HB 230-AIDEA BONDS FOR PROCESSING FACILITIES  3:47:27 PM CHAIR OLSON announced that the next order of business would be HOUSE BILL NO. 230, "An Act allowing the Alaska Industrial Development and Export Authority to issue bonds for an oil or gas processing facility; and creating the oil and gas infrastructure fund to finance construction or improvement of an oil or gas processing facility." 3:47:45 PM REPRESENTATIVE PAUL SEATON, Alaska State Legislature, as the prime sponsor, stated that HB 230 moves forward the strategy to increase oil in the Trans-Alaska Pipeline System (TAPS) and increase throughput. An impediment to increasing oil in TAPS has been the difficulty in access to existing processing facilities, including water and gas constraint within the handling facilities. Also, companies want to reserve space for their own product. This bill is to remove these impediments. 3:48:48 PM REPRESENTATIVE REINBOLD moved to adopt the proposed committee substitute, (CS) for HB 230 labeled 28-LS1053\U, Martin, 2/10/14, as the working document. REPRESENTATIVE JOSEPHSON objected for the purpose of discussion. 3:49:16 PM REPRESENTATIVE SEATON explained that HB 230 would expand the Alaska Industrial Development and Export Authority (AIDEA). It are limited to $400 million bonding authority for all of its projects. He said that oil and gas processing facilities are expensive, and HB 230 will allow AIDEA to issue up to $200 million in bonds to fund projects without additional legislative authority. He said this relieves constraint in two ways. First, it isn't clear under the statutes that AIDEA has authority to finance oil and gas processing facilities. Second, it removes the monetary restraint. If the legislature approves this bonding, it provides authority on a timeline for commercial operations and accelerates the production of oil from smaller fields into the pipeline. He stated that the current $10 million limit, in effect, means AIDEA must come back to the legislature for approval, which means sometimes waiting until the legislature is in session. Thus, this bill would allow AIDEA to issue bonds up to $200 million for oil and gas processing equipment and renovations. 3:51:07 PM REPRESENTATIVE SEATON explained that HB 230 also creates the [Oil and Gas Infrastructure Fund to assist in financing oil and gas processing facilities on the North Slope]. The legislature may decide to appropriate funds rather than use a bonding authority. Historically, the state has negotiated with AIDEA between 10 to 12 percent on bonds so the state will make money on these loans and the new fund will be the repository of the earnings, which will be used for oil and gas projects. The current AIDEA fund can be used for any economic development. Thus, if the legislature wishes to target the extra bonding authority, it can do so. REPRESENTATIVE SEATON stated that the bill defines oil and gas processing as taking gas molecules out of oil. Additionally, it allows gas to liquid (GTL) by chemical conversion as opposed to phase conversion under liquefied natural gas (LNG). This would make GTL available, necessary due to emission control areas. Currently the state must import ultra-low sulphur diesel, but it can be made in Alaska. He pointed out one provision was added to SB 21 by the House Resources committee last year; however, it would have required a title change. Additionally, the bill duplicates the oil and gas [processing facility] tax credit section for construction or improvement of modules. This language was included in SB 21 and the tax credit duplicated in HB 230 to be sure the greatest opportunity for building modules is in the state. Thus, if modules are manufactured in Alaska the tax credit will apply. He offered to provide additional information on the service industry tax credit. 3:54:54 PM REPRESENTATIVE JOSEPHSON asked whether the sponsor agreed with the addition of the tax credit language. REPRESENTATIVE SEATON answered yes. He indicated that a portion targets Alaska jobs and provides an incentive for building the modules in Alaska. He pointed out that one smaller operator could have resulted in more oil in the pipeline if they could have obtained financing at commercially reasonable terms to build the facilities in the Matanuska-Susitna valley and truck them. He acknowledged a number of smaller outfits would be in line to put oil in the pipeline. He pointed out that processing facilities don't make money if the company is processing its own oil. Thus, it's not a profit center so it is more difficult on a business relationship to build processing facilities than it is for companies to undergo exploration. 3:56:53 PM REPRESENTATIVE JOSEPHSON suggested that the tax credit is designated for smaller independents. He asked whether larger companies can use the credits. REPRESENTATIVE SEATON answered that nothing limits the tax credits to smaller companies. He explained that these tax credits are not designed for projects the size of LNG plants. However, if there was the necessity for larger companies to renovate facilities they could approach AIDEA. Typically, the large producers generally have better access to capital than smaller outfits and AIDEA performs due diligence. He deferred to AIDEA with respect to due diligence. 3:58:23 PM REPRESENTATIVE JOSEPHSON related his understanding that the conventional wisdom is that access problems for existing processing facilities are access problems for independents. It seems fairly circular. He said the controversy is whether the "big three" are allowing access so to allow them to benefit from the credit seems to exacerbate it. REPRESENTATIVE SEATON clarified that this tax credit is not for production; instead it is a "qualified oil and gas service industry expenditure credit." The tax credits would apply if molecules are built in Alaska instead of Japan. This credit is exactly the same as the credit approved in SB 21 to incentivize building facilities in Alaska, creating jobs in Alaska, and driving Alaska's economy. He said that the combination cannot exceed $10 million a year. Thus, this provision does not provide an additional credit. In the event that SB 21 is repealed, it would still allow stimulation of Alaska hire and building modules in Alaska, he said. 4:00:33 PM REPRESENTATIVE JOSEPHSON withdrew his objection. There being no further objection, Version U was before the committee. REPRESENTATIVE CHENAULT commented that Representative Seaton is a man of many hats. He explained that in terms of access to facilities a limitation exists. He described the oil process, such that when a field is developed the initial oil wells produces significant oil, a little gas, and water. As time goes on, the percentages change, and sometimes wells can produce up to 95 percent water. He pointed out that sometimes even major oil companies are limited by the capacity of the facility itself and by composition changes as the wells age. He said that the facilities are expensive to build and operate and agreed that this bill is not a "bad" bill. CHAIR OLSON acknowledged many people would agree with him. 4:02:55 PM REPRESENTATIVE JOSEPHSON asked about the maximum tax credits. TED LEONARD, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), deferred to the expertise of the Department of Revenue (DOR) to respond the question. 4:03:41 PM REPRESENTATIVE JOSEPHSON asked whether it would be at the discretion of AIDEA's board on whether to issue bonds. MR. LEONARD misunderstood the question, noting he thought that he was asking about tax credits. 4:04:21 PM REPRESENTATIVE JOSEPHSON wondered whether the financing was statutorily mandated or if the board meets. He acknowledged that the LNG trucking was mandated, but he was trying to understand whether this bill would operate under the AIDEA board's discretion. MR. LEONARD responded that under AIDEA's current statutes, AIDEA invests in projects through direct financing or owning a portion of a project. The board goes through a due diligence phase and during the review process on projects decides what type of capital structure will work and if it will issue bonds for a project. Under the current statue anything over $10 million is subject to legislative approval prior to the board issuing bonds. He explained that the authority by the legislature is not a mandate, but rather the legislature grants authority to issue bonds. The AIDEA still goes through its complete due diligence phase. Before AIDEA would issue bonds, the AIDEA board will first approve the project and per statute identify a finance plan to repay the bonds. In reality this bill would increase the authority to issue up to $200 million in bonds, which avoids the necessity for AIDEA to request bonding authorization from the legislature every time the board might consider investing in a facility. 4:06:54 PM REPRESENTATIVE JOSEPHSON said he was curious how generous the credits could become; however, he certainly liked the policy. 4:07:56 PM REPRESENTATIVE JOSEPHSON asked how much the state would forego in taxing authority if the potential for tax credits were issued. MATT FONDER, Director, Anchorage Office, Tax Division, Department of Revenue (DOR), admitted he has just seen Version U containing the tax credits this afternoon. He offered his belief that bonding and tax credits are separate issues. Proposed Sec. 2 and AS 43.20, the corporate income tax section, set forth a new credit for oil and gas processing facilities. He viewed the bonding and the tax credit as separate issues. 4:08:54 PM REPRESENTATIVE JOSEPHSON asked if he could predict how many people could take advantage of these credits. MR. FONDER answered that "at first blush" the way the language appears it could include any company with an oil and gas processing facility on the North Slope, any company that would like to build one, and any company working on an oil and gas processing facility. Thus, it could be an oil and gas producer or service provider on any of those facilities. REPRESENTATIVE JOSEPHSON said he didn't know what the answer is but he thanked Mr. Fonder. REPRESENTATIVE SEATON explained the tax credit mirrors existing law. He stated that SB 21 passed the legislature last year with this language - 10 percent of the qualified oil and gas service industry expenditures during the tax year or $10 million, whichever is less. This bill includes language that this existing tax credit can't be combined. He reiterated that this is not a new tax credit; he just wanted to make sure that no matter what the outcome of the [upcoming] referendum is, that the tax credit to stimulate production of facilities in Alaska will remain the same and will remain in place. 4:10:55 PM REPRESENTATIVE JOSEPHSON said that Representative Seaton was clear. He related his understanding that the projections by the Office of Management & Budget and DOR projects under SB 21 would continue regardless of the outcome of the August referendum. REPRESENTATIVE SEATON answered yes. 4:11:36 PM CHAIR OLSON said he would keep public testimony open. [HB 230 was held over.]