Legislature(2017 - 2018)HOUSE FINANCE 519

04/08/2017 01:00 PM FINANCE

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01:59:35 PM Start
02:00:29 PM HB111
02:07:21 PM Amendments
04:07:04 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
-- Continued from 04/07/17 --
Moved CSHB 111(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 111                                                                                                            
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     and providing for an effective date."                                                                                      
2:00:29 PM                                                                                                                    
Representative  Pruitt  informed   the  committee  that  the                                                                    
consultant [Rich Ruggiero,  Consultant, Castle Gap Advisors,                                                                    
LLC;] was available to answer questions during the meeting.                                                                     
Vice-Chair  Gara  commented  that the  consultant  had  been                                                                    
available  since mid-March  for every  member to  contact at                                                                    
any time.  He voiced that he  had never been given  the same                                                                    
courtesy in the past as  a longtime member of the committee.                                                                    
He noted that  the committee had previously  held 8 hearings                                                                    
on the bill starting on March  20, 2017 and Mr. Ruggiero was                                                                    
available a week prior to the stated date.                                                                                      
Co-Chair  Foster  relayed  a  list  of  legislators  in  the                                                                    
audience. [See above under "Also Present"]                                                                                      
Representative Wilson  appreciated the expert  testimony for                                                                    
prior meetings.  She was not  looking to slow the  bill down                                                                    
but felt that  the bill had changed  dramatically and wanted                                                                    
additional clarification.                                                                                                       
2:05:24 PM                                                                                                                    
Co-Chair Foster commented that he intended to discuss the                                                                       
two amendments and then proceed to questions for the                                                                            
Representative  Pruitt  appreciated  the  accommodation.  He                                                                    
noted that the Legislative  Budget and Audit Committee (LBA)                                                                    
approved his  request for Mr.  Ruggiero to consult  with the                                                                    
committee during the meeting.                                                                                                   
2:07:21 PM                                                                                                                    
Co-Chair Seaton MOVED to ADOPT Amendment 1.                                                                                     
     1    Page 31, lines 5 - 28:                                                                                                
     2    Delete all material and insert:                                                                                       
     3    "{2)  AS 43.55.01l{g){3),  the monthly  production                                                                    
     tax value of oil                                                                                                           
     4    taxable  under  AS   43.55.0ll{e)  produced  by  a                                                                    
     producer during a month                                                                                                    
     5    CA) from  leases or properties  in the  state that                                                                    
     include land                                                                                                               
     6    north of  68 degrees  North latitude is  the gross                                                                    
     value at the point of                                                                                                      
     7    production of  that oil, less 1/12  the producer's                                                                    
     lease expenditures under                                                                                                   
     8    AS  43.55.165 for  the calendar  year incurred  to                                                                    
     emlore for, develop, or                                                                                                    
     9    produce oil and gas  deposits located in the state                                                                    
     north of 68 degrees North                                                                                                  
     10   latitude  or located  in leases  or properties  in                                                                    
     the state that include land                                                                                                
     11   north of  68 degrees  North latitude,  as adjusted                                                                    
     under AS 43.55.170;                                                                                                        
     12   CB> in  a calendar year  that is before  or during                                                                    
     the last                                                                                                                   
     13   calendar year under AS  43.55.024(b) for which the                                                                    
     producer could take a                                                                                                      
     14   tax credit  under AS 43.55.024Cal. from  leases or                                                                    
     properties in the state                                                                                                    
     15   outside the Cook Inlet  sedimentary basin, no part                                                                    
     of which is north of 68                                                                                                    
     16   degrees  North  latitude,  other  than  leases  or                                                                    
     properties subject to                                                                                                      
     17   AS 43.55.0llCpl.  is the gross value  at the point                                                                    
     of production of that oil,                                                                                                 
     18   less 1/12 the  producer's lease expenditures under                                                                    
     AS 43.55.165 for the                                                                                                       
     19   calendar  year incurred  to explore  for, develop,                                                                    
     or produce oil and gas                                                                                                     
     20   deposits  located in  the state  outside the  Cook                                                                    
     Inlet sedimentary basin and                                                                                                
     21   south  of 68  degrees North  latitude, other  than                                                                    
     oil and gas deposits located                                                                                               
     22   in a  lease or property  that includes  land north                                                                    
     of 68 degrees North latitude                                                                                               
     23   or that  is subject to AS  43.55.0llCpl or, before                                                                    
     January l, 2027, from                                                                                                      
     1    which     commercial     production     has    not                                                                    
     begun.  as adjusted under                                                                                                  
     2    AS 43.55.170;                                                                                                         
     3    CC)  from  leases  or  properties  subject  to  AS                                                                    
     43.55.0ll(p) is                                                                                                            
     4    the  gross value  at the  point  of production  of                                                                    
     that oil, less 1/12 the                                                                                                    
     5    producer's lease  expenditures under  AS 43.55.165                                                                    
     for the calendar year                                                                                                      
     6    incurred  to explore  for develop  or produce  oil                                                                    
     and gas deposits located in                                                                                                
     7    leases  or properties  subject to  AS 43.55.0llCp)                                                                    
     or, before January l, 2027,                                                                                                
     8    located  in  leases  or properties  in  the  state                                                                    
     outside the Cook Inlet                                                                                                     
     9    sedimentary basin,  no part  of which is  north of                                                                    
     68 degrees North latitude                                                                                                  
     10   from  which commercial  production has  not begun,                                                                    
     as adjusted under                                                                                                          
     11   AS 43.55.170;                                                                                                         
     12   (D)  from leases  or properties  in  the state  no                                                                    
     part of which is                                                                                                           
     13   north  of 68  degrees North  latitude, other  than                                                                    
     leases or properties subject                                                                                               
     14   to  CB) or  CC)  of this  paragraph  is the  gross                                                                    
     value at the point of?                                                                                                     
     15   production of  that oil  less 1/12  the producer's                                                                    
     lease expenditures under                                                                                                   
     16   AS  43.55.165 for  the calendar  year incurred  to                                                                    
     explore for, develop, or                                                                                                   
     17   produce oil and gas  deposits located in the state                                                                    
     south of 68 degrees North                                                                                                  
     18   latitude, other than oil  and gas deposits located                                                                    
     in a lease or property in                                                                                                  
     19   the state  that includes land north  of 68 degrees                                                                    
     North latitude, and                                                                                                        
     20   excluding lease  expenditures that  are deductible                                                                    
     under (B) or (C) of this                                                                                                   
     21   paragraph or would be deductible  under CB> or CC)                                                                    
     of this paragraph if                                                                                                       
     22   not  prohibited   by  (bl  of  this   section,  as                                                                    
     adjusted under AS 43.55.170; a                                                                                             
     23   separate  monthly production  tax  value shall  be                                                                    
     calculated for                                                                                                             
     24   (i) oil  produced from each  lease or  property in                                                                    
     25   Cook Inlet sedimentary basin;                                                                                         
     26   (ii)  oil produced  from  each  lease or  property                                                                    
     27   the  Cook  Inlet  sedimentary basin,  no  part  of                                                                    
     which is north of 68                                                                                                       
     28   degrees  North  latitude,  other  than  leases  or                                                                    
     properties subject to                                                                                                      
     29   CQ of this paragraph [(3) OF THIS SUBSECTION]."                                                                       
Representative Wilson OBJECTED.                                                                                                 
Co-Chair  Seaton  spoke  to   the  technical  amendment.  He                                                                    
indicated  that  the  original bill  mistakenly  omitted  AS                                                                    
43.22.160 (h)  (2) in section  25 of the bill.  He explained                                                                    
that under  current law, oil  and gas were  taxed separately                                                                    
after  2022, but  lease expenditures  for both  oil and  gas                                                                    
were  able  to be  deducted  against  the  tax on  oil.  The                                                                    
amendment  ensured that  the deduction  continued by  adding                                                                    
back the language regarding the  expenditures for gas in the                                                                    
calculation  of  production  tax value,  which  matched  the                                                                    
language in current statute.                                                                                                    
Representative Pruitt thought the  amendment was more than a                                                                    
technical amendment. He wanted verification.                                                                                    
2:09:18 PM                                                                                                                    
AT EASE                                                                                                                         
2:11:56 PM                                                                                                                    
2:12:27 PM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
wanted  the committee  to understand  what  would happen  in                                                                    
2022.  He noted  that the  provision was  part of  the AKLNG                                                                    
legislation  that  passed in  2014  [SB  138 (Gas  Pipeline;                                                                    
AGDC; Oil  & Gas  Prod. Tax)  [Chapter 14  SLA 14  - Enacted                                                                    
05/08/2014].   He  indicated   that   in   2022  the   state                                                                    
transitioned to  a gross gas  tax. The  tax was part  of the                                                                    
state accepting  payment in  kind for gas  in lieu  of taxes                                                                    
and royalties for  the state's share of  throughput into the                                                                    
pipeline that  the state partially owned.  He furthered that                                                                    
a lot of technical and  conforming language was necessary in                                                                    
statute beginning in  2022. In January 1, 2022,  the net tax                                                                    
was  only on  oil but  the expenses  from oil  and gas  were                                                                    
subtracted from  the tax on  oil. The amendment  amended the                                                                    
section to  describe the tax  calculation, not only  for the                                                                    
base  25  percent  tax  but  also  on  the  new  15  percent                                                                    
surcharge on  the amount  of profits  above $60  per barrel.                                                                    
The Committee  Substitute (CS) did  not delineate  that both                                                                    
the oil  and gas expenditures  were counted against  the oil                                                                    
value  for  calculating  the  tax.   He  revealed  that  the                                                                    
Department of Law (DOL)  attorney, Mary Gramling, discovered                                                                    
the  oversight and  brought the  issue to  Co-Chair Seaton's                                                                    
attention.  The   amendment  language   was  written   by  a                                                                    
Legislative Legal  Services attorney,  which he  agreed, was                                                                    
in  accordance   with  the  bill's  intent.   The  amendment                                                                    
included language  regarding how the amendment  affected the                                                                    
Middle  Earth tax  cap and  Cook  Inlet, which  he felt  was                                                                    
irrelevant.  He detailed  that the  relevant  change was  in                                                                    
subsection  (a) that  stated oil  and gas  expenditures were                                                                    
counted against oil value.                                                                                                      
2:15:01 PM                                                                                                                    
Representative  Pruitt  reiterated  his  question  regarding                                                                    
whether the amendment "truly" was technical in nature.                                                                          
SUSIE  SHUTTS,  LEGISLATIVE   LEGAL  SERVICES,  JUNEAU  (via                                                                    
teleconference),  introduced herself.  She provided  a brief                                                                    
overview  of   AS.43.55.160.  The  statute   determined  the                                                                    
production tax value of oil and  gas that was broken down in                                                                    
subsection (a) as follows: "for  oil and gas produced before                                                                    
January  1, 2022"  and  in subsection  (H),  "for oil  after                                                                    
2022."  She  elucidated  that subsection  (h)  paragraph  1,                                                                    
dealt  with the  production tax  value for  the purposes  of                                                                    
subsection (e)  and paragraph 2,  dealt with  the production                                                                    
tax value  calculations for the  purposes of  subsection (g)                                                                    
which was the  new subsection added to AS  43.55.01 (g) (3),                                                                    
for  the  additional  surcharge tax  calculated  at  certain                                                                    
price points. She relayed that  the changes in the amendment                                                                    
added  oil and  gas lease  expenditures and  broke down  the                                                                    
calculation to  the same  that existed  in AS  43.55.160 (h)                                                                    
and would be under subsection (h) (1) in an amended bill.                                                                       
2:17:35 PM                                                                                                                    
Representative Pruitt asked why  the provision was missed in                                                                    
the  initial  CS  version. Ms.  Shutts  responded  that  the                                                                    
production  tax value  could be  calculated differently  for                                                                    
the  purposes of  (g)  versus (e).  She  indicated that  the                                                                    
amendment calculated the production  tax for the purposes of                                                                    
(g) the  same as for  (e); the break  down was the  same and                                                                    
the lease  expenditures for  oil and  gas was  deducted. The                                                                    
calculations could  be done several different  ways, but the                                                                    
amendment  specified the  break down  and the  same type  of                                                                    
lease expenditure deducted in  the calculation of production                                                                    
tax   value.  Representative   Pruitt   asked  whether   the                                                                    
amendment was  a substantial change  in policy.  He surmised                                                                    
that the  "ability to break  down and separate the  two [oil                                                                    
and gas] was hampered because  the gas was being pumped back                                                                    
into the ground." The ability  to write off anything related                                                                    
to gas  was limited. He  asked whether his  understanding of                                                                    
the  amendment was  correct. Ms.  Shutts  encouraged him  to                                                                    
direct his policy  question to the sponsor  of the amendment                                                                    
in terms  of intent. She  offered that the  amendment change                                                                    
was in line  with paragraph 1, subsection  (m). The decision                                                                    
was  whether  the  committee  wanted  to  deviate  from  the                                                                    
existing statute  for the purposes of  the calculation under                                                                    
subsection (g).                                                                                                                 
Vice-Chair Gara  explained the purpose of  the amendment. He                                                                    
recounted that  the legislature  had made  a policy  call to                                                                    
encourage  a future  gas pipeline  by  allowing certain  gas                                                                    
expenses to  be deducted from  oil taxes. He  indicated that                                                                    
one provision in  the current CS failed to  include the word                                                                    
"gas" which  created uncertainty  over whether  the previous                                                                    
policy was included in the CS.  He noted that the policy was                                                                    
not wholly embraced  and might be debated again  in a future                                                                    
legislature.  However,  Amendment  1 maintained  the  policy                                                                    
that future  gas expenses were  an allowable  deduction from                                                                    
oil production  taxes. Mr. Alper  clarified that  in current                                                                    
statute,  oil and  gas were  taxed  together establishing  a                                                                    
single  tax  on  the  North Slope.  Beginning  in  2022,  by                                                                    
existing law,  gas tax changed to  a gross tax. He  drew the                                                                    
committee's attention to  page 29 of the  CS, subsection (h)                                                                    
[AS 43.55.160 (h)]  line 16, relating to  oil produced after                                                                    
January 1,  2022, and  the words,  "oil produced."  He noted                                                                    
that  the  words   were  changed  from  "oil   and  gas"  in                                                                    
subsection (a)  of the  previous CS. He  pointed to  line 24                                                                    
that referred to the costs  to produce oil and gas deposits,                                                                    
and commented  the calculation against oil  revenues applied                                                                    
in  2022  according  to  a provision  adopted  by  the  28th                                                                    
legislature in 2014.  He referred to page  31, subsection ii                                                                    
[line 1] and  reported that the language  contained the same                                                                    
structure for calculating taxable  value for the purposes of                                                                    
the  new  15 percent  progressivity  bracket.  He cited  the                                                                    
language, "applicable to  the oil" on lines 12  and 20 [page                                                                    
31],  and  pointed  out  that the  references  to  gas  were                                                                    
missing  and  brought it  to  the  Co-Chair's attention.  He                                                                    
restated that  when correcting the  bill, the  drafters went                                                                    
further and  applied the  changes to  Middle Earth  and Cook                                                                    
Inlet in subsections  (b), (c), and (d).  He emphasized that                                                                    
the main concern  was how oil and gas were  taxed, which was                                                                    
specified  on  line  9  of the  amendment.  He  opined  that                                                                    
subsection  (b)  was  most likely  unnecessary  because  the                                                                    
Middle  Earth  credit  had never  been  used.  He  furthered                                                                    
clarified  that  subsection  (c)  related to  oil  that  was                                                                    
subject to the Middle Earth  4 percent gross tax cap through                                                                    
2027 and  subsection (d) referenced  the Cook Inlet  tax. He                                                                    
focused  attention  to   subsection  (a)  that  specifically                                                                    
addressed the relevant issue.                                                                                                   
2:24:13 PM                                                                                                                    
Representative  Pruitt  asked  whether  the  intent  of  the                                                                    
change meant  that the new  15 percent tax would  remain the                                                                    
same beyond 2022. Mr. Alper  answered in the affirmative. He                                                                    
explained that  the 25 percent  tax applied to the  net; gas                                                                    
and  oil   costs  were   deducted.  The   amendment  enabled                                                                    
subtraction  of gas  costs to  the base  tax. He  maintained                                                                    
that the amendment was not  merely a correction, but more of                                                                    
a policy amendment. He felt  that the amendment kept the new                                                                    
tax policy beyond  the 2022 timeframe and  was a substantial                                                                    
Representative Wilson MAINTAINED her OBJECTION.                                                                                 
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Gara, Grenn, Guttenberg,  Kawasaki, Ortiz, Foster,                                                                    
OPPOSED: Pruitt, Thompson, Tilton, Wilson.                                                                                      
The MOTION to ADOPT Amendment 1 PASSED (7/4).                                                                                   
Representative Wilson wondered whether  her Amendment 2 "was                                                                    
on the right track."                                                                                                            
2:27:44 PM                                                                                                                    
Representative  Wilson  commented  that   the  CS  was  much                                                                    
different from  the original  proposal. She  understood that                                                                    
it was  very similar to  Alaska's Clear and  Equitable Share                                                                    
(ACES) when applied to the lower  oil price ranges of $55 to                                                                    
$90 versus $100. She asked for comments.                                                                                        
2:28:49 PM                                                                                                                    
RICH  RUGGIERO, CONSULTANT,  CASTLE  GAP,  HOUSTON, TX  (via                                                                    
teleconference), commented that  her question contained many                                                                    
questions. He deduced that the CS  was not the same as ACES.                                                                    
The  CS  changed  to  a  progressive net  tax  with  a  much                                                                    
different  form of  progressivity.  He  delineated that  the                                                                    
progressivity was  much more  favorable to  issues regarding                                                                    
marginal tax rates  and only applied to  dollars and volumes                                                                    
above a certain  point, instead of being  retroactive to all                                                                    
volumes and profits. He offered  a high-level view regarding                                                                    
the bill.  He discerned that  Alaska had a very  complex tax                                                                    
system and  the complexity  could be  removed through  a tax                                                                    
system that  started taxing at  a low rate and  increased as                                                                    
the profitability  increased versus  the existing  high base                                                                    
rate with per  barrel credits, which was a  form of negative                                                                    
progressivity. He  had recommended an  alternative structure                                                                    
and  advised that  members review  the  "compendium" of  his                                                                    
former presentations.  He advised  utilizing "more  than two                                                                    
levels" for a net progressive  tax system. He indicated that                                                                    
the way  the CS was  crafted, heavy  oil and Cook  Inlet was                                                                    
not  included but  believed  they should  be  included as  a                                                                    
"multi-step  net  system"  versus   a  two-step  system.  He                                                                    
recommended  eliminating  Middle  Earth, Cook  Inlet,  North                                                                    
Slope, gas  and heavy oil  distinctions and utilize  one tax                                                                    
system. In  his tax scenario,  the decisions focused  on how                                                                    
much  the legislature  thought a  fair tax  rate was  at low                                                                    
profitability  and  how  high   a  tax  should  increase  as                                                                    
profitability improved.  He recounted  previously discussing                                                                    
achieving two  goals simultaneously: one was  addressing the                                                                    
taxable  credits issue  and the  other was  to maintain  oil                                                                    
throughput. He  thought that the legislation  solved some of                                                                    
the cashable credit  issues by removing some  of the state's                                                                    
financial burden. In  terms of increasing the  amount of oil                                                                    
in  the   pipeline,  he   felt  that   at  least   one  more                                                                    
progressivity step  was necessary  to account for  the lower                                                                    
unit profitability in Cook Inlet  and other areas to boil it                                                                    
down to  one tax  system. He  judged that  the more  the tax                                                                    
system was combined  into one simpler system  the less other                                                                    
elements  like oil  versus gas  expenses, state  and federal                                                                    
land issues, etc. needed to be factored in separately.                                                                          
2:33:56 PM                                                                                                                    
Representative  Wilson   provided  a   hypothetical  example                                                                    
regarding  non-transferrable   credits  between  exploration                                                                    
companies and  development companies. She  expressed concern                                                                    
regarding the  consequences of  the bill  being antithetical                                                                    
to the main  goal of incentivizing more  oil production. Mr.                                                                    
Ruggiero responded  that the  way to meet  the goal  of more                                                                    
oil  in  the pipeline  was  to  ensure development  lead  to                                                                    
production. He  heard concerns about companies  merely using                                                                    
the credits  as deductions  against income;  where companies                                                                    
purchased credits  and did not develop  fields. He concluded                                                                    
that the  goal of increased  production was not met  in that                                                                    
scenario. He warned that allowing  a third-party to purchase                                                                    
credits from  an explorer needed  a system that  ensured the                                                                    
credits  were used  in the  production  of new  oil and  not                                                                    
current  oil. Representative  Wilson agreed  and shared  the                                                                    
concern. She asked about the  provision that began to expire                                                                    
lease  expenditures after  7 years.  She asked  whether that                                                                    
would deter  developers that anticipated  unforeseen project                                                                    
delays.  Mr. Ruggiero  answered  that Representative  Wilson                                                                    
raised  a  valid concern  regarding  the  "forces outside  a                                                                    
company's control" that can influence  how quickly a project                                                                    
was  completed.  He  was   unclear  whether  the  seven-year                                                                    
timeframe  was  adequate.  He thought  that  data  regarding                                                                    
companies'  actual   experiences  should  be   accessed.  He                                                                    
deduced that the amount of  the total development costs that                                                                    
were  spent until  the  time of  the  delay was  encountered                                                                    
might  need to  be considered,  but  felt that  most of  the                                                                    
projects  costs were  not incurred  until after  the problem                                                                    
was solved  and development ramped  up. He favored  a cutoff                                                                    
date  because  it forced  the  discovery  into a  production                                                                    
2:38:23 PM                                                                                                                    
Representative   Wilson   mentioned   competitiveness.   She                                                                    
wondered  whether  the  bill made  Alaska  competitive.  Mr.                                                                    
Ruggiero  surmised  that  the  provision  to  move  from  50                                                                    
percent NOLs (net operating losses)  to 100 percent NOLs was                                                                    
beneficial  because it  allowed companies  to recover  costs                                                                    
and  kept the  state in  a competitive  position. He  stated                                                                    
that  the tax  rates in  the CS  were less  than many  other                                                                    
countries'  tax   rates.  He   furthered  that   timing  and                                                                    
minimizing  the risk  of cost  recovery played  an important                                                                    
role in  investment. He  indicated that  the CS  allowed for                                                                    
deductions  as soon  as revenues  were realized,  which kept                                                                    
Alaska in a  "very good competitive position."  He noted the                                                                    
necessity to factor in other  elements of the tax system for                                                                    
a  complete assessment  of competitiveness.  He provided  an                                                                    
example by questioning when and how  an NOL could be used in                                                                    
a scenario where  a company did not incur  enough revenue to                                                                    
cover current  expenses and carry  forwards. The  NOLs could                                                                    
be reduced or eliminated,  if current expenses were required                                                                    
to  be  deducted  first.  He  counseled  that  allowing  NOL                                                                    
deductions first provided a more  beneficial outcome for the                                                                    
company. He  advised that  the "nuts and  bolts" of  how the                                                                    
tax worked determined the competiveness of the system.                                                                          
2:41:19 PM                                                                                                                    
Representative Pruitt  asked whether  the provisions  in the                                                                    
CS  was  more  complex  or easier  to  administer  than  the                                                                    
current system. Mr. Ruggiero believed  the system was moving                                                                    
in  a  more  streamlined  direction.  Representative  Pruitt                                                                    
recalled  a  chart  from   previous  testimony  that  showed                                                                    
increases  and decreases  in tax  systems over  the last  10                                                                    
years. He asked  whether the CS included a  tax increase and                                                                    
where the state  fit in on the chart.  Mr. Ruggiero believed                                                                    
he was referencing the "IHS"  chart on fiscal regime changes                                                                    
that  was plotted  against the  price of  oil and  had green                                                                    
boxes  denoting more  favorable fiscal  terms by  government                                                                    
and orange boxes  for less favorable terms  [found in Castle                                                                    
Gap Advisors  presentation titled: "Petroleum  Fiscal Design                                                                    
HB  111"  March 23,  2017  slides  18  through 20  (copy  on                                                                    
file).]  He suspected  that  by simply  looking  at the  tax                                                                    
rates  payable  over a  range  of  taxes and  expected  unit                                                                    
profitability the  CS increased  taxes, but when  looking at                                                                    
the  overall package,  he  would have  to  examine the  bill                                                                    
further to  discover whether the  effects were  net positive                                                                    
or negative.                                                                                                                    
Co-Chair Foster  recognized Representative David  Eastman in                                                                    
the audience.                                                                                                                   
Representative Pruitt asked about  the issue of ring fencing                                                                    
for a company currently producing on the North Slope.                                                                           
2:45:57 PM                                                                                                                    
Mr.  Ruggiero  answered that  ring  fencing  by project  was                                                                    
prevalent worldwide.  Secondly, he referred to  AS 43.55.160                                                                    
(a) (1) and reported that  the tax system already included 7                                                                    
different  ring   fencing  options.  How  it   impacted  the                                                                    
traditional  3 legacy  producers on  the North  Slope versus                                                                    
the  new  producers  coming  in  required  analysis  of  new                                                                    
projects  versus the  legacy production  and the  ability to                                                                    
write   off  expenses   on   new   items  against   existing                                                                    
production.  He   defined  that  a  ring   fence  moved  the                                                                    
deduction out in time. The  deduction was still allowed, and                                                                    
he viewed the  effect as a time value loss  that depended on                                                                    
the  amount of  time to  determine whether  it was  a "major                                                                    
issue." Representative  Pruitt commented that  the committee                                                                    
had had  two days  to review the  bill. He  wondered whether                                                                    
the bill  needed more  time for review  or whether  two days                                                                    
was  enough. Mr.  Ruggiero opined  that he  would need  more                                                                    
time but understood the legislative process.                                                                                    
2:49:48 PM                                                                                                                    
Representative Pruitt asked how  Mr. Ruggiero viewed how the                                                                    
bill  would  impact  North Slope  investment.  Mr.  Ruggiero                                                                    
urged  members  to  look  at  likely  fields  to  come  into                                                                    
production within the next 5  years. Alaska only had limited                                                                    
types  of projects.  He suggested  obtaining  data from  the                                                                    
Department  of  Natural  Resources (DNR)  and  producers  to                                                                    
identify the projects and assess  the tax system against the                                                                    
projects.  He communicated  that  until  the state  analyzed                                                                    
projects  likely  to  come  online   it  was  impossible  to                                                                    
determine   how   taxes   would   affect   new   production.                                                                    
Representative Pruitt  used the  Armstrong Energy,  LLC. and                                                                    
Repsol oil find  as an example. He  communicated that Repsol                                                                    
was  an international  company with  investment dollars  and                                                                    
Armstrong  owned  the  leases  but were  not  producers.  He                                                                    
wondered how  the CS affected such  companies moving forward                                                                    
with production.  Mr. Ruggiero indicated that  every company                                                                    
used a set of criteria to  determine where to invest and the                                                                    
best  use its  resources.  He observed  that  a benefit  for                                                                    
Alaska was  that energy projects  had a long  life; industry                                                                    
tended to  invest in new  technology on long life  fields to                                                                    
increase  extraction.  He  reported  that  the  benefits  of                                                                    
switching  from  NOL credits  to  NOL  carry-forwards for  7                                                                    
years then reducing them 10  percent each year was currently                                                                    
unknown. He  reiterated his belief that  each project should                                                                    
be measured against  the tax system to  determine the impact                                                                    
on  overall  profitability  and the  timing  for  investment                                                                    
returns.  He   was  unable  to  offer   an  opinion  without                                                                    
performing  calculations  for each  project.  Representative                                                                    
Pruitt  referenced information  from Mr.  Ruggiero's initial                                                                    
presentation  [cited  earlier   in  the  meeting]  regarding                                                                    
"long-term drivers and  short-term drivers" that highlighted                                                                    
two  things that  helped to  fill the  pipeline: "more  from                                                                    
legacy  fields and  new big  North  Slope fields  developed"                                                                    
[slide  9].  He  questioned whether  the  legislation  would                                                                    
result  in  more  production  in   the  legacy  fields.  Mr.                                                                    
Ruggiero responded  that the CS  raised taxes  which lowered                                                                    
the producer's share of revenue.  He guessed that due to the                                                                    
lower  profitability environment,  companies would  view the                                                                    
CS negatively.                                                                                                                  
2:56:26 PM                                                                                                                    
Representative Pruitt  inquired whether the  legislation was                                                                    
representative  of  a  slight increase  or  a  "substantial"                                                                    
increase in  taxes, relative  to the  current price  of oil.                                                                    
Mr. Ruggiero  recounted that he had  cautioned against using                                                                    
"averaged"  data when  raising taxes.  He restated  that the                                                                    
impact  depended  on  the  "overall  profitability"  of  the                                                                    
specific field  and its cost structure.  He ascertained that                                                                    
the  per-barrel credit  was based  on market  price and  the                                                                    
current tax  was based on  unit profitability.  He discerned                                                                    
that in  terms of  averages, average field  costs and  a $30                                                                    
per-barrel  cost  structure;   fields  that  were  currently                                                                    
accruing 7  percent to 15  percent effective tax  rates paid                                                                    
the  base   rate  of  25  percent   under  the  legislation.                                                                    
Representative  Pruitt asked  how  Mr.  Ruggiero viewed  the                                                                    
legislation's effect  on new investment in  Alaska. He asked                                                                    
whether the tax  would be a deterrent for  new entrants. Mr.                                                                    
Ruggiero answered that "overall"  many oil regimes attracted                                                                    
"significant  investment" that  enacted multiple  changes to                                                                    
their fiscal  systems. He qualified  that the  changes moved                                                                    
in the "right direction;" higher  state take with higher oil                                                                    
prices  and lower  taxes at  lower oil  prices. He  remarked                                                                    
that the  unit costs  were high, and  the project  lead time                                                                    
was long in  Alaska along with other places in  the world. A                                                                    
new entrant  assessed the  two factors  against the  risk of                                                                    
profitable investment returns. He  perceived that Alaska was                                                                    
"still  attractive  to  new  entrants"  because  it  allowed                                                                    
investment cost  recovery as quickly  as production  and the                                                                    
market  price allowed.  He stated  that "players  that would                                                                    
come to  the Alaska North  Slope were not players  that were                                                                    
in  it  for  the   short-term."  He  added  that  short-term                                                                    
developers were  not the type  of companies the  state would                                                                    
want on  the North  Slope. Representative Pruitt  asked that                                                                    
in terms of  stability, whether the structure in  the CS was                                                                    
a concern  for long-term  entrants considering  operating on                                                                    
the  North Slope.  Mr. Ruggiero  felt  that producers  would                                                                    
view the  legislation unfavorably, but  producers understood                                                                    
the  economic reality  in  the  state and  that  it was  not                                                                    
uncommon for heavily oil dependent  regimes to engage in tax                                                                    
changes during fiscally challenging times.                                                                                      
3:03:07 PM                                                                                                                    
Vice-Chair  Gara recalled  Mr.  Ruggiero's term  "bracketed"                                                                    
when referring to the surcharge  at $60 in profits. He asked                                                                    
how the overall tax rate  increases compared to the previous                                                                    
two profits based tax systems.  Mr. Ruggiero compared the CS                                                                    
progressivity   to   the   progressivity   under   Petroleum                                                                    
Production Tax (PPT)  and ACES. He explained  that under PPT                                                                    
and ACES  "as the profit  per barrel increased the  tax rate                                                                    
increased and  the tax rate  was applied against  the entire                                                                    
production  tax value."  He compared  a bracketed  tax to  a                                                                    
wedding cake. The  25 percent was an overall  base rate, but                                                                    
the  next layer  up was  smaller; the  15 percent  surcharge                                                                    
only applied  above the  $60 price and  unlike PPT  and ACES                                                                    
was  not applicable  back  to the  first  dollar of  profit.                                                                    
Vice-Chair Gara  asked whether a  bracketed profits  tax was                                                                    
more  favorable to  industry. Mr.  Ruggiero replied  that he                                                                    
would "no-brainer" choose the current  CS versus ACES if his                                                                    
choice  was  the  way  brackets   were  handled  under  both                                                                    
systems. Vice-Chair  Gara referred  to "a law"  that reduced                                                                    
the payment from industry if  a company proved the reduction                                                                    
"made the  field economic."  He asked  how a  royalty relief                                                                    
statute  calculated   into  the  decision  to   invest.  Mr.                                                                    
Ruggiero  was  not  familiar with  requests  for  relief  in                                                                    
Alaska.  He  believed  that the  option  was  available  for                                                                    
producers  in  Alaska.  Vice-Chair Gara  asked  whether  Mr.                                                                    
Ruggiero thought royalty relief  was favorable for high cost                                                                    
fields.  Mr.  Ruggiero  answered   in  the  affirmative  but                                                                    
recommended  a much  lower tax  rate on  "a first  bracket,"                                                                    
therefore, low  profitability due  to high costs  garnered a                                                                    
lower tax. Vice-Chair  Gara wished the CS  addressed the low                                                                    
tax  situation  in  Cook  Inlet.  He  inquired  whether  Mr.                                                                    
Ruggiero  had  an  opinion  on   the  matter.  Mr.  Ruggiero                                                                    
responded that  the amount of  changes to the  tax structure                                                                    
was   the   committee's    decision.   He   reiterated   his                                                                    
recommendation to include more than two brackets in the CS.                                                                     
3:09:25 PM                                                                                                                    
Representative  Thompson   asked  whether  the   loss  carry                                                                    
forwards   and   the   ring  fencing   provisions   combined                                                                    
discourage  new  independents  and  their  ability  to  find                                                                    
investors. Mr.  Ruggiero responded  than what Alaska  had in                                                                    
comparison was  not different from other  regimes. He voiced                                                                    
that one  concern was  that the  ring fencing  provided less                                                                    
options  for  cashing  in  or  selling  out  and  the  costs                                                                    
remained with  the project, which  was the  practice "across                                                                    
the   world."   Representative   Thompson   expressed   some                                                                    
confusion  about ring  fencing.  Mr.  Ruggiero relayed  from                                                                    
personal experience  working in the United  Kingdom with two                                                                    
different  types of  fields  in the  North  Sea; one  highly                                                                    
profitable and  the other  with high  costs. The  ability to                                                                    
"cross  deduct  one versus  the  other"  was not  available;                                                                    
therefore, one field  paid high taxes while  the other field                                                                    
covered the  loss. He  was aware of  the situation  prior to                                                                    
investing and did  not view it negatively.  He worked harder                                                                    
to  increase  production  and  made  use  of  carry  forward                                                                    
3:12:17 PM                                                                                                                    
Representative  Tilton referred  to Mr.  Ruggiero statements                                                                    
regarding  moving  towards  a   simpler  system.  She  asked                                                                    
whether the  CS reflected his recommendations.  Mr. Ruggiero                                                                    
responded  that he  had  offered  more recommendations  that                                                                    
were not  included. He voiced  that in  the end, he  was not                                                                    
the decision maker. He noted  that if changes outside of his                                                                    
recommendations   were   made   he   would   offer   further                                                                    
suggestions  to  avoid  potential "pitfalls  and  unintended                                                                    
consequences"  from  the  decisions.  Representative  Tilton                                                                    
mentioned prior discussions regarding  increasing taxes at a                                                                    
lower  per-barrel  price  point,   which  was  the  opposite                                                                    
compared  to   other  regimes.   She  wanted   to  encourage                                                                    
competition and  wondered how higher  taxes at  lower prices                                                                    
per-barrel helped  Alaska. Mr. Ruggiero reiterated  that the                                                                    
whole tax  system required consideration and  he used Norway                                                                    
as  an example.  He  articulated  that two  of  the big  oil                                                                    
companies that  operated in Alaska  were major  investors in                                                                    
Norway and  every dollar of  production tax value  (PTV) was                                                                    
taxed  at  78 percent  by  a  combination of  petroleum  and                                                                    
corporate taxes.  He observed that  both companies  were not                                                                    
deterred  from investing  in  Norway.  Norway had  extremely                                                                    
favorable terms  for investment  recovery. He  believed that                                                                    
the  favorable terms  on investment  returns was  the reason                                                                    
investment  occurred  in  high  tax  regimes.  He  cautioned                                                                    
against  focusing  on  any  one  aspect  and  encouraged  an                                                                    
evaluation  of  the   tax  as  part  of   a  whole  package.                                                                    
Representative  Tilton asked  whether  two  days was  enough                                                                    
time to  assess how  all the  tax elements  worked together.                                                                    
Mr.  Ruggiero was  uncertain about  whether enough  time was                                                                    
allotted and  attributed the issue  to "the workings  of the                                                                    
legislature."  He  addressed   her  question  regarding  the                                                                    
interplay  of  the  tax provisions.  He  believed  that  the                                                                    
bracketed  tax, removing  the  per-barrel  credits, and  NOL                                                                    
provisions contained  in the CS  "fixed" many of  the issues                                                                    
he had  identified in the old  system and the prior  CS from                                                                    
the House Resources Committee version.                                                                                          
Vice-Chair  Gara  asked Mr.  Ruggiero  to  elaborate on  his                                                                    
comments concerning the improvements  in the current CS. Mr.                                                                    
Ruggiero  cited  his  assessment  of NOLs  in  the  document                                                                    
previously provided  to the committee  titled "Understanding                                                                    
the Impact of NOLs" dated March  29, 2017 (copy on file). He                                                                    
relayed that  his analysis discovered that  where a producer                                                                    
expected to recover costs through  deductions and not paying                                                                    
tax  during  cost recovery,  that  the  combination of  per-                                                                    
barrel credits,  Gross Value  Reductions (GVR),  floors etc.                                                                    
reduced NOLs  to approximately 30  percent or 60  percent or                                                                    
an  amount lower  than their  full value.  He added  that he                                                                    
could  not model  a  situation  where an  NOL  was above  80                                                                    
percent of its value. He reasoned  that the cause was due to                                                                    
the interaction  with the per-barrel  credits more  than the                                                                    
minimum  tax. He  pointed out  that  through elimination  of                                                                    
per-barrel credits  (based on market  price) and  basing the                                                                    
tax on unit profitability, the  focus of the taxation was on                                                                    
profitability.  He stated  that the  NOLs offered  more cost                                                                    
recovery and were more useful to the producers.                                                                                 
3:21:14 PM                                                                                                                    
Vice-Chair  Gara  remarked  that   in  the  House  Resources                                                                    
Committee version  the minimum tax  was raised to  5 percent                                                                    
and  the CS  eliminated the  increase on  the gross  tax. In                                                                    
addition, the  House Resources CS eliminated  the decreasing                                                                    
gross tax from  zero to 4 percent and adjusted  the tax to a                                                                    
minimum  of  4  percent.   The  current  CS  reinstated  the                                                                    
decreasing gross tax.  He asked how Mr.  Ruggiero viewed the                                                                    
changes.  Mr. Ruggiero  restated that  an evaluation  of the                                                                    
impact on  the entire tax  system on different  operators at                                                                    
different prices was preferable.  He deemed that eliminating                                                                    
the  5 percent  to  4  percent on  the  top grossing  amount                                                                    
lowered taxes and the 25 percent  tax at the first barrel of                                                                    
profitability   represented  an   increase  in   taxes.  The                                                                    
reinstatement of  the decreasing tax  was based on  very low                                                                    
prices that  were highly unlikely.  He doubted that  the tax                                                                    
had any effect at all; positive or negative.                                                                                    
Representative Wilson recounted that SB  21 was brought to a                                                                    
public vote.  She remarked that  since that  taxation system                                                                    
went into  effect oil  production increased.  She referenced                                                                    
Mr. Ruggiero's  remarks from previous testimony  that a more                                                                    
equitable  way to  deal  with cashable  credits  was to  add                                                                    
interest to NOLs to maintain  their value. She asked whether                                                                    
her interpretation was correct.  Mr. Ruggiero responded that                                                                    
he thought it would be fair  to eliminate the ability to use                                                                    
an   expense  as   a  cashable   credit  and   receive  cash                                                                    
immediately.  However, he  favored  some  "uplift" with  the                                                                    
expectation  that expenses  were recovered  from production,                                                                    
in consideration  of the  time value  of money  between when                                                                    
the  expenses occurred  and when  the costs  were recovered.                                                                    
Representative Wilson asked Mr. Ruggiero  if he was aware of                                                                    
any location  in the world  where a system appeared  to work                                                                    
and  was  changed in  a  period  of low  profitability.  Mr.                                                                    
Ruggiero referred to the IHS  chart he previously discussed.                                                                    
He noted that many changes  were instituted in many regimes.                                                                    
He emphasized  that the scenario  was not the first  time an                                                                    
increase   happened  in   a  low-price   environment  by   a                                                                    
government  that  heavily  relied  on oil  revenue  for  its                                                                    
3:26:05 PM                                                                                                                    
Representative  Wilson  remarked  that  he  had  stated  the                                                                    
legislation had many moving parts.  She anticipated that the                                                                    
oil  producers would  "react" to  the changes.  She wondered                                                                    
whether the  legislature should have a  better understanding                                                                    
of how  the bill worked  to avoid revisiting the  issue next                                                                    
year.   Mr.   Ruggiero   restated   that   issue   was   the                                                                    
legislature's decision.  He thought that small  changes were                                                                    
easier  to adopt;  the consequences  would be  discovered by                                                                    
the actions of  the producers. He voiced  that major changes                                                                    
necessitated more  time. Representative  Wilson asked  if he                                                                    
thought the CS was a major  change or a moderate change. Mr.                                                                    
Ruggiero  assessed that  the changes  in the  CS were  "very                                                                    
small  or  moderate."  He   recommended  eliminating  the  7                                                                    
different  categories  of  taxes currently  in  statute  (AS                                                                    
43.55.160),  Middle  Earth,  Cook  Inlet,  and  North  Slope                                                                    
distinctions  and employ  a  bracketed system  with  4 to  5                                                                    
brackets to simplify the tax  system for all. The simplified                                                                    
system  provided incentives  to small  new entities  or high                                                                    
cost projects  and appropriately  taxed large  companies and                                                                    
profitable projects.  Representative Wilson opined  that the                                                                    
simplified system would not  incentivize more oil production                                                                    
in the state.                                                                                                                   
3:29:04 PM                                                                                                                    
Representative Wilson MOVED to ADOPT Amendment 2.                                                                               
     Page I, lines I- 9:                                                                                                        
     2    Delete all material and insert:                                                                                       
     3    ""An Act relating to the interest applicable to                                                                       
     delinquent oil and gas production                                                                                          
     4    tax; relating to the net operating loss credit                                                                        
     against the oil and gas production tax;                                                                                    
     5    relating to lease expenditures; and providing for                                                                     
     an effective date.""                                                                                                       
     7    Page I, line 11, through page 2, line 16:                                                                             
     8    Delete all material. 9                                                                                                
     10   Page 2, line 17:                                                                                                      
     11   Delete "Sec. 3"                                                                                                       
     12   Insert "Section l"                                                                                                    
     14   Renumber the following bill sections accordingly.                                                                     
     16   Page 3, line 12, through page 21, line 28:                                                                            
     17   Delete all material. 18                                                                                               
     19   Renumber the following bill sections accordingly.                                                                     
     21   Page 22, line 29:                                                                                                     
     22   Delete "[OR (g)]"                                                                                                     
     23   Insert "or (g)"                                                                                                       
     2    Page 23, line 1, through page 27, line 24:                                                                            
     3    Delete all material. 4                                                                                                
     5    Renumber the following bill sections accordingly.                                                                     
     7    Page 27, line 28:                                                                                                     
     8    Delete "(h) (l) [(h)]"                                                                                              
     9    Insert "(h)"                                                                                                          
     11   Page 28, line 5:                                                                                                      
     12   Delete "(h) (l) (C) [(h) (3)]"                                                                                        
     13   Insert "(h) (3)" 14                                                                                                   
     15   Page 28, line 15, through page 31, line 28:                                                                           
     16   Delete all material. 17                                                                                               
     18   Renumber the following  bill sections accordingly.                                                                    
     20   Page 32, lines 21 - 30:                                                                                               
     21   Delete all material and insert:                                                                                       
     22   "(3) lease expenditures, as  adjusted under (m) of                                                                    
     this section, that                                                                                                         
     23   (A)  met the  requirements of  AS 43.55.160(e)  in                                                                    
     the year that                                                                                                              
     24   the lease expenditures were incurred;                                                                                 
     25   (B)  were         deductible        in         the                                                                    
     immediately    preceding    10                                                                                             
     26   calendar  years, not  counting the  year in  which                                                                    
     the expenditure   was                                                                                                      
     27   incurred;                                                                                                             
     28   (C)  have not  been deducted in  the determination                                                                    
     of the                                                                                                                     
     29   production  tax  value of  oil  and  gas under  AS                                                                    
     43.55.160(a) in a previous                                                                                                 
     30   calendar year;                                                                                                        
     31   (D)  were not  the basis  of a  credit under  this                                                                    
     title; and                                                                                                                 
     1    (E)  were incurred  to  explore  for, develop,  or                                                                    
     produce an oil                                                                                                             
     2    or gas  deposit located north of  68 degrees North                                                                    
     4    Page 32, line 31, through page 33, line 10:                                                                           
     5    Delete all material and insert:                                                                                       
     6    "* Sec.  5. AS  43.55.165 is  amended by  adding a                                                                    
     new subsection to read:                                                                                                    
     7    (m) A loss  carried forward under (a)  (3) of this                                                                    
     section shall increase in value                                                                                            
     8    at a rate of 10  percent, compounded annually.  An                                                                    
     increase in value under this                                                                                               
     9    subsection begins  to accrue  on January I  of the                                                                    
     calendar year immediately following                                                                                        
     10   the calendar    year   in  which   the    loss was                                                                    
     accrued   and   no longer   accrues on                                                                                     
     11   December  31  of  the  calendar  year  immediately                                                                    
     preceding the calendar year in which a                                                                                     
     12   carried-forward  annual  loss  is  applied.    The                                                                    
     increase in value accrued under this                                                                                       
     13   subsection has no value except  as applied in this                                                                    
     section. An increase in value may not                                                                                      
     14   accrue                                                                                                                
     15   (I) for a partial calendar year;                                                                                      
     16   (2) for  more than 10 calendar  years, consecutive                                                                    
     or nonconsecutive; or                                                                                                      
     17   (3) on a loss carried  forward by a producer whose                                                                    
     average amount of                                                                                                          
     18   oil and  gas produced a  day and taxable  under AS                                                                    
     43.55.0ll (e) is more than 50,000                                                                                          
     19   BTU  equivalent barrels  during the  calendar year                                                                    
     that the loss was accrued." 20                                                                                             
     21   Page 33, line 11, through page 38, line 4:                                                                            
     22   Delete all material and insert:                                                                                       
     23   "*  Sec. 6.  The uncodified  law of  the State  of                                                                    
     Alaska is amended by adding a new section to                                                                               
     24   read:                                                                                                                 
     25   APPLICABILITY. (a) AS  43.55.023(b), as amended by                                                                    
     sec. 2 of this Act, applies to                                                                                             
     26   lease  expenditures  incurred   on  or  after  the                                                                    
     effective date of sec. 2 of this Act.                                                                                      
     27   (b)  AS 43.55.165(a)  (3) and  43.55.165(m), added                                                                    
     by secs. 4 and 5 of this Act, apply to                                                                                     
     28   a  lease  expenditure  incurred on  or  after  the                                                                    
     effective date of secs. 4 and 5 of this Act." 29                                                                           
     30   Renumber the following bill sections accordingly.                                                                     
     1    Page 38, line 14:                                                                                                     
     2    Delete "Section 3"                                                                                                    
     3    Insert "Section l" 4                                                                                                  
     5    Page 38, line 15:                                                                                                     
     6    Delete "Sections 3, 30, 36, and 37"                                                                                   
     7    Insert "Sections 1, 7, and 8" 8                                                                                       
     9    Page 38, line 17:                                                                                                     
     10   Delete "Section 26"                                                                                                   
     11   Insert "Section 4" 12                                                                                                 
     13   Page 38, line 19:                                                                                                     
     14   Delete "secs. 38 and 39"                                                                                              
     15   Insert "secs. 9 and 1O"                                                                                               
Co-Chair Seaton OBJECTED.                                                                                                       
Representative Wilson explained  the amendment. She remarked                                                                    
that  the goal  was to  address the  state's liability  from                                                                    
cashable credits.  She explained that the  amendment deleted                                                                    
most of the  bill, converted the cashable  credits into NOLs                                                                    
that accrued  interest to protect  their initial  value, and                                                                    
only  applied  to  the   smaller  companies  that  currently                                                                    
received the  credits. In  addition, the  lease expenditures                                                                    
were  extended  to  10  years  and  would  end  without  any                                                                    
decrease  in   value  over  time.  She   believed  that  the                                                                    
extension  would address  unanticipated  project delays  and                                                                    
would offer a tax benefit.                                                                                                      
Co-Chair Seaton MAINTAINED his OBJECTION.                                                                                       
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Pruitt, Thompson, Tilton, Wilson.                                                                                     
OPPOSED:  Grenn,   Guttenberg,   Kawasaki,   Gara,   Seaton,                                                                    
The MOTION to adopt Amendment 2 FAILED (4/7).                                                                                   
Vice-Chair  Gara  reviewed  the new  Department  of  Revenue                                                                    
(DOR) fiscal note allocated to  the Tax Division. He pointed                                                                    
to  page 4  of the  fiscal note  analysis, which  included a                                                                    
chart that  reported the bill's  revenue impact.  He relayed                                                                    
that the impacts  were $20 million in FY 18,  $85 million in                                                                    
FY 19,  $90 million in  FY 20, $100  million in FY  21, $145                                                                    
million in FY  22, and $190 million in FY  23. He noted that                                                                    
the increases  were based on  forecasted rising  oil prices.                                                                    
He reported a capital cost of $1.2 million.                                                                                     
3:34:00 PM                                                                                                                    
Representative Wilson  remarked that DOR testified  in prior                                                                    
testimony  that  the  price  of  oil  was  not  expected  to                                                                    
increase soon.  She wondered whether any  other factors were                                                                    
taken into consideration when  predicting the bill's revenue                                                                    
impact. Mr. Alper responded that  the numbers built into the                                                                    
fiscal  note  were  predicated  on  the  Fall  2016  revenue                                                                    
forecast.  The numbers  reflected a  situation where  as the                                                                    
price of oil rose above  $50 to $55 it initiated significant                                                                    
change in  the use of  the per-barrel credit.  He delineated                                                                    
that  the   reason  total  revenue   did  not   also  change                                                                    
dramatically was due  to the 4 percent minimum  tax floor. A                                                                    
company only used  a small portion of  its per-barrel credit                                                                    
at  $50 to  $52 oil  before  the credit  bumped against  the                                                                    
floor, as the price increased  more of the per-barrel credit                                                                    
was used before  the minimum tax was reached.  He noted that                                                                    
the amount  of per-barrel  credit offset on  line 5,  of the                                                                    
chart  grew significantly  larger as  more use  of the  per-                                                                    
barrel credit  was used  to achieve  the minimum  tax floor.                                                                    
Representative   Wilson  asked   whether  the   calculations                                                                    
included  volume.  Mr.  Alper replied  in  the  affirmative.                                                                    
Representative  Wilson asked  whether the  expected increase                                                                    
in oil production  was based on the tax structure  in SB 21.                                                                    
Mr. Alper  responded that future oil  production projections                                                                    
were based on  "a number of things including  what was known                                                                    
about  company  investments."  He   did  not  attribute  the                                                                    
forecast  to  "any  particular law."  Representative  Wilson                                                                    
queried whether Mr. Alper was  suggesting that no matter how                                                                    
much a  company was  taxed its  behavior remained  the same.                                                                    
Mr.  Alper responded  that  it was  reasonable  to say  that                                                                    
significant changes to a tax  system would change companies'                                                                    
behavior.  Representative   Wilson  asked  whether   it  was                                                                    
accurate to  say that the state  had not seen the  amount of                                                                    
increased  production  in  the   last  14  years  since  the                                                                    
inception of SB  21. Mr. Alper reported  that the production                                                                    
of oil increased  last year over the year prior  and was the                                                                    
first increase since 2001. He  agreed that her statement was                                                                    
correct. Representative Wilson asked  how Mr. Alper made the                                                                    
analogy  considering the  production  increases because  the                                                                    
state taxed  companies fairly  under SB  21. She  asked what                                                                    
kind  of response  the state  should expect  under increased                                                                    
taxes. Mr. Alper  responded that he thought it  was a matter                                                                    
of  opinion  and speculation  and  he  could not  accurately                                                                    
answer  the question.  Representative Wilson  disagreed with                                                                    
the fiscal  note and commented that  fiscal note information                                                                    
should be accurate.                                                                                                             
Mr. Alper  directed member's attention to  the note included                                                                    
on page 4 of the fiscal note. He read the following:                                                                            
     Note:  The  fiscal  impact  of   this  proposal  is  an                                                                    
     estimate  based  on  the Fall  2016  revenue  forecast.                                                                    
     Estimates shown  here are draft/preliminary  data based                                                                    
     on our  interpretation of possible changes,  and do not                                                                    
     include any changes in company  behavior as a result of                                                                    
     the   proposal.   We   reserve  the   right   to   make                                                                    
     modifications to  estimates for any  forthcoming fiscal                                                                    
Mr.  Alper shared  that  the department  was  not trying  to                                                                    
interpret any  changes in  company behavior,  investment, or                                                                    
3:40:36 PM                                                                                                                    
Representative  Guttenberg  voiced  the difficulty  for  Mr.                                                                    
Alper  to   speculate  on  activity   that  took   place  in                                                                    
boardrooms  full  of   local,  national,  and  international                                                                    
corporations. He believed  that it was DOR's  job to present                                                                    
the best  facts and not  forecast based on  assumptions that                                                                    
were impossible  to predict. He  stressed that  "things that                                                                    
happened during  the time SB  21 was  in place did  not mean                                                                    
they were  the result of  SB 21."  Mr. Alper added  that the                                                                    
fiscal note was mostly a  "mathematical exercise" based on a                                                                    
3:42:20 PM                                                                                                                    
Co-Chair  Seaton  MOVED to  report  CSHB  111 (FIN)  out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal note.                                                                                                       
Representative Wilson OBJECTED.                                                                                                 
Representative  Wilson spoke  to  her  objection and  stated                                                                    
that "Alaskans would  be the true losers." She  spoke to job                                                                    
losses on the North Slope.  She agreed that cashable credits                                                                    
were  problematic. She  suggested  addressing the  situation                                                                    
with adding  interest to NOLs.  She described  provisions in                                                                    
the CS she felt were  damaging to the state: the elimination                                                                    
of the  utilization of cashable  credits as  collateral, and                                                                    
transferrable  credits.  She  declared  that  the  citizenry                                                                    
spoke when  they voted for SB  21. She suggested that  SB 21                                                                    
was  working,  and  more  fields  were  coming  online.  She                                                                    
anticipated that  company behaviors would likely  change and                                                                    
continued to  argue against  the CS.  She believed  that the                                                                    
oil industry  "paid the bills  for the state" and  was being                                                                    
penalized for  making a profit.  She believed that  the bill                                                                    
would  stop exploration  and increase  oil  job losses.  She                                                                    
believed that Alaska was owed  a good portion of revenue for                                                                    
its resources, but the state  received a lot of revenue from                                                                    
royalties and corporate taxes. She  was thankful for the oil                                                                    
companies  and  predicted  a loss  in  state  revenues.  She                                                                    
apologized  to the  oil companies  for the  legislation that                                                                    
she could not stop.                                                                                                             
Representative Thompson  compared the  bill to  his property                                                                    
tax at  home. The bill  was tripling the tax  and negatively                                                                    
impacted  production,  jobs,  and  investment.  He  strongly                                                                    
opposed the bill.                                                                                                               
Co-Chair Foster acknowledged  Representative Chenault in the                                                                    
3:48:33 PM                                                                                                                    
Vice-Chair  Gara  relayed  that  Mr.  Ruggiero  stated  that                                                                    
Alaska was still attractive to  new entrants under the bill.                                                                    
He elaborated  that many  fields paid  no production  tax to                                                                    
the state; the CS raised  taxes above zero. He reported that                                                                    
as new production took the  place of older field production,                                                                    
the  state would  have more  and more  fields in  the future                                                                    
that  had a  zero percent  production  rate up  to $70  per-                                                                    
barrel for the  first seven years of  production. He thought                                                                    
the  public was  right in  wanting to  balance the  public's                                                                    
interest  and treat  producers fairly.  He thought  zero was                                                                    
out of  balance. He thought  the public wanted to  know that                                                                    
if they  were being  asked to "chip  in," the  oil companies                                                                    
were  also  expected  to  chip  in.  He  noted  that  Conoco                                                                    
Phillips had  made a profit  in the previous year  in Alaska                                                                    
at $41 per-barrel, but lost  revenue elsewhere in the world.                                                                    
He  thought the  tax  was  fair and  was  raised or  lowered                                                                    
according to  profits. He related that  the bill established                                                                    
a "modest profits tax rate  of 25 percent." He reported that                                                                    
if a  field was  not profitable, a  company was  not charged                                                                    
the 25 percent  profit tax and only paid the  3 or 4 percent                                                                    
gross tax. He reminded the  committee that under Alaska law,                                                                    
a  royalty  relief  reduction  was  available  under  proven                                                                    
"uneconomic"  circumstances. The  relief offset  the 3  or 4                                                                    
percent gross tax  by 7 to 13 percent  in royalty reduction,                                                                    
which he  believed was  more generous  and erased  the gross                                                                    
tax. He  mentioned three previous  cases of  royalty relief.                                                                    
He  believed   the  bill  balanced  both   the  state's  and                                                                    
industry's  interest.   He  cited  Mr.   Ruggiero  statement                                                                    
regarding  the   modest  nature   of  the  tax   change.  He                                                                    
characterized  the bill  as  instituting  a "modest  profits                                                                    
tax." In addition, the bill  offered NOLs and carry forwards                                                                    
on losses. He felt that the bill was fair and balanced.                                                                         
3:54:44 PM                                                                                                                    
Representative Pruitt declared that  he ascertained that the                                                                    
bill increased taxes.  He reported that BP  lost $87 million                                                                    
and paid $822  million in royalties and taxes  over the last                                                                    
two years  according to the  Alaska Journal of  Commerce. He                                                                    
highlighted how difficult  it was to get  royalty relief. He                                                                    
reported from the Petroleum News,  December 2014 that only 8                                                                    
cases were submitted to the  Department of Natural Resources                                                                    
(DNR) for royalty  relief since 1995, and  only two resulted                                                                    
in royalty  relief. He  stated that  royalty relief  was not                                                                    
"prevalent." He read from BP  talking points that called the                                                                    
CS  a "rig  killer" for  the North  Slope legacy  fields. He                                                                    
believed  that  the  oil  companies  would  reduce  spending                                                                    
resulting in  job loss and reduced  throughput. In addition,                                                                    
lower  property  tax  values   were  a  possible  "ancillary                                                                    
effect."  He  disagreed  with   increasing  taxes  when  the                                                                    
industry  was  "struggling" and  felt  the  action sent  the                                                                    
wrong  message to  business. He  acknowledged that  cashable                                                                    
credits needed changing  but thought the bill  went too far.                                                                    
He  spoke of  people crying  when he  last campaigned  going                                                                    
door  to door  and hearing  from constituents  who had  lost                                                                    
their  jobs because  of  the  low oil  price.  He felt  that                                                                    
current  job losses  were caused  by the  "inability of  the                                                                    
legislature  to  control  its   own  budget."  He  cautioned                                                                    
against supporting the legislation.                                                                                             
3:59:53 PM                                                                                                                    
Representative  Kawasaki remarked  that he  did not  want to                                                                    
see anyone  cry. He relayed  that BP had just  published its                                                                    
annual report for  2016. The report noted that  BP made $115                                                                    
million worldwide  and $85 million  of the total  was profit                                                                    
from Alaska. He  did not believe the bill  would decrease or                                                                    
cease production in  the state. He would be  voting in favor                                                                    
of the bill.                                                                                                                    
Co-Chair Foster acknowledged  Representative Zach Fansler in                                                                    
the audience.                                                                                                                   
Co-Chair Seaton  commented on  the remarks  regarding having                                                                    
to  revisit  the  issue  next   session  due  to  unintended                                                                    
consequences. He thought that if  the CS was not adopted the                                                                    
legislature would  have to  deal with  another oil  tax bill                                                                    
next  year. He  believed that  industry was  aware that  the                                                                    
current tax system  was unworkable and was  not designed for                                                                    
the  low  oil  price  environment. Solving  the  matter  now                                                                    
ensured  that a  bill  was not  necessary  next session.  He                                                                    
offered that the  tax was based on profits and  was what the                                                                    
industry had wanted for many  years. In response to industry                                                                    
testimony, the  bill only applied  to profitable  fields and                                                                    
at over  $60 PTV  per-barrel a  15 percent  surcharge kicked                                                                    
in, but  only on  the amount  over and  above $60.  He added                                                                    
that  the  bill  eliminated detrimental  cash  credits,  but                                                                    
offered carry  forward NOLs at  100 percent for 7  years. He                                                                    
reasoned that  the 7-year limit incentivized  production but                                                                    
offered time  sensitivity for non-production. He  noted that                                                                    
ring fencing  on net operating  losses primarily  applied to                                                                    
new fields where companies were  producing or exploring. The                                                                    
NOL's  were not  transferrable for  legacy fields  that were                                                                    
operating and profitable and left  new field undeveloped. He                                                                    
believed that transferring NOLs  to offset profitable legacy                                                                    
field taxes  as a  way to increase  oil production  "made no                                                                    
sense". He  maintained that ring  fencing NOLs  would "push"                                                                    
project  development. He  felt that  the bill  was balanced,                                                                    
and supported the legislation.                                                                                                  
Representative Wilson MAINTAINED her OBJECTION.                                                                                 
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Guttenberg, Kawasaki, Ortiz, Gara, Foster, Seaton                                                                     
OPPOSED: Pruitt, Thompson, Tilton, Wilson, Grenn                                                                                
The MOTION to REPORT OUT CSHB 111 (FIN) PASSED (6/5).                                                                           
CSHB  111 (FIN)  was REPORTED  OUT of  committee with  4 "do                                                                    
pass" recommendations,  4 "do  not pass"  recommendations, 2                                                                    
"no     recommendation"    recommendations,     1    "amend"                                                                    
recommendation, and  with a  new fiscal  impact note  by the                                                                    
Department of Revenue.                                                                                                          
Co-Chair  Foster  reviewed  the  agenda  for  the  following                                                                    
Co-Chair Foster recessed the meeting  to a Call of the Chair                                                                    
[Note: the meeting never reconvened].                                                                                           

Document Name Date/Time Subjects
SB 26 CS version U.pdf HFIN 4/8/2017 1:00:00 PM
SB 26
SB 26 Comparision_Senate to House Finance CS_4.7.2017.pdf HFIN 4/8/2017 1:00:00 PM
SB 26
HB 111 Amendment #1.pdf HFIN 4/8/2017 1:00:00 PM
HB 111
HB 111 DOR Tax Division NEW FN 4-7-17.pdf HFIN 4/8/2017 1:00:00 PM
HB 111
HB 111 Gara 4.8.17 Potential Maximum Royalty Reduction Allowed Under Royalty Relief.pdf HFIN 4/8/2017 1:00:00 PM
HB 111
HB 111 Amendment 2 Wilson.pdf HFIN 4/8/2017 1:00:00 PM
HB 111