Legislature(2013 - 2014)BARNES 124

02/11/2013 01:00 PM RESOURCES


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01:02:51 PM Start
01:03:11 PM HB72
03:04:28 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 72 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Presentation by Bill Sponsor
+ Bills Previously Heard/Scheduled TELECONFERENCED
               HB  72-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:03:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE announced  that  the only  order  of business  is                                                               
HOUSE BILL NO. 72, "An  Act relating to appropriations from taxes                                                               
paid under  the Alaska Net  Income Tax  Act; relating to  the oil                                                               
and gas production  tax rate; relating to gas used  in the state;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to oil  and gas production  tax credits                                                               
for  certain losses  and expenditures;  relating to  oil and  gas                                                               
production tax  credit certificates; relating  to nontransferable                                                               
tax credits based on production; relating  to the oil and gas tax                                                               
credit  fund;  relating to  annual  statements  by producers  and                                                               
explorers; relating  to the determination  of annual oil  and gas                                                               
production   tax  values   including  adjustments   based  on   a                                                               
percentage  of  gross  value  at the  point  of  production  from                                                               
certain leases  or properties; making conforming  amendments; and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
1:04:07 PM                                                                                                                    
                                                                                                                                
DAN  SULLIVAN,  Commissioner,  Department  of  Natural  Resources                                                               
(DNR),  began  his co-introduction  of  HB  72 with  Commissioner                                                               
Bryan  Butcher,  Department  of  Revenue   (DOR),  by  way  of  a                                                               
PowerPoint presentation  entitled, "A Durable Tax  System that is                                                               
Competitive for  the Long Term."   He said HB 72  is important to                                                               
the  state, present-day  Alaskans, and  future generations.   The                                                               
presentation  will  provide  a  background  of  the  Trans-Alaska                                                               
Pipeline System (TAPS) challenges,  review the investment that is                                                               
happening  throughout the  U.S. and  the world  which is  hitting                                                               
all-time records,  and show that  the TAPS throughput  decline is                                                               
not inevitable.   He said the  basis for the bill  comes from the                                                               
integrated  efforts of  DNR  and DOR.   He  shared  that he  just                                                               
returned from  the North American  Petroleum Expo  (NAPE) meeting                                                               
in Houston,  Texas, where  the state made  a presentation  and he                                                               
had the opportunity to meet with several companies.                                                                             
                                                                                                                                
1:06:50 PM                                                                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN said TAPS is  a critical state and national                                                               
energy  infrastructure asset  [slide  2].   The  history of  TAPS                                                               
shows the  important role played  by the federal  government, and                                                               
Congress in  particular, in  getting TAPS up  and running.   That                                                               
federal  partnership  is needed  to  turn  around the  throughput                                                               
decline, but  it has not  been seen.   At one point  TAPS carried                                                               
2.2  million  barrels a  day,  representing  25 percent  of  U.S.                                                               
domestic production  [slide 3].   [The decline] is  important and                                                               
urgent  to the  state.   Referring to  the "giveaway"  discussion                                                               
that  has occurred  over the  past several  years, he  maintained                                                               
that the ultimate giveaway is the  loss of 40,000 barrels per day                                                               
over  the past  year that  is  no longer  in the  pipeline or  in                                                               
Alaska's economy.   That is about 14.7 million  barrels lost over                                                               
the past  year, which at  $100 per  barrel is about  $1.5 billion                                                               
that is  gone and  no longer  in the  Alaska economy,  whether in                                                               
state coffers  or circulating  around the economy.   That  is the                                                               
giveaway the administration is trying to turn around.                                                                           
                                                                                                                                
1:09:24 PM                                                                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN  turned to a graph  depicting the challenge                                                               
of declining Alaska  North Slope (ANS) production [slide  4].  He                                                               
stressed that a  mature field, like Prudhoe Bay, is  not the same                                                               
thing  as  a mature  basin.    Significant opportunity  for  both                                                               
conventional  and unconventional  oil still  exists on  the North                                                               
Slope.   He related  that in his  meetings with  other companies,                                                               
the  consistent theme  is  that almost  every  company sees  this                                                               
basin as providing enormous opportunity.                                                                                        
                                                                                                                                
COMMISSIONER SULLIVAN  pointed out  the urgency  to the  state of                                                               
the TAPS throughput  decline challenge [slide 5].   Two years ago                                                               
TAPS had a shutdown when it  was 40 degrees below 0, and although                                                               
the  state dodged  the  bullet  it was  not  clear  at that  time                                                               
whether the  pipeline could be  brought back  up.  This  issue is                                                               
not a scare  tactic, but a problem  that is in the  present.  The                                                               
lesson learned is  that the lower the TAPS output,  the more risk                                                               
like what happened two years  ago.  Companies are certainly going                                                               
to be  spending more  dollars to  maintain the  infrastructure to                                                               
avoid  these   kinds  of  technical  challenges,   but  that  has                                                               
consequences for tariffs and less  revenue for the state, and for                                                               
companies that want  to come to Alaska.  The  best way to address                                                               
any of these challenges in  technical aspects of a premature TAPS                                                               
shutdown is to get more oil in the pipeline.                                                                                    
                                                                                                                                
1:11:53 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  SULLIVAN said  the state  has many  positive things                                                               
going for it to address this  challenge [slide 6].  Number one is                                                               
that the North  Slope is a world class hydrocarbon  basin that is                                                               
still relatively unexplored.  He  related that the administration                                                               
thinks  the state  has enough  resources, and  the potential  for                                                               
resources, to secure  the state's future for decades  to come, an                                                               
important  point   for  how  to   address  the   TAPS  throughput                                                               
challenges.   Turning  around the  TAPS  throughput challenge  is                                                               
going  to require  billions of  dollars of  additional investment                                                               
[slide 7].   The North  Slope is one of  the few places  in North                                                               
American where  both large conventional  and shale oil  plays can                                                               
be looked for at the same time.                                                                                                 
                                                                                                                                
1:13:42 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  SULLIVAN stated  that  when looking  at  HB 72,  an                                                               
important consideration is the energy  production going on in the                                                               
U.S. and  globally [slide  8].  The  "World Energy  Outlook 2012"                                                               
report,  put  out  by  the  International  Energy  Agency  (IEA),                                                               
predicts that  the U.S. will be  the largest producer of  oil and                                                               
gas by  2020.  This  huge renaissance  of oil and  gas production                                                               
bodes well for Alaska.  Plus, there  has also been a huge boom in                                                               
global  investment in  oil and  gas  exploration and  production.                                                               
Last year the  Financial Times estimated that  about $600 billion                                                             
was spent on exploration, much of  that going to countries in the                                                               
Organisation  for Economic  Co-operation and  Development (OECD),                                                               
which  includes  the U.S.    The  good  news  is that  for  2013,                                                               
[exploration  and production]  spending is  projected to  be $650                                                               
billion.   The more depressing  news is  that in 2012  Alaska got                                                               
about one-half of  one percent of that, despite  sitting on still                                                               
one  of the  world's great  hydrocarbon basins.   He  said Alaska                                                               
needs  to be  leading, not  an  anchor, on  this American  energy                                                               
production renaissance and  needs to be focused  on becoming more                                                               
competitive to get in on  this boom in exploration and production                                                               
investment that is predicted to continue this year.                                                                             
                                                                                                                                
1:15:41 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  SULLIVAN said  the administration,  as well  as the                                                               
companies, believe  Alaska has the  geology [slide 9].   A global                                                               
investment boom is  happening, but the question  still remains as                                                               
to whether  [Alaska's production  decline] can be  turned around.                                                               
The  administration looked  at whether  other basins  have turned                                                               
around their  throughput declines  and found that  their declines                                                               
have not only flattened out but  have come back up.  The articles                                                               
shown on slide 9  are examples of what is predicted  to be a very                                                               
strong investment boom  in the United Kingdom's (UK)  oil and gas                                                               
sector.   A  couple  years ago  the  UK raised  its  oil and  gas                                                               
production taxes  and not surprising  was a  decline.  So  the UK                                                               
government reformed its taxes which  resulted in an immediate and                                                               
significant impact  on investment and  jobs, an analog  to Alaska                                                               
that is very relevant.                                                                                                          
                                                                                                                                
1:17:41 PM                                                                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN  pointed out  that there are  many examples                                                               
in  individual fields,  as well,  one example  being the  Forties                                                               
Field in the  North Sea [slide 10].   Apache Corporation acquired                                                               
that  field  from  BP  and with  investment  and  technology  the                                                               
decline was reversed.  It is  important to learn lessons from the                                                               
many examples  that are being seen  all over the globe,  he said.                                                               
Alaska is one of the few big  basins not seeing a turn around and                                                               
it is important  to address that [slide 11].   The administration                                                               
is  addressing  that by  undertaking  a  comprehensive plan.    A                                                               
missing  piece with  regard to  competitiveness is  the issue  of                                                               
making  Alaska's  tax regime  more  competitive.   Common  themes                                                               
heard at  last week's North  American Petroleum Expo  (NAPE) were                                                               
the  recognition of  a huge  resource basin  on the  North Slope,                                                               
enormous  opportunity,  but  also   the  cost.    In  particular,                                                               
questions  were  being  asked   about  Alaska's  taxes  and  more                                                               
specifically about  progressivity.   He found that  companies are                                                               
keeping an  eye on what  is happening in Alaska  this legislative                                                               
session  and Alaska's  competitiveness  is at  the forefront  for                                                               
those companies that want to invest in the state.                                                                               
                                                                                                                                
COMMISSIONER  SULLIVAN said  important activity  is happening  in                                                               
Alaska [slide 12],  but that only the surface  is being scratched                                                               
in terms  of the  multiple billions of  dollars of  investment in                                                               
Alaska necessary to  turn around the TAPS  throughput challenge -                                                               
and those  dollars are out  there.  While  there is a  good start                                                               
with a  diversity of players and  resource plays, a lot  more can                                                               
be done and tax reform is a critical component of that.                                                                         
                                                                                                                                
1:21:01 PM                                                                                                                    
                                                                                                                                
BRYAN  BUTCHER,   Commissioner,  Department  of   Revenue  (DOR),                                                               
reviewed  the governor's  four principles  of  tax reform  [slide                                                               
13].   He said  the base  of looking at  these principles  has to                                                               
come  from a  point of  trying to  make Alaska  competitive.   At                                                               
current prices,  Alaska has  the highest oil  taxes in  the U.S.,                                                               
the highest in North America, and  the second highest of all OECD                                                               
countries, being  second to Norway.   If  oil prices went  up $10                                                               
per  barrel, Alaska's  taxes would  surpass Norway.   Alaska  has                                                               
extremely high  taxes at the high  oil prices seen over  the last                                                               
five  years.    Combined  with  Alaska  being  one  of  the  most                                                               
expensive places to  explore, develop, and produce oil,  it is no                                                               
surprise  that Alaska  is not  seeing  a lot  of the  investment,                                                               
development,  and  production that  is  occurring  in many  other                                                               
areas in  the world, including  many jurisdictions with  far less                                                               
oil than the state of Alaska.                                                                                                   
                                                                                                                                
1:22:20 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER  specified that the first  of the governor's                                                               
four  principles is  that tax  reform must  be fair  to Alaskans,                                                               
which means Alaska  needs to be competitive while  keeping a fair                                                               
share in both  the short and long term.   The second principle is                                                               
to encourage new production.  While  this needs to be done in new                                                               
smaller fields, it  is vital that it also be  done in the current                                                               
legacy fields.   The DOR  long-term production  forecast predicts                                                               
that, over 10  years out, over 50 percent of  the oil expected to                                                               
be produced  will come from  legacy fields.  The  third principle                                                               
is that it needs to be simple  so that it restores balance to the                                                               
system.  Right now Alaska  takes a disproportionately large share                                                               
on the high end and a very small  percentage on the low end.  The                                                               
result is that when the price of  oil is low and the state really                                                               
needs the  income, it sees  very little  income; and on  the high                                                               
end the state brings in larger  surpluses than needed to meet its                                                               
budget.  The  bill looks at trying to balance  the system in this                                                               
regard.                                                                                                                         
                                                                                                                                
1:24:10 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER,  continuing his discussion about  the third                                                               
principle, said  that in addition to  restoring balance, Alaska's                                                               
tax structure needs to be simple.   Alaska has one of, if not the                                                               
most, complex  tax structures  for oil in  the world.   Companies                                                               
looking at investing  in Alaska have had  difficulty figuring out                                                               
the  entire picture  for Alaska's  [complex]  oil tax  structure:                                                               
what  it means  at certain  price levels,  how the  progressivity                                                               
works, how  the tax credits  work.   For example, Texas  has just                                                               
the 1  percent and  North Dakota  has 8.5 percent  up to  $50 per                                                               
barrel  and then  11 percent.   In  talks with  jurisdictions all                                                               
over North  America as  they were turning  around and  Alaska was                                                               
not,  the emphasis  was on  simplicity.   A good  example is  the                                                               
state of  North Dakota which has  just one person working  on oil                                                               
taxes  because it  is  simply  a matter  of  multiplying what  is                                                               
produced times the price times a  certain percentage.  It is very                                                               
difficult for  a new  company to  understand Alaska's  tax system                                                               
well enough to be able to  explain to its board of directors what                                                               
an  investment in  Alaska would  mean.   That the  tax has  to be                                                               
calculated  monthly,  rather  than  yearly, makes  it  even  more                                                               
difficult.                                                                                                                      
                                                                                                                                
1:25:49 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER  moved to  the governor's  fourth principle:                                                               
the tax system  needs to be durable  for the long term.   He said                                                               
Alaska's oil  taxes have been  changed a  number of times  in the                                                               
last seven  years and  now it's looking  at changing  them again.                                                               
When a state is constantly  changing its tax structure, a company                                                               
that  is contemplating  where to  invest is  unable to  determine                                                               
what is  going to happen  to its  investment over the  10-year to                                                               
30-year period  of investment.   He related that the  governor is                                                               
hoping  to set  up a  tax system  that will  work short-term  and                                                               
long-term and  will work for  current producers and  new entrants                                                               
and that over a longer period  of time is something the companies                                                               
can rely on.                                                                                                                    
                                                                                                                                
1:27:02 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER noted  the team working on  [oil tax reform]                                                               
is  much  more  integrated  than it  has  been  previously,  with                                                               
expertise from DOR  and DNR brought to the table,  along with the                                                               
expertise of consultant, Econ One  Research, Inc., that was asked                                                               
to analyze where  Alaska is and is not competitive.   Econ One is                                                               
familiar with Alaska,  having worked over the years  on oil taxes                                                               
and gas  issues for the  administration and the legislature.   He                                                               
highlighted the process the team  went through [slide 14], saying                                                               
the  team began  with  a  review of  previous  work  by both  the                                                               
administration and the legislature from  the time of the economic                                                               
limit  factor  (ELF)  to  the production  profits  tax  (PPT)  to                                                               
Alaska's Clear and  Equitable Share (ACES).   The team identified                                                               
what  it   considers  problems  with  the   current  tax  system:                                                               
declining  production,  competitive  environment,  progressivity,                                                               
and tax  credits.  Additionally,  the team looked at  the impacts                                                               
of  production decline  not just  on  revenues, but  also on  the                                                               
Trans-Alaska Pipeline System (TAPS).                                                                                            
                                                                                                                                
1:29:42 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER  next looked  at the jurisdictions  in North                                                               
America that are  the largest oil producers along  with the state                                                               
of Alaska  [slide 15].  He  explained that the green  dotted line                                                               
on  the graph  is the  price of  oil, which  bounced up  and down                                                               
between  1977 and  the mid-2000s  but which  has had  a sustained                                                               
price increase  over the  last 8  years except  for one  dip that                                                               
came  right back  up.   Turning  to the  states  depicted on  the                                                               
slide, he noted that North  Dakota had very little production for                                                               
decades, but  then had a  giant jump when  the price of  oil went                                                               
up, surpassing  Alaska in  production.  He  explained it  was not                                                               
economic  to produce  shale oil  in North  Dakota until  oil rose                                                               
above  $70 a  barrel; therefore,  if today's  price was  $40-$50,                                                               
that  upturn  would  not  have  been seen.    Higher  oil  prices                                                               
combined with  technology created the  jump in North Dakota.   He                                                               
said  this same  thing  happened  in Alberta  -  once oil  prices                                                               
became  sustained  at  higher  than  $30  per  barrel  it  became                                                               
economic and profitable to produce northern Alberta's oil sands.                                                                
                                                                                                                                
1:32:16 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER,  continuing  his  look  at  oil  producing                                                               
states [slide  15], directed attention  to a comparison  of Texas                                                               
and Alaska.   He pointed out  that Texas, which has  produced oil                                                               
much longer than  Alaska, began a production decline  in the mid-                                                               
1970s while Alaska was on  its production increase that peaked in                                                               
the  late 1980s  at 2.1  million barrels  a day,  at which  point                                                               
Alaska and Texas come together.   For the most part over the next                                                               
decades  the Alaska  and Texas  declines  were almost  identical.                                                               
Then came the 2004/2005 jump in  oil prices, at which point Texas                                                               
flattened   out  and   then  began   turning  around.     Alaska,                                                               
unfortunately, has  continued the  decline that Texas  would have                                                               
seen had the price of oil  not jumped.  Unlike North Dakota where                                                               
the increased  production is  from shale  oil, the  turnaround in                                                               
Texas was  almost 100  percent from  conventional oil,  until the                                                               
upward shot of the past two  years that is almost entirely due to                                                               
oil shale.   Thus, the  high prices allowed  a state that  was on                                                               
the same decline as Alaska  to turn around.  Commissioner Butcher                                                               
added that, similar  to Alaska, the North Sea had  a mature field                                                               
that  was declining;  but  this  area has  been  turned around  a                                                               
couple of times.   "The idea that once an  oil field is declining                                                               
is  simply  not  true,"  he  said.   He  related  that  the  U.S.                                                               
Geological Survey  (USGS) does not consider  Alaska's North Slope                                                               
to be  a mature oil field  because over 70 percent  of it remains                                                               
minimally  explored,  if  at  all.   The  tendency  is  to  think                                                               
specifically about only  Prudhoe Bay and Kuparuk,  but Alaska has                                                               
lots opportunities and their sizes and levels need to be found.                                                                 
                                                                                                                                
1:35:04 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER compared a  50 million barrel development in                                                               
Alaska to  comparable developments in  the Lower 48,  Norway, and                                                               
the  United Kingdom's  North  Sea [slide  16].   At  a price  per                                                               
barrel of  $100 and a net  present value (NPV) discounted  at the                                                               
industry standard of 12 percent, a  company would earn:  $4.07 in                                                               
Alaska, $5.52  for unconventional oil  in the Lower 48,  $2.34 in                                                               
Norway, and $8.25  in the North Sea's brownfield,  which has seen                                                               
the real jump in investment over  the last year.  Ideally, Alaska                                                               
would  be more  competitive with  countries and  states that  are                                                               
seeing jumps in investment; the  closer Alaska gets to Norway the                                                               
less likely its competitiveness.                                                                                                
                                                                                                                                
1:37:05 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER  said   progressivity  is  complicated  and                                                               
unpredictable,  for  both the  state  and  investors [slide  17].                                                               
Alaska's tax includes  a 25 percent base rate,  increasing by 0.4                                                               
percent for  every $1  per barrel that  the production  tax value                                                               
exceeds $30  per barrel up to  $92.50 per barrel, at  which point                                                               
it goes down  to 0.1 percent per dollar until  the total tax rate                                                               
equals 75 percent, a cap the state  has yet to come close to.  He                                                               
noted  the production  tax value  (PTV) is  the price  per barrel                                                               
minus    transportation   costs    minus   lease    expenditures.                                                               
Progressivity is  calculated monthly.   He pointed out  that when                                                               
state-by-state comparisons are  made on oil tax  rates, Alaska is                                                               
frequently  listed as  25-75  percent.   Unrealistic  as that  75                                                               
percent number  is, when  companies are looking  at 7  percent in                                                               
Texas they  may take  a step  back before  even digging  into the                                                               
complex nature  of progressivity.   Alaska's tax system  also has                                                               
high  marginal tax  rates.    At today's  higher  oil prices,  80                                                               
percent of  each increasing dollar  goes to the  government, most                                                               
to  the  State  of  Alaska,   some  to  the  federal  government.                                                               
Alaska's high marginal rate means  that at high prices, companies                                                               
do not  get as big  a bite as  they would in  other jurisdictions                                                               
[to make up for losing money at low oil prices].                                                                                
                                                                                                                                
1:39:31 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER reviewed a  graph of Alaska's production tax                                                               
credits [slide  18], saying this  was a piece  the administration                                                               
looked at when focusing on what should  be in the bill.  Shown on                                                               
the  graph in  red  are credits  applied  against production  tax                                                               
liability; these  are companies that  take their tax  credits off                                                               
what they  owe in  taxes to  the state.   Shown  in grey  are tax                                                               
credit  certificates refunded;  these  are  companies doing  work                                                               
that qualifies  for tax credits  but that are not  producing, are                                                               
not paying taxes  to the state, so the state  pays the credits in                                                               
cash  to these  companies.    The state  is  paying a  tremendous                                                               
amount of money in credits, he  said.  To determine whether these                                                               
credits are leading  to new production, DOR put  together a five-                                                               
year look back  from ACES to today.  A  direct connection between                                                               
the  tax  credits and  production  was  not  seen, but  rather  a                                                               
connection to  increased spending.   In particular, the  state is                                                               
looking  at  $800   million  in  the  current   fiscal  year  and                                                               
potentially $1 billion  in fiscal year 2014.  At  high oil prices                                                               
these numbers tend  not to be noticed because they  are one piece                                                               
taken out of a very large  amount of money coming into the state.                                                               
However, Commissioner  Butcher cautioned, as everyone  knows, oil                                                               
prices go up  and down, and if  oil prices dropped to  $80 or $90                                                               
per barrel the  State of Alaska would find itself  in billions of                                                               
dollars of deficit.   These tax credits are  not price sensitive,                                                               
so  if oil  prices dropped  to $60  or $80  per barrel  the state                                                               
would still owe $1  billion.  While the focus is  on areas in the                                                               
budget that need  to be funded, there is still  that number of $1                                                               
billion.   This number would  mean one  thing if it  was directly                                                               
connected to a  future production, but it means  quite another if                                                               
there is not that connection.                                                                                                   
                                                                                                                                
1:42:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  asked  whether DOR's  look back  found                                                               
that tax  credits were given  to companies for  doing maintenance                                                               
that would have been done anyway.                                                                                               
                                                                                                                                
COMMISSIONER BUTCHER replied that,  until this current year, this                                                               
was something DOR was unable to  define in enough detail to know.                                                               
When  DOR started  this  process two  years  ago, the  department                                                               
heard from  this committee that  it needed  to be known  what the                                                               
state was  getting for these tax  credits.  In DOR's  defense, he                                                               
pointed out  that the department  had to write up  and administer                                                               
over 70  regulations with the passage  of ACES, so the  focus was                                                               
on that  rather than this  detail.   In its five-year  look back,                                                               
DOR asked the companies to  voluntarily provide more information,                                                               
but  this  information could  not  be  required because  DOR  was                                                               
looking  back.    While  the   companies  were  helpful  and  are                                                               
following the law, it was  still not enough information to define                                                               
specifically  and  DOR  was  unable to  connect  it  directly  to                                                               
production.  Starting this calendar  year, 2013, DOR is requiring                                                               
much  greater detail  from the  companies, so  going forward  DOR                                                               
will be able to provide a better snapshot.                                                                                      
                                                                                                                                
1:44:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  concluded from  slide 18 that  lots of  cash is                                                               
walking out the  door - $800 million to $1  billion.  He inquired                                                               
whether there  is any  importance or  information that  should be                                                               
attached  to the  ratios of  what  is actually  being applied  to                                                               
production versus not.                                                                                                          
                                                                                                                                
COMMISSIONER BUTCHER  responded DOR focused  on that but  did not                                                               
really come  out with a determining.   [The ratio] has  been more                                                               
or less 50:50, but DOR has  not figured out specifically why that                                                               
might go back and forth.                                                                                                        
                                                                                                                                
COMMISSIONER SULLIVAN  interjected that the [graph  on the] slide                                                               
makes the  point that the  grey areas  are cash payments  out the                                                               
door without any kind of tie to any production.                                                                                 
                                                                                                                                
1:46:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  remarked that he  is confused as  to DOR's                                                               
direction here.   He recalled industry's  strong testimony during                                                               
development  of PPT  and  ACES  that trying  to  tie directly  to                                                               
production  was  counterproductive  because the  lead  time  from                                                               
investment to  actual production  was so long  that the  value of                                                               
the state's  participation was drastically  diminished if  it was                                                               
based on sometime proving that  oil went into the pipeline rather                                                               
than based on investment up  front.  He further recalled industry                                                               
testifying that it  most needed help with  exploration because of                                                               
the potential for  a dry hole.  However, what  he is hearing from                                                               
DOR now is that the state does  not want to give credits to risky                                                               
exploration but  instead to tie  credits only to things  that can                                                               
be demonstrated as production.                                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER  pointed out that the  administration is not                                                               
looking  at eliminating  these credits,  but at  reimbursing them                                                               
when  there is  production.    In looking  back  over a  six-year                                                               
period,  DOR did  not  need  to see  exactly  that  receipt of  X                                                               
produced Y, but the department did  not see anything.  In looking                                                               
at the fields potentially coming on  over the next 5 to 10 years,                                                               
there is  not a  whole lot  there.   The expectation  in spending                                                               
billions of  dollars from  the state treasury  was that  it would                                                               
lead  to  something.    The  North Sea  saw  $50-$60  billion  in                                                               
investment.   If, as  hoped for,  Alaska got  $20 billion  in new                                                               
investment from new  companies over a number of  years, the state                                                               
would be  looking at paying out  $8-$12 billion in cash  to these                                                               
companies.   He  said he  does not  even know  that the  treasury                                                               
could make  it to the point  in which there would  potentially be                                                               
production  if the  state got  the  kind of  boom and  investment                                                               
under  its current  tax  structure  that Commissioner  Sullivan's                                                               
work would hope to lead to.                                                                                                     
                                                                                                                                
1:49:55 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER, returning  to his  presentation, discussed                                                               
tariffs in  TAPS [slide 19].   He  shared that a  growing concern                                                               
was  identified  with  DOR's  revenue  modeling,  which  did  not                                                               
dynamically  link throughput  with TAPS  tariff rates  or capture                                                               
any added capital expenditure  ("capex") or operating expenditure                                                               
("opex") for low-throughput mitigation  measures.  This means DOR                                                               
would look  forward one  to three years  to determine  what would                                                               
happen to  the tariff as  lower throughput occurred and  what the                                                               
expected effects would  be to the State of  Alaska.  [Preliminary                                                               
observations are that] low flow  mitigation capital and operating                                                               
expenditures  could  increase  tariffs  by  as  much  as  $1  (18                                                               
percent) per  barrel by 2019  and as  much as $2.50  (33 percent)                                                               
per barrel in 2022.   [Assuming the price, production, and tariff                                                               
used] in DOR's  Fall 2012 Revenue Sources Book, a  $1 increase in                                                               
the TAPS  tariff will decrease  state oil  and gas revenue  by an                                                               
average of $110  million.  While there can be  argument about how                                                               
many decades the pipeline has left,  he stressed it is known that                                                               
the  decline  in  throughput  is causing  more  problems  due  to                                                               
cooling of  the oil and  more water, which requires  more capital                                                               
spending   which   then   results  in   tariff   increases   that                                                               
subsequently  reduce the  revenue the  state gets  from its  12.5                                                               
percent royalty oil.                                                                                                            
                                                                                                                                
1:52:05 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER  highlighted the  proposals in HB  72 [slide                                                               
20], saying the bill would:   eliminate progressivity and credits                                                               
based  on capital  expenditures; reform  remaining credits  to be                                                               
carried  forward to  when there  is production  and a  company is                                                               
paying taxes; and  establish a gross revenue  exclusion for newer                                                               
units and  for new  participating areas in  existing units.   The                                                               
benefit of the gross revenue exclusion  is that it can be used to                                                               
focus on  other more challenged  developments.  Lastly,  the bill                                                               
would not make any changes to  Cook Inlet and Middle Earth; these                                                               
two areas  would be held  harmless because the  bill specifically                                                               
applies to north of 68 degrees North latitude.                                                                                  
                                                                                                                                
1:53:50 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER compared current law  with HB 72 [slide 21].                                                               
He said the  current base tax rate of 25  percent would remain at                                                               
25 percent  under the  proposed bill.   Progressivity  in current                                                               
law would be removed by HB 72.   Some of the current tax credits,                                                               
cash reimbursements and  reduced tax revenue to  the state, would                                                               
be  altered and  some would  be  eliminated.   The proposed  bill                                                               
would provide a  gross revenue exclusion (GRE) for new  oil.  For                                                               
fiscal year  2014, eliminating  progressivity would  reduce state                                                               
revenue  by $1.5  billion,  but changing  the  tax credits  would                                                               
reduce the amount the state pays  out by $1 billion; therefore HB
72 has  a much more modest  fiscal note than did  [the governor's                                                               
previous proposal in] House Bill 110.                                                                                           
                                                                                                                                
1:55:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  referring to slide  10, said that  a year                                                               
ago  DOR  was  asked  for  examples  and  the  only  example  the                                                               
department could come  up with was the turnaround  of the Forties                                                               
Field.   The lesson  was that  the Forties Field  was owned  by a                                                               
single legacy  producer unwilling to  re-invest in the  field, so                                                               
the field  was sold  to a more  nimble independent  that invested                                                               
and turned  around the  field.   The three  legacy owners  on the                                                               
North Slope  - Prudhoe Bay being  the biggest field -  have joint                                                               
operating  agreements under  which each  owner must  agree to  an                                                               
investment, otherwise that investment does  not go forward.  Now,                                                               
he continued,  the proposal  is to change  the tax  structure for                                                               
the legacy owners  when the example provided to  the committee is                                                               
for a field  that the legacy owner was unwilling  to invest in to                                                               
turn around.   Members  need some  information and  some security                                                               
that  there will  be a  reversal in  the attitude  of the  legacy                                                               
owners about  investing in and  turning around their fields.   He                                                               
asked why the  Forties Field is a good example  for the situation                                                               
on the  North Slope, given  that the  legacy owners would  not be                                                               
selling the fields to someone with a different attitude.                                                                        
                                                                                                                                
1:58:02 PM                                                                                                                    
                                                                                                                                
COMMISSIONER SULLIVAN  replied the  point of today's  overview is                                                               
to give the committee a sense, at  a high level, of what is going                                                               
on  in  different fields  and  basins  and  what is  driving  the                                                               
different  production  decline  turnarounds,  whether  it  is  in                                                               
fields  basin-wide, which  is what  slide  15 is  focused on,  or                                                               
whether it is  the North Sea incentives, or  more specific fields                                                               
themselves.  The idea was not  to get into details of exactly why                                                               
BP [sold] or  Apache purchased a field, or  what the implications                                                               
are for a  veto power of the operating agreement  at Prudhoe Bay,                                                               
but to  give the committee  a sense  of what is  happening basin-                                                               
wide and can happen to specific  fields.  Sometimes in the debate                                                               
it is heard that this is  Alaska's future and nothing can be done                                                               
about it.   [The administration] does not believe  that, and more                                                               
importantly, there are  examples all over the  world showing that                                                               
that  does not  have to  be Alaska's  future.   The point  of the                                                               
various  slides was  to demonstrate  at  a high  level that  this                                                               
turnaround,  that is  absolutely  fundamentally  critical to  the                                                               
future of  Alaska, is doable.   This tax reform proposal  is also                                                               
to help with  getting more competition on the North  Slope - more                                                               
investors,   huge   investors,  medium-sized   investors,   small                                                               
investors.   More  investors  on the  North  Slope would  provide                                                               
Alaska the  opportunities that can  either turn around  fields or                                                               
discover  new fields.    It is  not just  focused  on the  legacy                                                               
producers.  Growing  the pie is what this tax  reform proposal is                                                               
ultimately about.   While the question is a good  one, [slide 10]                                                               
was  meant to  give an  overview sense,  not the  detail, that  a                                                               
turnaround in production decline is doable in Alaska.                                                                           
                                                                                                                                
2:01:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON clarified  he was  not saying  it was  not                                                               
doable.  If, as in the example,  it took a change in ownership, a                                                               
change in the structure of the  investors, instead of a change in                                                               
the tax  rates to make the  change, should the state  take a look                                                               
at the structural change that took place  to do that?  He said he                                                               
wants  to  ensure  that  the  actual  structural  impediments  to                                                               
turning around the fields are  addressed instead of just assuming                                                               
that  a  change  of  one  thing  will  address  those  structural                                                               
changes.                                                                                                                        
                                                                                                                                
COMMISSIONER  SULLIVAN  allowed  the aforementioned  is  a  valid                                                               
point.   He said  [the administration] is  trying to  address the                                                               
throughput decline across  a number of areas, some  of which have                                                               
to do with  tax reform and some  of which do not,  but tax reform                                                               
is a fundamental element.                                                                                                       
                                                                                                                                
2:03:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER,  regarding slide 16, requested  an expansion on                                                               
the $4.07  per barrel that would  be earned under ACES  in Alaska                                                               
at a  price of $100.   While he  understood that the  net present                                                               
value of 12 percent changes  the calculation, he said people have                                                               
heard that  there is lots more  profit per barrel than  the $4.07                                                               
that is shown on the slide.                                                                                                     
                                                                                                                                
MICHAEL PAWLOWSKI, Oil & Gas  Development Project Manager, Office                                                               
of the Commissioner, Department of  Revenue (DOR), first noted he                                                               
is the advisor for petroleum  fiscal systems to the Department of                                                               
Revenue.  He  then replied that looking at the  net present value                                                               
(NPV) is but  one of several financial metrics.   The net present                                                               
value per  barrel takes  the lifecycle  earnings over  the entire                                                               
future development  of this field  and pulls all of  that expense                                                               
in  cash back  to the  first years;  so, it  is just  one way  of                                                               
looking  at  something.   The  earnings  that people  talk  about                                                               
typically  are thought  of as  the cash  margins that  are earned                                                               
each  year on  that development,  which is  actually a  different                                                               
metric  than  what this  slide  is  showing.    In the  Econ  One                                                               
presentation included  in the  committee packet,  it can  be seen                                                               
that each  region is compared  not just  on net present  value or                                                               
internal rate of  return, but rather on a range  of metrics where                                                               
each  tells a  different story  about what  the actual  economics                                                               
look like.   Slide 16 is  showing that after the  costs and after                                                               
the cash flows  have been brought all the way  back to today this                                                               
is the way they look like for  this specific field.  In the past,                                                               
the  use of  analytics,  one analytic  versus  another, has  been                                                               
limited,  so going  forward there  will be  focus on  the variety                                                               
because each one will show Alaska in a different context.                                                                       
                                                                                                                                
2:06:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK, returning to  the BP/Apache example on slide                                                               
10,  recalled that  at a  joint committee  meeting last  year PFC                                                               
Energy stated BP does not specialize  in getting the last drop of                                                               
oil and  oftentimes sells to  companies that are experts  in this                                                               
regard.  He further recounted that  PFC said Alaska is clearly in                                                               
a harvest  mode and that ACES  was working well for  that harvest                                                               
mode situation.   He concurred  that more competition,  not less,                                                               
is needed  on the North Slope,  but said the hard  part is trying                                                               
to get  the legacy people  to move and how  to get them  to move.                                                               
He said  he, too, is  concerned about  the amount of  money going                                                               
out and  that it  is unknown  what the state  is getting  for it.                                                               
However, the  governor's bill  of the past  [House Bill  110] did                                                               
not guarantee anything  either and he does not know  about HB 72.                                                               
He  understood the  legacy fields  have an  advantage in  that an                                                               
unsuccessful well  has better tax  advantages than those  for the                                                               
new companies.   Profits on the  North Slope are very  good right                                                               
now,   he  opined,   but  the   companies  [are   not  increasing                                                               
production] because it  is not in their best interest  to do that                                                               
right now  based on what  they have going on  in the rest  of the                                                               
world.  A nice thing about  Alaska's current tax credit system is                                                               
the state  is guaranteeing that  those investments  are happening                                                               
in  Alaska  and  that  is   what  is  happening  with  those  new                                                               
companies.  It  would be nice to know what  information the state                                                               
is receiving  for the  money it is  spending so  that legislators                                                               
can make  better decisions  going forward.   He offered  his hope                                                               
that if this information is not  in the sectional analysis or the                                                               
bill that  the administration will  allow the legislature  to put                                                               
those provisions in  the bill to ensure that  the right decisions                                                               
are made going forward.                                                                                                         
                                                                                                                                
COMMISSIONER  SULLIVAN  responded  that everyone  agrees  on  the                                                               
importance of legacy  producers as well as  getting new investors                                                               
up to  Alaska to explore  and to maybe  partner with some  of the                                                               
legacy producers.   He said no one sees  the progressivity aspect                                                               
of ACES  as a positive element  in their decision making  to come                                                               
to Alaska.  It is an issue  raised by every company he has talked                                                               
to and he is very convinced  that it affects new entrants as well                                                               
as the legacy producers.                                                                                                        
                                                                                                                                
2:09:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK, referring to  slide 16, inquired whether the                                                               
brownfield is located in the North Sea.                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER confirmed that it is.                                                                                      
                                                                                                                                
CO-CHAIR  FEIGE  added  that the  difference  between  the  terms                                                               
brownfield and  greenfield is  that greenfield  is open  land and                                                               
brownfield already has some development on it.                                                                                  
                                                                                                                                
2:09:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR drew attention to  slide 18 and recalled that                                                               
Commissioner  Sullivan  stated the  credits  are  not helping  in                                                               
terms of investment.   Presuming that fiscal years  2013 and 2014                                                               
are based  on the Fall  2012 Revenue Sources Forecast,  she asked                                                               
why there  is a  jump upward  in those two  fiscal years  for tax                                                               
credits if the companies were not investing [in Alaska].                                                                        
                                                                                                                                
COMMISSIONER SULLIVAN  answered there  might be  some correlation                                                               
between the investment credits,  the exploration credits, and new                                                               
companies coming up  to explore.  By nature of  the way those are                                                               
designed right  now, there is  no requirement, no  nexus, between                                                               
the  spending  [and  production].    The  governor's  bill  would                                                               
tighten  that  nexus  significantly   with  regard  to  not  just                                                               
spending, but  credits that relate  to [indisc.],  something with                                                               
which most legislators would agree.                                                                                             
                                                                                                                                
COMMISSIONER  BUTCHER interjected  that  tax credits  incentivize                                                               
spending, but it  is not known that  they incentivize production.                                                               
For companies  currently producing  there is  a spending  jump of                                                               
over  $100  million  from  fiscal  year 2013  to  2014,  but  the                                                               
question  is whether  the state  is getting  more production  for                                                               
those dollars.                                                                                                                  
                                                                                                                                
2:12:46 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  then provided  a  PowerPoint  overview of  HB  72                                                               
entitled, "Overview  of HB 72  Oil & Gas Production  Tax," noting                                                               
the purpose  of his presentation  is to familiarize  members with                                                               
the bill's  different sections and  the specific  provisions that                                                               
they relate  to.   He reiterated  the governor's  four principles                                                               
[slide 2]:   tax reform must be fair to  Alaskans, must encourage                                                               
new production,  must be  simple so that  it restores  balance to                                                               
the  system, and  must be  durable for  the long-term.   He  said                                                               
these  principles are  all  geared toward  the  ultimate goal  of                                                               
making Alaska competitive while adhering to these principles.                                                                   
                                                                                                                                
2:14:09 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI reviewed  highlights  of the  proposal [slide  3],                                                               
saying that HB  72 balances the elimination  of progressivity and                                                               
credits based on qualified capital  expenditures.  First, not all                                                               
of the  credits are being reformed  or gone through by  the bill;                                                               
for  example, the  exploration stage  credits under  AS 43.55.025                                                               
are  not adjusted  by  HB 72.   Credits  being  adjusted are  the                                                               
qualified  capital expenditure  credit,  the  net operating  loss                                                               
carry forward credit,  and the small producer [credit].   The key                                                               
is to look at progressivity as  a revenue generator, with its own                                                               
impacts and  issues, balanced against  credits that are  based on                                                               
purely capital expenditures.  Second,  the credits being retained                                                               
would  be  reformed  to  be  carried forward  to  when  there  is                                                               
production, the principle of being  fair to Alaskans in that when                                                               
the state  gives an incentive  there is  corresponding production                                                               
in  revenue to  pay for  the incentive  being given.   Third,  is                                                               
establishing a  gross revenue exclusion  for the newer  units and                                                               
the new  participating areas  within existing  units, encouraging                                                               
new production by  offering an incentive that  is geared directly                                                               
towards  that  new  production.     Both  the  second  and  third                                                               
proposals  are geared  towards new  production -  the incentives,                                                               
credits, are  received by a  company when  it produces oil.   The                                                               
gross revenue exclusion is given when the new oil is produced.                                                                  
                                                                                                                                
2:16:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON understood that  net would still be used                                                               
in  the rest  of Alaska's  tax  system, except  for the  proposed                                                               
exclusion that would use gross.                                                                                                 
                                                                                                                                
MR. PAWLOWSKI replied correct.   The bill would maintain the base                                                               
25 percent net tax, which is  the core of the current tax system.                                                               
The progressivity  and the qualified capital  expenditure credits                                                               
would  be removed.   Currently,  the net  operating loss  credit,                                                               
which is  an additional 25  percent, can  be cashed out  from the                                                               
state by someone  who does not have  a tax liability.   In HB 72,                                                               
that credit would have to be  carried forward to be used when the                                                               
producer actually has a tax liability.                                                                                          
                                                                                                                                
2:17:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON surmised  the gross  revenue exclusion  is                                                               
just another mechanism and understood  it would lower the revenue                                                               
by one-fifth,  or 20 percent.   He inquired whether there  is any                                                               
difference between that and just saying  the tax rate for new oil                                                               
is going to be 20 percent instead of 25 percent.                                                                                
                                                                                                                                
MR. PAWLOWSKI  replied the aforementioned is  right conceptually,                                                               
but the  difference is in  the execution.  Previous  proposals by                                                               
the  administration  had  functionally  different  tax  rates  in                                                               
recognition that some of this  new development for infrastructure                                                               
has  much more  challenged economics  that  a lower  tax rate  is                                                               
necessary  for.    However, different  tax  rates  for  different                                                               
fields causes  the Department of  Revenue a serious  problem with                                                               
apportioning  costs by  field back  through  the net  system.   A                                                               
gross revenue exclusion  allows the ability to offer  a lower tax                                                               
rate on that  new production because it only taxes  80 percent of                                                               
the value  and it  avoids all of  the complicated  accounting and                                                               
apportioning  costs that  come  up when  there  are separate  tax                                                               
rates.  Remembering that one of  the core principles is trying to                                                               
be simple, it was decided that  the gross revenue exclusion was a                                                               
better  mechanism  to  get  to the  ultimate  goal  of  providing                                                               
incentive for new oil without complex accounting.                                                                               
                                                                                                                                
2:18:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  concluded that although it  is a different                                                               
mechanism the effect  is the same as lowering the  tax rate to 20                                                               
percent on new oil.                                                                                                             
                                                                                                                                
MR. PAWLOWSKI  responded he  would have to  look at  the specific                                                               
math that  20 percent is the  exact number because it  would move                                                               
around  based on  costs  and  the way  the  gross revenue  works.                                                               
However, it  is effectively  correct that it  is just  offering a                                                               
lower tax rate in a simple way.                                                                                                 
                                                                                                                                
2:19:16 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  returned to his  presentation, stating  the fourth                                                               
highlight of  HB 72 is that  the majority of the  bill relates to                                                               
the no changes to the Cook Inlet and Middle Earth provisions.                                                                   
                                                                                                                                
2:19:30 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI next  provided a  sectional analysis  of the  bill                                                               
[slide 4], beginning with the  elimination of progressivity under                                                               
[Sections 1,  2, and 26].   Section 26,  page 23, line  12, would                                                               
repeal  AS  43.55.011(g),  which  is the  identification  of  the                                                               
progressive part  of the tax.   Repeal of AS  43.55.011(g) causes                                                               
multiple other  things within  the statute to  then happen.   The                                                               
first of  those impacts  is in  Section 1,  beginning on  page 1,                                                               
line  12.   Under  current  law, a  portion  of progressivity  is                                                               
directed to the community revenue sharing  fund.  The idea was to                                                               
have three years  of funding for community revenue  sharing in an                                                               
account  that  could forward  fund  a  balance for  revenue  fund                                                               
sharing  in the  future.    Eliminating progressivity  eliminates                                                               
that fund  source for  community revenue sharing.   The  first of                                                               
two important  changes is on  page 2, line [2],  which eliminates                                                               
the  language "an  amount  equal  to 20  percent  of  the".   The                                                               
concern  about this  language is  that  it limits  the amount  of                                                               
money available to  go into the revenue sharing fund.   As can be                                                               
seen  from  page  2,  lines  5-6, the  revenue  sharing  fund  is                                                               
intended to be  $60 million per year or, when  needed, up to $180                                                               
million.   Twenty percent  of progressivity  when prices  are low                                                               
and when  there is no progressivity  is zero.  When  the governor                                                               
looked at  this issue, it  was to meet  the intent of  the actual                                                               
financial benchmarks  for community revenue sharing  that are set                                                               
at $60  million and $180  million.   The 20 percent  language was                                                               
seen as a  limitation and could potentially  lead to underfunding                                                               
the  community revenue  sharing fund,  so that  problem is  dealt                                                               
with by eliminating  the language "an amount equal  to 20 percent                                                               
of the".   Page 2, line  3, moves the revenue  source for funding                                                               
of  the  community  revenue  sharing  fund  to  AS  43.20.030(c),                                                               
receipts from  the Alaska Net Income  Tax Act.  This  tax is paid                                                               
by  other corporations  as well  as oil  and gas  companies, thus                                                               
providing  a broader  and  more  stable source  of  funding.   In                                                               
fiscal year 2013 the total amount  of revenue from this tax was a                                                               
bit over  $660 million  and is  projected to be  a bit  over $700                                                               
million in fiscal year 2014.                                                                                                    
                                                                                                                                
2:23:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE surmised the better  Alaska's economy does overall                                                               
the more money will be available for revenue sharing.                                                                           
                                                                                                                                
MR. PAWLOWSKI answered correct.                                                                                                 
                                                                                                                                
2:23:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  inquired whether  all money  from [the                                                               
net income tax]  currently goes into the general  fund or whether                                                               
some goes into the permanent fund.                                                                                              
                                                                                                                                
MR.  PAWLOWSKI replied  the money  that goes  into the  permanent                                                               
fund is a function of the  royalties, bonuses, and leases paid to                                                               
the state.   [The net  income tax] is just  tax revenue so  it is                                                               
general  fund  revenue,  just as  the  progressivity  revenue  is                                                               
general  fund revenue.   With  elimination  of progressivity  the                                                               
source  of funding  to community  revenue sharing  goes away,  so                                                               
another source had to be found.                                                                                                 
                                                                                                                                
2:24:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled that when this  was developed the                                                               
state was  in deficit spending  and had eliminated  the municipal                                                               
and community revenue sharing program  entirely.  This was put in                                                               
so  that when  there were  surpluses through  progressivity there                                                               
would be  funding for  the fund because  during times  of deficit                                                               
spending the legislature has historically  not taken money out of                                                               
savings  to give  away through  municipal  and community  revenue                                                               
sharing.   He asked  whether, with this  change, the  governor is                                                               
now saying  that he  is committed  to funding  municipalities and                                                               
communities  at $60  million  a  year even  if  the  state is  in                                                               
deficit  spending  and taking  money  out  of savings,  which  is                                                               
different philosophy than the legislature  had when it put in the                                                               
mechanism of funding municipal revenue sharing with surpluses.                                                                  
                                                                                                                                
MR. PAWLOWSKI responded he will  take that question to the Office                                                               
of Management &  Budget for an answer because he  is not equipped                                                               
to speak  to the actual spending  plans.  However, the  point was                                                               
to ensure  that the revenues  for community revenue  sharing were                                                               
replaced with a different mechanism.                                                                                            
                                                                                                                                
2:26:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   said  an  answer  from   the  Office  of                                                               
Management & Budget would be appreciated.                                                                                       
                                                                                                                                
MR. PAWLOWSKI  added that corporate income  taxes are necessarily                                                               
subject to income.   As incomes rise the more  money available to                                                               
go into  the community  revenue sharing  fund.   Corporate income                                                               
tax  has  risen  as oil  prices  have  gone  up,  so there  is  a                                                               
sensitivity.   If  there was  no income  for the  companies there                                                               
would be no corporate income  tax receipts and therefore no money                                                               
for the revenue sharing.  However,  in this instance it is better                                                               
diversified because there are other  businesses that pay into the                                                               
net income tax.                                                                                                                 
                                                                                                                                
2:27:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  recalled the thinking behind  the funding of                                                               
municipal revenue sharing through oil  development was that it is                                                               
a common property  resource, so that wealth would  be shared with                                                               
and distributed  to local communities.   Therefore,  the proposal                                                               
seems  like  a fundamental  shift  in  the  way those  funds  are                                                               
acquired.   While  those funds  would be  going into  the general                                                               
fund,  would there  be a  reason to  be concerned  about that  in                                                               
terms  of the  way that  change would  change the  situation, she                                                               
asked.                                                                                                                          
                                                                                                                                
MR.  PAWLOWSKI allowed  that  is  a fair  point,  but noted  that                                                               
mining and fisheries businesses pay  a corporate income tax.  So,                                                               
the broad  breadth of  resources is now  related through  the net                                                               
income  tax   system  towards  the  community   revenue  sharing.                                                               
Eliminating  progressivity   takes  away   the  money   that  was                                                               
designated   directly  to   community  revenue   sharing.     The                                                               
importance  of  the  principle is  the  commitment  to  community                                                               
revenue  sharing, the  degree  to which  is  subject to  ultimate                                                               
budgets and  appropriations, but the  bill makes a  commitment to                                                               
putting money into that fund.                                                                                                   
                                                                                                                                
2:28:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  inquired whether  there could be  a [future]                                                               
situation where, for  example, tough times for  oil revenue would                                                               
create increased  pressure on  the other  industries to  help put                                                               
[money] into that fund.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  answered he  would have to  think about  that with                                                               
the  department and  talk about  projections to  corporate income                                                               
tax receipts.   Regarding the number  of $60 million, he  said he                                                               
is not sure  the circumstance of which corporate  income taxes on                                                               
a diversified basis would drop below that.                                                                                      
                                                                                                                                
2:29:35 PM                                                                                                                    
                                                                                                                                
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department of Natural  Resources (DNR) followed up  on the points                                                               
made relative to  progressivity and revenue sharing.   He pointed                                                               
out that in  forecasts for the very near  term, expected revenues                                                               
are projected to  be below expected expenses.  The  state will be                                                               
in  a deficit  in  the  near time  with  plenty of  progressivity                                                               
coming  in the  door.   Thus, progressivity  by itself  is not  a                                                               
demonstration of the state having itself in good fiscal health.                                                                 
                                                                                                                                
CO-CHAIR FEIGE interjected  it is still up to  the legislature to                                                               
appropriate the money as appropriate.                                                                                           
                                                                                                                                
2:30:16 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, continuing  his  presentation,  said [Section  1]                                                               
moves away from the core of the  bill, which is reform of the oil                                                               
and  gas fiscal  system.   However, given  the importance  of the                                                               
community revenue sharing fund, he  thought it important to spend                                                               
a  few  minutes  talking  about  the  mechanism.    Returning  to                                                               
discussion of  the way HB  72 relates to  oil and gas  taxes, Mr.                                                               
Pawlowski stated  that Section  2, on  page 2,  lines 8-18,  is a                                                               
further reform necessary to the  statute because of the repeal of                                                               
AS 43.55.011(g).   The annual  production tax before  credits, as                                                               
it currently exists under AS  43.55.011(e), is the combination of                                                               
the 25 percent [base rate]  plus the progressivity, which is "the                                                               
sum, over  all months of  the calendar  year, of the  tax amounts                                                               
determined under  [AS 43.55.011(g)]".  In  that the progressivity                                                               
is  eliminated, the  sum  language  needs to  go  away.   The  25                                                               
percent base rate is maintained.                                                                                                
                                                                                                                                
2:31:36 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  next addressed the conforming  sections related to                                                               
the elimination  of progressivity  [Sections 5,  6, 22,  and 23].                                                               
Drawing attention to Section 5, beginning  on page 5, line 27, he                                                               
explained that  there are monthly  installment payments  for Cook                                                               
Inlet  and   Middle  Earth   that  exist   for  one   year  until                                                               
progressivity is  repealed.   Section 5 amends  Section 4  of the                                                               
Act which had to be amended  to preserve the current tax ceilings                                                               
and  treatments  there,  but  Section   5  is  when  the  monthly                                                               
progressivity  installment  payments  go away  and  the  language                                                               
needs to  be changed to  reflect that.   Throughout Section  5 it                                                               
can be seen that Cook Inlet  and Middle Earth are broken out; for                                                               
example, page  6, line 11, takes  out "the sum of"  because it is                                                               
no longer the sum of 25  percent plus a progressivity, it is just                                                               
the 25  percent.  The  important difference  there is on  page 7,                                                               
lines  3-5,  which  is  an   adjustment  for  the  gross  revenue                                                               
exclusion  that occurs  later in  the  bill.   The section  being                                                               
dealt  with  is  the  calculation   of  the  monthly  installment                                                               
payments  which are  currently the  sum  of 25  percent plus  the                                                               
taxpayer's progressivity  as adjusted  by the  tax ceilings.   In                                                               
that  the progressivity  is going  away, the  monthly installment                                                               
payment section must be adjusted.                                                                                               
                                                                                                                                
2:33:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE understood that Section  5 is basically amending a                                                               
previous change in the law that was put in Section 4.                                                                           
                                                                                                                                
MR. PAWLOWSKI replied yes.                                                                                                      
                                                                                                                                
CO-CHAIR FEIGE requested  clarification for why it  is being done                                                               
this way.                                                                                                                       
                                                                                                                                
MR.  PAWLOWSKI explained  Section 4  makes amendments  to reflect                                                               
the different tax ceilings and  preferential tax treatment put in                                                               
place over the  years for:  the Cook Inlet  basin, the area south                                                               
of 68  degrees North  latitude [known as]  Middle Earth,  and gas                                                               
produced  and   used  in-state.    In   adjusting  progressivity,                                                               
sections of  law are referenced  that are all interrelated.   For                                                               
example,  Section 4,  page  3,  line 4,  adds  the language  "not                                                               
subject to AS 43.55.011(o) or  (p)"; AS 43.55.011(o)-(p) includes                                                               
the  different treatments  such as  tax ceiling  and special  tax                                                               
rate  for  gas  produced  and  used in-state.    If  passed,  the                                                               
effective  date  of  the  bill and  repeal  of  progressivity  is                                                               
January 1, 2014.   Since it is currently the  calendar year 2013,                                                               
there  will  be   a  one-year  period  in   which  these  monthly                                                               
installment payments  will still be made.   So this is  a cleanup                                                               
of the [tax ceiling and  preferential tax treatment] language for                                                               
that one-year  time period and  then an amendment to  the cleanup                                                               
in the immediate next year.                                                                                                     
                                                                                                                                
2:36:40 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  returned  to his  presentation,  explaining  that                                                               
Section 22, page 21, line  10, deals with the different ceilings.                                                               
What remains  after progressivity goes away  are separate buckets                                                               
of different  types of  oil and  gas that  under current  law are                                                               
treated  and taxed  differently.   While  progressivity does  not                                                               
apply to  them now, cleaning up  the statute makes it  easier for                                                               
the future.  So Section 22  attempts to organize the statute in a                                                               
way that is clearer to people  trying to do business in the state                                                               
and to  companies that are  investing.  He reminded  members that                                                               
the price of oil minus transportation  cost is the gross value at                                                               
the  point of  production, minus  the lease  expenditures is  the                                                               
production tax  value, which can be  thought of as the  cash flow                                                               
to which taxes  are applied.  Section 22  addresses the different                                                               
ways that  taxes are applied  to the  different types of  oil and                                                               
gas  that have  been  given preferential  treatment in  different                                                               
pieces of law throughout time.                                                                                                  
                                                                                                                                
2:38:35 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  read paragraph (1)  of Section 22, page  21, lines                                                               
21-23,  which  states,  "oil  and gas  produced  from  leases  or                                                               
properties in  the state  that include land  north of  68 degrees                                                               
North latitude, other  than gas produced before 2022  and used in                                                               
the state;".   He said that is  by and large North  Slope oil and                                                               
gas and  the main target of  HB 72 is  the North Slope.   He then                                                               
drew attention  to paragraph  (2) of Section  22, page  21, lines                                                               
24-30,  which  states,  "oil  and gas  produced  from  leases  or                                                               
properties in  the state  outside of  the Cook  Inlet sedimentary                                                               
basin, no  part of which  is north  of 68 degrees  North latitude                                                               
..." and  said this is the  Middle Earth section that  is not the                                                               
North Slope  and not Cook Inlet.   He next read  subparagraph (A)                                                               
which states,  "gas produced before  2022 and used in  the state;                                                               
or" and  subparagraph (B) which  states, "oil and gas  subject to                                                               
AS  43.55.011(p);"  and explained  that  AS  43.55.011(p) is  the                                                               
language  included in  legislation last  year that  provided a  4                                                               
percent  gross tax  ceiling for  oil  and gas  produced from  the                                                               
Middle Earth area.                                                                                                              
                                                                                                                                
2:39:53 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  continued  reading the  remaining  paragraphs  of                                                               
Section 22, which state:                                                                                                        
                                                                                                                                
          (3) oil produced before 2022 from each lease or                                                                       
     property in the Cook Inlet sedimentary basin;                                                                              
          (4) gas produced before 2022 from each lease or                                                                       
     property in the Cook Inlet sedimentary basin;                                                                              
          (5) gas produced before 2022 from each lease or                                                                       
     property   in  the   state  outside   the  Cook   Inlet                                                                    
     sedimentary  basin and  used in  the state,  other than                                                                    
     gas subject to AS 43.55.011(p);                                                                                            
          (6) oil and gas subject to AS 43.55.011(0)                                                                            
     produced from leases or properties in the state;                                                                           
          (7) oil and gas produced from leases or                                                                               
     properties in  the state no  part of which is  north of                                                                    
     68  degrees  North  latitude, other  than  oil  or  gas                                                                    
     described  in  (2),  (3),  (4), (5),  or  (6)  of  this                                                                    
     subsection.                                                                                                                
                                                                                                                                
MR.  PAWLOWSKI  said  paragraph  (7) is  looking  to  the  future                                                               
because  paragraphs (1)-(6)  all have  expiration dates  of 2022.                                                               
After all  of those exclusions expire  in 2022, a section  in law                                                               
had to  be created where  they could all  fall back into.   After                                                               
those 2022 dates go away, all of  the oil and gas produced in the                                                               
state will default into the general 25 percent flat taxes.                                                                      
                                                                                                                                
2:41:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER understood  the 4 percent gross  tax ceiling for                                                               
oil and gas  produced from the Middle Earth area  was a provision                                                               
of Senate Bill 23 enacted into law in [September ] 2012.                                                                        
                                                                                                                                
MR. PAWLOWSKI  replied correct.   Responding further  to Co-Chair                                                               
Saddler,  he expounded  on the  process that  would happen  after                                                               
2022.  He drew attention to  page 21, line 29, which states, "gas                                                               
produced before 2022  ...", and said that is the  way the law was                                                               
drafted and adopted.   Page 21, line 31, is  "oil produced before                                                               
2022 ..."  and that language is  also in paragraphs (4)  and (5).                                                               
He read from AS 43.55.011(p), which states:                                                                                     
                                                                                                                                
          (p) For the seven years immediately following the                                                                     
     commencement  of commercial  production of  oil or  gas                                                                    
     produced from  leases or properties  in the  state that                                                                    
     are outside  the Cook Inlet sedimentary  basin and that                                                                    
     do not include  land located north of  68 degrees North                                                                    
     latitude, where that  commercial production began after                                                                    
     December  31, 2012,  and before  January  1, 2022,  the                                                                    
     levy of tax  under (e) of this section for  oil and gas                                                                    
     may not exceed  four percent of the gross  value at the                                                                    
     point of production.                                                                                                       
                                                                                                                                
That is  for seven years before  2022, he continued.   In statute                                                               
it must be looked forward to  the fact that 2022 might happen and                                                               
the legislature or  the public might not actually  change the law                                                               
to  address Cook  Inlet  or  Middle Earth  before  then.   So,  a                                                               
statutory construction  needed to be  made to allow  clearly what                                                               
actually happens  once those  expire.  In  the current  law these                                                               
statutes kind  of spread throughout  the statute.  Section  22 is                                                               
an  orderly  clarification  of  the  different  oil  or  gas  tax                                                               
treatments that have been passed by  the legislature set out in a                                                               
very deliberative fashion.                                                                                                      
                                                                                                                                
2:43:25 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  explained that  Section  23  is an  amendment  to                                                               
conform to the  changes that were made in Section  22 so that the                                                               
production tax  value is calculated under  [AS 43.55.160] (a)(3),                                                               
(4), (5), or (6) rather than (a)(1)(C), (D), (E), or (F).                                                                       
                                                                                                                                
2:44:06 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI then  reviewed Section  8,  a provision  in HB  72                                                               
related  to  North  Slope  qualified  capital  expenditure  (QCE)                                                               
credits.   Drawing  attention to  page 10,  lines 16-18,  he said                                                               
that  the  QCE  credit,  which  is  the  20  percent  of  capital                                                               
expenditures, will be  allowed for 2013, but  an expenditure made                                                               
on the North Slope after January  1, 2014, will no longer qualify                                                               
for a QCE credit.                                                                                                               
                                                                                                                                
2:45:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  understood the QCE credits  are allowed at                                                               
the time the  expenditures are made rather than when  the work is                                                               
done.  He said information  has been received that some operators                                                               
have been  paying service  companies for  well work  overwork but                                                               
not having  the work done.   He offered  his belief that  that is                                                               
legal under  the law because it  is when the expenditure  is made                                                               
and  allowed   it  would  be   reasonable  if  the   company  was                                                               
anticipating that  the work would be  done in the next  year.  He                                                               
asked if  DOR is tracking  whether the work is  being frontloaded                                                               
and not performed  at the time and whether DOR  has any audits on                                                               
that.  He further asked  whether this [proposed] deadline for the                                                               
end of  2013 will result in  companies paying for work  that will                                                               
be  done  in  the  future  and  legitimately  claim  the  capital                                                               
expenditures this year.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  responded "in that  expenditures are  made legally                                                               
and qualify  in 2013, the bill  does not change the  treatment of                                                               
those credits for expenditures in  2013."  As to the department's                                                               
internal   controls  for   the   credit,  he   said  the   deputy                                                               
commissioner and auditors are on line  and may be able to provide                                                               
the detail about  what and how the department  tracks the concern                                                               
about  frontloading  expenditures.   He  said  it  is up  to  the                                                               
committee as to the detail it would like.                                                                                       
                                                                                                                                
REPRESENTATIVE SEATON said  it would be fine for DOR  to get back                                                               
to the committee with the details.                                                                                              
                                                                                                                                
2:47:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  suggested the companies themselves  be asked this                                                               
question.  He concluded  from Representative Seaton's description                                                               
that the  companies are making  the expenditure early to  get the                                                               
tax benefit,  but said he did  not think they would  put too much                                                               
money out there without getting  the work done because that would                                                               
not make much business sense.                                                                                                   
                                                                                                                                
MR.  BALASH interjected  that some  vendors  have had  challenges                                                               
getting payment  after the work  was done,  so there may  be some                                                               
commercial value to having payment up front in certain cases.                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON recounted  that  when  these credits  were                                                               
being  talked about  it was  discussed that  investment could  be                                                               
stimulated during  high prices by allowing  payment for something                                                               
like a  total pipeline replacement  and getting a lot  more state                                                               
participation in that  pipeline at those high tax rates.   So, it                                                               
is not  necessarily a nefarious  thing, but this  proposed change                                                               
could  stimulate something  that  has been  marginal  up to  this                                                               
point.                                                                                                                          
                                                                                                                                
2:49:37 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI returned  to his  presentation  and discussed  the                                                               
conforming  sections for  the North  Slope QCE  credit provision.                                                               
He  explained  that  under current  law,  a  capital  expenditure                                                               
credit,  which is  based on  20 percent  of that  expenditure, is                                                               
divided  into two  certificates for  the North  Slope -  half the                                                               
credit may be  used in the year  it is earned and  the other half                                                               
must be  carried forward.   Under conforming  Section 7,  page 9,                                                               
lines 21-22, the  requirement that not more than half  of the tax                                                               
credit may be  applied for in a single year  is deleted.  Credits                                                               
earned for expenditures in 2013,  therefore, would be used in one                                                               
certificate instead of  two.  The impact of using  the credits in                                                               
one year instead of over two  is reflected in the fiscal note for                                                               
fiscal  year  2014.   Because  [Section  8]  shuts down  the  QCE                                                               
program  for  the North  Slope  after  calendar year  2013,  this                                                               
provision is intended  to take care of the liability  in one year                                                               
and finish the program.                                                                                                         
                                                                                                                                
2:51:24 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI pointed  out that  Section 7  does not  include AS                                                               
43.55.023(m),  that portion  of  statute for  QCE credits  earned                                                               
south of 68  degrees [North latitude] and which  are not required                                                               
to be divided into two years.   Therefore, since the credit would                                                               
be taken  in one year,  conforming Section  11, page 11,  line 8,                                                               
replaces the word "certificates"  with "certificate".  Also, page                                                               
11, line  20, replaces  the word  "two" with  "a" to  reflect the                                                               
current practice  [under AS 43.55.023(m)] of  one certificate for                                                               
south of  the North Slope.   Given there  would no longer  be any                                                               
qualified capital  expenditure credits for the  North Slope, this                                                               
change goes  back to the  simple principle  - making it  clear in                                                               
every section of the law that it is one certificate, not two.                                                                   
                                                                                                                                
2:53:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  understood that  because the  qualified capital                                                               
expenditure credit  would be phased  out, Section 7 bumps  up the                                                               
taking of  the credits  to one year;  other credits  will remain,                                                               
but instead of two years it will be one year.                                                                                   
                                                                                                                                
MR. PAWLOWSKI  replied that the  remaining credits  are currently                                                               
one-year credits.   The only  credit that would be  eliminated is                                                               
the  current two-year  credit.   So,  moving  forward, why  leave                                                               
other sections of statute conflicting?                                                                                          
                                                                                                                                
2:54:04 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI,  continuing his discussion of  conforming sections                                                               
for the  proposed elimination  of North  Slope QCE  credits, drew                                                               
attention to Section 12, beginning on  page 11, line 29.  He said                                                               
the conforming language in this  section is just being clear that                                                               
"except for  a tax  credit based  on lease  expenditures incurred                                                               
after  December  31,  2013  ...   north  of  68  degrees  [North]                                                               
latitude", a person may take a tax credit.                                                                                      
                                                                                                                                
2:54:32 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI moved to the  other major proposals included within                                                               
HB 72  [slide 5], noting  that another primary credit  related to                                                               
qualified capital  expenditures is  the net operating  loss carry                                                               
forward credit  under AS 43.55.023(b),  which is 25 percent  of a                                                               
company's  loss.   The bill  would maintain  that credit,  but it                                                               
would be carried  forward to when there is  production.  Sections                                                               
9  and 15  are the  changes to  the way  that credit  is treated.                                                               
Since this  net operating  loss credit  is being  eliminated only                                                               
for the North  Slope and not for other regions,  Section 9, lines                                                               
21-24, makes this  credit subject to the  new subsections (p)-(u)                                                               
that  are added  under  Section  15 of  the  bill.   Section  15,                                                               
beginning on page  13, line 15, adds new  subsections (p)-(u) [to                                                               
AS 43.55.023]  to govern how  that 25 percent net  operating loss                                                               
carry  forward credit  for North  Slope expenditures  is treated.                                                               
Subsection (p),  beginning on page  13, line 16, states  that the                                                               
tax credit  for lease  expenditures located  north of  68 degrees                                                               
North latitude,  i.e. the North  Slope, may not be  applied until                                                               
two  calendar  years after  the  expenditure  is made,  which  is                                                               
basically under current  law when a company would  be getting the                                                               
credit.  So, a company can  make the expenditure and then use the                                                               
credit the next year, but does not  have to bring it to the state                                                               
for a  credit certificate until  the second  year.  This  is just                                                               
recognizing  the  natural  flow  through DOR  of  the  way  these                                                               
credits are earned and processed.                                                                                               
                                                                                                                                
2:57:03 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI said  the  important limitation  is  that each  of                                                               
these credits is  only good for a time period  of 10 years, after                                                               
which each  one of  these credit  certificates expires  (page 13,                                                               
line 23).  The importance of  the time limit for when this credit                                                               
can be used to offset production  taxes can be seen in subsection                                                               
(r), page  14, line 2.   Under current law, a  company receives a                                                               
cash payment  from the  state for the  credit.   Recognizing that                                                               
there is  a time value  to money, the  value of the  credit being                                                               
carried  forward increases  at a  rate  of 15  percent per  year,                                                               
starting in  the second year  after the  money is expended.   The                                                               
goal was to  provide an increase that is comparable  to the other                                                               
opportunity  the   company  may  have  to   invest  that  capital                                                               
somewhere else and  earn a rate of  return.  So, the  way the net                                                               
operating loss carry  forward credit works is  the expenditure is                                                               
made, 25 percent of the value  of that expenditure is turned into                                                               
a credit and carried forward.   Under the governor's plan, rather                                                               
than cash being paid out, the  value of that 25 percent increases                                                               
at  15 percent  a  year starting  in the  second  year after  the                                                               
credit has been  issued and ends at  year 10.  If  the credit has                                                               
not been earned by year 10 it is not useable at all.                                                                            
                                                                                                                                
2:58:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER understood  that credits  used sooner  are more                                                               
valuable  than  credits  used  later.     He  asked  whether  any                                                               
consideration was given to losing a  percent per year over the 10                                                               
years, or was the consideration  that just having a two-year wait                                                               
period was enough value to encourage things upfront.                                                                            
                                                                                                                                
MR. PAWLOWSKI replied that  when the administration's consultants                                                               
come  forward  it will  be  seen  just  how important  the  carry                                                               
forward credit rate is to improving  the net present value of the                                                               
project in a way that is fair  to the producers but also does not                                                               
put a  burden on the treasury.   The credit is  being deferred so                                                               
the  state is  not paying  it out  until there  is production  to                                                               
charge the credit against.                                                                                                      
                                                                                                                                
2:59:46 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI,  returning to his presentation,  explained that to                                                               
protect  the state,  new subsection  (q), page  13, beginning  on                                                               
line 25,  would implement  the "first  earned, first  used" rule.                                                               
Since credits are being earned  every year and each is increasing                                                               
at a rate, in  time the first credit earned is  the one that must                                                               
be used  first and then  the second  credit earned is  the second                                                               
credit used.                                                                                                                    
                                                                                                                                
3:01:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK understood that  the net operating loss carry                                                               
forward credit  for the  North Slope would  grow 15  percent each                                                               
year.   He asked  whether after  10 years  the credit  would stop                                                               
growing but  still be a valid  credit or would the  credit become                                                               
null and void altogether.                                                                                                       
                                                                                                                                
MR. PAWLOWSKI responded that the credit is null and void.                                                                       
                                                                                                                                
3:01:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  it  seems to  him  that the  current                                                               
system  for   net  operating  loss   credits  has   been  greatly                                                               
successful for  Alaska, given  all the new  players on  the North                                                               
Slope  and almost  half of  the  credits coming  back.   Previous                                                               
testimony  by the  people  out drilling  the  holes and  building                                                               
pipelines has  been that it is  important to get the  credit back                                                               
as quick  as possible for  reinvestment.  Changing the  system so                                                               
that the  credits cannot be  received for  two years and  so they                                                               
are lost if  it takes a company  longer than 10 years  to get the                                                               
oil  into the  pipeline seems  to  eliminate the  value that  has                                                               
produced  the investment  the state  has  been looking  for.   He                                                               
requested that  when there is time  he would like to  be apprised                                                               
of the  basic structural philosophy  as to  how this is  going to                                                               
stimulate the investment that the current credit has achieved.                                                                  
                                                                                                                                
3:03:24 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI allowed  that is an important question  and said it                                                               
will be seen in Econ  One's presentation that the credits offered                                                               
up front  were intended  to stimulate that  new activity  in that                                                               
new development.   There is a difference  between the exploration                                                               
stage and  the development stage and  that is why HB  72 does not                                                               
change the exploration credits, but  rather the credits that work                                                               
in the development  stage.  Because of  progressivity and because                                                               
of the lifecycle economics, the  ability to get to development is                                                               
not working with the credits, which  will be seen in the Econ One                                                               
models.   The  bill, in  context, is  attempting to  dramatically                                                               
improve the  overall economics which  will drive  the development                                                               
decision.                                                                                                                       
                                                                                                                                
3:04:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE held over HB 72.                                                                                                 

Document Name Date/Time Subjects
HB0072A.PDF HRES 2/11/2013 1:00:00 PM
HB 72
0647-DNR-DOG-1-14-13.pdf HRES 2/11/2013 1:00:00 PM
0647-DOR-TAX-01-15-13.pdf HRES 2/11/2013 1:00:00 PM
01.15.13 Chenault Oil Tax Transmittal Letter.pdf HRES 2/11/2013 1:00:00 PM
Butcher to Feige & Saddler 1-17-2013.pdf HRES 2/11/2013 1:00:00 PM
Econ One Presentation TAPS Throughput 1-24-2013.pdf HRES 2/11/2013 1:00:00 PM
OTR Sectional Analysis HB 72 2-11-2013.pdf HRES 2/11/2013 1:00:00 PM
HB 72
Sectional LL0647-DOR-TAX-01-14-13 House.pdf HRES 2/11/2013 1:00:00 PM
Sullivan_Butcher_House Resources HB 72 Overview_2-11-13 FINAL.pdf HRES 2/11/2013 1:00:00 PM
HB 72
HRES HB72 Corrected Slide #18 Comm. Presentation 2.11.13.pdf HRES 2/11/2013 1:00:00 PM
HB 72