios  at  forecast ANS  price."  The  final                                                                    
slide illustrated  the comparison using the  forecast price.                                                                    
In the  early years, less  revenue was projected with  SB 21                                                                    
using all three scenarios than  under ACES projected. The FY                                                                    
2017 - FY 2019 time frame  exhibited a level of revenue that                                                                    
was similar  to ACES.  He reiterated  that the  analysis was                                                                    
not  a   forecast  but   illustrated  how   much  additional                                                                    
production was  necessary under SB  21 to equal  the revenue                                                                    
under ACES.                                                                                                                     
                                                                                                                                
Co-Chair Meyer expressed that  the previous slides addressed                                                                    
his  concerns  regarding  information about  the  amount  of                                                                    
additional  production   necessary  to  offset   the  fiscal                                                                    
impacts  of  changing  the tax  regime.  He  wondered  which                                                                    
scenario DOR felt was most likely to occur.                                                                                     
                                                                                                                                
Mr. Pawlowski stated that any  scenario was "imperfect." The                                                                    
conclusion  drawn  from  scenario   a  was  that  new  field                                                                    
development  was  not  sufficient   to  offset  the  revenue                                                                    
impact. Scenario b demonstrated  that more production in the                                                                    
legacy  fields significantly  improved the  revenue outlook.                                                                    
He detailed  that the analysis  in scenario b included  a 15                                                                    
percent decline  each year. The more  realistic scenario was                                                                    
scenario  b; the  addition of  rigs in  a legacy  field. The                                                                    
development  of  "large  pads"   (scenario  c)  was  a  more                                                                    
"difficult"  and  long  term  investment.  But  was  a  more                                                                    
desirable investment for the state.                                                                                             
                                                                                                                                
9:39:53 AM                                                                                                                    
                                                                                                                                
Mr.  Stickle   added  that  DOR  felt   the  scenarios  were                                                                    
"plausible" but could not attach a percentage probability.                                                                      
                                                                                                                                
Co-Chair Meyer asked whether the  analysis included the cost                                                                    
for credits under  ACES. Mr. Stickle thought  that they were                                                                    
factored in.                                                                                                                    
                                                                                                                                
Mr.  Pawlowski answered  in the  affirmative. He  added that                                                                    
"the  analysis portrayed  what incremental  production would                                                                    
have  to  happen  under  the  CS  to  get  towards  ACES  as                                                                    
forecast."                                                                                                                      
                                                                                                                                
Senator  Hoffman reiterated  analysis that  showed that  the                                                                    
state was  foregoing $1.4  billion at the  low end  and $1.8                                                                    
billion at the  high end. He cited scenario  C. He commented                                                                    
that  the  analysis  did not  look  promising.  He  wondered                                                                    
whether  a  business  would make  a  similar  adjustment  to                                                                    
revenues. Mr. Pawlowski replied  that the scenarios included                                                                    
only  basic areas  of new  investment.  The committee  could                                                                    
model   additional   incremental   production   if   further                                                                    
evaluation  was  desired  after  balancing  future  industry                                                                    
testimony.  Senator  Hoffman   voiced  that  any  additional                                                                    
investment  was  purely   hypothetical,  if  any  additional                                                                    
drilling  occurred at  all. But  the revenue  the state  was                                                                    
foregoing under ACES was not.                                                                                                   
                                                                                                                                
Co-Chair   Meyer   relayed   that  according   to   industry                                                                    
testimony;  a  more  competitive environment  in  the  state                                                                    
meant more industry activity.                                                                                                   
                                                                                                                                
Co-Chair Kelly  pondered whether the legislators  were "here                                                                    
to protect the interest of the  government or are we here to                                                                    
protect  the people  of Alaska."  He opined  that the  state                                                                    
"spent  too  much." He  believed  that  too much  discussion                                                                    
occurred   among  legislators   about  "keeping   money  for                                                                    
government."   He  believed   the  problem   was  too   much                                                                    
government.  The state  took too  much money  from investors                                                                    
under  ACES and  now must  examine how  to "give  some money                                                                    
back so business will stay  here and continue to invest." He                                                                    
felt that  the state  must give  back measured  against what                                                                    
the people wanted not what  the government wanted. He wanted                                                                    
the legislature  to examine  how the  state spent  money. He                                                                    
stated   that  "a   $5.7   billion   operating  budget   was                                                                    
ridiculous."  The state  savings would  be expended  because                                                                    
the  state   spends  too  much   not  because  of   oil  tax                                                                    
reductions. He wanted to protect  the ability of Alaskans to                                                                    
spend their money by ensuring jobs were available.                                                                              
                                                                                                                                
Senator Olson wondered how revenue  sharing would work under                                                                    
the  new  legislation.  He indicated  that  revenue  sharing                                                                    
would be  appropriated from to  the general fund  instead of                                                                    
linked to progressivity.                                                                                                        
                                                                                                                                
9:48:37 AM                                                                                                                    
                                                                                                                                
Mr.  Pawlowski offered  that the  finance  CS mandated  that                                                                    
state  revenues were  deposited into  the general  fund. The                                                                    
original  version "softly  dedicated"  corporate income  tax                                                                    
revenue  to the  revenue sharing  fund. He  deemed that  the                                                                    
finance  CS  authors  decided   that  corporate  income  tax                                                                    
revenues were  general fund revenues. He  explained that the                                                                    
revenue sharing statue guided  the decision. The legislature                                                                    
may appropriate  either $60  million per year  or up  to the                                                                    
amount  necessary to  bring the  balance of  the fund  up to                                                                    
$180  million.  The  CS  took  the  appropriation  from  the                                                                    
broader pool  of the  general fund  instead of  the specific                                                                    
corporate income tax.                                                                                                           
                                                                                                                                
Senator  Olson   wondered  whether  the   legislature  could                                                                    
radically  change  the  revenue  sharing  contribution.  Mr.                                                                    
Pawlowski answered that the  original language required that                                                                    
the legislature appropriated  the revenue from progressivity                                                                    
into   the  revenue   sharing  fund.   The  amount   of  the                                                                    
appropriation  was  maintained   in  statute.  The  statutes                                                                    
focused on how much the  fund needed which provided stronger                                                                    
guidance for  full funding given that  the legislature chose                                                                    
to appropriate to the revenue sharing fund.                                                                                     
                                                                                                                                
Senator Olson asked what the  bill's potential impact on the                                                                    
revenue  sharing fund  was. Mr.  Pawlowski  replied that  no                                                                    
difference existed.  The amount deposited into  the fund was                                                                    
subject to legislative appropriation.                                                                                           
                                                                                                                                
Co-Chair Meyer  added that the revenue  sharing language was                                                                    
the  same  as what  was  currently  in  ACES. The  fund  was                                                                    
subjected to legislative appropriation.                                                                                         
                                                                                                                                
9:51:24 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:56:09 AM                                                                                                                    
                                                                                                                                
RECONVENED                                                                                                                      
                                                                                                                                
BARRY PULLIAM,  MANAGING DIRECTOR,  ECON ONE  RESEARCH, INC.                                                                    
presented the  Power Point presentation "Comments  on Senate                                                                    
Finance CS SB21."                                                                                                               
                                                                                                                                
Mr.  Pulliam  began with  Slide  2:  "Summary of  Investment                                                                    
Measures  New  Participant  Investment   in  50  MMBO  field                                                                    
$20/Bbl  Developmental  Capex,  12.5  %  Royalty  Rate."  He                                                                    
explained  that the  spreadsheet contained  a comparison  of                                                                    
"investment metrics"  between ACES  and various  versions of                                                                    
SB 21  and other oil producers  in the world. He  noted that                                                                    
the net present  value (NPV) (measured at  price per barrel)                                                                    
for the investor improved with each version of SB 21.                                                                           
                                                                                                                                
Mr. Pulliam  pointed out  that the new  provision in  the CS                                                                    
allowed losses to  be monetized in contrast  to losses being                                                                    
carried   forward.  The   carry   forward   allowed  a   new                                                                    
participant's economics  to look  similar to  an established                                                                    
producer.                                                                                                                       
Mr. Pulliam  continued with Slide  2. He  directed attention                                                                    
to Government  Take figures and  noted that Alaska  was more                                                                    
competitive  compared  to  other  parts  of  the  world.  He                                                                    
believed that the investment climate  looked very good to an                                                                    
investor.                                                                                                                       
                                                                                                                                
Mr.  Pulliam  turned  to Slide  3,  "Summary  of  Investment                                                                    
Measures  Incumbent  Investment  in 50  MMBO  Field  $20/Bbl                                                                    
Development Capex, 12.5% Royalty  Rate" He reported that the                                                                    
spreadsheet contained the  same analysis as slide  2 for the                                                                    
incumbent.  The figures  in column  four that  reflected the                                                                    
finance  CS  were  identical  to   the  chart  for  the  new                                                                    
participant. Unlike ACES, a new  participant had the same or                                                                    
better tax  rate as  the incumbent.  He exemplified  that at                                                                    
$100 per barrel,  CSSB 21 (FIN) offered a higher  NPV to the                                                                    
new  participant ($5.97)  than  the  incumbent ($5.87).  The                                                                    
small  difference was  driven by  the small  producer credit                                                                    
extended until 2022. The credit was  a write off to buy down                                                                    
the incumbent's current tax  obligation. Monetization of the                                                                    
early  investment  by the  new  participant  placed the  new                                                                    
participant in the same financial  footing as the incumbent.                                                                    
He  suggested  the committee  re-examine  the  need for  the                                                                    
small   producer   credit  while   simultaneously   allowing                                                                    
monetization of the losses.                                                                                                     
                                                                                                                                
Co-Chair Meyer  asked whether  the need  for the  credit was                                                                    
necessary  while offering  a net  operating loss  (NOL). Mr.                                                                    
Pulliam responded  that both the  NOL and  monetizing losses                                                                    
placed the  new participant  on a  level playing  field with                                                                    
the  incumbent.  He thought  that  made  the small  producer                                                                    
credit unnecessary.                                                                                                             
                                                                                                                                
Co-Chair Meyer asked how that  would impact the fiscal note.                                                                    
Mr. Pulliam replied that would  amount to $25 million to $50                                                                    
million per  year with  the same  number of  producers. More                                                                    
producers would  continue to qualify for  the small producer                                                                    
credit and the impact would increase.                                                                                           
                                                                                                                                
Mr.  Pulliam  concluded that  the  finance  CS "leveled  the                                                                    
playing field"  between the new and  incumbent investors and                                                                    
created a more favorable investment climate.                                                                                    
                                                                                                                                
Senator Bishop  asked for an  explanation of a  cash margin.                                                                    
Mr. Pulliam explained that a  cash margin was the producer's                                                                    
cash  flow  after tax  payments  divided  by the  number  of                                                                    
barrels that were produced. According  to the spreadsheet, a                                                                    
producer had a cash margin of  $44.16 under CSSB 21 (FIN) in                                                                    
contrast to $29.48  for ACES. Senator Bishop  noted that the                                                                    
cash  flow under  the finance  CS was  better than  in North                                                                    
Dakota.                                                                                                                         
                                                                                                                                
Senator Dunleavy asked  whether any of the  new or incumbent                                                                    
participants related  what they thought of  the proposed tax                                                                    
legislation.    Mr.Pulliam   heard    favorable   responses,                                                                    
particularly from new participants.                                                                                             
                                                                                                                                
10:07:28 AM                                                                                                                   
                                                                                                                                
Mr. Pulliam discussed Slide 4:                                                                                                  
                                                                                                                                
    "Duration of the GRE."                                                                                                      
                                                                                                                                
   · GRE has the effect of reducing` tax rate                                                                                   
   · Removing GRE during life of a well is a tax increase                                                                       
     on that production (to the nominal rate)                                                                                   
   · Increase occurs as well productivity is declining and                                                                      
     per unit costs are rising                                                                                                  
   · can shorten productive life of a well and total                                                                            
     recoveries                                                                                                                 
   · Better Alternative would be a lower GRE over life of                                                                       
    well that provides same economics to the producer.                                                                          
                                                                                                                                
Mr. Pulliam identified the  methods that provided incentives                                                                    
in the tax  systems: (1) GRE, (2) per  barrel allowance, (3)                                                                    
capital credit (ACES). The incentives  lowered tax rates and                                                                    
improved  the  economics for  the  producer.  He shared  his                                                                    
concern about  limiting the GRE  over time.  He demonstrated                                                                    
that a  lower GRE  extended over  the life of  a well  was a                                                                    
better option through the following three slides.                                                                               
                                                                                                                                
Mr. Pulliam highlighted Slide 5:                                                                                                
                                                                                                                                
   "Well Production Profile Initial 1,500 BPD, 12% Decline                                                                      
   Rate."                                                                                                                       
                                                                                                                                
     ¾Approximately 50 percent of oil [was] produced                                                                           
        during the first 5-7 years of well life                                                                                 
     ¾Well productivity declines while $/Bbl operating                                                                         
        costs rise over time                                                                                                    
     ¾Maintenance and Workovers Extend the Production Life                                                                     
        of a Well                                                                                                               
                                                                                                                                
Mr. Pulliam explained that the  slide contained a graph that                                                                    
depicted  the annual  and cumulative  production  over a  20                                                                    
year period  of the well. The  GRE would raise the  tax rate                                                                    
of  the  well while  it  was  becoming less  productive  and                                                                    
profitable.  He suggested  the effect  was  contrary to  the                                                                    
objective of the legislation.                                                                                                   
                                                                                                                                
Mr. Pulliam  reviewed Slide 6: "Relationship  Between Length                                                                    
of GRE  and Percent  of NPV of  Drilling Cost  Initial 1,500                                                                    
BPD, 12%  Decline Rate." The slide  graphed the relationship                                                                    
over time. He exemplified that if  the GRE was offered at 20                                                                    
percent at  $100 per  barrel over  5 years  the NPV  for the                                                                    
producer amounted to 30 percent  of the cost of drilling the                                                                    
well. The  GRE was similar  to a 30 percent  capital credit.                                                                    
If the  limit was extended  to 10  years the NPV  totaled 40                                                                    
percent  and beyond  10  years the  NPV  valued 45  percent.                                                                    
Alternatively, the  GRE could be  reduced to 15  percent for                                                                    
the  life of  the well.  The alternative  produced the  same                                                                    
results for  the producer and "eliminated  the potential for                                                                    
having  an earlier  shut in  for the  well." He  recommended                                                                    
that the committee consider a  lower percentage GRE over the                                                                    
full life of a well.                                                                                                            
                                                                                                                                
Mr. Pulliam  discussed Slide 7: "Example  of Tax Calculation                                                                    
With and  Without GRE."  He noted that  the analysis  on the                                                                    
chart was  based on  the rates included  in the  finance CS.                                                                    
The  calculation was  based on  gross production  of 100,000                                                                    
barrels at  12.5 percent royalty amounting  to 87.5 thousand                                                                    
taxable  barrels.  The  calculation without  the  GRE  minus                                                                    
expenses amounted to a taxable  value of $70 per barrel. The                                                                    
total production tax  value was $6.125 million  taxed at the                                                                    
30 percent  tax rate  minus the  $5 production  allowance of                                                                    
$437.5 thousand  for a  net taxable  total of  $1.4 million.                                                                    
The tax  as percentage  of the net  value of  production was                                                                    
22.9 percent. The tax as a  percentage of the gross value of                                                                    
production  was 16  percent. The  same variables  with a  20                                                                    
percent  GRE ($20  per barrel)  were subtracted  out of  the                                                                    
taxable  value resulting  in  a taxable  value  of $50.  The                                                                    
taxes due minus the $437.5  thousand ($5 per barrel) totaled                                                                    
$875 thousand.  The same  variables applied at  a GRE  of 15                                                                    
percent.  The  taxable  value  was   $55  per  barrel  which                                                                    
resulted in  a slightly higher  tax due of  approximately $1                                                                    
million dollars. The tax was higher with the lower GRE.                                                                         
                                                                                                                                
10:18:15 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  indicated that the resources  CS version set                                                                    
the  GRE at  30 percent.  The taxes  would be  significantly                                                                    
less  at the  30  percent rate.  Mr.  Pulliam confirmed  and                                                                    
replied  that  the  tax  base  rate was  set  higher  at  35                                                                    
percent. The tax rate and GRE offset each other.                                                                                
                                                                                                                                
Co-Chair  Meyer commented  that CSSB  21 (FIN)  attempted to                                                                    
accomplish  the same  rate as  the Resources  CS but  with a                                                                    
lower tax  rate and higher  GRE. He surmised that  it wasn't                                                                    
an even  exchange. Mr. Pulliam  agreed the numbers  were not                                                                    
exact but thought that it was close enough.                                                                                     
                                                                                                                                
In response  to a  question by  Co-Chair Meyer,  Mr. Pulliam                                                                    
reiterated  that  he  advocated  lowering the  GRE  for  the                                                                    
entire life of  the well instead of the 20  percent GRE with                                                                    
a limited duration.                                                                                                             
                                                                                                                                
Senator   Bishop  wondered   whether  the   "theory"  behind                                                                    
extending a  lower GRE was  to incentivize keeping  the well                                                                    
producing while in decline. Mr. Pulliam concurred.                                                                              
                                                                                                                                
Mr.  Pulliam  addressed  Slide 8:  "Example  of  NOL  Credit                                                                    
Related to New Investment Of  $1 Billion." He understood the                                                                    
intent  of  the NOL  credit.  He  described that  the  chart                                                                    
exemplified  the NOL  over  a five  year  period. The  chart                                                                    
depicted a  capital spending column  and tax loss  column at                                                                    
30  percent. The  tax  loss,  or portion  of,  would be  the                                                                    
amount  monetized. The  intent  of  the CS  was  to tie  the                                                                    
amount  of monetization  to  the  continued investment.  The                                                                    
first year  loss was monetized out  of a loss in  the second                                                                    
year  and the  remainder of  the loss  was carried  forward,                                                                    
which continued through year three.  In the fourth and fifth                                                                    
year the  tax loss for  the year  was monetized at  the full                                                                    
amount  and there  was no  carry  forward. In  the 5th  year                                                                    
production began  and the monetized  amount over the  5 year                                                                    
period  was 50  percent  and the  carry  forward totaled  50                                                                    
percent.  The  carry forward  losses  were  increased at  15                                                                    
percent per year. The carry  forward was counted against the                                                                    
tax obligation as  it became due. The  monetization was tied                                                                    
to the ongoing investment in  an effort to avoid investments                                                                    
for  the sole  purpose of  investing without  production. He                                                                    
believed  that  the 30  percent  tax  rate itself  dissuaded                                                                    
illegitimate investments. He  suggested that investors could                                                                    
pre-qualify the project.  Pre-qualification could accomplish                                                                    
a  level  playing  field  between   the  incumbent  and  new                                                                    
investor and ensured that the investment was legitimate.                                                                        
                                                                                                                                
10:28:14 AM                                                                                                                   
                                                                                                                                
Senator Bishop asked whether the  loss was split between the                                                                    
producer and  the state  under the  NOL credit.  Mr. Pulliam                                                                    
answered  in the  affirmative. He  added  the carry  forward                                                                    
would apply to the producer's tax obligation going forward.                                                                     
                                                                                                                                
Vice-Chair Fairclough  reported that  she presented  the NOL                                                                    
concept  based on  the  idea that  "people  that wanted  the                                                                    
state's  money should  invest that  money  into the  state."                                                                    
Consultants  suggested using  capital credits  to accomplish                                                                    
the objective.                                                                                                                  
                                                                                                                                
Mr. Pulliam turned to Slide  9: "Annual State Cash Flows New                                                                    
Participant   Investment  in   50   MMBO   Field  $20   Bbl.                                                                    
Development Capex  12.5 Percent  Royalty Rate.  He explained                                                                    
that two graphs on each  side of the slide illustrated NOL's                                                                    
carried  forward   with  and  without  the   GRE  and  NOL's                                                                    
monetized  with and  without the  GRE in  relation to  taxes                                                                    
specifically   production  tax   (depicted   in  blue.)   He                                                                    
highlighted that  the main difference was  that monetization                                                                    
of  the  NOL's meant  that  the  state would  collect  taxes                                                                    
sooner and if the NOL's  were carried forward tax collection                                                                    
was delayed.                                                                                                                    
                                                                                                                                
Mr.  Pulliam  discussed  slide  10:  "Shares  of  Per-Barrel                                                                    
Values  Under SFIN  CS  SB  21 (30  %  Base  Rate, $5  /Bbl.                                                                    
Allowance, Losses  Monetized) for  All Producers (FY  2015 -                                                                    
FY 2019) He explained that  the graph illustrated the profit                                                                    
share among  the state  and federal  government and  the oil                                                                    
industry. He summarized that as  the price of oil raises the                                                                    
state  and  industry shares  were  similar  and the  federal                                                                    
government share was smaller.                                                                                                   
                                                                                                                                
Mr. Pulliam examined Slide 11:  "Interest Rates 1977 - 2012"                                                                    
He  noted  that  provisions  in  the  finance  CS  contained                                                                    
changes  to   the  overdue  tax  interest   rate,  which  he                                                                    
concurred with.  The current  law required the highest of 11                                                                    
percent  or  the  federal  funds rate  plus  5  percent.  He                                                                    
believed  the  11  percent  rate   was  very  high  and  was                                                                    
sympathetic  with industries  disapproval  of  the rate.  He                                                                    
opined  that the  rate  was punitive  and  the state  should                                                                    
charge  a  penalty  instead. He  explained  that  the  graph                                                                    
looked back  over the  time since  ANS (Alaska  North Slope)                                                                    
oil was produced and depicted  the tax rate declining except                                                                    
for a  period of time in  the late 1970's and  early 1980's.                                                                    
He encouraged the committee to  eliminate the 11 percent and                                                                    
tie the interest rates to the federal funds rate plus 3                                                                         
percent. He felt that was a simpler system and more                                                                             
equitable for both sides.                                                                                                       
                                                                                                                                
Co-Chair Meyer liked the suggestion to change the interest                                                                      
rate.                                                                                                                           
                                                                                                                                
SB 21 was HEARD and HELD in committee for further                                                                               
consideration.                                                                                                                  
                                                                                                                                
10:37:36 AM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:38 a.m.                                                                                         
                                                                                                                                

Document Name Date/Time Subjects
SB 21 3.13.13 CS Fiscal Note SFIN PowerPoint.pptx SFIN 3/13/2013 9:00:00 AM
SB 21
SB 21 Econ One Presentation For Senate Finance (3-13-13) (2).pdf SFIN 3/13/2013 9:00:00 AM
SB 21
SB 21 2013 03 12 Oil Tax and Credits Spreadsheet.pdf SFIN 3/13/2013 9:00:00 AM
SB 21
SB 21 Oil Tax Provisions Comparison 03122013 ACESvSB21introvSB21CSResvSB21CSFi .pdf SFIN 3/13/2013 9:00:00 AM
SB 21