SB 112-OIL & GAS PRODUCTION TAX  4:19:30 PM CHAIR GIESSEL announced the consideration of SENATE BILL NO. 112 "An Act relating to credits against the oil and gas production tax; and providing for an effective date." 4:19:56 PM CHAIR GIESSEL solicited a motion. 4:20:08 PM SENATOR WIELECHOWSKI moved to adopt the committee substitute (CS) for SB 112 work order 34-LS0566\I, as the working document. 4:20:19 PM CHAIR GIESSEL objected for purposes of discussion. 4:20:25 PM SENATOR WIELECHOWSKI explained that Senate Bill 21, 2013, originally proposed a 25 percent oil tax rate with no credits, but the Senate raised it to a 35 percent rate with a $5 per- barrel credit. The House later increased the credit to $8 per barrel. Modeling at the time assumed unrealistically high oil prices, and the larger credit has since cost the state about $8.9 billion. He said SB 112 sought to return the per-barrel credit cap from $8 back to $5, matching the Senate's original version. Prior testimony from the Department of Revenue indicated that a $5 cap would keep producers competitive, and former Commissioner Lucinda Mahoney noted that the governor would support this change if the legislature did as well. The proposed adjustment is expected to generate $100$180 million in additional annual revenue. 4:23:38 PM HUNTER LOTTSFELDT, Staff, Senator Bill Wielechowski, Alaska State Legislature, Juneau, Alaska, presented the summary of changes for CS 112, version I: [Original punctuation provided.] Senate Bill 112  Oil & Gas Production Tax  Summary of Changes 34-LS0566\N to 34-LS0566\I Section 2. On page 3, lines 4-5, Amends AS 43.55.024(j): Adds in a final $0 per-barrel credit tier for when the gross value of a taxable barrel of oil is at or above $120. 4:24:15 PM CHAIR GIESSEL removed her objection. 4:24:25 PM CHAIR GIESSEL found no further objection and CSSB 112 was adopted as the working document. 4:24:35 PM MR. LOTTSFELDT provided the sectional analysis for CSSB 112, version I: [Original punctuation provided.] Senate Bill 112  Oil & Gas Production Tax  Sectional Analysis for Version I Section 1. Amends AS 43.55.024(i): Adds language to conform to the new subsection (k) under section 3 limiting the application of the $5 per-barrel credit for new fields receiving a gross value reduction. Section 2. Amends AS 43.55.024(j): Adds both conforming language for subsection (k) under section 3 and reduces the per-barrel credit slider from an $8 to $1 slider to a $5 to $1 slider. Section 3. Adds a new subsection (k) to AS 43.55.024: This new subsection will tie the amount of per-barrel credits a producer may claim to the amount of qualified capital expenses that producer incurs on their property or leases. Limits a producer's ability to carry forward unused per-barrel credits. Section 4. Adds an applicability section: This Act applies to credits from oil production on or after January 1, 2025. Section 5. Adds a new uncodified law section: This section addresses the transition of tax payments under this Act. Section 6. Adds a new section of uncodified law: This section addresses the Department of Revenues ability to make regulations retroactive. Section 7. Adds a new section of uncodified law: Sets a retroactive date of January 1, 2025. Section 8. Sets an immediate effective date. 4:26:15 PM SENATOR MYERS asked for an explanation of the mathematical formula and its effects in Section 3. 4:26:38 PM MR. LOTTSFELDT said the intent of Section 3 was to tie the amount of per-barrel credit a producer receives for barrels produced each year to capital expenditures in that same year. 4:27:26 PM SENATOR MYERS noted terminology used by Department of Natural Resources (DNR) and the oil companies, specifically: • unit • lease • participating area SENATOR MYERS asked for clarification of the terms and which of them were addressed by SB 112, Section 3 as "each lease or property". 4:28:26 PM MR. LOTTSFELDT said "lease" or "property holding" in Section 3 applied to the [specific] producer. He noted that there were individual leases and participation by multiple producers in one unit, as in Prudhoe Bay. He said the intent was to encompass the range of holdings a producer may have. 4:29:05 PM SENATOR MYERS asked whether SB 112 would require the Department of Revenue to calculate taxes at the level of each small, individual lease rather than at the broader unit level (e.g., Prudhoe Bay, Kuparuk, Endicott). He noted that leases started out small and were later combined into units. He asked whether the intent was to separate tax reporting for every individual lease within those units. 4:30:03 PM CHAIR GIESSEL suggested that experts available online may be able to answer Senator Myers's questions. 4:30:56 PM MARK MYERS, representing self, Fairbanks, Alaska, explained that ownership of oil was tied to individual leases, but production occurred from a shared pool of oil. All leases overlying that pool were grouped into a participating area within a larger unit. Units were typically bigger than the proven reservoir to allow for expansion. Production and costs were allocated back to each lease through this unitization process. He opined that using "lease" in the language for SB 112 was appropriate, as production and costs were allocated to the lease level. 4:31:59 PM SENATOR MYERS asked for confirmation that the "lease or property" language in SB 112, Section 3, would not require the Department of Revenue to track taxes at the individual lease level, and that the Department of Revenue (DOR) can continue tracking at the unit level instead. 4:32:37 PM MR. MYERS explained that allocation to individual leases was already handled through established processes. As a field developed and boundaries changed, producers continually recalculated and agreed on each lease's equitable share of production. He noted that the state participated in setting the participating area, which determined unit size. He explained that all oil was produced through shared facilities, and allocations ensured every lessee received their fair share. He said the value per barrel was allocated back to each individual lease in an orderly, existing system. 4:33:43 PM SENATOR DUNBAR asked how SB 112, Section 3, would change practices for producers on the North Slope from the way they operate currently. 4:34:47 PM MR. MYERS said he did not think it was different in terms of the way barrels and costs per barrel were allocated. He said the change was to limit the amount of credit a producer can claim based on the amount of capital. 4:35:17 PM SENATOR WIELECHOWSKI said SB 112, Section 3, ensured that companies would not receive more in tax credits than the amount they spend on qualified capital expenditures. He said for example that if a company spent $100 million in Prudhoe Bay, its tax credits could not exceed $100 million. He emphasized that the goal of SB 112, Section 3 was to encourage investment while preventing credits from surpassing real spending. He noted that in practice, the change would have a minimal effect because companies generally did not receive credits above their expenditures. 4:36:26 PM SENATOR DUNBAR asked for confirmation that SB 112 applied to capital expenditures in producing fields and not to fields in development, like the Willow project. SENATOR WIELECHOWSKI concurred and explained that the language [of SB 112, Section 3] limits a producer's tax credits to no more than the qualified capital expenditures for that specific lease or property. He said a producer could not apply credits that exceed what they spent on that property. 4:37:01 PM SENATOR CLAMAN asked whether, under the language of SB 112, Section 3, any unused portion of the capital-expenditure-based tax credit disappeared at the end of the calendar year. For example: if a producer has $300 million in qualified capital expenditures but only $200 million of tax liability to apply credits against, would the remaining $100 million in credits be forfeited, since the subsection says unused credits may not be carried forward. 4:37:57 PM SENATOR WIELECHOWSKI affirmed that the credit could not be carried forward. 4:38:02 PM SENATOR CLAMAN asked how that differed from today. 4:38:09 PM SENATOR WIELECHOWSKI said the impact of SB 112 would be minimal. He said the presentation included ten-year future modeling by Department of Natural Resources (DNR). 4:38:28 PM SENATOR CLAMAN clarified his hypothetical example: If a producer had $300 million in credits but can only use $200 million in the first year, under current law the remaining $100 million could be carried forward and used the next year. His question was whether SB 112 would change that, meaning the extra $100 million would no longer be usable in year two. 4:38:54 PM SENATOR WIELECHOWSKI explained that two separate mechanisms were involved: • Carry-forward of lease expenditure deductions • Carry-forward of the per-barrel tax credit SENATOR WIELECHOWSKI said SB 112 would affect only the per- barrel credit, limiting the ability to carry it forward. SB 112 would not affect companies' ability to carry forward lease expenditure deductions. DOR's modeling suggested the overall impact of this change over the next decade to be minimal. 4:39:51 PM MR. LOTTSFELDT moved to slide 2. He explained that there were currently two types of per-barrel production tax credits: • A flat $5 credit for new production fields that qualified for a gross value reduction (GVR). • A sliding per-barrel credit that provided $8 when oil is $80 or less, then gradually decreased as oil prices rose, dropping to $1 at $140$150, and becoming zero above $150. MR. LOTTSFELDT explained that the sliding credit was a form of reverse progressivity, designed to offer more support when oil prices were low and less when prices were high and production more profitable. [Original punctuation provided.] Where we currently are: Current Law: The State of Alaska's major North Slope production fields receive a credit per-barrel of taxable oil. The amount of that credit is based on the sliding scale of average gross wellhead value. $8/barrel at less than $80; $7/barrel at $80 to less than $90; $6/barrel at $90 to less than $100; $5/barrel at $100 to less than $110; $4/barrel at $110 to less than $120; $3/barrel at $120 to less than $130; $2/barrel at $130 to less than $140; $1/barrel at $140 to less than $150; $0/barrel at $150 4:40:55 PM MR. LOTTSFELDT moved to and narrated slide 3: [Original punctuation provided.] Where did Per-Barrel Credits come from? • SB 21, from 2013, the "More Alaska Production Act" (MAPA), was introduced with no per-barrel credits. • A flat $5 per-barrel credit was added by the Senate before passing the body. This version of SB 21 was supported not only by the Senate, but the Governor and Industry as well. • The House made the flat $5 per-barrel credit apply to new fields. The House then added a sliding scale per-barrel credit that went $8 to $1 for oil prices $80 and below, up to $150 and below. 4:41:57 PM MR. LOTTSFELDT moved to slide 4. He emphasized that the price of oil was much lower in reality than had been modeled for Senate Bill 21, 2013: [Original punctuation provided.] There was little time to consider these changes • SB 21 was sent back from the House with these new per-barrel credits the day before adjournment. • The Senate on the last day of session voted to concur with the changes made by the House. • The new per-barrel credits were modeled on a forecast average Alaska North Slope ($ANS) price of $106.2, the real average price over the same period was $61.1. 4:44:18 PM MR. LOTTSFELDT moved to and narrated slide 6: [Original punctuation provided.] Chapter 8 4 Historical Production Tax Credits and Forecast FY 2015 - FY 2034 Since 2014 Alaska has lost $8.6 billion to per-barrel credits [Slide 6 contains a table of various tax credits for the oil and gas industry from FY 2015 through FY 2024, highlighting the per taxable barrel credit, AS 43.55.024(i)-(j).] Source: 2024 Fall Revenue Sources Book 4:44:28 PM MR. LOTTSFELDT moved to and narrated slide 7: [Original punctuation provided.] Chapter 8 4 Historical Production Tax Credits and Forecast FY 2015 - FY 2034 The State of Alaska is projected to give out another $6.5 billion in the next 8 years. [Slide 6 contains a table of various tax credits for the oil and gas industry from FY 2025 through FY 2034, highlighting the per taxable barrel credit, AS 43.55.024(i)-(j).] Source: 2024 Fall Revenue Sources Book 4:44:40 PM SENATOR MYERS recounted a past conversation where someone involved in creating the per-barrel credits explained that they were designed to introduce progressivity into Senate Bill 21, like Alaska's Clear and Equitable Share (ACES) used a progressive tax rate that increased by small increments, for example, a quarter-percent, as prices rose. He asked whether the state was now saying it lost money because of per-barrel credits under Senate Bill 21, and if that implied the state would also have lost money under ACES, which used a different but still lower level of progressivity and a lower tax rate? 4:45:39 PM MR. LOTTSFELDT said forego may be a better term than lost. He explained that the state was foregoing revenue. 4:46:06 PM MR. LOTTSFELDT moved to and narrated slide 8. He pointed out that between 2016 and 2021 the production tax revenue was less than the amount of incentive the state was giving in per barrel credits: [Original punctuation provided.] History of production tax revenue vs. per-barrel credits [Slide 8 contains a line graph comparing revenue to the State of Alaska through Production Tax vs Per- Barrel Credits.] Sources: 2024 Spring Forecast & 2024 Fall Revenue Sources Book 4:46:36 PM MR. LOTTSFELDT moved to and narrated slide 9: [Original punctuation provided.] Per-Barrel Credits Have Not Incentivized Investment on the North Slope: Expenditures [Slide 9 includes a table illustrating Qualified Capital Expenditures for the Prudhoe Bay Unit and for all other Alaska North Slope (ANS) producers.] Source: DOR Reported ANS Lease Expenditures and Capital Lease Expenditures: CY 2014 CY 2023 & DOR's response to SRES 3.3.25 4:46:59 PM SENATOR MYERS noted apparent contradiction in how the per-barrel credits were being described. They're said to provide tax progressivity, yet also said to incentivize investment, two purposes that don't obviously align. If, in 2013 [Senate Bill 21], the credits were primarily intended to make the system progressive, then SB 21 already had separate provisions designed to encourage new development through allowable lease expenditures. He asked why it mattered now whether the per- barrel credits incentivized investment, if their original purpose was progressivity rather than investment. 4:47:47 PM MR. LOTTSFELDT clarified that the per-barrel credit was not traditional progressivity but reverse progressivityproviding more benefit at lower oil prices to incentivize production and maintain jobs. 4:48:40 PM SENATOR MYERS asked whether the intent under the previous Alaska Clear and Equitable Share (ACES) was also to incentivize production. 4:48:57 PM MR. LOTTSFELDT said he would follow up when he could provide an accurate answer. 4:49:07 PM CHAIR GIESSEL noted that the legislature's intent to support new [oil and gas] development and gross value reduction was designed to incentivize new oil development on the North Slope, offering temporary reductions based on price. She suggested that expert testimony was available to explain and answer questions. SENATOR MYERS affirmed that he would appreciate the opportunity for explanation questions when appropriate. 4:49:59 PM MR. LOTTSFELDT moved to and narrated slide 10, Per-Barrel Credits Have Not Incentivized Investment on the North Slope: Credits. He highlights that in 2021, Prudhoe Bay received an estimated $448 million in per-barrel credits but only spent $106 million on qualified capital expenditures, showing a significant gap between credits received and actual investment. 4:51:14 PM SENATOR DUNBAR observed that there appeared to be no clear correlation between the credits collected and capital spending in Prudhoe Bay. MR. LOTTSFELDT affirmed that credits and capital expenditures appeared unrelated. 4:51:43 PM SENATOR DUNBAR asked whether any regression analysis had been done to determine how much additional production or capital spending is generated per dollar of tax credit, such as increasing the credit cap from $8 to $9. 4:52:31 PM DAN STICKEL, Chief Economist, Tax Division, Department of Revenue (DOR), Juneau, Alaska, said no such analysis had been done because predicting how taxpayers will react to tax changes was extremely difficult. He acknowledged that changes in per- barrel credits may influence tax-payer decisions, but the Department of Revenue does not try to estimate the exact impact on investment or production. 4:53:29 PM SENATOR DUNBAR said his question might be 12 years too late. He reflected that it seemed odd to create incentives without knowing their impact. He acknowledged the complexity but noted that the policy involved hundreds of millions of dollars. He added the wish that such analysis had been done earlier, and hoped some modeling existed at the time. 4:53:58 PM SENATOR HUGHES noted a claim by former Department of Revenue (DOR) Commissioner Brian Fechter that changing the credit from $8 to $5 wouldn't affect investment. She noted the claim did not appear to be based on any documented analysis. She asked whether any written modeling or supporting materials existed and, if so, requested that they be provided to the committee.5 4:54:39 PM MR. STICKLE said he could not speak to past officials' statements and acknowledged that while the Department of Revenue had done various analyses and hired consultants over the years, he didn't know what specific analysis Deputy Commissioner Fechter relied on when making his claim. 4:55:09 PM SENATOR HUGHES noted that if any analysis existed, DOR should still have it. Since no written work appeared to exist, she asked whether DOR could confidently say the credit change would not affect production, revenue, or royalties.  4:55:38 PM MR. STICKLE said he would not say with certainty that a tax change would not impact production. He referred to the fiscal note from the Department of Revenue (DOR), OMB Component Number 2476, dated March 7, 2025. He said it was an indeterminate fiscal note in part because SB 112 would be expected to impact taxpayer behavior. 4:56:11 PM SENATOR WIELECHOWSKI asked Mr. Stickle or another expert available online to explain the lessee's legal duty to produce oil in Alaska, specifically the obligations required when a company holds a state lease. 4:56:31 PM MR. STICKLE deferred to Department of Natural Resources (DNR). 4:56:40 PM CHAIR GIESSEL noted that there was not a DNR representative available online. She said there would be more hearings on SB 112 with representation from DNR as well as documentation and modeling from past policy decisions. 4:57:21 PM MR. LOTTSFELDT resumed the presentation on SB 112, speaking to slide 10. He pointed out that in 2021, Prudhoe Bay producers received about $448 million in credits but spent only $106 million on qualified capital costs, and SB 112, Section 3, aimed to narrow that gap. 4:57:51 PM SENATOR HUGHES noted that Covid-19 may have affected production in 2021. MR. LOTTSFELDT acknowledged her observation. 4:58:16 PM MR. LOTTSFELDT moved to slide 11. He quoted former Alaska governor Jay Hammond: [Original punctuation provided.] "Development that actually costs the state remains Alaska's least understood and most pressing economic problem. Few politicians seem concerned that we do not extract enough wealth from new resource development to offset its costs." -Governor Jay Hammond [Slide 11 includes a photograph of Governor Hammond.] 4:58:50 PM SENATOR MYERS asked whether the per-barrel tax credits resulted in foregone state revenue so large that it failed to cover state costs such as Department of Natural Resources (DNR) and Department of Environmental Conservation (DEC) oversight, and Department of Transportation and Public Facilities (DOTPF) maintenance of the Deadhorse airport and the Haul Road. 4:59:25 PM SENATOR WIELECHOWSKI answered that Alaska's current tax structure [under Senate Bill 21] resulted in three consecutive years of effectively negative oil taxes, meaning the state paid companies more in credits than it collected in taxes. He argued that this fails the constitutional requirement to obtain maximum value from the state's resources. He noted that oil once funded 90 percent of Alaska's budget but currently funded only about 30 percent. He likened it to an employee volunteering for a salary cut from $90,000 to $30,000 and then struggling to pay bills, asserting that Senate Bill 21 massively reduced revenue and harmed the state's fiscal position. 5:00:42 PM SENATOR MYERS asserted that a wholistic conversation would be necessary to consider not only the severance tax, but also royalties and other revenue the state received from oil companies. 5:01:00 PM SENATOR WIELECHOWSKI concurred and emphasized that one of the largest producers on the North Slope was currently paying zero corporate income taxes and there should be continued hearings on that. 5:01:15 PM CHAIR GIESSEL referred to the graph on slide 8. She pointed out that during 20212024, the four dollar-per-barrel minimum tax was crucial for the state, especially when oil prices briefly went negative during COVID. She said that the minimum tax essentially "saved" the state's bacon in those years. 5:01:54 PM MR. LOTTSFELDT moved to and narrated slide 12: [Original punctuation provided.]   What SB 112 does  SB 112 reduces the sliding-scale per-barrel credit by $3 and ties credits received to the amount of capital investment by the producer: • Sliding per-barrel credits vary between $5 for oil priced at $80 or less and $1 for oil priced at $120 or less, and $0 thereafter. • Producers may only claim credits commensurate with their qualified capital expenses from the same year. The new investment caveat encourages investment spending on projects in Alaska that will maintain production, create jobs for Alaskans, and promote industry growth. 5:02:59 PM MR. LOTTSFELDT moved to slide 13, How much does SB 112 raise? He said the table in slide 13 contained modeling for SB 112 by DOR for fiscal years 2026 through 2035: • Row 1: projected revenue gain from the three-dollar credit reduction. • Row 2: projected revenue with unchanged credit amount; but linking credits to qualified capital spending (SB 112, Section 3). • Row 3: Combining both changes, projected to bring in about $190 million in FY26, tapering to about $100 million by FY35.  5:04:20 PM CHAIR GIESSEL held SB 112 in committee.