Legislature(1993 - 1994)
03/17/1993 05:05 PM Senate O&G
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
SENATE SPECIAL COMMITTEE ON OIL & GAS
March 17, 1993
5:05 p.m.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Rick Halford
Senator Bert Sharp
Senator Judith Salo
Senator Al Adams
MEMBERS ABSENT
All Present
COMMITTEE CALENDAR
SENATE BILL NO. 134
"An Act establishing credits for purchasers of state royalty
oil for expenditures made by those purchasers on qualifying
capital investments to be applied against liquidated
purchase arrearages established in contracts, settlements,
or final judgments; and providing for an effective date."
PREVIOUS ACTION
No previous action to record.
WITNESS REGISTER
Senator Mike Miller
State Capitol
Juneau, Alaska 99801-1822
POSITION STATEMENT: Sponsor of SB 134.
Gene Burden, Vice President
Tesoro
3230 C Street
Anchorage, Alaska 99510
POSITION STATEMENT: Supported SB 134.
Jonathan Tillinghast, Attorney
Tesoro
One Sealaska Plaza #301
Juneau, Alaska 99801
POSITION STATEMENT: Supported SB 134.
Attorney General Cole
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
POSITION STATEMENT: Strongly opposed SB 134.
Richard Cline
Cline's Texaco
442 Gamble
Anchorage, Alaska 99501
POSITION STATEMENT: Strongly opposed SB 134.
Bernie Smith, Senior Engineer
Tesoro Refinery
P. O. Box 3369
Kenai, Alaska 99611
POSITION STATEMENT: Said he would testify tomorrow.
Chris Gabriel
Big G Electric
P.O. Box 4257
Soldotna, Alaska 99669
POSITION STATEMENT: Supported SB 134.
Ray Hutchison
9499 Brayton Dr., #55
Anchorage, Alaska 99507
POSITION STATEMENT: Opposed SB 134.
John Torgeson
Kenai, Alaska 99611
POSITION STATEMENT: Did not comment.
ACTION NARRATIVE
TAPE 93-6, SIDE A
Number 001
SENATOR LEMAN called the Special Committee on Oil and Gas
meeting to order at 5:05 p.m. and announced SB 134 CREDITS
AGAINST PURCHASE OF ROYALTY OIL to be up for consideration.
SENATOR MILLER, sponsor, said he thought SB 134 was good
public policy. He said that additional costs are always
passed on to the consumer. This bill would help create more
jobs in Alaska and the Commissioner of the Department of
Commerce and Economic Development would have to sign off on
these projects. He noted that a poll had been done of 515
people statewide who mostly favored in-state processing and
refining of Alaskan oil and also favored value added
industries in Alaska.
The amount of money the state wants to collect from in-
state refiners for past taxes is over $300 million covering
a period from the past 10 years. When asked about this
issue in the poll, thirty nine percent responded they should
pay the claim. Forty two percent said they should not have
to pay the claim; nineteen percent said they were unsure.
Another option, SENATOR MILLER said, would be for the state
to provide incentive for Alaska's in-state refiners to
expand by allowing them to satisfy the state's claim with
invest in new projects in Alaska. The poll asked what their
response would be if these new projects provided new jobs
and new taxes. Seventy six percent favored that proposal.
Number 162
SENATOR ADAMS said it was bad policy to put the bill before
the legislature. He said he could word another
questionnaire so he could get a different percentage. He
said he didn't see that the bill created jobs for Alaskans.
SENATOR ADAMS asked, regarding page 2, lines 11-15, how we
measure the benefit to the Alaskan economy.
SENATOR MILLER answered that the Commissioner might find
there is a benefit created by new jobs within the state.
SENATOR LEMAN said he appreciated Senator Adam's comments,
but asked him to reserve additional comments for tomorrow so
they could get comments from the other participants.
SENATOR ADAMS said he would reserve his questions for
tomorrow.
Number 206
GENE BURDEN, Vice President, Tesoro, supported SB 134. He
said the value-added refiners represented by TESORO, MAPCO,
and PETROSTAR employ a total of 1,000 people in Alaska.
Approximately 200,000 barrels of oil a day goes through the
refineries. He said the refineries represent one of the
success stories of the state in development of its natural
resources.
Number 245
MR. BURDEN explained that the refiners had contracts with
provisions that gave rise to claims of retroactive price
adjustments for a very long period of time, in excess of 10
years in some cases. Waiting for disposition of the final
outcome of the royalty oil case, known as Amerada Hess, the
parties have collaborated in the matters of economics and
business relations. Neither the royalty owners nor the
refiners knew what price would be attached to the oil until
settlement of the case recently. Their companies are not
able to go back to their customer and make up the
difference.
TESORO's interest in having capital credits has been a long
term interest which has been brought up frequently in
negotiating a settlement.
He pointed out that capital projects would increase tax
revenues to the state.
Number 515
JON TILLINGHAST, representing Tesoro, said the legislature
should recognize that most of the legislation passed is
special interest in that it benefits or hurts some Alaskans
more than others. He noted there is no tax in Alaska that
everyone pays. Every tax is tailored to a specific
industry.
He said the Department of Law is advocating legislation that
would grant credits against royalty liability for the
producers, but not the refiners (SB 151 OIL & GAS
EXPLORATION INCENTIVE CREDITS). The Hickel administration
recognizes granting credits against royalty payments is an
effective way to encourage new economic activity in the
state. It also recognizes that the incentive has to be
tailored to fit the particular industry as in SB 151.
SB 134 confines its coverage to in-state. The refiners are
being asked to pay one third of the Amerada Hess bill, but
that misses the different abilities of the two industries to
spread the impacts of Amerada Hess throughout their product.
The refiners get all of the State's share of North Slope
oil, but it's only one eighth of the total.
Another inequity is the royalty oil sold to major oil
companies in the early 1980's that was then shipped out of
state. Those sales had no Amerada Hess clause in them. So
that royalty oil went out of state and those companies
aren't being asked to pay any Amerada Hess surcharge.
MR. TILLINGHAST noted that the producers' liability under
Amerada Hess is about $700 million, but it represents about
6% of their assets based in Alaska. On the other hand the
$100 million each from Tesoro and Mapco represents in each
instance almost 100% of their asset base in Alaska. The
ability of the industry to withstand the tax and still
prosper is a legitimate consideration for the legislature.
A policy unique to the refining industry is the state using
royalty oil management as a tool to create and foster an in-
state refining industry. This has been a remarkably
successful policy. SB 134 further polishes this policy.
He presented the Committee with a page of examples of how
the state has foregone money to encourage a particular
industry -the fisheries business tax credit (discontinued in
1991), a special tax credit in the corporate income tax that
allowed certain types of economic activity to take a much
higher percentage of their federal investment tax credit
than other tax payers got to take in order to encourage the
creation of those activities (also discontinued), and the
generous tax credit to the mining industry which exempts
them from paying license taxes for three and one half years
to induce them to open up new mines (current policy). The
oil companies get to take a credit against royalty payments
to drill exploratory wells, also.
MR. TILLINGHAST said the test was under the "public purpose
clause" of the Alaska Constitution - whether a private
entity benefits, whether the expenditure will directly
enhance the general welfare of the community, or whether it
resolves energy problems. He noted that the legislature
makes the decision whether the public purpose clause has
been filled.
He said it does appear that passage of this law would yield
benefits that are at least commensurate with the amount of
the credits being given, most likely greater.
He noted SB 134 has safeguards in it that the other credit
bills don't have. It can be disapproved by the Commissioner
of DCED and the credits have to be used within a certain
period of time.
He said the Permanent Fund clause applies to funds that are
received by the state. The dictionary say that means "to
come in possession of." So until the state comes in
possession of these funds, they are not subject to the
requirement for deposit to the Permanent Fund.
Number 552
ATTORNEY GENERAL COLE said SB 134 created a new section
under Title 38.05.183, Subsection (i). Subsection (f), or
the legislative approval of a contract for the sale of
royalty oil that would appreciably reduce the consideration
received by the state, would no longer be applicable if this
were enacted.
Subsection 1 is applicable to a capital project. Nothing
requires the construction of any improvement to even be
related to the oil industry.
TAPE 93-6, SIDE A
Number 580
He pointed out there was not much limitation imposed on the
Commissioner of the Department of Commerce and Economic
Development when deciding about the credits.
Commenting on the phrase that the capital credit must yield
a benefit to the economy that is "commensurate with the
amount of the credit" Attorney General Cole said that wasn't
much of a test. "Commensurate with" is a very wishy washy
phrase enabling them to slip by anything. It is also a
negative test. In Section (2) (A) taking the credit against
any other obligation the purchaser may owe, means the state
would allow them to take the credit against any obligation,
taxes, for instance, and to take the credits at any time
within a poetential 15 year period.
ATTORNEY GENERAL COLE also noted the "if applicable"
language was vague. He noted the finite period of time in
which to pay the taxes to be very indefinite. This issue
could be litigated for 5 - 7 years, he explained, and then
the purchaser has the right to claim that credit within the
next 10 years.
ATTORNEY GENERAL COLE said the industry knew when this
contract was entered into for the purchase of state royalty
oil that there was a disagreement between the state and
purchasers over the value of the state royalty oil. They
agreed by contract to be bound by the outcome of that
litigation. They, therefore, should have no excuse for not
taking a reserve to guard against the final outcome of that
litigation. They now say they don't have the money to pay
this. They have known for years that large sums were being
claimed by the state and they agreed to be bound by the
result.
Number 475
This bill excuses the party from a debt or obligation to pay
money under a written contract if it spends the money for a
capital investment within the state, ATTORNEY GENERAL COLE
explained. He repeated, "This bill says a party doesn't
have to pay money to the state that a court found was due
and owing." This is grossly unfair to people within the
state who have agreed to pay the state money under contract
and are willing to pay their obligations and do not dispute
them. He said the State routinely takes action to foreclose
upon those who have received agricultural loans from the
state. These people receive no relief for creating
employment. They leave farms they have lived on for 10 or
15 years. Here, in this legislation, we tell corporations
who have paid their shareholders tens of millions of dollars
in dividends which they could have reserved, you don't have
to pay money you owe the state if you just make a capital
investment commensurate with what you owe.
This bill would also be grossly unfair to the competitors -
the gasoline and convenience stores.
Furthermore, this bill is not limited to past obligations.
Basically, SB 134 presents a flawed public policy. The
legislature itself should make decisions on the public
purposes of expenditures of monies due and payable to the
state treasury. "Why should corporations have the ability
to decide what capital projects serve the greatest public
interest?" he asked.
Even if the corporations built projects, where would the
benefits go? They would go to the shareholders of Mapco,
Tesoro, etc., not the state. Mapco has distributed $125
million in the last several years to its shareholders and if
this legislation passes, they will be able to pay even more
dividends to their shareholders.
Why should not the state be receiving the return on the
capital investments? If we are, in fact, building a
refinery with this money for Tesoro, then Tesoro should pay
the state rent on the refinery the state money built for
Tesoro.
In conclusion, he said, if this legislation becomes law he
is not prepared as Attorney General to go to "big oil" and
say, "Pay, you owe money to the state." He said the
negotiations are so delicate, that the bargaining
relationship would be drastically changed.
Lastly, ATTORNEY GENERAL COLE said, he was authorized to say
the Governor would veto this bill if it passed the
legislature in substantially its current form..
Number 356
RICHARD CLINE, Anchorage, opposed SB 134. He asked the
Committee to look at how many jobs this bill would create
and to then look at how many jobs it would eliminate,
because of the unfair competition it would create at the
retail level. He couldn't compete against a corporation
that owned all phases of the product. He thought it was an
anti-trust violation.
Number 308
BERNIE SMITH, Senior Engineer, Tesoro Refinery, said he
would testify tomorrow because of the time limit today.
NUMBER 292
CHRIS GABRIEL, Big G Electric, Soldotna, supported SB 134,
because we would benefit from the increased investment
through creation of more jobs.
Number 273
RAY HUTCHISON, Anchorage, opposed SB 134, because it would
be unfair to an independent business person.
JOHN TORGESON, Kenai Peninsula Borough Assembly, presented a
resolution passed by the Assembly which SENATOR LEMAN said
was already part of the record.
Number 251
JIM EASON, Director, Division of Oil and Gas, said he would
present his testimony at tomorrow's meeting.
Number 240
SENATOR LEMAN adjourned the meeting at 6:25 p.m.
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