HB 223-TAX & ROYALTY FOR CERTAIN GAS  2:31:03 PM CHAIR MCKAY announced that the final order of business would be HOUSE BILL NO. 223, "An Act relating to the production tax and royalty rates on certain gas; and providing for an effective date." [Before the committee, adopted as a working document on 2/23/24, was the proposed committee substitute (CS) for HB 223, Version 33-LS0886\S, Nauman, 2/10/24 ("Version S").] 2:32:18 PM CHAIR MCKAY moved to adopt Amendment 1 to HB 223, Version S, labeled 33-LS0886\S.9, Nauman 2/29/24, which read as follows: Page 1, line 1, following "rates": Insert "and payments" Page 1, line 13, through page 9, line 31: Delete all material and insert:  "* Sec. 2. AS 38.05.180 is amended by adding new subsections to read: (mm) Notwithstanding a requirement in the leasing method chosen of a minimum fixed royalty share, for leases issued in the Cook Inlet sedimentary basin, the department shall accept, as complete payment for royalties due to the state, zero in royalties for qualified new gas and 50 percent of the minimum fixed royalty share for qualified new oil, unless payment is lower under another subsection of this section. The royalty reduction in this subsection applies until the earlier of either (1) 10 years following the commencement of commercial production that begins after July 1, 2024; or (2) the date on which a commercial quantity of oil or gas produced from the Cook Inlet sedimentary basin is shipped out of the state. (nn) In (mm) of this section, (1) "qualified new gas" means gas produced from (A) a field or pool that the commissioner determines has not previously produced gas for commercial sale before January 1, 2024; (B) a field or pool that has previously produced gas, but did not produce gas during calendar year 2024; (C) a well that did not exist on January 1, 2025, if the commissioner determines that production of that gas from the field or pool from an existing well was not economically feasible; (2) "qualified new oil" means oil produced from (A) a field or pool that the commissioner determines has not previously produced oil for commercial sale before January 1, 2024; (B) a field or pool that has previously produced oil, but did not produce oil during calendar year 2024; (C) a well that did not exist on January 1, 2025, if the commissioner determines that production of that oil from the field or pool from an existing well was not economically feasible. * Sec. 3. AS 31.05.030(i); AS 38.05.180(f)(5), and 38.05.180(dd) are repealed." Renumber the following bill section accordingly. 2:32:23 PM REPRESENTATIVE RAUSCHER objected for the purpose of discussion. 2:32:26 PM ED KING, Staff, Representative Tom McKay, Alaska State Legislature, on behalf of Representative McKay, explained that Amendment 1 would repeal everything except the effective date and the first section of the bill, thereby repealing AS 38.05.180(f)(5), which is the royalty relief provision. The proposed amendment would also allow the state to accept less than its full royalty and forego the deed for an amendment to the lease rather than renegotiating the terms of the contract to reduce the royalty. In addition, the definitions of "new gas" and "new oil" in Version S would be limited to gas and oil sold in state. Furthermore, in the event that a lease is eligible for royalty relief under a different subsection, the lower rate would prevail. He further noted that paragraph (2) on lines 15- 16 adds new language to reflect a sunset condition that says if in the future, the state is exporting liquified natural gas (LNG) again, the royalty relief would no longer be necessary. Last, the definition of "qualified new oil" adds a subparagraph that was missing in the previous version. 2:35:18 PM REPRESENTATIVE SADDLER referred to paragraph (2) and asked whether its fair to presume that if oil and gas were being commercially delivered outside the state, it would be evidence in itself that the royalty reduction is no longer necessary. MR. KING answered, "That is correct." 2:35:52 PM REPRESENTATIVE RAUSCHER asked to hear from the department on Amendment 1. 2:36:23 PM JOHN CROWTHER, Deputy Commissioner, Department of Natural Resources, shared his understanding that Amendment 1 is a "mechanical adjustment" to accomplish the same intent as the committee substitute. He said DNR supports Amendment 1. 2:37:33 PM REPRESENTATIVE RAUSCHER removed his objection to Amendment 1. There being no further objection, Amendment 1 was adopted. 2:37:53 PM The committee took a brief at-ease at 2:37 p.m. 2:38:35 PM REPRESENTATIVE MEARS moved to adopt Amendment 2 to HB 223, Version S, labeled 33-LS0886\S.7, Nauman, 2/20/24, which read as follows: Page 8, line 30, following "production": Insert "that begins on or before December 31, 2033," 2:38:55 PM REPRESENTATIVE RAUSCHER objected for the purpose of discussion. REPRESENTATIVE MEARS explained that Amendment 2 would add a sunset date to avoid losing potential revenue. 2:40:16 PM REPRESENTATIVE RAUSCHER asked to hear from the department on Amendment 2. MR. CROWTHER said DNR does not support Amendment 2 but understands if the committee wishes to adopt different timeframes that it deems appropriate. 2:41:28 PM CHAIR MCKAY explained that as the gas well ages, the royalty would increase; however, wells never increase in production at the end of their life. In addition, tax stability is always being emphasized. For those two reasons, he voiced his opposition to Amendment 2. REPRESENTATIVE SADDLER observed that Version S has a 10-year limit. He shared his belief that contrary to Representative Mears's assertion that the date of the reduced royalties could extend indefinitely into the future, the legislature could change that in statute. He spoke against the insertion of a hard deadline and said he is disinclined to support Amendment 2. CHAIR MCKAY said citizens would pay more for gas than what the state would make in revenue from the declining gas wells. Consequently, he opined that the benefit of having low-cost gas energy coming from the Cook Inlet Region far outweighs any revenue that would be gained by a small royalty rate. 2:44:06 PM REPRESENTATIVE ARMSTRONG clarified that the bill was expanded to include both oil and gas, so the timeline would impact both. CHAIR MCKAY said the problem is that wells often produce both oil and gas together; consequently, he asked how a well would be taxed for both commodities. 2:45:31 PM REPRESENTATIVE MEARS clarified that as written, royalties would be collected on declining oil production after the first 10 years of a well. In response to Representative Saddler, she said there would be a potential for royalty relief to continue for the next 20 years, as Amendment 2 would place a sunset on wells drilled 11 years from now. She pointed out that if current wells stop producing in 10 years, there is 70 billion cubic feet (Bcf) of gas being produced in the Cook Inlet to meet demand, which is $80 million per year at 12.5 percent in royalty relief that's unrealized by the state. The bill would support Hilcorp with 20 Bcf per year amounting to $23 million in gas that they would have produced over the next decade regardless [of the royalty relief]. CHAIR MCKAY reiterated that the goal is to produce low-cost gas from the Cook Inlet to save residents of the Railbelt a significant amount of money that would otherwise go to imported LNG. 2:48:50 PM REPRESENTATIVE RAUSCHER maintained his objection. 2:49:22 PM A roll call vote was taken. Representatives Mears and Armstrong voted in favor of adopting Amendment 2. Representatives McCabe, Baker, Rauscher, Saddler, and McKay voted against it. Therefore, Amendment 2 failed to be adopted by a vote of 2-5. 2:50:09 PM REPRESENTATIVE MEARS moved to adopt Amendment 3 to HB 223, Version S, labeled 33-LS0886\S.3, Nauman, 2/20/24, which read as follows: Page 1, line 1, following "gas;": Insert "relating to transferable oil and gas  production tax credit certificates;" Page 9, following line 24: Insert a new bill section to read:  "* Sec. 5. AS 43.55.028 is amended by adding a new subsection to read: (t) The percentage of a transferable tax credit certificate issued under AS 43.55.023(d) or former AS 43.55.023(m) or a production tax credit certificate issued under AS 43.55.025(f) purchased by the department may not exceed the percentage of resident workers in the applicant's workforce in the state in the preceding calendar year, including workers employed by the applicant's contractors. An amount of a credit not purchased because of application of this subsection may be applied against the applicant's tax liability under this chapter. In this subsection, "resident worker" has the meaning given in AS 43.40.092(b)." Renumber the following bill sections accordingly. 2:50:42 PM REPRESENTATIVE RAUSCHER objected for the purpose of discussion. 2:50:50 PM REPRESENTATIVE MEARS explained that Amendment 3 makes a title change to the bill to allow for transferable tax credits that encourage local hire and attribute a percentage of tax credit to an applicant's contractors and employees on site. 2:51:05 PM REPRESENTATIVE SADDLER stated his objection to Amendment 3 and characterized it as the "poster child" for inconsistent tax policy. He opined that it's not appropriate to predicate tax credits on the rate of hire. CHAIR MCKAY reported that the rate of local hire in the Alaska oil and gas industry is approximately 80 percent. He surmised that its unconstitutional to demand that "everyone" be an Alaska resident. 2:52:55 PM REPRESENTATIVE MEARS [moved to withdraw] Amendment 3. [There being no objection, Amendment 3 was withdrawn.] 2:53:04 PM REPRESENTATIVE MEARS moved to adopt Amendment 7 to HB 223, Version S, labeled 33-LS0886\S.1, Nauman, 2/20/24, which read as follows: Page 1, line 1, following "gas;": Insert "relating to disclosure of information  related to oil and gas production taxes;" Page 9, following line 24: Insert new bill sections to read:  "* Sec. 5. AS 43.55.890 is amended to read: Sec. 43.55.890. Disclosure of tax information. Notwithstanding any contrary provision of AS 40.25.100 or AS 43.05.230, [AND REGARDLESS OF WHETHER THE INFORMATION IS CONSIDERED UNDER AS 43.05.230(E) TO CONSTITUTE STATISTICS CLASSIFIED TO PREVENT THE IDENTIFICATION OF PARTICULAR RETURNS OR REPORTS,] the department shall make publicly available [MAY PUBLISH] the following information under this chapter, [IF AGGREGATED AMONG THREE OR MORE PRODUCERS OR EXPLORERS,] showing by month or calendar year and by lease or property, unit, or area of the state: (1) the amount of oil or gas production; (2) the amount of taxes levied under this chapter or paid under this chapter; (3) the effective tax rates under this chapter; (4) the gross value of oil or gas at the point of production; (5) the transportation costs for oil or gas; (6) qualified capital expenditures, as defined in AS 43.55.023; (7) exploration expenditures under AS 43.55.025; (8) production tax values of oil or gas under AS 43.55.160; (9) lease expenditures under AS 43.55.165; (10) adjustments to lease expenditures under AS 43.55.170; (11) tax credits applicable or potentially applicable against taxes levied by this chapter.  * Sec. 6. The uncodified law of the State of Alaska is amended by adding a new section to read: APPLICABILITY. AS 43.55.890, as amended by sec. 5 of this Act, applies to information collected on or after the effective date of sec. 5 of this Act." Renumber the following bill sections accordingly. 2:53:21 PM REPRESENTATIVE RAUSCHER objected. 2:53:59 PM REPRESENTATIVE MEARS explained that Amendment 7 requires physical transparency by making disclosure of tax information publicly available. REPRESENTATIVE SADDLER asked how often the Division of Oil & Gas exercises the discretion to release confidential information. 2:55:49 PM MR. CROWTHER responded that DNR regularly publishes this kind of information pursuant to the terms of current law, which prevents individual or corporate information from being disclosed. He expressed concern that releasing that kind of particularized data could result in significant exposure to corporate and commercial information. 2:57:36 PM DEREK NOTTINGHAM, Director, Division of Oil & Gas, Department of Natural Resources, agreed that the individualized release of that information exposes those entities to competitive information being released publicly. REPRESENTATIVE SADDLER asked whether companies would be more or less likely to invest if their competitive information was made public. MR. CROWTHER responded that it would be a key change to the operational environment of Alaska. Operators would have to carefully assess what information would be submitted to the department. 2:59:13 PM REPRESENTATIVE ARMSTRONG sought to confirm that Amendment 7 would put Alaska in compliance with the way that disclosures are handled in Texas and North Dakota. MR. CROWTHER said he could not confirm the treatment of tax or commercial information in either state. REPRESENTATIVE ARMSTRONG referenced the Texas Report on Natural Gas Tax and pointed out that Texas is not considered a fragile jurisdiction like Alaska, has a well-endowed university, and does not have income tax. She shared her belief that Amendment 7 would be hugely beneficial to Alaska, and she posited that citizens of both Texas and North Dakota have benefited from the availability of this information as well. 3:01:10 PM REPRESENTATIVE MCCABE said he might be inclined to support Amendment 7 if there were a grandfather clause for entities already established in Alaska. He asked whether this is another "thinly veiled" attempt to access Hilcorp's data that it refuses to provide. REPRESENTATIVE MEARS responded that Amendment 7 is an honest and vigorous attempt to understand the largest business in Alaska. REPRESENTATIVE MCCABE said he would not be supporting Amendment 7 because it's unfair to target one company. CHAIR MCKAY reiterated that the intent of the bill is to incentivize gas production in Cook Inlet and opined that requiring "the opening of books" would be a disincentive. 3:03:40 PM REPRESENTATIVE RAUSCHER maintained his objection to Amendment 7. 3:04:21 PM A roll call vote was taken. Representatives Mears and Armstrong voted in favor of adopting Amendment 7. Representatives McCabe, Baker, Rauscher, Saddler, and McKay voted against it. Therefore, Amendment 7 failed to be adopted by a vote of 2-5. 3:05:22 PM CHAIR MCKAY announced that HB 223, Versions S, [as amended], was held over.