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." 7:32:38 PM Co-Chair Kelly MOVED to ADOPT Amendment 1(copy on file). Page 1, line 3: Delete "and hydrocarbon processing facilities" Page 3, lines 11-12: Delete "or hydrocarbon processing facility" Page 3, lines 12-13: Delete "Except as provided in (b) of this section, a" Insert "A" Page 3, line 13: Delete "or hydrocarbon processing facility" Page 3, lines 14-15: Delete "or processed hydrocarbon products" Page 3, line 20-21: Delete "or hydrocarbon processing facility" Page 3, lines 22-27: Delete all material Reletter the following subsections accordingly. Page 4, line 12: Delete "(e)" Insert "(d)" Page 4, line 19: Delete "or hydrocarbon processing facility" Page 4, line 26: Delete "or hydrocarbon processing facility" Page 4, lines 29-30 Delete "or hydrocarbon processing facility" Page 5, line 2: Delete "or hydrocarbon processing facility" Page 5, lines 3-4: Delete "or hydrocarbon processing facility" Page 5, lines 12-14: Delete all material Renumber the following paragraphs accordingly. Page 5, lines 17-18: Delete ", petroleum-based feedstock, or processed hydrocarbon products" Insert "or petroleum-based feedstock" Co-Chair Meyer OBJECTED for discussion. JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, explained Amendment 1. Co-Chair Meyer WITHDREW his OBJECTION. There being NO further OBJECTION, Amendment 1 was ADOPTED. 7:36:28 PM Commissioner Balash continued to discuss the bill and stated that there was a hope to see a change in the cost of energy for interior Alaska, with the completion of the Interior Energy Plan to bring LNG to the Interior. He stated that DNR had reached out to Petro Star, and wondered if they would be the next to announce their closure. He stated that March was the month of the year for Petro Star to renew their crude oil purchases, so they were faced with a big decision. He stated that the consequence of Petro Star was of too great magnitude, because they were the chief supplier of military grade jet fuel for Eielson Air Force Base, Fort Wainwright, Jay Bear, and Kodiak Air Station; and the marine grade diesel for Kodiak Air Station. He stressed that DNR was compelled to determine what could keep Petro Star operational. There had been strong consideration for the sale of royalty oil at a discounted price, but that path was not pursued. He stated that DNR formulated a package of incentives that was first heard and reviewed by the House, but they changed it to a different combination for the investment incentive credit. 7:41:42 PM Senator Dunleavy queried the sunset date of the legislation. Commissioner Balash directed the committee's attention to page 3, lines 17 and 18. He stated that the effective date was after December 31, 2014 and before January 1, 2020. Senator Dunleavy wondered if there would be some retroactivity. Commissioner Balash replied in the negative. Co-Chair Meyer asked how DNR had determined five years. Commissioner Balash responded that there were some projects that the refineries were currently examining, so there was a near term perspective. Some other investments that would be applied to the refinery itself, there may be a component of their air permitting that must be examined. Co-Chair Meyer looked at page 4, line 8, and asked how that provision worked. He assumed that the company would still receive a payment if they had not applied, but were eligible for the tax credit. Commissioner Balash responded that the credit would be taken against a state corporate income tax liability. If they had exhausted the liability, but had credit remaining, the language would allow them to request a refund similar to the credit program for the Alaska oil and gas production tax system. Vice-Chair inquired how Alaska would compete in the new world of refining. 7:47:34 PM Vice-Chair Fairclough requested that the Petro Star representative testify again before the committee. DOUG CHAPADOS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PETRO STAR INC., introduced himself. Vice-Chair Fairclough remarked that Petro Star had indicated that the refinery was carrying a negative net profit. She wondered if that was accurate. Mr. Chapados replied that Petro Star had carried a negative profit in 2014. Vice-Chair Fairclough inquired why Mr. Chapados responded that Petro Star had taken steps to become a very efficient operation. He reported that the quality bank had become less solvent over the last few years. 7:51:32 PM Vice-Chair Fairclough queried what expenditure would be made to reduce the cost to qualify for the credit that made Petro Star more profitable. Mr. Chapados replied that there was a current project with the Alaska Railroad, but the details were outlined in a nondisclosure agreement. Vice-Chair Fairclough noted that it had been stated that the quality bank and the cost of crude were the major components for why Petro Star was not profitable. She surmised that there would be a capital expenditure to qualify for the credit, but not fix the problem. Mr. Chapados replied that Petro Star could not control the cost of crude and other aspects of the business. He stressed that Petro Star worked hard to control the things that they had some measure of influence over. Vice-Chair Fairclough surmised that the capital expenditure would turn a profit to maintain business for an extended period of time. Mr. Chapados replied in the affirmative, and furthered that the capital expenditure was just one of many proposed projects for Petro Star. Vice-Chair Fairclough queried if there would be an opposition to review the credit. Mr. Chapados would be open to a review the following year to determine if the credit had the desired results. Senator Bishop noted that refining was not wildly profitable for anyone anywhere. He surmised that Petro Star was examining many different ways to save money, and the credit would allow the business to decrease transportation costs. Mr. Chapados agreed. Vice-Chair Fairclough inquired if a tax credit for bulk storage had been created the prior legislative session. Commissioner Balash replied that it was his understanding that there was a storage credit, but it was for LNG. 7:57:22 PM Vice-Chair Fairclough asked for more influence to support the legislation. Commissioner Balash replied that there was no intention to bring and incentive for this particular industry. He stressed that it was an unregulated market, which was fiercely competitive. He stressed that there was no intention to pick winners and losers among the state's refineries. In order for the administration and public to fully understand the economic benefits of the refineries to Alaska, DNR was prepared to undertake a competitiveness review and analysis of the factors that were driving the operations of the industry's facilities. He explained that he was already in conversation with an economist that had previously worked with the state regarding this issue in the industry. He felt that the analysis could be conducted concisely and inexpensively. The only way to ensure that the credits were effective, would be to conduct the analysis and review to determine a healthy refining industry for Alaska in the long term. Vice-Chair Fairclough wondered why a credit would be extended beyond the one business that supplied 100 percent of the military grade jet and marine diesel fuel, at approximately 50 to 60 million gallons annually. Commissioner Balash responded that DNR attempted to keep in mind the maximum cost and the corresponding contribution that the facilities make to the state treasury. He explained that the state's royalty values increased and the production tax value increased. In 2013 the total quality bank charges paid by all TAPS refineries exceeded $112 million, and the total back to the state was in excess of $50 million between increased royalty value and increased production tax value. 8:04:57 PM Vice-Chair Fairclough wondered why the credit was extended to other businesses other than Petro Star. Commissioner Balash replied that the liquid oil products industry was one that was very competitive for customers at fueling stations around Alaska. He felt that extending the credit to other businesses would enhance that positive competitiveness. Vice-Chair Fairclough surmised that limiting the credit to only one business would interfere with the market. Commissioner Balash replied that it was a policy concern, in not wanted to upset the existing competitive balance. 8:07:27 PM Co-Chair Kelly stressed that the oil refinery industry was strong. He remarked that the demand for refined products was strong. He felt that environmental regulations inhibited the improvement of existing refineries and the building of new refineries. He stressed that Alaska needed refined products, and therefore needed a strong refinery industry. Vice-Chair Fairclough remarked that there was an issue of the security of a refinery to produce in Alaska and the jobs of those that were currently employed. She wondered if there should be an exclusion for those that were already receiving a royalty oil sale contract. Commissioner Balash replied that the legislation was the same legislation in Resources, but had some added pages. He stated that DNR was seeking the approval of a royalty sale contract to Tesoro. Tesoro was paying a price that was higher than the state would have received under the RIV calculation with the producers. He felt that creating an eligibility exemption would create a disincentive for the instate refineries to purchase royalties from the state. The state wants the refineries to purchase royalties, because they pay more than what was received from the producers. 8:13:01 PM Vice-Chair Fairclough wondered how Commissioner Balash would respond to people that feel that credits should not be available to those that were operating a healthy business. Commissioner Balash noted that the refineries were the exact type of operation that many legislators focus upon. Co-Chair Kelly wondered what if the company must repay the credit, if the company shuts down. Commissioner Balash replied in the affirmative, and explained that the provision was on page 4, line 19. Senator Dunleavy queried the difference between Petro Star and Tesoro's situations. Commissioner Balash replied that Tesoro was located on the Kenai Peninsula, and had access to natural gas to generate their electricity. He furthered that Tesoro had water access, and could bring in crude oil as necessary that was not exclusive North Slope or TAPS crude oil. He stated that Tesoro had a refined product pipeline that ran from their facility to Anchorage, which allowed them to deliver their products efficiently to market. That pipeline was approaching capacity, and may need to be looped to deliver additional product, particularly in light of the closure of Flint Hills. He stated that Tesoro saw many different varieties of crude oil, so they were seeking to construct a pipeline from the west side of Cook Inlet over to their facility on the east side of Cook Inlet. That pipeline would allow for the elimination of a tank and barge system that presently operated on the west side near a volcano. 8:17:09 PM Senator Dunleavy noted that earlier in the year, the major producers and Tesoro were on the same page in the quality bay. He wondered if the state was a part of that discussion. Commissioner Balash replied that Flint Hills had filed a complaint with the Federal Energy Regulatory Commission (FERC), and the state intervene. Subsequently, the state's goal was to see the system operated fairly. The state would ensure that high quality oil would be valued appropriately and compensated for dilution. He stressed that DNR was not seeking to eliminate quality bank charges paid by the TAPS refineries. He felt that they situation must be revisited and adjusted to bring it into balance. The quality bank system worked with a variety of components that could tie to the products made from a crude oil stream. Some of the components were valued on a market basis, but some components were fixed. It would appear that the fixing of that value caused the rest of the system to fall out of balance. The specific complaint filed by Flint Hills, and the specific remedy may not be agreed upon by the state. He explained that FERC had opened their own investigation. He stated that the Flint Hills action may soon be dismissed by the Administrative Law Judge. Senator Dunleavy wondered if the Valdez facility could import oil from North Dakota and refine it at a lower cost. Commissioner Balash deferred to Mr. Chapados, but believed that Valdez could feasibly import and refine the oil. Senator Dunleavy restated his question. Mr. Chapados responded that the possibility was currently being examined. Co-Chair Meyer wondered how the state was protected, if the refineries sold assets or became bankrupt. Commissioner Balash responded that the amount of the credit claimed was prorated over the remaining nine years. If in any one year the facility ceases commercial operation, the remaining amount of the credit would be reflected as an increase in tax liability by the tax payer. 8:23:18 PM Co-Chair Meyer wondered if it should be covered in the legislation. Commissioner Balash replied that it may be covered in corporate income tax. Co-Chair Meyer asked if Mr. Fonder could respond to the questions. Vice-Chair Fairclough looked at page 4, line 19, and wondered how the state would be protected. MATT FONDER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, explained that the language was modeled after the gas storage facility credit and the LNG storage facility credit. The functionality was like any other tax liability. Vice-Chair Fairclough felt that Mr. Fonder did not respond to the question. She wondered if the state was entitled to any reimbursement if a person received a tax credit and invested in a piece of property that improved the asset, then sold the property. She felt that line 20 did not allow the state any reimbursement. Mr. Fonder responded that he did not believe that it was specifically covered in the language. 8:26:26 PM AT EASE 8:33:28 PM RECONVNED Vice-Chair Fairclough MOVED to ADOPT a conceptual amendment 2. Page 4, line 20 Following "operation" Insert "or is sold" There being NO OBJECTION, it was so ordered. Co-Chair Meyer inquired how the amendment worked for the commissioner. Commissioner Balash responded that DNR would be able to involve the Department of Law (DOL) to ensure that the right material was captured. He felt that the conceptual amendment made it clear that there could be a specific piece of property that was subject to the credit in question. Vice-Chair Fairclough agreed that it was her intent to include the property. Senator Olson wondered how the state was protected if the company was bankrupt. Commissioner Balash replied that he read, "If the facility ceases commercial operation", related to bankruptcy. Senator Bishop felt that Mr. Fonder alluded to that summation. Senator Dunleavy wondered what the state received in royalty oil in conjunction with Petro Star. Commissioner Balash replied that the amount of increased value the state received for the royalty, as a consequence of the quality bank charges by all TAPS refineries was $20.6 million in 2013. Senator Dunleavy surmised that ANS was trading at a premium; and Tesoro was refining oil from the west coast. Senator Hoffman asked why there was no program to subsidize fuel for the military. Commissioner Balash responded that a subsidiary mechanism might work, if Petro Star had closed. 8:40:57 PM AT EASE 8:41:40 PM RECONVENED Vice-Chair Fairclough MOVED to REPORT SCS CSHB 287(FIN) out of committee as amended with individual recommendations, the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. SCS CSHB 287(FIN) was REPORTED out of committee as amended with "no recommendation" and with a previously published indeterminate fiscal note: FN2 (DNR) and a forthcoming amended fiscal note from the Department of Revenue. HJR 10 was SCHEDULED but not HEARD. HB 384 am was SCHEDULED but not HEARD.