CS FOR HOUSE BILL NO. 287(RLS) am "An Act relating to the determination of the royalty received by the state on oil production refined or processed in the state; providing tax credits for qualified infrastructure expenditures for in-state refineries and hydrocarbon processing facilities; approving and ratifying the sale of royalty oil by the State of Alaska to Tesoro Corporation and Tesoro Refining and Marketing Company LLC; and providing for an effective date." 6:23:41 PM Co-Chair Meyer MOVED to ADOPT the proposed committee substitute for HB 287, Work Draft 28-GH2862\O (Nauman, 4/19/14). There being NO OBJECTION, it was so ordered. JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, explained the legislation and the changes to the bill: New section 1 amends AS 38.05.180(cc) to include the DNR commissioner's ability to accept payment on a federal lease for the state's royalty share of oil production. Current law is limited to gas production. New section 2 adds new subsections (hh) under AS 38.05.180 to allow the DNR commissioner to enter into an agreement with the lessee to use or accept as a price for the royalty oil an amount not less than the contract price between the lessee and an in-state refiner. The price would not exceed the amount that would otherwise be due under the lease. Before entering into an agreement, the commissioner must make a written finding that the agreement is in the state's best interest; the in-state refiner meets certain criteria; and the contract price or prospective royalty receipts are balanced by employment opportunities or other tangible benefits to the state. The subsection defines how contract or purchase parties are affiliated through influence, interest, or action. Subsection (ii) defines "in-state refiner", "price established in the contract between lessee and an in- state refiner", and "state's royalty share of oil production". New section 3 adds a new section AS 43.20.053, which adds a new corporate income tax credit for a taxpayer that owns an in-state refinery or hydrocarbon processing facility and incurs "qualified infrastructure expenditures". The credit may not exceed the lesser of 40 percent of total qualifying expenditures or $10 million per tax year and sunsets in 5 years. The taxpayer is required to apply the credit against any corporate income taxes owed to the state, and any unused portion can be refunded by the state. New subsection (b) clarifies the credit may not be applied to an expenditure for the installation, modification, adjustment, or other alteration of tangible personal property primarily used for the manufacture or transport of liquefied natural gas, compressed natural gas, or to convert natural gas to liquids. New subsection (h) defines "processed hydrocarbon products", "qualified infrastructure expenditure", "refined petroleum products" and "unpaid delinquent tax". New section 4 amends AS 43.55.028(a) to include the qualified infrastructure expenditures as a credit that can be paid from the oil and gas tax credit fund. New section 5 amends AS 43.55.028(g) to allow the Department of Revenue to adopt regulations to carry out purposes of this section for refunds and payments under the qualified infrastructure expenditure. Section 6 (previously Section 1) provides legislative approval of an amendment of a royalty oil contract between the State of Alaska and Tesoro Corporation and Tesoro Refining & Marketing Company LLC, attached as Exhibit 1 to the final best interest finding and determination executed January 9, 2014. Section 7 provides an effective date of January 1, 2015 for Sections 1-5. Section 8 provides an immediate effective date for Section 6 related to the Tesoro royalty oil contract. 6:34:02 PM DOUG CHAPADOS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PETRO STAR INC., JUNEAU, spoke in support of HB 287. He stated that there was a hard copy of a PowerPoint in the backup, which provided some information on Petro Star. Senator Olson noted that the bill was integral to the survival of an important industry. He inquired about the negative effects of bill not passing. Mr. Chapados replied that the closure of the Petro Star would have ramifications all across Alaska. Petro Star's biggest customers were the airlines; it was also the sole supplier of military grade jet fuel for the military bases in the state. 6:38:12 PM AT EASE 6:38:32 PM RECONVENED Senator Olson asked many people and families would be affected by closing the refinery. Mr. Chapados responded that there was information in the backup, which outlined the economic impacts of the refinery closure. 6:41:54 PM MATT GILL, SENIOR MANAGER, EXTERNAL AFFAIRS, TESORO, JUNEAU, spoke in support of HB 287. He stated that the contract extension outlined in the legislation would provide Tesoro with a stable supply of ANS crude oil, and give the flexibility to accommodate seasonal fluctuations in demand for refined products. The availability, flexibility, and stability of the contract would have a positive impact on Tesoro's ability to maintain ongoing operations at its Kenai refinery. Vice-Chair Fairclough CLOSED public testimony. Senator Dunleavy wondered how many individual facilities would qualify under the legislation. Commissioner Balash responded that the qualifying facilities included the Flint Hills facility in North Pole; the Petro Star facility in North Pole; the Petro Star facility in Valdez; and the Tesoro facility in Nikiski. He stated that the Petro Star facility in North Pole was slated to close, so there would only be three qualifying facilities once the credits become available. Senator Dunleavy wondered if Agrium facility was qualified. Commissioner Balash replied in the affirmative. Senator Dunleavy queried the total possible tax credit. Commissioner Balash responded that, if all four refineries plus the Agrium facility participated, it would be 50 multiplied by 5, which would equal $250 million. He stressed that the facility provided a positive impact to the state treasury. 6:47:10 PM Senator Bishop wondered if the major oil companies were still refining product on the North Slope. Commissioner Balash responded in the affirmative. Senator Bishop asked if those companies were excluded from the legislation. Commissioner Balash replied that those companies were excluded from the legislation. Vice-Chair Fairclough wondered if there was an analysis of the costs that were part of the advancement of the proposal. Commissioner Balash replied that DNR had conducted best interest findings, and DNR had conducted a review of specific economics of the refining done in state. Vice-Chair Fairclough queried whether there would be a further examination of the structural problems of the Alaskan refineries. Commissioner Balash stated that DNR did not intend to pursue that type of investigation. The department was aware of the impacts to the refineries costs He explained that the quality bank and its charges were decided at the federal level and that the state had little ability in that regard to influence decision making. As commissioner, he intended to watch those companies closely as they were given the tax credits. 6:54:36 PM Vice-Chair Fairclough wondered why the companies would not be investigated first, followed by offering credits. Commissioner Balash responded that there was an urgency to maintaining the operations of the facilities. He stressed that the revised legislation was much less generous than its original version. Senator Olson asked what the state would do if the legislation failed. Commissioner Balash replied that Petro Star had renewed its annual contract and that the state expected. He stated that the impacts would be fairly widespread. Senator Olson queried what other financial issues committee might should consider, if the legislation failed. Commissioner Balash expressed concerns that additional costs fuel prices would continue to increase. 7:02:36 PM Senator Olson wondered if the airports would still need refineries after the ten-year period. Commissioner Balash replied that he was concerned that the number of landings in Ted Stevens International Airport would decrease. Senator Bishop expressed additional concern that the availability of asphalt would be affected. HB 287 was HEARD and HELD in committee for further consideration. 7:05:35 PM AT EASE 7:06:14 PM RECONVENED