Legislature(2013 - 2014)HOUSE FINANCE 519
04/11/2013 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| SB85 | |
| SB83 | |
| SB22 | |
| SB88 | |
| SB47 | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| + | SB 47 | TELECONFERENCED | |
| + | SB 83 | TELECONFERENCED | |
| + | SB 85 | TELECONFERENCED | |
| + | SB 62 | TELECONFERENCED | |
| += | SB 18 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 22 | TELECONFERENCED | |
| += | SB 7 | TELECONFERENCED | |
| += | SB 88 | TELECONFERENCED | |
| + | SB 65 | TELECONFERENCED | |
| += | SB 27 | TELECONFERENCED | |
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; 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; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
9:46:08 AM
AT EASE
9:47:25 AM
RECONVENED
Co-Chair Stoltze discussed the intent of the committee.
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, spoke to the bill.
Representative Costello MOVED to ADOPT the proposed
committee substitute for CSSB 21(FIN) am(efd fld), Work
Draft 28-GS1647\L (Nauman/Bullock, 4/10/13).
There being NO OBJECTION, Work Draft 28-GS1647\L was
ADOPTED.
Mr. Pawlowski supported that the CS maintained the
administration's intention for revenues from the corporate
income tax to be directed to the community revenue sharing
fund (Section 1, page 2). The administration appreciated
the bill's retention of the qualified oil and gas service
to industry expenditure credit in Section 3, page 3. He
directed attention to a tax rate increase from 33 percent
in the House Resources Committee version to 35 percent
(page 4, Section 4, line 20); related conforming changes
had been made throughout the bill. He moved to page 9
(Section 8), which included the mechanism for installment
payments. He noted that conforming amendments had been made
on page 9, lines 15 and 30; and page 10, lines 12 and 21.
9:51:56 AM
Mr. Pawlowski referred to a capital expenditure credit
repeal included in the prior bill version and how it would
impact smaller oil companies that had plans of development
under the current system. He pointed to Section 14, page
14, which allowed the tax credit for the carry-forward
loss; the credit only applied to companies when spending
exceeded the tax liability. He observed that the carry-
forward credit had been increased to 45 percent (page 14,
line 26) between January 1, 2014 and January 1, 2016 and
decreased to 35 percent following the latter date. Under
the current system the companies received a 25 percent loss
credit and a 20 percent capital credit; under the House
Resources Committee proposal the total credit would have
dropped to 35 percent. He complimented the committee on its
solution, which he believed addressed public comment.
Representative Gara asked about the carry forward credit
that went from 45 percent through January 2016 to 35
percent (page 14) and down to 25 percent (page 15).
Mr. Pawlowski responded that the 25 percent was modified by
page 14, line 31 for expenditures south of the North Slope.
The provision preserved the current system in Cook Inlet
and Middle Earth related to the credits.
Mr. Pawlowski addressed conforming amendments in Section
20, page 17. The CS increased the gross revenue exclusion
(GRE) for certain new units. He discussed the bill's clear
direction to the department recognizing which per barrel
credits would apply (page 17, lines 14 and 21). The
department appreciated the way the language had been
structured.
Representative Gara asked for more detail on the issue. Mr.
Pawlowski pointed to Section 27, page 24. He explained that
subsection (f), lines 10 through 27 retained the prior bill
version's GRE. Additionally, subsection (g) had been added,
which linked to units developed after January 1, 2003;
language on page 25 required that units had to be made up
solely of leases with a royalty share of more than 12.5
percent in amount or value of the production removed or
sold from lease. The bill added a 10 percent GRE on top of
the 20 percent offered at the base level. He communicated
that language in Section 20 conformed to ensure that legacy
production received a sliding scale because it did not
qualify for the GRE.
9:57:31 AM
Mr. Pawlowski continued to discuss changes in the CS. He
pointed to pages 25 through 28, which included the
reintroduction of the Oil and Gas Competitiveness Review
Board (the language had been in prior versions of the
bill).
Co-Chair Stoltze noted that the provision may be further
modified.
Mr. Pawlowski believed the administration saw the Oil and
Gas Competitiveness Review Board as an opportunity to
continue the dialogue on "what was hopefully a relatively
less political perspective" related to the state's long-
term competitiveness regarding the tax system and an
alternative means to improve Alaska's position. He pointed
to a reference to workforce development, infrastructure
investment, and the permitting and regulatory environment
on page 27. He shared that in previous bill versions the
Department of Revenue (DOR) had committed to supporting the
effort with existing staffing levels and had not introduced
a new position to support the board's work. He believed the
department would maintain a similar position if the
language was retained in the CS.
10:00:02 AM
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, communicated that the Department of Natural
Resources (DNR) was available to all members and would
continue to review the CS.
Representative Gara wondered whether the tax rate would
always be 35 percent or if 35 percent was the cap. Mr.
Pawlowski responded that the statutory tax rate was 35
percent, but the effective tax rate would be lower; it
would cap out for the legacy production, which had a
sliding scale credit. The rate would not reach the 35
percent for new production and areas with higher royalties
due to the GRE.
Representative Gara asked if the sliding scale was $0.00 to
$8.00 and applied only to legacy fields. Mr. Pawlowski
answered in the affirmative. He pointed to page 17, lines
14 and 21 related to the criteria under subsections (f) or
(g) [AS 43.55.160] that linked to GRE eligibility.
Representative Gara queried if the CS maintained language
that the 35 percent tax rate would be reached at $150 per
barrel. Mr. Pawlowski responded in the affirmative.
Representative Gara asked what the tax rate would be at the
lowest end of the sliding scale. Mr. Pawlowski replied that
related to legacy production the CS maintained the
prohibition that the sliding scale per barrel credit could
not be used to offset the 4 percent gross minimum tax (page
17, line 24). He detailed that on legacy production,
barring other outside credits that could be applied the 4
percent gross minimum would be a real floor. He was
uncertain about the amount on a net rate.
Co-Chair Stoltze relayed that the department would have an
opportunity to clarify and expand on answers at a later
time.
10:03:39 AM
Representative Gara asked what the effective tax rate would
be at the bottom of the sliding scale without consideration
of the gross floor. Mr. Pawlowski would follow up on the
question.
Representative Gara asked about non-legacy fields. He
referred to the GRE and asked what the effective tax rate
would be on $110 per barrel oil. He surmised that the rate
would be less than 35 percent.
Co-Chair Stoltze asked Mr. Pawlowski to come back with a
comprehensive analysis. Mr. Pawlowski would follow up on
the question.
Mr. Balash remarked that overall the total government take
would be approximately 60 percent to 61 percent.
Co-Chair Stoltze asked for verification that the
administration was preparing various scenarios. Mr.
Pawlowski agreed.
Co-Chair Stoltze believed the administration had prepared
an analysis on a multitude of rate scenarios.
Representative Gara requested effective tax rates for all
provisions of the bill. He referred to testimony on a prior
bill version that a 20 percent GRE on new oil equated to an
effective tax rate of 17 percent at $110 per barrel. He
wondered which fields the 30 percent GRE would apply to.
Mr. Pawlowski replied that the 30 percent GRE only applied
to a unit made up of leases with a royalty share of more
than 12.5 percent (page 25).
10:06:49 AM
Representative Gara referred to higher royalty fields and
asked if the 30 percent GRE applied to legacy and new oil
fields. Mr. Balash was not aware of any currently producing
units that would start off qualifying for the 30 percent
GRE. He explained that Prudhoe Bay and Kuparuk had one-
eighth [12.5 percent] leases and would not qualify. The two
currently producing units intended to qualify were
Nikaitchuq and Oooguruk. He detailed that Oooguruk would
remain at the 20 percent because it had a royalty
modification currently in effect; once payout on the NPSLs
[net profit share leases] was reached and royalty rates
increased, the field would qualify for the 30 percent GRE
the following calendar year.
Representative Gara asked for verification that the
Oooguruk royalty rate reduction had been based on the
economics under the current Alaska's Clear and Equitable
Share (ACES) tax system. He surmised that royalty relief
for Oooguruk had been granted in order to make the field
economic. Mr. Balash replied that royalty modification for
Oooguruk had been granted in 2006 prior to the
implementation of ACES.
Representative Gara asked whether Oooguruk was the only
existing field that would qualify for the 30 percent GRE.
Mr. Balash replied that he would need to check to determine
whether the Nikaitchuq field would qualify for the 30
percent GRE; it would definitely qualify for the 20 percent
GRE. He relayed that there was a lease in the field's unit
that had been segregated because it had originally been in
one of the legacy units; the unit received a new lease
number after January 1, 2003; therefore the lease would not
disqualify the Oooguruk unit for the 20 percent GRE in AS
43.55.160(f)(1).
10:09:49 AM
Mr. Pawlowski pointed to a presentation by Pioneer and
added that the additional development in the Oooguruk unit
was occurring where new pockets of oil were being
developed. The provisions would apply to the additional
development within the unit such as the Torok participating
area when the unit was above the one-eighth [12.5 percent]
lease.
Co-Chair Stoltze asked members to provide additional
questions to his office for distribution to the
departments.
Representative Gara stated that originally the governor had
defined new oil inside a legacy field. Additionally, the
governor had included a new lower tax rate with the GRE
inside legacy fields for new oil. He pointed to the
governor's definition for new separate geological units,
which had been changed in the bill. He wondered whether the
administration preferred the original definition.
Mr. Balash replied that the House Resources Committee
language accomplished what the administration needed, which
was to highlight what would qualify going forward. He
communicated that the only part of the existing and
currently producing participating areas (PA) that would
qualify were any additions made in the future; he relayed
that if something was not currently in the PA, it was not
thought to be contributing. He discussed additional work
that would be necessary in order to bring the additional
area into production. The change in the legislation still
satisfied the fundamental goal of rewarding new production.
Representative Gara asked what the term "new area" within a
legacy field meant. He did not want an additional tax break
to go to new oil that was in the same pool in a legacy
field that a company would produce at a later time.
Mr. Balash answered that the units were managed through the
PA process. He explained that when companies found oil or
gas they had the resource put into a unit to cover all of
the leases the oil and gas underlies, which was the basis
for managing and governing activity and production on the
unit. Additionally, areas to be drilled and produced were
identified through the development plan; the expectation of
which part of the unit would be contributing to production
was the portion included in the PA. The determination was
based on expectations of lessees, various working interest
owners in the unit, the state, and the Division of Oil and
Gas. He elaborated that PAs were formed when production
began and over the course of time if production performed
differently than expected the PAs may be contracted or
expanded. He relayed that if an addition was made to an
existing PA it may qualify for the GRE, but only if the
producer could satisfy DOR with regard to how it would
allocate or account for the production and to keep it
separate from existing production.
10:15:09 AM
Co-Chair Stoltze commended Representatives Eric Feige and
Dan Saddler on their work in the House Resources Committee.
CSSB 21(FIN) am(efd fld) was HEARD and HELD in committee
for further consideration.
[Note: CSSB 21(FIN) am(efd fld) was heard later in the same
meeting beginning at 3:58 p.m.]
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; 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; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
3:58:36 PM
Vice-Chair Neuman called the meeting back to order. He
relayed that the administration would provide further
analysis on the bill. He asked if the presenters would
present two presentations.
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, responded in the affirmative.
Vice-Chair Neuman noted that members had copies of the
presentations. He asked members to hold questions until the
presentations were finished.
BARRY PULLIAM, MANAGING DIRECTOR, ECON ONE RESEARCH, INC.,
relayed that he had updated his previous analysis to focus
on changes included in the CS. He provided a PowerPoint
presentation titled "Analysis of HCS CS SB21 (FIN) for
House Finance Committee" dated April 11, 2013 (copy on
file). He pointed to slide 2.
Representative Gara noted that he had to leave for
conference committee [on the operating budget].
Mr. Pulliam began on slide 2: "Key Features, of ACES, SB
21/HB 72, HCS CSSB 21(RES) and HCS CS SB21 (FIN)." He
relayed that the slide added the House Finance Committee CS
to the comparison and showed the terms that were different.
He stated that under the CS the base rate had increased
from 33 percent to 35 percent. The Gross Revenue Exclusion
(GRE) had been split into two sections: 20 percent GRE
remained for 12.5 percent royalty and 30 percent GRE if the
royalty was greater than 12.5 percent. The net operating
losses (NOLs) had been increased to 45 percent through 2015
and 35 percent thereafter, which was equal to the tax rate.
The current small producer credit would remain and would
phase out in 2016.
4:02:10 PM
Mr. Pulliam turned to slide 3 titled "Effective Net Tax
Rates under HCS CSSB 21 (FIN)." The chart showed legacy
production, 12.5 percent royalty/20 percent GRE production,
and 16.67 percent royalty/30 percent GRE production over a
price range of $50 a wellhead to $200 a wellhead. He noted
that the effective tax rate for the legacy fields would dip
slightly below 10 percent before it caught the gross
minimum floor, which would increase as the wellhead price
increased and would top out at 35 percent at $150 wellhead.
Representative Gara requested to ask some questions prior
to leaving for conference committee. Vice-Chair Neuman
asked him to write the questions down.
Mr. Pulliam moved to slide 4 titled "Effective Gross Tax
Rates under HCS CS SB21 (FIN)." The chart showed legacy
production, 12.5 percent royalty/20 percent GRE production,
and 16.67 percent royalty/30 percent GRE production over a
price range of $50 a wellhead to $200 a wellhead. He
highlighted the 4 percent gross floor [at $50 per barrel]
for the legacy production, which increased to 30 percent at
a wellhead price of $200. The 12.5 percent/20 percent GRE
topped out at approximately 20 percent [at a wellhead price
of $200] and the 16.67 percent royalty/30 percent GRE
topped out at approximately 17 percent [at a wellhead price
of $200]. The calculations for the slides were contained in
the appendix.
4:04:42 PM
Mr. Pulliam directed attention to slide 5: "Effective Tax
Rates on Gross Value for Legacy Production ACES vs.
SB21/HB72, HCS CS SB21 (RES), HCS CS SB21 (FIN) and Other
Large Oil-Producing States with Production Taxes at $100
Wellhead Value," which was based on cost information for FY
2012. The base rate change from 33 percent to 35 percent
would move the effective gross rate up slightly between the
House Resources Committee CS and the House Finance
Committee CS. He looked at slide 6, which showed the
average government take for all existing producers (FY 15-
FY 19) for all versions of the bill. The slide included HCS
CSSB 21(FIN) in column 5 and showed that the tax increase
from 33 percent to 35 percent would increase the government
take by approximately 1 percent. Under the House Finance
Committee CS the government take would run from a low of 60
percent to 61 percent up to a high of 67 percent at a price
of $150.
4:06:20 PM
Mr. Pulliam pointed to slide 7 titled "State, Federal and
Producer Take at Various $2012 WC ANS Prices for All
Producers (FY 2015-FY 2019) ACES and HCS CS SB21 (FIN)."
The percent of total take for ACES was shown on the top
half of the slide and the same information was provided for
the CS on the bottom portion of the slide. The CS increased
the state take over the price range, which was consistent
with government takes seen previously; the state take was
approximately 40 percent on the low end and slightly under
50 percent at the $140 price range as a result of the
progressive nature of the severance tax.
Mr. Pulliam addressed slide 8 titled "Summary of Investment
Measures for New Participant 50 MMBO Alaska Oil Development
ACES and HCS CS SB21 (FIN) v. Benchmark Areas." The slide
highlighted updated economics for a new participant.
Columns (2) and (3) included the economics used in the GRE;
column (2) showed a 12.5 percent royalty with a 20 percent
GRE and column (3) showed a 16.67 percent royalty with a 30
percent GRE. He detailed that the metrics in the two
columns were aligned and were attractive relative to other
areas.
Vice-Chair Neuman asked for verification that the
Department of Revenue would be available to answer any
questions.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, replied that multiple staff members
were available in person and via teleconference to answer
any questions.
Vice-Chair Neuman wanted to ensure that members had the
opportunity to confer with the administration.
4:09:27 PM
Mr. Pulliam continued to discuss slide 8. He noted that the
net present value (NPV) on new investment increased from
$4.17 under ACES (column (1)) to $6.75 under column (2) and
$6.54 under column (3). The cash margins moved up and the
government take for the GRE barrels would be at
approximately 60 percent, which would put takes in Alaska
at a favorable and competitive position.
Mr. Pulliam moved to slide 10: "Tax Calculation Using
Stepped Scale Production Credit (Volumes Not Subject to
Gross Revenue Exclusion)." The slide included calculations
underlying the effective tax rate charts [slides 3 through
5] and applied to legacy production. Slide 11 titled "Tax
Calculation Using Fixed $5 Production Credit (Volumes
Subject to Gross Revenue Exclusion, 12.5% Royalty)" showed
the calculation for 12.5 percent royalty barrels; the 20
percent GRE would apply. Slide 12 titled "Tax Calculation
Using Fixed $5 Production Credit (Volumes Subject to Gross
Revenue Exclusion, >12.5% Royalty)" related to volumes
greater than 12.5 percent royalty, which would qualify for
the 30 percent GRE.
4:11:44 PM
Representative Costello pointed to slide 2 and asked if the
House Finance Committee CS was represented in the slide
title. Mr. Pawlowski stated yes.
Representative Costello pointed to the slide and believed
that the CS would remove the small producer credit and add
the 30 percent GRE to fields with greater than 12.5 percent
royalty. She believed the column representing the CS should
be corrected related to the small producer credit.
Mr. Pawlowski apologized for not addressing what was not
included in the CS in his discussion of the bill earlier in
the day. He relayed that the small producer credit in the
House Resources Committee CS had been extended to 2022; the
removal of the language left the small credit in place for
qualifying companies. The credit was scheduled to expire in
2016; therefore, companies would be required to have
production prior to that time in order to qualify. He
explained that if the credit was repealed it would be taken
away from companies receiving the credit currently. He also
noted that provisions related to the Alaska Industrial
Development and Export Authority (AIDEA) financing of
infrastructure and the joint interest billings (language
adjusting how DOR conducted audits) had been removed from
the CS.
Representative Costello thanked Mr. Pawlowski for the
clarification.
Representative Gara asked about slide 6 that included
government take for existing oil. He wondered whether there
was a chart that reflected the lower government take for
new oil. Mr. Pulliam replied that the chart showed the
average government take for the time period covered by the
fiscal note for all existing production (production
occurring at present and production forecast to come on
prior to 2019).
Vice-Chair Neuman noted that any questions should pertain
to a correction to the presentation information.
Representative Gara pointed to slide 8 and noted that a
comparison of the profitability of ACES was only made for
the few fields with a 16 percent royalty. He wondered
whether the presentation showed a comparison for ACES with
the 12.5 percent royalty.
4:15:33 PM
Mr. Pulliam answered that the information was not included
in the presentation.
Mr. Pawlowski added that slide 8 showed the economics for a
new participant as a standalone investment for new
development, which was different than the government take
on existing production shown on slide 6.
Mr. Pulliam agreed and noted that the new standalone
investment by a new participant would typically carry a
16.67 percent royalty.
4:16:39 PM
Mr. Pulliam turned to slide 13 titled "Estimated Average
2013 - 2042 State Oil Revenues ($2012 Billion Dollars)
Under Potential Production and Tax Scenarios ACES v. HCS CS
SB21 (FIN) (35% Base Rate, 30% GRE) $120 West Coast ANS
($2012)." He relayed that the set of slides contained
information requested by Representative Gara and were a
derivative of an analysis he had presented to the committee
earlier.
Representative Wilson asked the presenters to reference
page numbers throughout the presentation. Mr. Pawlowski
pointed to slide 13.
Mr. Pulliam relayed that slide 13 provided an update of an
earlier analysis that showed the additional oil revenue
that would be collected by the state assuming different
decline rates under different tax systems. Previously the
information had been presented on two slides showing a 6
percent decline and a 3 percent decline; the information
was now included on one slide. The top section began with a
6 percent decline (at the $90 level). With a 6 percent
decline under ACES the average annual state revenue would
be approximately $2.6 billion over a 30-year period (shown
in real 2012 terms). Under the House Finance Committee CS a
6 percent decline would mean a revenue drop of
approximately $200 million per year; if the decline rate
was slowed to 3 percent the state revenue would increase to
$3.1 billion. He explained that the blue bars represented
incremental volumes over the base decline all with a 30
percent GRE. The upper right portion of the chart factored
in half of the new volume coming on from legacy fields (the
other half represented new oil that would qualify for the
GRE); he believed the scenario was more realistic. He
pointed out that the revenue increase would be slightly
higher under the scenario that included legacy oil.
4:20:11 PM
Mr. Pulliam noted that slides were included for every $10
price increase. Slide 14 titled "Estimated Average 2013 -
2042 State Oil Revenues ($2012 Billion Dollars) Under
Potential Production and Tax Scenarios ACES v. HCS CS SB21
(FIN) (35% Base Rate, 30% GRE)$100 West Coast ANS ($2012)"
showed what would happen at $100 West Coast ANS. Under the
scenario revenue was enhanced as long as the decline was
stemmed. Slide 15 showed the scenario at $110 West Coast
ANS and reflected a revenue enhancement if decline was
stemmed. Slide 16 provided the data at $120 West Coast ANS,
which showed that any decline under 6 percent would result
in a revenue enhancement. The bottom section showed a
revenue enhancement or a breakeven at the zero to 1 percent
level.
Mr. Pawlowski pointed to slide 16 and noted that half of
the revenue represented in the green bars on the right came
from legacy fields (where the majority of new oil was
potentially found). The data showed the impact of the
progressive system on the legacy fields; the CS would mean
60 percent to 67 percent government take, which improved
revenue as prices increased.
Mr. Pulliam moved to slide 17 titled "Estimated Average
2013 - 2042 State Oil Revenues ($2012 Billion Dollars)
Under Potential Production and Tax Scenarios ACES v. HCS CS
SB21 (FIN) (35% Base Rate, 30% GRE) $130 West Coast ANS
($2012)." Slide 17 provided the data at $130 per barrel
West Coast ANS. Slide 18 showed the data at $140 per barrel
West Coast ANS.
Mr. Pulliam turned to slide 19 titled "Estimated Additional
Annual Volumes Needed (2013 - 2042) Under HCS CS SB21 (FIN)
(35% Base Rate, 30% GRE) to Match State Oil Revenues ($2012
Billion Dollars) Under ACES at 6% and 3% Decline Rates."
The slide showed annual volumes per year that would be
needed to come online over and above a base decline rate to
make up for revenues that would be lost in the transition
from one tax system to another. The top panel assumed a 6
percent base decline rate. The blue bars represented the
volume needed (at different price levels) to breakeven on
the revenue loss related to new oil (30 percent GRE
barrels). The green bars showed the volume needed related
to 50 percent new oil/50 percent legacy oil.
4:23:43 PM
Mr. Pawlowski provided a PowerPoint Presentation titled
"Fiscal Impact Draft HFIN CSSB21: House Finance Committee
Version 28-GS1647\L." The presentation was aimed at
highlighting some of the elements that would be seen in a
fiscal note. He communicated that DOR reserved the right to
continue working through the numbers with any changes that
may occur to the bill. He addressed slide 2: "Provisions in
draft HCS CSSB21(FIN) and their Estimated Fiscal Impact as
Compared to Spring 2013 Forecast ($millions)." The slide
showed revenue losses, revenue gains, and the total fiscal
impact of the CS. He remarked that the data had been
updated to reflect the DOR Spring 2013 Revenue Forecast. He
noted that the legislation would be effective on January 1,
2014; therefore, he would speak to FY 15. Line 1 showed the
elimination of the progressive portion of the tax, which
would mean a reduction of approximately $1.4 billion. The
increase of the base tax rate (line 2) from 25 percent up
to 35 percent would add approximately $1,050 billion. Line
3 showed that the limitation of credits for qualified
capital expenditures (the 20 percent credits that would be
eliminated in 2014) would increase state revenue by $675
million.
Mr. Pawlowski moved to line 5 on slide 2 that showed a
slightly wider GRE over time from between $0.00 and $25
million in FY 15 rising to between $50 million and $75
million in FY 19. The line reflected potential impacts of
the change in GRE to 30 percent and that potential
scenarios existed in which some of the production in the
forecast may carry it.
4:27:36 PM
Mr. Pawlowski continued on slide 2, line 8, which showed
the sliding scale per barrel credit and the $5.00 per
barrel for GRE eligible oil. The provision would lead to a
reduction in state revenue in FY 15 of approximately $825
million. The CS made no adjustments to the oil and gas
service industry expenditure credit or to the interest
rates or removal of the three-mile requirement for the
Frontier Basin credit; neither item had a fiscal impact.
Additionally, there was no fiscal impact from the
establishment of the competitiveness review board. He noted
that the impact on the operating budget of the qualified
capital expenditure credits issued to non-current taxpayers
and redeemed through the oil and gas credit fund was an
increase in state revenue (through a reduction in the
needed appropriation) of $150 million. A reduction of $80
million for the net operating loss credits to 45 percent
from 35 percent was shown for FY 15. The total revenue
impact was potentially (assuming no incremental production
between $500 million and $575 million) a loss of $430
million to $505 million in FY 15, which would increase in
FY 19 to between $765 million and $840 million. He relayed
that the projection was problematic because it did not
include potential changes in production, which was the
underlying intent of the legislation.
Representative Edgmon relayed Co-Chair Austerman's request
to have the information in line 8 split into two line items
(credit of $5.00 per taxable barrel and the sliding scale
$0.00 to $8.00 credit per taxable barrel based on oil
price). Mr. Pawlowski agreed to update the table.
4:30:32 PM
Mr. Pawlowski addressed slide 3 titled "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. Pawlowski pointed to slide 4 titled "Production
Scenarios":
Scenario B:
· Operators of existing units add 4 drill rigs to
current plans
· Each rig adds 4,000 bbls/day in new production
each year
· Which each then decline at 15% per year
· Does not qualify for GRE
Mr. Pawlowski expounded that Scenario B assumed an initial
low production of 1,000 barrels per day with a steady 15
percent decline per year. Scenario C was outlined on slide
5:
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/day in 2018
· Does not qualify for GRE
· Scenario C also includes items in A and B.
Mr. Pawlowski elaborated that Scenario C factored in the
addition of large investments within legacy fields. He
relayed that the scenarios were for illustrative purposes
only.
4:32:40 PM
Mr. Pawlowski turned to a bar chart on slide 6 titled
"Projected revenues under production scenarios - at
$90/barrel ANS." The chart illustrated the effect of the
legislation with incremental production across the range of
the fiscal note; the bars represented the Spring 2013
Revenue Forecast (blue), Scenario A (red), Scenario B
(green), Scenario C (purple), and ACES (black). Slide 7
illustrated the effect of the legislation on projected
revenues under the three production scenarios at $100 per
barrel ANS. He noted that the numbers had been rounded to
the nearest hundred million dollars. Slide 8 showed the
impact at $120 per barrel ANS. He pointed out that
production under Scenarios B and C surpassed ACES in the
out-years shown on the slide. Slide 9 presented the impact
at the forecast ANS price.
Mr. Pawlowski addressed slide 10 titled "Production
Profiles of Production Scenarios" showed production volumes
underlying the scenarios.
4:35:00 PM
Mr. Pawlowski referred to a letter that had been issued to
the committee from DOR in response to members' questions
[dated April 10, from Deputy Commissioner Bruce Tangeman]
(copy on file). The letter addressed a request from
Representative Gara to assume a decline rate that was
different than the spring forecast going forward from FY
16. The table provided the comparable forecast that showed
the different decline rate in outer years.
Mr. Tangeman clarified that the information was included in
a DOR response [to members' questions that arose in a House
Finance Committee meeting on April 9, 2013] from the prior
day.
Vice-Chair Neuman asked for verification that the packet
included answers to questions asked by members. Mr.
Tangeman replied in the affirmative.
Representative Gara asked for verification that the revenue
projection scenarios used DOR's forecast of a 6 percent to
7 percent decline rate beginning in 2017. Mr. Tangeman
answered in the affirmative.
Representative Gara referred to a ConocoPhillips assessment
that assumed a 3 percent revenue decline by 2017 on the
Alpine field and legacy fields that it shared with Exxon
and BP. He asked for verification that the alternative
projections had been done at his request based on the 3
percent decline.
Mr. Tangeman disagreed. He stated that the information DOR
had from all producers on the North Slope was included in
the department's forecast projections. He clarified that
the 3 percent was already included in the department's
production forecast.
Representative Gara referred to an article he had provided
to DOR in which Conoco predicted a 3 percent decline by
2017 for legacy fields (Kuparuk, Prudhoe Bay, and Alpine)
based on investment it had committed to; if new fields were
added in they predicted a 2 percent decline. He stated that
other oil on the North Slope was not really declining at a
major rate. He wondered where DOR's projected steeper
decline rate had come from.
4:37:44 PM
Mr. Tangeman discussed the department's production forecast
methodology. He detailed that the state had consistently
put out an overly optimistic production forecast for the
past 10 to 20 years. The department's goal had been to
provide the governor, the administration, and the
legislature a more realistic and reliable projection in
order to help with short-term budget and long-term planning
decisions. He expounded that forecasts had historically
been 60 percent or higher beginning 5 or 6 years out. He
explained that the error rate would have been cut in half
if DOR's newly implemented process that risked new oil in
the future had been in place 10 years earlier. He stated
that it was not prudent or responsible to assume that
everything that was hoped for would happen when expected.
He provided the Liberty oil field as an example: the field
had continually been included in forecasts for years
because of production delays. He acknowledged that the
potential of a 2 percent or 3 percent decline existed, but
the administration was working the bill to make the number
positive. He added that the department was not in a
position to select winners and losers, but based on history
it was known that some things would not come online as
planned at predicted production levels.
4:39:49 PM
Representative Gara asked whether the department agreed
that projected revenue went down under ACES as the assumed
decline rate grew.
Mr. Pawlowski asked Representative Gara to repeat the
question.
Representative Gara restated his question. He surmised that
the less revenue projected by ACES meant the closer the
numbers were between ACES and the various versions of SB 21
if a larger decline rate was assumed. Mr. Pawlowski replied
in the affirmative. He noted the information was shown in
the analysis provided by the department.
Representative Gara referred to information provided to the
committee by DOR on April 10, 2013 (copy on file). He
pointed to a chart on page 3.
Vice-Chair Neuman remarked that it was difficult to follow
along because other committee members did not have the
charts.
Representative Gara responded that DOR had provided the
information to all committee members. He thought the
information would be in the PowerPoint presentation.
Vice-Chair Neuman noted that only questions related to the
PowerPoint would be heard.
Representative Wilson referred to slides 3 through 5 of the
DOR presentation related to Scenarios A, B, and C. She
wondered why the scenarios had been selected and if they
were realistic.
Mr. Pawlowski replied that the scenarios had been developed
by the department to model sensitivities to initial
production; therefore, in order to remain consistent and
accessible, the scenarios had been used throughout the
process. He communicated that the scenarios had been built
based off of data the department used to model out various
types of development that could bring production on in a
fairly realistic way.
Representative Wilson wondered if the data could be
compared to what North Dakota and Texas had seen under
their tax structures.
Mr. Pawlowski replied in the negative. The department's
goal was to base the scenarios on the types of development
that occurred in Alaska, which were typically more
expensive, had longer lead times, and were not necessarily
as productive. For example, the types of wells modeled in
Scenario B had a very long decline at 15 percent; whereas,
the type of wells seen in North Dakota had very high
initial production with a much steeper decline. He compared
the development occurring in different locations to apples
and oranges. He encouraged members to look at an Econ One
chart for a comparison that showed benchmarks against other
regions (e.g. Norway, North Dakota, and other).
Representative Wilson asked how much the developments would
cost under each scenario. Mr. Pawlowski replied that
Scenario A (50 million barrel field) was modeled at $500
million (listed on slide 3).
Vice-Chair Neuman RECESSED the meeting.
4:44:55 PM
RECESSED
7:28:20 PM
RECONVENED
Co-Chair Stoltze RECONVENED the meeting with all members
present.
Mr. Pawlowski pointed to a presentation titled "Select
Slides from DOR Responses: House Finance Committee
Supplemental Slides as Requested by Representative Gara"
dated April 11, 2013 (copy on file). Slide 2 showed the
potential fiscal impact of the House Finance Committee CS
for CSSB 21(FIN) without potential changes in production.
He relayed that the administration had walked through a
similar table earlier in the meeting; the slide was
provided as a reference. He directed attention to slide 3
that showed the fiscal impact of varying the per barrel
credit between $1.00 and $10.00 across fiscal years; the
slide showed the fiscal impact of moving the dollar per
barrel at the forecast level.
Mr. Pawlowski turned to slide 4 that showed a fiscal table
based on the prior bill version (HCS CSSB 21(RES)); the
table was included as a reference. Slide 5 was in response
to a request to break out the impact of the per barrel
credit into two separate lines. Line 8a showed the per
barrel for GRE-eligible production ($5 million in FY 14,
$10 million in FY 15, and $25 million per year in FY 16
through FY 19). Line 8b showed the impact of the legacy
barrels (non-GRE eligible).
7:32:11 PM
Mr. Pawlowski pointed to slide 6 that showed the fiscal
impact on a per barrel range from $80 to $160 based on the
spring 2013 forecast. Slides 7 and 8 showed revenue
sensitivity for FY 16 and FY 17. Slides 8 through 10 showed
adjusted decline rates used in the spring forecast for FY
17 through FY 19 (the [3 percent] decline rate had been
used as requested by Representative Gara).
Co-Chair Stoltze clarified asked if the slides included the
House Finance Committee CS in the comparison (slides 7
through 10). Mr. Pawlowski replied that the slide did not
include the [base tax rate] change to 35 percent, which had
been made in the House Finance Committee CS.
Co-Chair Stoltze noted that the slides included the Senate
version of the bill [and others], but not the House Finance
Committee CS.
Mr. Pawlowski relayed that the purple bar in the charts
(slides 6 through 10) was based on the House Resources
Committee CS. He noted that the House Finance Committee CS
contained a 35 percent base tax rate and therefore had
higher revenues over the spectrum of time compared to the
slides, which showed the 33 percent base rate. Slides 9 and
10 related to FY 18 and FY 19 respectively. Slide 11 showed
an update to the spring 2013 forecast per the committee's
request. The slide also included the 3 percent decline
assumption beginning in FY 17 per request. Slide 12 showed
the same analysis, but used a 35 percent tax rate. He
relayed that slide 12 was a closer representation of the CS
before the committee.
7:35:34 PM
Representative Gara did not believe there was much analysis
with the current version of the bill. He pointed to slide
8, which showed DOR's rate of decline through FY 17 and a 3
percent rate of decline from that point on. He opined that
based on a ConocoPhillips article the 3 percent decline was
more accurate. He asked what the current CS would look like
under the scenario on slide 8 at $120 per barrel.
Mr. Pawlowski replied that a 1 percent change in the base
tax rate was equal to approximately $100 million;
therefore, under the current CS there would be an increase
of approximately $200 million across the price spectrum
represented on slide 8.
Representative Gara asked for verification that on slide 8
at $120 per barrel ACES (blue bar) was approximately $7.7
billion and the House Resources Committee CS was
approximately $6.2 billion (which would become
approximately $6.4 billion under the current CS). Mr.
Pawlowski agreed that the numbers would fall within that
range.
Representative Gara asked if the difference would be
approximately $1.4 billion (under his requested 3 percent
decline scenario). Mr. Pawlowski replied that the
assumption was that there was no production increase under
the legislation by FY 17; assuming a 3 percent decline, the
administration had shown revenue sensitivities if the
legislation went to a 1 percent or zero percent decline.
The administration had avoided projecting its hopes for
stemming the decline (ConocoPhillips had noted that there
were opportunities to reverse the decline in its analyst
report). The hope was for increasing production instead of
continual decline.
Representative Gara remarked that he would also like to see
increased production. He asked whether the administration
had spoken with oil companies about specific projects that
would decrease the decline to between zero and 3 percent
(projected decline used by the administration under the
legislation).
Mr. Pawlowski answered that the administration had not put
specific projects on the table; it had listened to company
testimony and had read analyst reports about the
opportunity to reverse decline. The administration had
attempted to provide various assumptions in order to
illustrate sensitivities to new production that would be
created under the legislation.
Representative Gara asked for verification that the
administration had no guarantee of any projects that would
occur based on the passage of the legislation. He asked for
confirmation that the decline rates used related to the
legislation were hypothetical. Mr. Pawlowski replied that
the sensitivity analyses were hypothetical in order to show
the potential response to the bill. He believed the
companies' testimony to the various committees stood on its
own.
Representative Gara recalled the testimony.
7:40:33 PM
Co-Chair Stoltze pointed to the amendments.
7:41:01 PM
AT EASE
7:47:36 PM
RECONVENED
Co-Chair Stoltze initiated the amendment process. He
relayed that various staff from the administration were
available in person and via teleconference to answer
questions.
Representative Thompson MOVED to ADOPT Amendment 1, 28-
GS1647\L.3, Nauman/Bullock, 4/11/13 (copy on file):
Page 5, following line 30:
Insert a new bill section to read:
"* Sec~ 8. AS 43.55.011(p) is amended to read:
(P) For the seven years immediately following the
commencement of commercial production of oil or gas
produced from leases or properties in the state that
are outside the Cook Inlet sedimentary basin and that
do not include land located north of 68 degrees North
latitude, where that commercial production began after
December 31, 2012, and before January 1, 2027 [2022],
the levy of tax under (e) of this section for oil and
gas may not exceed four percent of the gross value at
the point of production."
Renumber the following bill sections accordingly.
Page 28, line 26:
Delete "sec. 2611
Insert "sec. 27"
Page 28, line 27:
Delete "sec. 13"
Insert "sec. 14"
Delete "sees. 15 -18"
Insert "sees. 16 -19"
Delete "Sec. 30"
Insert "Sec. 31"
Page 29, line 19:
Delete "15 -18, 23, and 31"
Insert "16 -19, 24, and 32"
Page 32, line 20:
Delete "sec. 13"
Insert "sec. 14"
Delete "see. 26"
Insert "sec. 27"
Extends the sunset on 4% production tax cap for first
7 years of production for new fields in Middle Earth
from 2022 to 2027.
Amendment 28-GS1647\L.3
When SB 23 passed there was a 2022 sunset on this
provision. This 2022 date is convenient because a
number of Cook Inlet tax treatments sunset then.
However, a sunset in 2022 works at cross purposes with
the objective of Middle Earth production and the hoped
for attractiveness may now be illusory. Whether
considering Yukon Flats, parts of Nenana, or the
Kotzebue area basins, none of those and similar areas
have much of a chance at getting into production
before 2022, even with aggressive exploration, success
and no setbacks. They are just too remote and
expensive. A simple, flat rate tax cap as a measure
was chosen to help attract new investment into these
high cost and geologically risky areas which have no
oil and gas infrastructure and no discoveries. A 5-
year extension to 2027 will go a long way toward
making this provision work as intended.
Co-Chair Stoltze OBJECTED.
Representative Thompson explained that the amendment would
insert a new bill section (Section 8) on page 5, following
line 30. He read a portion of the proposed section, which
would amend AS 43.55.01(p):
For the seven years immediately following the
commencement of commercial production of oil or gas
produced from leases or properties in the state that
are outside the Cook Inlet sedimentary basin and that
do not include land located north of 68 degrees
North...
Representative Thompson elaborated that the amendment would
extend the date from 2022 to 2027. He read from the
amendment explanation (also included above):
...However, a sunset in 2022 works at cross purposes
with the objective of Middle Earth production and the
hoped for attractiveness may now be illusory. Whether
considering Yukon Flats, parts of Nenana, or the
Kotzebue area basins, none of those and similar areas
have much of a chance at getting into production
before 2022, even with aggressive exploration, success
and no setbacks. They are just too remote and
expensive. A simple, flat rate tax cap as a measure
was chosen to help attract new investment into these
high cost and geologically risky areas which have no
oil and gas infrastructure and no discoveries. A 5-
year extension to 2027 will go a long way toward
making this provision work as intended.
Co-Chair Stoltze asked the administration to respond.
7:51:01 PM
Mr. Pawlowski spoke to the impact of the provision.
Currently DOR did not forecast any production from Middle
Earth (the area between the North Slope outside the Cook
Inlet sedimentary basin). He relayed that the state and
legislature had worked to open the basin in order to
deliver new production in new areas. The amendment would
extend the qualification period to enter into production
and to utilize benefits included in legislation passed the
prior year; many provisions within the House Finance
Committee CS supplemented, corrected, and revised pieces of
the legislation from the past year (AS 43.55.011 in
particular). He stated that the amendment subject was
germane to the CS.
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, spoke about the policy side of Amendment 1. He
shared that Department of Natural Resources (DNR) had
supported the sponsors' efforts of the legislation the
prior year that had put the particular piece into place.
The department believed the time extension was reasonable,
given that the areas (frontier basins) did not currently
have infrastructure. He relayed that the state owned the
mineral rights for much of the land in the basins and had a
long-term interest in seeing the areas explored and
developed.
7:53:30 PM
Representative Kawasaki recalled that he had not liked the
bill that had passed the prior year. He appreciated
Amendment 1. He wondered when drilling was anticipated to
begin. He asked whether stretching the credit out farther
would impact future liabilities to the state.
Mr. Pawlowski replied that the provision in AS 43.55.011(p)
was a tax ceiling and not a credit. The ceiling was an
alternative to the tax rate, which set a flat 4 percent
gross tax rate on production from the relevant areas.
Representative Kawasaki wondered whether the ceiling could
potentially be viewed by DOR as a liability in future
revenue forecasting. Mr. Pawlowski replied that the
department currently forecast a liability in its revenue
forecast for the credits to undertake the exploration;
therefore, the liability had already been accepted. The
amendment related to the tax in the event that exploration
was successful and resulted in production.
Representative Kawasaki wondered if DOR factored into its
forecasting the possibility of the state earning lower than
expected revenues. Mr. Pawlowski answered that DOR received
development and exploration forecasts from companies. The
department did not forecast what the state may have earned
on something that did not go forward.
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 1 was ADOPTED.
7:56:43 PM
Representative Edgmon MOVED to ADOPT Amendment 2, 28-
GS1647\L.1, Nauman/Bullock, 4/11/13 (copy on file).
Page 17, line 18, through page 18. line 20:
Delete all material and insert:
"(j) For each month of the calendar year for
which a producer's average monthly gross value at the
point of production of a barrel of taxable oil and gas
is less than $150, a producer may apply against the
producer's tax liability for the calendar year under
AS 43.55.011 (e) a tax credit in the amount specified
in this subsection for each barrel of taxable oil
under AS 43.55.01I(e) that does not meet any of the
criteria in AS 43.55.160(f) and that is produced
during a calendar year after December 31, 2013, from
leases or properties north of 68 degrees North
latitude. A tax credit under this section may not
reduce a producer's tax liability for a calendar year
under AS 43.SS.011(e) below zero. The amount of the
tax credit for a barrel of taxable oil subject to this
subsection is
(1) if the producer's average monthly gross value
at the point of production of a barrel of taxable oil
and gas is less than or equal to $100, $5 for each
barrel of taxable oil; or
(2) if the producer's average monthly gross value
at the point of 17 production of a barrel of taxable
oil and gas is more than $100 and less than $150, $5
for each barrel of taxable oil, reduced by one tenth
of the difference between that average monthly gross
value at the point of production of a barrel of oil
and $100."
Co-Chair Stoltze OBJECTED.
Representative Edgmon explained that Amendment 2 attempted
to give the state more of the share when the price of oil
reached $100 per barrel or less. Under the amendment the
sliding curve for the legacy fields (non-GRE) would go from
$5.00 per barrel to $100 per barrel; above $100 per barrel
the curve would slope downwards as it would have originally
under the legislation. He detailed that the idea was to
share more proportionately on the downside when oil was
$100 per barrel or less and to ensure that the state was
protected.
Mr. Pawlowski spoke against the amendment. He believed
everyone shared the concern about how low oil prices,
particularly at very low production rates, would impact the
state. He opined that the amendment's approach was very
fair. However, the administration believed the amendment
would upset the balance of the sliding scale. He discussed
offering better economics at lower prices and the impact it
had on the planning cycles of projects, which allowed the
state to take more as the price of oil rose. He
communicated that the administration was comfortable with
the 4 percent gross floor, which could be used under the
CS; the administration saw the floor as an appropriate
place to set downside protection, particularly when the
removal of the qualified capital expenditure credit also
provided protection for the state. He summarized that
removing the encouragement to economics on the downside
would necessitate the removal of the upside as well; it
would take a relatively progressive system and move it back
towards progressive, but without the appropriate economics
incentive.
Representative Gara responded to Mr. Pawlowski's comment on
progressivity in the CS. He stated that the progressivity
in the CS capped out at 35 percent regardless of the cost
per barrel; progressivity was lower than 35 percent below
$150 per barrel. He did not see the system as progressive.
He wondered what the amendment would do to taxes at higher
prices.
Representative Edgmon replied that at $100 per barrel the
amendment would resume the slope of the curve in the
sliding scale under the CS. He detailed that the sliding
scale would be $4.00 at $110 per barrel, $3.00 at $120,
$2.00 at $130, $1.00 at $140, and zero at $150.
Representative Gara asked how the tax under the amendment
would be different at $150 per barrel in comparison to the
CS. Representative Edgmon answered that the tax [at $150
per barrel] would be identical. The trajectory of the
downward slope from $100 to $150 per barrel would be the
same as in the CS.
Representative Gara surmised that the tax would cap at 35
percent. He asked for verification that the amendment would
lower taxes at lower prices, but did nothing at higher
prices. Representative Edgmon replied in the affirmative.
8:02:03 PM
Mr. Pawlowski remarked that each committee that had heard
the bill had made policy calls related to the
competitiveness of the tax regime they wished to create. He
stated that technically the amendment would do what the
sponsor had testified it would. He reiterated his earlier
statement that the administration believed the amendment
would upset the balance struck in the relatively
progressive nature of the system in the CS.
Representative Edgmon agreed that the issue was a policy
call for the committee and legislature to make. He had not
been convinced throughout testimony on the bill that moving
the per barrel credit from $8.00 down to $5.00 would not be
an inducement to increase activity. The credit related to
legacy oil (the committee had been told by DOR that there
were approximately 3 billion barrels of recoverable legacy
oil). He contended that even $5 per barrel could be too
much. He detailed that by lowering the credit to $5 per
barrel there was still an opportunity to give explorers and
producers a credit, while softening the impact to the state
at the bottom line going forward. He added that if the
price of oil dipped down the state would be protected given
the lower per barrel credit on legacy fields up to $100.
8:04:54 PM
A roll call vote was taken on the motion to adopt Amendment
2.
IN FAVOR: Edgmon, Gara, Kawasaki, Munoz
OPPOSED: Neuman, Thompson, Wilson, Costello, Holmes,
Austerman, Stoltze
The MOTION to Adopt Amendment 2 FAILED (4/7).
Representative Thompson MOVED to ADOPT Amendment 3, 28-
GS1647\L.2, Nauman/Bullock, 4/11/13 (copy on file):
Page 19, following line 11:
Insert a new bill section to read:
"* Sec. 22. AS 43.S5.02S(b) is amended to read:
(b) To qualify for the production tax credit
under (a) (5), (6), or (7) [(a)] of this section, an
exploration expenditure must be incurred for work
performed after June 30, 2008, and before July 1,2016,
or, for work qualifying under (a)(l), (2), (3), or (4)
of this section, for work performed in an area outside
of the Cook Inlet sedimentary basin and south of 68
degrees North latitude, after June 30, 2008, and
before January 1, 2022, and
(1) may be for seismic or other geophysical
exploration costs not connected with a specific well;
(2) if for an exploration well,
(A) must be incurred by an explorer that
holds an interest in the exploration well for which
the production tax credit is claimed;
(B) may be for either a well that encounters
an oil or gas deposit or a dry hole;
(C) must be for a well that has been
completed, suspended, or abandoned at the time the
explorer claims the tax credit under (f) of this
section; and
(D) must be for goods, services, or rentals
of personal property reasonably required for the
surface preparation, drilling, casing, cementing, and
logging of an exploration well, and, in the case of a
dry hole, for the expenses required for abandonment if
the well is abandoned within 18 months
Co-Chair Stoltze OBJECTED.
Representative Thompson explained that Amendment 3 would
insert a new bill section (Section 22) on page 19,
following line 11, which would amend AS 43.55.025(b).
Currently the production tax credit had a sunset date of
July 1, 2016. The new section would extend the date to
January 1, 2022 for work outside of Cook Inlet and south of
68 degrees North latitude. The amendment would extend the
30 percent and 40 percent credits under AS 43.55.025(a)(1),
(2), (3), or (4) to 2022 for Middle Earth. The 2016 sunset
would be left in place for the 75 percent and 80 percent
credits applicable only to Middle Earth.
Mr. Balash responded that the administration was comforted
that the specific credits had a two-step process: (1) a
company was required to obtain prequalification from the
Division of Oil and Gas, which entailed demonstrating that
a geologic target would be pursued through the exploration
effort; and (2) companies were required to report their
results to the Resource Evaluation Division following
exploration activity. After approval, the company could go
to DOR to qualify and receive the credit certificates. He
stated that the administration felt that the process
provided a reasonable check on the particular credit and
any exposure it may mean for the state. He referenced his
earlier comments related to the Frontier Basins and the
opportunity presented the state and overall economy.
Representative Costello asked whether the information
collected by the companies became the state's property. Mr.
Balash replied in the affirmative. He detailed that the
state was required to maintain confidential treatment of
the information for a period of time; the time period was
shorter if the information pertained to public land.
Representative Kawasaki wondered whether the FY 09 through
present Middle Earth credits had been audited. Mr.
Pawlowski deferred the question to the DOR Tax Division. He
asked the division whether the credits for the specified
time period had been used at present.
MATT FONDER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE
(via teleconference), replied that the tax credits had been
adopted in the prior legislative session and the division
had not yet received an application.
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 3 was ADOPTED.
8:11:06 PM
Representative Wilson MOVED to ADOPT Amendment 4, 28-
GS1647\L.6, Nauman/Bullock, 4/11/13 (copy on file):
Page 25, lines 27 -29:
Delete "nominated by the two leading nonprofit
trade associations representing the oil and gas
industry in the state and appointed by the governor,
with one member nominated by each association"
Insert "of the public appointed by the governor
who do not represent the oil and gas industry."
Page 26, line 22:
Delete "may not meet more than"
Insert "shall meet at least"
Co-Chair Stoltze OBJECTED.
8:11:44 PM
Representative Wilson explained that Amendment 4 pertained
to the Oil and Gas Competitiveness Review Board structure.
She pointed to page 25, lines 27 through 29 of the bill
where the amendment would delete "nominated by the two
leading nonprofit trade associations representing the oil
and gas industry in the state..." The amendment would
insert language to read: "of the public appointed by the
governor who do not represent the oil and gas industry."
The amendment would delete language on page 26, line 22
that read "may not meet more than" and would replace it
with "shall meet at least." The purpose was to ensure that
the review board would meet at least once per calendar
year. She relayed that the board would help the state gain
a broader understanding related to its competitive
position. The amendment recognized that markets and
technology changed over time. Additionally, the goal was to
decrease the political nature of the board structure.
Representative Holmes voiced support for the amendment. She
was in favor of reinstating the review board, but believed
the language in the CS was industry heavy. She relayed that
the three public members in the past review board had all
been petroleum engineers, geologists, financial analysts,
members of the Alaska Oil and Gas Association,
commissioners, and other. The goal was to include public
members who were not affiliated with the industry. The
amendment would also ensure that the board would meet at
least once per year.
There being NO further OBJECTION, Amendment 4 was ADOPTED.
[Note: The action to adopt Amendment 4 was rescinded later
in the meeting. A modified version of the amendment
(Amendment 16) was adopted. See 9:53:20 p.m. through 9:58
p.m.]
8:14:02 PM
Representative Gara MOVED to ADOPT Amendment 5, 28-
GS1647\L.9, Nauman/Bullock, 4/11/13 (copy on file):
Page 24, line 11, following "section,":
Insert "for the first seven years immediately
following production subject to tax under AS 43.55.011
(e),"
Page 24, line 30, following "section,":
Insert "for the first seven years immediately
following the commencement of production subject to
tax under AS 43.55.011 (e),"
Co-Chair Stoltze OBJECTED.
Representative Gara hoped the compromise offered in several
of his amendments would gain a consensus from members. He
asked the department to pull up slide 3 from an Econ One
presentation dated 4/11/13 ["Analysis of HCS CS SB21 (FIN)
for House Finance Committee"] (copy on file). He discussed
the state's current fairly robust tax rate and the argument
by some that the rate was too high at high oil prices. He
opined that without some amendments the current bill went
too far in the other direction. He addressed the area of
new oil under the legislation where the tax rate at current
prices was around 17 percent or 18 percent. He stressed
that the state could not build an economy on an 18 percent
tax rate. He elaborated that as an increasing amount of oil
became new oil the next generation of Alaskans would be
left with a tax rate of 18 percent. He stated that the CS
contained a new tax rate of approximately 14 percent at
current prices. He did not believe any company needed a tax
rate that low or that an economy could be built on the low
rate. He equated the low rates to tax rates in countries
that had minimal oil (e.g. Peru).
Representative Gara relayed that the amendment would help
encourage production at the lower tax rate for seven years.
A company would recoup much of its costs and make
additional profits. He pointed out that the bill would
adopt a much lower tax rate than under current law. Under
the amendment, after the seven-year period, the tax rate
would revert to what the administration's consultants
called a competitive rate. He was accepting of a low rate
for the first seven years, but could not support a
perpetual 14 percent or 18 percent rate going forward. He
emphasized that the rate would not provide the state with
adequate funding for schools, the capital budget, or
savings.
8:18:20 PM
Mr. Balash spoke in opposition to Amendment 5. He stated
that the amendment lacked clarity on what would qualify
under the temporary seven-year period (i.e. the unit,
lease, and/or PA). The administration believed that in
addition to taxes it was necessary to factor in total
government take. He stressed that royalties mattered. He
pointed to a slide presented earlier in the evening and
stated that while the tax rate for the 16 and two-thirds
leases would be lower, the royalties were higher, which had
an offsetting effect. The administration believed the
policy was to ensure that the one-sixth [16.67 percent]
leases had the same attractiveness as the one-eighth [12.5
percent] leases. He was interested in seeing the 16 and
two-thirds leases explored, developed, and brought into
production. Additionally, he pointed to the impact a time
limit had on economic behavior. The administration believed
the time limit would have a distortion on investment
behavior if a company utilized the tax relief for the first
seven years of production and then experienced tax and unit
cost increases as production declined. The administration
had concern that under the amendment ultimately development
could proceed in a way that did not achieve the maximum
resource recovery in the long-term.
8:21:16 PM
Mr. Pawlowski pointed to slide 8 of the [Econ One, 4/11/13]
presentation, which showed comparable economics for various
regions. He detailed that the slide showed models that
assumed specific development and production happened at
certain times. He furthered that operating in Alaska often
did not work out as hoped; a permitting delay changed the
economics of a field. He noted that there were many
challenges to overcome. The administration saw the total
overall economics to the project including the government
take as critical to moving new development forward. He
pointed to the NPVs for the State of Alaska at the bottom
of the slide. The administration believed that the "life-
cycle" government take that opened up new areas at high
royalty rates with a reasonable tax rate would yield
dividends to the state. He highlighted that the models
showed the state as consistently ahead of the companies on
a NPV basis; the state took a larger share of the total
than the industry.
Representative Munoz spoke in support of Amendment 5. She
stated that the changes in the bill would increase Alaska's
competitiveness compared to other areas in the U.S. She
spoke to provisions allowed through the GRE for new fields
and her concern that a lower rate would be locked in
indefinitely for any new major discoveries. She believed a
time limit would protect the state's revenues in the long-
term.
Co-Chair Austerman asked whether increasing the amendment's
proposed timeline from 7 up to 10 years would make the
administration more comfortable. Mr. Balash replied that
change would not alter the administration's concern that
increasing taxes later in the life of a well or PA could
shut it in for economic purposes.
8:24:40 PM
Representative Kawasaki spoke in support of Amendment 5. He
referred to a comment by the administration on what was
considered new oil and old oil, which he believed related
to the GRE portion of the bill. He supported that the
amendment would help clarify what new oil meant and whether
it was being produced (either under a 7 or 10-year look-
forward). He believed that it was fair to say that the
meaning of new oil may be unclear, but a 7-year limit would
provide the opportunity to look at the issue.
Representative Costello voiced opposition to Amendment 5.
She referred to companies' comments that taxes had changed
up to four times during the length of one lease; companies
had expressed their hope that the instability would be
changed. She did not believe inserting a tax change in the
legislation would be beneficial to the state.
Representative Edgmon spoke in favor of the amendment. He
believed the debate underscored the difficulty of the
issue. He contended that the amendment would act as a
safeguard to protect the state's interests. He pointed to
the possibility that the price of oil could go up to $150
and remain high; he wondered what the state would do then.
He observed that there was more than one way to look at the
issue.
Vice-Chair Neuman asked how Amendment 5 would affect fields
within and the expansion of PAs. Mr. Pawlowski believed the
amendment applied to the broader GRE for new areas and
large capital investments the development of undeveloped
pools of viscous oil within legacy fields that were more
challenging and costly. He relayed that the amendment
applied to the suite of the oil that part of the
legislation aimed to target; to lay a foundation and grow
production throughout the future.
8:28:23 PM
Co-Chair Stoltze spoke in opposition to the amendment. He
noted that the amendment pertained to non-producing oil and
one of the bill's goals was to provide incentive to
increase new production. He discussed reward for investors
taking risk on fields that had higher costs and were less
proven. He supported increasing revenue from oil that was
not currently in production.
Representative Gara provided closing remarks on Amendment
5. He did not believe it would ever be possible to increase
the revenue brought in with 14 percent to 18 percent tax
rates. He stressed that the rates were among the lowest in
the world. He was disappointed that the administration did
not provide a chart showing how Alaska would look compared
to the rest of the world using the 14 percent or 18 percent
tax rate. He reminded the administration that it called the
35 percent tax rate very competitive; after 7 years the tax
rate would increase to the new competitive tax rate. He
stressed that there would be no punishment under the
scenario and that companies would be able to recoup their
costs. He continued that after 7 years at one of the lowest
tax rates in the world a company would then be subject to a
tax rate that the administration called very competitive.
He believed a 7-year cap on the 14 percent or 17 percent
tax rate made sense. He relayed that making taxes too high
or too low could make a tax system unstable given potential
pressure to make a change to the tax structure. He noted
that he was open to changing the 7-year period to a 10-year
period if an amendment to the amendment was offered. He did
not believe the administration acknowledged the way the
state significantly benefited new oil; the state helped pay
for new oil by paying for exploration credits and other. He
believed that in the end the tax rate was still low.
Without the amendment he did not know how the state would
be able to afford school construction, hire new teachers,
or fund the state.
8:32:39 PM
A roll call vote was taken on the motion to adopt Amendment
5.
IN FAVOR: Munoz, Edgmon, Gara, Kawasaki, Austerman
OPPOSED: Holmes, Neuman, Thompson, Wilson, Costello,
Stoltze
The MOTION to adopt Amendment 5 FAILED (5/6).
Representative Gara MOVED to ADOPT Amendment 6, 28-
GS1647\L.29, Nauman/Bullock, 4/11/13 (copy on file):
Page 4, line 18, following "to":
Insert "the sum of (A)"
Page 4, line 20, following "percent";
Insert H; and (B) the sum, over all months of the
calendar year, of the tax amounts determined under (g)
of this section"
Page 4, line 21, through page 5, line 7:
Delete all material and insert: "* Sec. 5. AS
43.55.011(g) is amended to read:
(g) For purposes of (e) of this section, the tax
amount is determined as follows:
(1) before January 1, 2014, for [FOR] each month
of the calendar year for which the producer's average
monthly production tax value under AS 43.55.160(a)(2)
of a [PER] BTU equivalent barrel of the taxable oil
and gas is more than $30, the amount of tax for
purposes of (e)(1)(B) and (e)(2)(B) [(e)(2)] of this
section is determined by multiplying the monthly
production tax value of the taxable oil and gas
produced during the month by the tax rate calculated
as follows:
(A) [(1)] if the producer's average monthly
production tax value of a [PER] BTU equivalent barrel
of the taxable oil and gas for the month is not more
than $92.50, the tax rate is 0.4 percent multiplied by
the number that represents the difference between that
average monthly production tax value of a [PER] BTU
equivalent barrel and $30; or
(B) [(2)] if the producer's average monthly
production tax value of a [PER] BTU equivalent barrel
of the taxable oil and gas for the month is more than
$92.50, the tax rate is the sum of 25 percent and the
product of 0.1 percent multiplied by the number that
represents the difference between the average monthly
production tax value of a [PER] BTU equivalent barrel
and $92.50, except that the sum determined under this
paragraph may not exceed 50 percent:
(2) on or after January 1, 2014, for each month
of the calendar year for which the producer's average
monthly production tax value under AS 43.55.160(a){2)
of a BTU equivalent barrel of the taxable oil and gas
is more than $60, the difference between the monthly
production tax value of a BTU equivalent barrel and
$60 multiplied by the volume of oil and gas produced
by the producer for the month multiplied by 10
percent."
Renumber the following bill sections accordingly.
Page 9, line 15, following "ii":
Insert "the sum of the amount calculated for the
month under AS 43.55.011(g) and"
Page 9, line 30, following "(iii)":
Insert "the sum of the amount calculated for the
month under AS 43.55.011(g) and"
Page 10, line 12, following "!ii":
Insert "the sum of the amount calculated for the
month under AS 43.55.011(g) and"
Page 10, line 21, following "i"
Insert "the sum of the amount calculated for the
month under AS 43.55.011(2) and"
Page 11, lines 10 -28:
Delete all material.
Renumber the following bill sections accordingly.
Page 13, lines 11 -29:
Delete all material.
Renumber the following bill sections accordingly.
Page 28, line 20:
Delete "AS 43.55.020(d), 43.55.023(i), and
43.55.023(p)"
Insert "AS 43.55.023(i) and 43.55.023(p)"
Page 28, line 26:
Delete "sec. 26"
Insert "sec. 24"
Page 28, line 27:
Delete "sec. 13"
Insert "sec. 11"
Delete "sees. 15 -18"
Insert "sees. 13 -16"
Page 29, line 7:
Delete "sec. 30"
Page 29, line 11:
Delete "15 -18, 23, and 31"
Insert "13 -16, 21, and 29"
Page 29, line 12:
Delete "sec. 13"
Insert "sec. 11"
Delete "sec. 26"
Insert "sec. 24"
Co-Chair Stoltze OBJECTED.
Representative Gara hoped Amendment 6 would gain bipartisan
support from the committee. He explained that the amendment
would maintain the tax rate from approximately 27 percent
to 35 percent at $150 per barrel that was included in the
CS. Company profits above $60 per barrel (what the governor
had referred to as "bracketing" the prior year) would be
taxed at 45 percent. He expounded that when companies were
making record or near-record profits above $60 per barrel
the state's share would increase to a slightly higher rate.
He believed the amendment would mitigate revenue loss to
the state. Additionally, the amendment would not deter new
investment because the rate would not take effect until
companies had made substantial profits. He opined that the
concept should be attractive to the oil industry.
8:36:09 PM
Mr. Pawlowski spoke against Amendment 6. He believed the
amendment was a fundamental departure from the structure
the administration aimed to build. He noted that
progressiveness of a system was in the eye of the beholder.
The administration believed that the concept created
distortions in the system. He pointed to page 2, line 13 of
the legislation and stated that linking a variation in the
monthly tax rate to the net value per barrel introduced the
incentive for companies to make decisions that would impact
the margin; if a value increase triggered an additional 10
percent tax it would drive a company to do something that
was relatively inefficient. The administration believed the
issue was important for the state because it had a profits-
based tax; increased efficiency in the oil sector meant
increased benefit for the state from the more profitable
barrels produced. He stressed that the CS maintained one of
the administration's central tenets that a flat,
predictable tax rate allowed investors to make long-term
planning decisions.
Mr. Pawlowski communicated that the progressive aspect of
the legislation came from the per barrel credit and not
from the change in the tax rate, which made the flat tax
system progressive. He stated that Amendment 6 reintroduced
a modified form of progressivity that would lead to the
same challenges the administration had been working on from
the beginning.
Representative Costello voiced opposition to Amendment 6.
She believed it was not well known that approximately $849
million of the state's share under the ACES progressivity
feature was lost due to the qualifying capital
expenditures; the bill would remove the feature. She had
heard that under the ACES structure companies were buying
down their tax rates; she observed that the state was not
benefitting from the situation because additional oil was
not being produced. She believed the instability of basing
tax on price was not viable for businesses' long-term
planning. She communicated that she cared about future
generations and remarked on the importance of weighing
gains and losses when making changes to the tax structure.
Representative Wilson asked what substantial profit meant
under the amendment. She asked if the term pertained to
each field, new fields, legacy fields or other. She
believed the amendment would be an accounting nightmare.
Representative Kawasaki replied that the amendment would
apply to producers and their average monthly production
tax. He explained that when a producer (there were 19 total
in Alaska) began making $60 of profit per barrel under the
amendment they would go to a bracketed tax rate that was
higher than the rates in the CS. He referred to testimony
on protecting the state at the low end and ensuring that
Alaska received its fair share under windfalls. He stressed
that the state ought to benefit from the extreme price
variations. He remarked that the state may not have
anticipated oil in the $90s or $100s, but there were
diagrams that showed prices as low as $10 and as high as
$200 per barrel. He stated that he had seen oil as high as
$140 and that it was currently slightly under $110. He
believed the amendment protected the value of Alaska's oil
and gave the state a fair share when companies were making
a considerable amount ($60 per barrel profit). He stated
that the number could be tweaked to one that members were
more comfortable with. He emphasized that when companies
were making a large profit that the state and future
generations should benefit as well.
8:43:05 PM
Representative Gara provided closing remarks on Amendment
6. In response to comments that the amendment was complex
he countered that the amendment was less complex than the
governor's bill from the prior year; the proposal the prior
year contained three or four brackets instead of one. He
disputed the claim that the administration would be unable
to administer the provision. He stressed that the provision
would be four times as easy to administer as the tax bill
proposed the prior year. He stated that the amendment would
benefit the state and was tepid for producers; a producer
would need to make $60 per barrel profit prior to the tax
increase. He stressed that the profit was high; it would
reach $6 million for 100,000 barrels. He emphasized that
the companies would continue to make a profit under the tax
increase. He disagreed with the administration's comment
that the amendment would be a disincentive to production.
He underscored that the tax increase was slight and would
allow the state to share more fairly at higher prices. He
believed the public would be happy with the provision. He
reminded the committee that a company would not pay
anything if they were not making profits.
A roll call vote was taken on the motion to adopt Amendment
6.
IN FAVOR: Gara, Kawasaki
OPPOSED: Munoz, Neuman, Thompson, Wilson, Costello, Edgmon,
Holmes, Stoltze, Austerman
The MOTION to adopt Amendment 6 FAILED (2/9).
Representative Gara MOVED to ADOPT Amendment 7, 28-
GS1647\L.10, Nauman/Bullock, 4/11/13 (copy on file):
Page 24, line 13:
Delete "20"
Insert "15"
Co-Chair Stoltze OBJECTED
Representative Gara asked Mr. Pawlowski to turn to slide 3
on the Econ One presentation ["Analysis of HCS CS SB21
(FIN) for House Finance Committee"] (copy on file).
Representative Gara relayed that the amendment had been
written to the prior bill version He asked to make an
amendment to Amendment 7. He proposed the deletion of
language on page 24, line 28.
Co-Chair Stoltze interjected that his preference would be
to have the amendment written out. Representative Gara
agreed.
Co-Chair Stoltze relayed his intent to postpone the
consideration of Amendment 7 until later in the meeting.
8:47:41 PM
AT EASE
8:54:41 PM
RECONVENED
Co-Chair Stoltze asked Representative Gara if he wished to
defer the consideration of Amendment 8. Representative Gara
replied in the affirmative.
Representative Gara MOVED to ADOPT Amendment 9, 28-
GS1647\L.11, Nauman/Bullock, 4/11/13 (copy on file):
Page 24, line 12, following "gas":
Insert "produced from an area, unit, or expanded
area that did not have production before July 1, 2013,
and"
Page 24, line 30, following "gas":
Insert "produced from an area, unit, or expanded
area that did not have production before July 1, 2013,
and"
Co-Chair Stoltze OBJECTED.
8:55:50 PM
AT EASE
8:56:17 PM
RECONVENED
Representative Gara explained Amendment 9. He referred to
the bill's permanent low tax rate for new oil of 14 percent
to 18 percent. He addressed the administration's aim to
incentivize new oil and stated that it was not possible to
incentivize something that had already been done. He
detailed that under the CS the low tax applied to any oil
produced after 2011; companies that were already producing
would be treated as new oil producers and would receive a
credit that was aimed to incentivize something that had
already begun. The amendment specified that the new oil tax
rate would apply to oil produced after July 1, 2013. He
believed companies should be satisfied with the change. He
opined that the money did not need to be given away.
Mr. Balash pointed to language that would be inserted by
the amendment reading "produced from an area, unit, or
expanded area that did not have production before July 1,
2013." He wondered whether a new PA in Prudhoe Bay would
qualify or whether the intent was to ensure that new PAs in
Prudhoe Bay would not qualify.
Representative Gara replied that the intent was to apply to
every category that the bill considered to be new oil
including new oil within an existing unit, outside of an
existing unit, and all other categories where the lower new
oil tax rate would apply. The amendment aimed to ensure
that the lower tax rate would only apply to oil
incentivized by the legislation.
Mr. Balash spoke in opposition to Amendment 9. The
amendment would undo the administration's intent to include
some of the newer units that were currently producing in
new areas including the Oooguruk unit operated by Pioneer.
He explained that the GRE would not apply to production in
the areas, which went against the administration's
objective. He believed the administration fundamentally
disagreed with the characterization [of the bill] by the
amendment's sponsor. He emphasized that the legislation was
not giving away anything. He stated "we're taking less in
order to get more."
Representative Kawasaki voiced support for Amendment 9. He
spoke to the bill's goal to incentivize new oil production
and the state's vast resources that the legislature had
been told were under explored and under developed. The
amendment communicated the desire to see new oil in the
pipeline (oil expanded into other areas across the North
Slope), not oil that was currently being produced.
Representative Munoz asked for verification that the
decision to move forward with development on the Oooguruk
field had been made prior to the implementation of ACES.
She surmised that the bill provided an opportunity to
extend a more favorable tax system to the specific
development.
Mr. Pawlowski replied in the affirmative. He detailed that
Oooguruk had been sanctioned prior to ACES; its sister-
field Nikaitchuq had been in development and nearing
sanction at the time ACES had been developed. He spoke to
new investment and stated that the administration was
concerned that it was necessary to look back to January 1,
2003 to identify fields that 9 years later were barely in
production. He stated that "we're talking about two fields
in the last 7-8 years"; he noted that there were a few
other fields in the works. He relayed that the
administration's policy call was related to the companies'
experiences through multiple tax changes.
9:04:10 PM
Representative Gara asked for verification that the
Nikaitchuq and Oooguruk oil fields had been given royalty
relief. He referenced statute that reduced royalty to make
the development of a property economic if the tax was too
high. Mr. Balash replied that both fields had received
royalty modifications. However, the Nikaitchuq modification
was a downside mechanism; at current prices Nikaitchuq paid
full royalty.
Representative Gara believed the point was that both fields
[Nikaitchuq and Oooguruk] had received royalty relief. He
explained that at full prices a company was not required to
pay the full royalty at certain prices; when fields became
economic at high prices the royalty relief disappeared. He
stated that the two fields currently had a tax system
tailored to make them economic. He remarked that
additionally the fields had the benefit of what the
administration called a very competitive tax rate; under
the amendment the fields would pay the tax rate used in the
proposed legislation. He believed the fields should pay the
regular base tax rate proposed in the CS as opposed to an
18 percent rate. He stressed that the 18 percent rate would
be one of the lowest rates in the world. He continued that
the companies had moved forward with the fields despite
ACES and had obtained royalty relief. He emphasized that it
did not make sense to incentivize something that was done
in the past; there was no reason to apply the 18 percent
rate for the remaining life of a field that the company had
decided was already economic. He concluded that the
companies would already pay a competitive tax rate of
approximately 30 percent at $110 per barrel if the
legislation became law.
Co-Chair Stoltze remarked that the current film tax credit
applied to a multitude of groups that were already working
in Alaska.
Representative Gara replied that a company that had done a
film in Alaska prior to the credit program had not received
the incentive.
A roll call vote was taken on the motion to adopt Amendment
9.
IN FAVOR: Gara, Kawasaki
OPPOSED: Neuman, Thompson, Wilson, Costello, Edgmon,
Holmes, Munoz, Austerman, Stoltze
The MOTION to adopt Amendment 9 FAILED (2/9).
9:08:43 PM
AT EASE
9:09:06 PM
RECONVENED
Representative Gara WITHDREW Amendment 10, 28-GS1647\L.12,
Nauman/Bullock, 4/11/13 (copy on file).
9:10:41 PM
Representative Gara MOVED to ADOPT Amendment 7 28-LS0021
(copy on file):
Page 24, line 13:
Delete "20" Insert "15"
Page 24, line 28 through Page 25, line 8
Delete all material
Co-Chair Stoltze OBJECTED.
Representative Gara asked Mr. Pawlowski to pull up a
presentation slide [slide 3 of the Econ One presentation
(copy on file)]. He believed Amendment 7 was modest and
made a necessary fix to the legislation; it addressed the
new oil tax rate. He stated that with a 20 percent [GRE]
the new oil tax rate went down at $110 per barrel to
approximately 18 percent. He addressed that the CS added an
additional new oil tax rate of approximately 14 percent for
higher royalty fields. The amendment would use a 15 percent
[GRE]. The change would reduce the tax rate in the CS by
approximately 30 percent; a 30 percent tax rate would be
decreased to 21 percent and 35 percent tax rate would be
decreased to approximately 23 percent. He detailed that new
oil would still be taxed at a permanent substantially lower
rate than legacy oil; he did not believe the rate needed to
be even lower. He stated that the 15 percent [GRE] was a 28
percent to 30 percent drop from the tax rate paid by other
oil under the CS.
Representative Gara anticipated the administration would
respond by saying that the 30 percent [GRE] was for fields
that paid the 16.67 percent royalty. He stated that the
higher royalty only applied in a negotiated deal between
the state and the company bidding on the lease on the
grounds that the lease was very promising. He emphasized
that DNR was not arbitrarily imposing the higher royalty
rate on worse prospects. He stated that the royalty was at
a market rate and furthered that DNR designed the system so
that companies that saw the fields as better prospects
would agree to pay a higher royalty. He concluded that it
made sense for the higher and lower royalty fields to pay
the same rate.
9:16:15 PM
Mr. Pawlowski voiced opposition to Amendment 7. He
addressed the subject of the agreement between companies to
invest in Alaska in the lease sales. He pointed to the past
several lease sales in the state that were in the tens of
millions of dollars. He detailed that the lease sale to buy
access for leases to look for gold off the coast of Nome
raised approximately $8 million to $10 million. He stressed
that people were not coming to buy the high value leases at
rates Alaskans hoped for because the state's cash margins,
NPVs, internal rates of return (IRR), and government take
were not as attractive as those offered in other locations
(Econ One presentation, slide 8); this was reflected in the
lease bonus bids received by DNR, which at $20-plus per
acre, were not comparable to those received in other
locations. The administration hoped that a reduced long-
term and stable tax rate would drive lease bonuses up and
increase the state's competitiveness. He communicated that
ultimately the NPV would increase to levels obtained by
other locations listed on slide 8.
Representative Holmes spoke in opposition to the amendment.
She was concerned about the second half of the amendment
that would impact the 30 percent GRE. She believed the GRE
had been raised to 30 percent in the CS to compensate for
the elimination of the small producer credit; the amendment
would reduce the GRE, but would not reinstate the small
producer credit, which would be a significant change.
Representative Gara provided a wrap up on Amendment 7. He
assumed DNR was making the decision to give the 12.5
percent royalty rates for fields that were deserving and
the higher 16.67 rate for others. He the idea that DNR was
a victim of itself for establishing a royalty rate that was
too high while it simultaneously stated it was open for
business was nonsensical. He did not believe that DNR was
arbitrarily imposing the higher royalty rate on fields that
it should not be. He opined that the amendment offered a
handsome incentive for new oil and a lower rate than the
one charged in the bill. He noted that at some point all
oil produced in the state would be new; he did not believe
an economy could be built on a 14 percent tax rate. He
summarized that the amendment offered a compromise, worked
consistently with the governor's bill, and provided a
substantial tax reduction for new oil.
9:20:41 PM
A roll call vote was taken on the motion to adopt Amendment
7.
IN FAVOR: Gara, Kawasaki
OPPOSED: Wilson, Costello, Edgmon, Holmes, Munoz, Neuman,
Thompson, Austerman, Stoltze.
The MOTION to adopt Amendment 7 FAILED (2/9).
9:21:29 PM
AT EASE
9:22:08 PM
RECONVENED
Representative Gara MOVED to ADOPT Amendment 11 28-
GS1647\L.14, Nauman/Bullock, 4/11/13 (copy on file). [Note:
Due to its length, the body of Amendment 11 was not
included in the minutes.]
Co-Chair Stoltze OBJECTED.
Representative Gara explained that Amendment 11 would
provide a more familiar way for the state to share in
windfall profits at high oil prices. He communicated that
it would be a progressivity rate that was lower than the
one under the Petroleum Production Tax (PPT); the state
would share in the increases in price of oil and oil
company profits. He elaborated that at the point where
companies made $55 in profit they would continue to pay the
tax rate included in the CS; above $55 in profit a
progressivity would be implemented to increase at 0.2
percent per every $1 increase in oil. The rate would equal
half of the progressivity under ACES and would be lower
than the rate under PPT. He stressed that at some point
when companies were making substantial profits, the state
should share in the money as well. He elaborated that the
amendment would help reduce shortfalls when the state
entered into years with $1 billion to $2 billion deficits.
He reiterated that oil companies would continue to make
increased profits if the amendment took effect.
Mr. Pawlowski spoke against Amendment 11 for technical and
philosophical reasons. He addressed the concept of hoping
the state could share [in profits]. He detailed that the CS
contained a profits-based tax with an effective progressive
rate that started lower and increased; as prices rose, the
state would take a growing share of the profit. He noted
that the state took a share in the profit through a tax,
royalty, corporate income, and property tax. He believed
that fundamentally there was a difference in philosophy
about the idea that at some point companies were profitable
in Alaska and that the opportunities did not exist
elsewhere. He elaborated that the impact of the price and
profit increase on companies' decisions had fallen in the
past 5 to 7 years due to the progressive tax rate; whereas,
the state's competitors had regressive tax rates (where
companies became more profitable as prices rise). He stated
that in 2011 and 2012 even California had been increasing
oil production. He stressed that Alaska needed to
reasonably compete in order to attract investment.
9:27:02 PM
Representative Kawasaki voiced support for Amendment 11. He
pointed to continued testimony that much of the increased
production in the Lower 48 was related to advancements in
technology; he hoped the public and the administration were
aware of this. He stated that taxes were only one part of
the equation; he disagreed with the logic that changing one
component would spur significant development. He disputed
testimony that progressive systems were not utilized by
other states or countries. He remarked that other locations
had progressive severance systems that worked well. He
stated that progressivity was understood by oil companies
and the public understood. He had supported progressivity
and had worked on its design in the past. He noted that Mr.
Balash had worked on presenting progressivity when he had
been a special assistant. He stated that the amendment
would take effect when profits reached $55; it had been set
to take effect at $55 because that was the point where ACES
reached the 35 percent tax rate. He believed Alaskans
should receive the benefit for a limited natural resource.
9:29:37 PM
Representative Gara provided closing remarks on Amendment
11. He stated that it was hard to hear from the
administration that a very low windfall profit share would
somehow deter investment. He recalled that three years
earlier the governor had believed ACES was fine and that
the only necessary change was to increase the infield tax
credit for legacy fields from 20 percent to 30 percent in
order to make the state very competitive. He continued that
two years earlier the governor had believed ACES was fine,
but that modifications were needed in order to make the
state very competitive; the proposal had been to increase
the infield tax credit from 20 percent to 30 percent and to
have progressivity that tampered down at high prices. He
addressed the administration's current standing that
progressivity did not work. He agreed with the governor's
statement in 2010 that the elimination of progressivity
gave companies money that they could spend anywhere else in
the world. His fundamental problem with the bill was that
it disagreed with the governor's 2010 comments on
progressivity.
Representative Gara pointed to slide 8 ["Select Slides from
DOR Responses" dated 4/11/13] that showed the 3 percent
decline rate (following FY 17) that everyone wanted to
reverse. He highlighted that at $120 per barrel the bill
would reduce taxes by approximately $1.4 billion per year.
He noted that as the governor had said, the money could be
spent anywhere in the world. The amendment addressed that
the state would like a small share of the high profit. He
stated that under ACES ConocoPhillips had taken in $2.3
billion in profits the prior year. He surmised that
although Exxon would not divulge its profits, the company
made profits similar to ConocoPhillips. He noted that BP's
profits in Alaska were not known because their reports
included other locations as well. He stressed that the
companies were making approximately $2 billion per year in
profits under ACES, which had a much higher progressivity
rate than the one included in the CS. He stated that ACES
attached a windfall profits tax when companies made $30 in
profit or above. The amendment would not increase the tax
until profits of $55 per barrel were obtained. He
reiterated that companies would pay 0.2 percent extra for
each $1 the price increased above the $55 mark. He believed
companies would be very happy with the scenario. He
concluded that the amendment contained the lowest possible
progressivity rate that would raise the share of money for
Alaskans.
A roll call vote was taken on the motion to adopt Amendment
11.
IN FAVOR: Gara, Kawasaki
OPPOSED: Holmes, Munoz, Neuman, Thompson, Wilson, Costello,
Edgmon, Austerman, Stoltze
The MOTION to adopt Amendment 11 FAILED (2/9).
Representative Gara WITHDREW Amendment 12, 28-GS1647\L.17,
Nauman/Bullock, 4/11/13 (copy on file).
9:35:30 PM
AT EASE
9:35:50 PM
RECONVENED
Representative Kawasaki WITHDREW Amendment 13, 28-
GS1647\L.18, Nauman/Bullock, 4/11/13 (copy on file).
Representative Gara MOVED to ADOPT Amendment 14, 28-
GS1647\L.21, Nauman/Bullock, 4/11/13 (copy on file). [Note:
Due to its length, the body of Amendment 14 was not
included in the minutes.]
Co-Chair Stoltze OBJECTED.
Representative Gara believed Amendment 14 would move the
state forward; under the amendment if a company produced
new oil in Alaska, its tax rate would be reduced. A tax
break would not be provided when no activity occurred or
based on hypotheticals. He stated that the tax rate
proposed by the administration was based on hypothetical
activity. He was not satisfied with hypothetical production
that could result in the loss of $1.4 billion to $1.5
billion to the state. He noted the state would already be
facing deficit spending. The amendment had a number of new
provisions that would encourage new investment, but
acknowledged that just eliminating progressivity would
allow companies to spend the money in other locations.
Representative Gara continued that the first provision in
the amendment established a 10 percent GRE for new oil in
legacy fields. He elaborated that the goal was to encourage
new production in legacy fields; therefore, a new
geological area inside an existing unit such as Prudhoe Bay
or Kuparuk would give a company a 10 percent GRE reduction,
which was roughly a 20 percent tax reduction for five
years. The credit would allow companies to recoup their
investment costs. The amendment would maintain the ACES
exploration and development credits, which encouraged
investment in Alaska; capital investment in the state had
doubled since the implementation of ACES. He reiterated
that the 10 percent GRE would benefit production inside
legacy fields where companies such as BP, ConocoPhillips,
and ExxonMobil already had a significant incentive to
maximize the costs put into the fields. The amendment would
provide a 20 percent GRE (close to a 40 percent tax break)
for the development of new units for a period of seven
years.
9:40:32 PM
Representative Gara communicated that Amendment 14 would
grant a 20 percent GRE reduction for increased production
in legacy fields; incremental oil above a company's 2012
production levels would receive the tax break. A 10 percent
GRE reduction (a 20 percent tax break) would be provided
for heavy oil. A research and development credit would also
be provided for heavy oil to help companies develop
technology needed to get more of the oil in the pipeline.
Additionally, the amendment provided for AIDEA bonding
assistance to help small producers build processing
facilities (where the separation of the oil from the gas
and water took place). He detailed that larger producers
did not provide smaller producers access to their
processing facilities. He stressed that everything in the
amendment would award a producer for moving ahead with new
oil in the state, but it would not break the bank. He noted
that the ACES tax rate was too high at high prices;
therefore, the amendment capped the rate at 55 percent
(down from 75 percent). He was amenable to tampering back
progressivity at higher prices if an amendment to Amendment
14 was offered.
Representative Gara emphasized that unlike the current CS
that gave a 40 percent tax break for oil in production,
none of the provisions in the amendment would give away
state revenue to companies for doing nothing. He stated
that the CS would eliminate the windfall profits share. He
believed the companies would receive between $1 billion to
$2 billion and would spend it in other locations throughout
the world as a result. He recalled that companies had told
him that they would look around the world to decide where
to spend the money when he had asked whether they would
spend it in Alaska if progressivity was eliminated. He
stressed that only reducing taxes did not work; up to 2006
there had been a zero production tax on 15 of the 19 fields
on the North Slope. He discussed various past oil prices
and the decline of production between 2000 and 2007 at an
annual rate of 5 percent to 8 percent; the same decline
rate as at present.
Representative Gara summarized that he was supportive of
rewarding companies for producing in Alaska, but was
uncomfortable providing $1 billion to $1.5 billion per year
without requiring any new production. He observed that
companies had two ways to increase profits: (1) to do work
or (2) to receive a tax break for no additional work. He
stated that the CS would give companies $1.5 billion at
$120 per barrel prices, which was the easiest way for a
company to make money. He strongly believed that Amendment
14 provided the right solution to oil tax reform.
9:46:16 PM
Representative Kawasaki addressed the goal of increasing
oil in the pipeline. He discussed testimony from small
producers who were not able to get their oil into the
pipeline. He elaborated that many of the major producers
had locked up major units and owned the entire
infrastructure. In response Amendment 14 included a fund
and money for heavy oil that was difficult to produce. He
referred to testimony from companies and other that there
needed to be a way to capitalize on research and
development; therefore, credits had been included in the
amendment. The intent was to incentivize companies for
production. He did not believe the CS went in the same
direction; therefore, he believed the amendment was
necessary.
A roll call vote was taken on the motion to adopt Amendment
14.
IN FAVOR: Gara, Kawasaki
OPPOSED: Thompson, Wilson, Costello, Edgmon, Holmes, Munoz,
Neuman, Stoltze, Austerman
The MOTION to adopt Amendment 14 FAILED (2/9).
9:49:31 PM
Co-Chair Austerman MOVED to ADOPT Amendment 15, 28-
GS1647\L.30, Nauman/Bullock, 4/11/13 (copy on file):
Page 2, line 14:
Delete "when a tax levied in this title becomes
delinquent"
Insert "a delinquent tax under this title,"
Page 2, line 15:
Delete "it"
Insert "[WHEN A TAX LEVIED IN THIS TITLE BECOMES
DELINQUENT, IT]"
Delete "a"
Insert "each [A]"
Page 2, line 20:
Delete "it"
Delete "a"
Insert "each"
Page 2, lines 23 -25:
Delete ", or at the annual rate of 11 percent,
whichever is greater, compounded quarterly as of the
last day of that quarter"
Page 22, lines 5 -6:
Delete "attributable to that category and to that
[FOR THE CALENDAR YEAR APPLICABLE TO THE]"
Insert "for the calendar year applicable to the"
Page 22, line 7:
Following "gas":
Insert "in that category"
Delete "for"
Insert "during"
Page 25, lines 9 -14:
Delete all material.
Renumber the following bill sections accordingly.
Page 29, line 7:
Delete "sec. 30"
Insert "sec. 29"
Delete "November 1, 2014"
Insert "January 1, 2014"
Page 29, line 11:
Delete "31"
Insert "30"
Co-Chair Stoltze OBJECTED.
Co-Chair Austerman relayed that the amendment contained
cleanup items identified by the administration.
Mr. Pawlowski communicated that Amendment 15 contained
technical cleanups to reflect the legislation's intent. The
first item corrected language on page 2, line 14, Section 2
related to an adjustment to interest rates included in the
legislation. He relayed that under current law the interest
rate was a variation between a floating rate and an 11
percent rate, which had come under fire over time through
the Carlson case and other. The amendment brought the
section back to its original intent by recognizing that the
statute should read "a delinquent tax under this title" in
order for the language to apply more broadly. He noted that
the following changes were conforming. Page 2, lines 23
through 25 removed the language "11 percent, whichever is
greater, compounded quarterly as of the last day of the
quarter." The change made the rate a true floating rate
that reflected the market rate. The next change occurred on
page 22, lines 5 through 6; the CS used the word
"attributable"; whereas the department preferred the word
"applicable," given that its regulations used the word
applicable. The change would provide clarity to investors.
Mr. Pawlowski continued to discuss Amendment 15. He pointed
to page 25, lines 9 through 14 that contained the
requirement for the department to prepare a report. The
language was deleted as it was superseded by the
reinstatement of the Oil and Gas Competitiveness Review
Board that would provide a more thorough and publicly
involved process to consider the issues facing Alaska.
Lastly, the amendment included corrections to the direction
to the administration and governor to provide appointments
to the review board (page 29, line 7). The date the
governor was required to appoint members to the board was
changed from November 1, 2014 to January 1, 2014; the
change would provide members of the board time to be
engaged in the process.
9:53:20 PM
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 15 was ADOPTED.
Representative Wilson asked the committee to RESCIND the
adoption of Amendment 4, 28-GS1647\L.6. There being NO
OBJECTION, it was so ordered.
9:54:31 PM
AT EASE
9:55:08 PM
RECONVENED
Representative Wilson MOVED to ADOPT Amendment 16 [a
modified version of the previous Amendment 4]:
Page 25, line 29, following "association"
Insert "and two members of the public appointed
by the governor who do not represent the oil and gas
industry."
Page 26, line 22:
Delete "may not meet more than"
Insert "shall meet at least"
Co-Chair Stoltze OBJECTED.
Representative Wilson explained that her intent was to add
two public members to the Oil and Gas Competitiveness
Review Board and that Amendment 4 should not have removed
two members of the oil and gas industry. She believed there
were many individuals in the oil and gas service industry
that could provide knowledge to the board. She opined that
having two public members and two members of the industry
made more sense. She asked for the committee's support.
Representative Gara felt that the expertise and
contribution of the oil and gas industry was very welcome;
however, he believed the industry would always vote in
favor of lowering oil taxes. He did not believe the two
members from the industry should have voting power on the
board, but he thought their contribution as advisory
members or consultants could be useful. He observed there
would be a disagreement over which consultants to hire. He
WITHDREW his OBJECTION.
There being NO further OBJECTION Amendment 16 was ADOPTED.
[Note: A conforming amendment to Amendment 16 was adopted
at approximately 10:08 p.m.]
9:58:28 PM
AT EASE
10:00:05 PM
RECONVENED
Representative Kawasaki MOVED to ADOPT Amendment 8, 28-
GS1647\S.38, Nauman/Bullock, 4/11/13 (copy on file). [Note:
Due to its length, the body of Amendment 8 was not included
in the minutes.]
Co-Chair Stoltze OBJECTED.
Representative Kawasaki discussed that the state would lose
money under the bill in the near-term and the hope that
money would be gained in later years due to increased
production. Amendment 8 would insert a sunset in 2019; it
would provide several years to allow for production and for
new fields to come online. He elaborated that the sunset
would not occur if production levels were higher in 2018
than in 2013.
Mr. Balash spoke in opposition to the amendment. The
administration believed a sunset mechanism that was
dependent on the actions of others would have a chilling
effect on incentivizing new investment and new production.
He expounded that the intent to create new investment and
production, particularly outside of the existing areas,
would be harmed by the provision. He added that the
conditional affect that relied on production from calendar
year 2013 was an unknown. He communicated that the use of a
calendar year that had been completed may be better.
Representative Gara believed that Mr. Balash's comments got
to Representative Kawasaki's point. He believed the bill
should be made subject to the conduct of others; companies
should only receive the tax break if production occurred.
He reflected on claims by the administration and
consultants that production would increase within two or
three years if the bill passed. He stated that the number
provided previously had been five to seven years. He opined
that the legislature needed to design a better bill if
production was not going to increase while money was lost.
He did not believe in claims that the bill or any other
bill would fill the pipeline (with the exception of
offshore oil that would not provide substantial tax
revenue). He stressed that under the amendment the bill
would not sunset if production increased [by 2019]. He did
not support the concept of an ongoing system that was based
on hypotheticals.
A roll call vote was taken on the motion to adopt Amendment
8.
IN FAVOR: Edgmon, Gara, Kawasaki
OPPOSED: Neuman, Thompson, Wilson, Costello, Holmes, Munoz,
Austerman, Stoltze
The MOTION to adopt Amendment 8 FAILED (3/8).
10:05:58 PM
AT EASE
10:07:46 PM
RECONVENED
Representative Wilson offered a conforming amendment to
Amendment 16; the Oil and Gas Competitiveness Review Board
membership would total 11 members.
Representative Holmes asked for verification that the
amendment would be made on page 25, line 26 of the CS.
Representative Wilson replied in the affirmative. There
being NO OBJECTION, Amendment 16 was amended [to increase
the review board membership from 9 to 11].
Co-Chair Stoltze asked Mr. Pawlowski to discuss the fiscal
impact of the bill.
Mr. Pawlowski referred to slide 2 of the presentation
titled "Fiscal Impact Draft HFIN CSSB21: House Finance
Committee Version 28-GS1647\L." He noted that any fiscal
impact of the amendments to the CS was not factored into
the presentation. He pointed to the Middle Earth
exploration credit that had been added as an amendment; the
change would move the fiscal impact slightly. The
information on slide 2 provided a variation of the table
showing the revenue impact and fiscal impact of the
legislation at the DOR Spring 2013 Revenue Forecast. The
slide did not include any potential changes in production.
The slide showed an impact in FY 14 (only half of the
calendar year) of between $675 million and $725 million. He
pointed out that $375 million of the amount was related to
the closeout of the qualified capital expenditure credit.
He directed attention to the FY 15 column for a true fiscal
impact; he noted that some provisions increased revenue,
while others reduced revenue. The FY 15 forecasted revenue
impact was [a reduction] between $430 million and $505
million. He restated that the slide was a draft and was not
reflective of amendments passed during the current meeting.
Other sections in the presentation showed production
scenarios to indicate how increased production could
replace the lost revenues. He relayed that the fiscal note
would reflect the type of analysis shown on slide 2; the
actual fiscal impact should be close to what was shown on
the slide.
10:11:59 PM
Representative Edgmon expressed discomfort that that the
Legislative Finance Division had not provided its own
numbers on the bill's fiscal impact.
Representative Gara stated that the fiscal note was based
on DOR's 2013 Spring Revenue Source Book. He communicated
that DOR's forecasted production decline was higher than
the decline rate published by ConocoPhillips, which
increased the amount of revenue the state would lose
compared to ACES. He believed the ConocoPhillips' numbers
should be used instead of the DOR numbers. He referred to a
chart from DOR showing that at $120 per barrel by 2017 the
fiscal difference was approximately $1.4 billion per year
when the ConocoPhillips numbers were used. He observed that
numbers could be changed significantly with various decline
curves and lower or higher prices; he did not believe the
fiscal note provided by the administration was accurate. He
stated that he did not have faith in the note without
having an independent review of the administration's
numbers by the Legislative Finance Division.
10:14:11 PM
Representative Costello MOVED to REPORT HCS CSSB 21(FIN)
out of committee with individual recommendations and the
accompanying fiscal notes.
Representative Kawasaki OBJECTED. He voiced opposition to
the legislation. He discussed his past membership on the
House Oil and Gas Committee where he had learned a
significant amount about the issue and its complexity. He
was uncomfortable moving the bill forward and believed
there were too many unknowns. He believed it was
irresponsible of the House Finance Committee to not hear
from the Legislative Finance Division on the potential
fiscal impacts prior to sending a bill to the House floor.
He opined that the committee did not sufficiently
understand the fiscal impact of the bill and that it was
rushing into the significant changes. He did not support
advancing the bill forward.
Representative Gara spoke against the bill. He stated that
the bill used a rate that he believed would harm the state
in the long-term; it was the highest rate of legislation
that had gone through the legislature. He pointed to March
14, 2013 testimony from Scott Jeffson of ConocoPhillips
when the bill had included a 33 percent tax; Mr. Jeffson
had testified that the company was not able to specify what
it would do differently if the legislation passed. He
elaborated that Damian Bilbao [BP] had testified that a 33
percent rate did not go far enough to attract the type of
meaningful investment that was required. He shared that Dan
Seckers [ExxonMobil] had communicated that the base rate
was too high at 33 percent and did not make Alaska
attractive enough. He remarked that the companies' effort
was to get the lowest possible tax rate and to ensure that
a bill giving a tax break passed the legislature. He
stressed that testimony had become more positive, but that
the companies did not commit to any production, specific
projects, spend, spend increase, or to ensure that the
state would be repaid for the amount given.
Representative Gara discussed that the committee had heard
many times from the administration about Alaska's lack in
competitiveness. He did not believe the Econ One data
proved the point (slide 8). The slide included a metric
showing what ACES did to a company's IRR; at $100 per
barrel the state had a higher rate of return than most of
the locations it was compared to. He noted that his
amendment would have made the state more competitive. He
observed that the administration had selected some of the
lower taxing jurisdictions in the world for the comparison;
they had not selected countries such as Libya, Bolivia, or
Russia that had high tax rates. He observed that at $100
per barrel under ACES the state's IRR was 23.3 percent,
which was higher than the Lower 48 Bakken field and Norway,
the same as offshore Gulf of Mexico and twice as high as
the Canadian Oil Sands. He pointed out that Alaska's IRR
beat out three of the seven locations at $120 per barrel.
He added that the state performed better than locations
companies were investing in that were more dangerous. He
suspected that Alaska performed even better and noted that
the Econ One slide only showed how profitable ACES was on
fields that paid the 16.67 percent royalty. He believed
that the committee had received information from its
consultants that seemed to only show the versions of facts
that benefited the administration's case. He agreed with
the fiscal note the administration had provided at his
request based on ConocoPhillips' testimony [using a 3
percent decline rate].
10:22:13 PM
Representative Gara did not believe the bill was a good way
to lose $1.4 billion per year. He communicated that he had
written to the administration "a long time ago"; the
administration had contracted a report from Gaffney Cline
and Associates to assess the state's oil tax system and to
provide recommendations for changes. He had written a
letter requesting a copy of the report; however, he had not
received it. He stated that when the administration had
been asked to share its experts it had told the minority to
hire its own; the minority did not have money to hire its
own experts. He opined that it was possible to get an
expert to say almost anything. He believed committee
members should have heard from additional experts in order
to make up their own minds. He did not believe withholding
information served the public or the state and he was
unhappy with the administration's decision to do so. He
reiterated his opposition to the bill.
10:25:31 PM
Co-Chair Austerman relayed that he would vote to move the
bill from committee, but it was not necessarily how he
would vote on the House floor. He believed that spending
the next six months on the legislation would not result in
a major difference in the result. He saw no reason to keep
the bill from the House floor where all members could
participate in the conversation.
Representative Wilson knew that the barrels of oil were
decreasing and that Fairbanks did not have the same number
of jobs that it had when ACES had been implemented. She
stressed that the lack of quality jobs was a primary reason
for the community's energy problems. She detailed that when
energy costs rose and there were less consumers the
remaining customers experienced higher prices. She
discussed credits provided to the industry for capital
projects that would allow them maintain old facilities,
which she believed had been the wrong approach. She
discussed that under the legislation production was
necessary in order to get the per barrel credit. She
emphasized that the oil industry was a business and
producers were supposed to make money. She disputed the
characterization that the state was giving companies money;
the companies had made the money. She elaborated that the
bill allowed companies to keep more of their own money. She
stated that if people cared about kids and schools the
state could not use "it" all up in the next four or five
years; she wondered what would happen then and asked if the
solution would be to tax everyone. She recognized that a
change to the tax system was necessary and believed the
bill was close. She thought it was time to move the bill
from committee. She stressed that a major issue existed and
that constituents were the ones paying for it.
10:28:11 PM
Vice-Chair Neuman relayed that he had been present for the
four changes in tax policy over the past nine years. He
pointed out that taxation "levers" continued to be turned
on the petroleum industry and that production continued to
decline. He stated that it was the producers' job to say
taxes were too high. He noted that 90 percent of the
state's revenue was based on oil production. He emphasized
that the state was experiencing rate decline of 40,000
barrels per day. He relayed that production had begun to
decline when ACES had been implemented. He discussed other
state's production had been increasing during oil price
increases. He stressed that the loss of 40,000 per day
equated to a loss of $1.5 billion per year. He opined that
something needed to be done. He elaborated that he would
make an adjustment if he had a business that was losing a
significant amount of money. He supported the changes in
the legislation. He added that the state's right to
taxation would not be lost and changes could be made in the
future if necessary.
10:31:22 PM
Representative Costello spoke to the heartfelt public
testimony on the issue. She discussed time spent on charts
and numbers and recognized that the market could not
testify. She addressed the pursuit for the right base rate;
she believed there was a range. She stressed that what
mattered was the whole package included in the bill and not
just one number. She stated that the current system was not
working and that numbers were stark; 10 rigs in Alaska
compared to over 800 in Texas; 500 exploratory wells in
Alaska and 1000s in other areas. She believed it would be
irresponsible for the legislature to ignore the "draconian"
statistics. She opined that it was important to address the
issue at present. She touched on money coming in under ACES
and communicated that she worried about the future of
children in the state. She was concerned that the state's
savings accounts would be depleted by the time the children
were in high school. She believed that it was the
responsibility of legislators to address the issue. She
hoped that action was taken and that Alaska would be on
equal footing with the rest of the world.
Representative Holmes shared that she had been present
during the ACES implementation. She recalled her time
observing past Oil and Gas Committee meetings. She observed
that over the past several years there had been significant
incoming revenue to the state along with declining
production. She discussed the House Finance Committee's
time spent on budgets and future projections for the state.
She believed the future projections were scary. She
addressed that the incentives built into ACES with the
intent to spur production appeared to have created a
complicated system that was hard to predict and model. She
thanked the chairman and believed the process had been
collaborative. She opined that the CS was no one's perfect
bill. She believed members could find optimism in the bill;
she stated that projections under the current structure
were not optimistic. She pointed to current budget deficits
and credited the legislature and governor for savings in
the current session. She supported advancement of the bill.
10:37:12 PM
Representative Edgmon communicated that he would vote to
move the bill forward for debate on the House floor. He
spoke to his apprehension and observed that it was not
possible to predict the future. He remarked that the state
would be put in a position of risk if nothing were done;
however, the search for a solution put the state in a
position of risk as well, given that reward and risk went
hand in hand. He believed all committee members had the
best intentions for the state's good fortune. However, he
communicated his nervousness that the bill could have been
further vetted. He pointed to DOR projections and noted
that they could be much smaller depending on production
numbers. He did not believe an accurate projection was
known about the potential generation of production. He was
incredibly hopeful that the bill would work. He stated that
the nervousness would carry with him until he saw that the
change had been successful. He would have liked to see some
consultants with experience in the oil industry the various
scenarios provided by the administration. He thanked the
chairman for his work and expressed appreciation for the
members' cooperation and collegiality.
10:40:14 PM
Co-Chair Stoltze thanked committee members for the process.
He believed it was natural to have a level of humility and
concern about whether such a large-scale decision was
right. He had more hope for doing something rather than
nothing.
Representative Gara and Representative Kawasaki WITHDREW
their OBJECTIONS. There being NO further OBJECTION, it was
so ordered.
HCS CSSB 21(FIN) was REPORTED out of committee with a "no
recommendation" and with one new indeterminate fiscal note
from the Department of Natural Resources; two new fiscal
impact notes from the Department of Revenue; and one
previously published zero fiscal note: FN11 (CED).
Co-Chair Stoltze discussed that the committee may reconvene
following House floor session.