SB 61-OIL/GAS LEASE: DNR MODIFY NET PROFIT SHARE  4:29:08 PM CHAIR REVAK reconvened the meeting and announced the consideration of SENATE BILL NO. 61 "An Act authorizing the commissioner of natural resources to modify a net profit share lease." He recapped that the bill was heard twice previously and public testimony was heard. He advised that there was a committee substitute (CS) and two amendments for the committee to consider before potentially moving the bill. 4:30:05 PM SENATOR MICCICHE moved to adopt the committee substitute (CS) for SB 61, work order [32-GS1706\B]. 4:30:20 PM CHAIR REVAK objected for discussion purposes. 4:30:24 PM At ease. 4:30:49 PM CHAIR REVAK reconvened the meeting and asked Senator Micciche to restate the motion. 4:30:54 PM SENATOR MICCICHE restated the motion to adopt the committee substitute (CS) for SB 61, work order 32-GS1706\B. 4:31:11 PM CHAIR REVAK objected for discussion purposes. He asked Ms. Tangeman to highlight the changes between version A and version B. 4:31:22 PM BETTY TANGEMAN, Staff, Senator Josh Revak, Alaska State Legislature, Juneau, Alaska, presented the summary of changes from version A to version B for SB 61. The prepared document read as follows: At the request of the Senate Resources Committee, legislative legal was asked to conform the initial version of the bill, 32-GS1706\A, to the legislative drafting style and make other changes consistent with existing law. The follow changes were made: 1. Changes to the Update: In several places, changes were made to the existing statutory language in AS 36.30.850 (b)(32) and AS 38.05.180 (j) to increase readability and modernize usage. The Department of Natural Resources, Division of Oil and Gas confirmed that they agreed with the changes. 2. Additional Subsections: AS 38.05.180(p), (s), and (t) all contain references to modification of royalty rates under AS 38.05.180 (j). This draft bill adds language related to the net profit share to those subsections, consistent with the addition of the net profit modification option added by the bill in (j). The Department of Natural Resources, Division of Oil and Gas confirmed that the edits were consistent with their intent. 4:33:03 PM CHAIR REVAK removed his objection. Finding no further objection, version B was adopted. 4:33:49 PM SENATOR MICCICHE moved Amendment 1. 4:33:54 PM CHAIR REVAK objected for discussion purposes. SENATOR MICCICHE explained that the amendment makes a language change for clarity. It changes "net profit share" to "royalty or net profit share on a lease". On page 2, line 17-18 it revises that language as well to clarify that "without additional capital expenditures, future production would no longer be economically feasible." He said the amendment makes no substantive change; it adds clarifying language. 4:34:38 PM CHAIR REVAK removed his objection; finding no further objection, Amendment 1 passed. 4:34:53 PM SENATOR KIEHL moved Amendment 2, work order 32-GS1706\B.4. 32-GS1706\B.4 Nauman 3/15/21 AMENDMENT 2 OFFERED IN THE SENATE BY SENATOR KIEHL TO: CSSB 61(RES), Draft Version "B" Page 3, following line 9: Insert a new paragraph to read: "(6) may not grant a net profit share modification for a field or pool under (1) of this subsection unless the modification requires the lessee or lessees to calculate separate net profit shares for oil and for gas, including separately accounting for oil and for gas for profit, costs, and expenditures;" Page 3, line 10: Delete "(6)" Insert "(7)" Page 3, line 16: Delete "(7)" Insert "(8)" Page 4, line 3: Delete "(8)" Insert "(9)" Page 4, line 28: Delete "(9)" Insert "(10)" Page 5, line 2: Delete "(10)" Insert "(11)" Page 5, line 4: Delete "(9)" Insert "(10)" Page 5, line 9: Delete "(11)" Insert "(12)" Page 5, line 16: Delete "(12)" Insert "(13)" Page 5, line 17: Delete "(9)" Insert "(10)" Page 5, line 29: Delete "(9)" Insert "(10)" Page 5, line 31: Delete "(13)" Insert "(14)" SENATOR KIEHL explained that Amendment 2 requires the department to decouple oil and gas if it enters into an agreement with a leaseholder to modify a net profit share contract. He noted that the legislature had begun the decoupling process for some taxes and it could continue to do so in the future, but because the net profit share lease is a contract, it can only be opened by mutual agreement. The amendment clarifies that if the contract is opened for modification, the state needs to get decoupling as part of that agreement. 4:36:09 PM CHAIR REVAK asked Mr. Fitzpatrick or Mr. Meza from DNR to comment on the amendment. 4:36:29 PM RYAN FITZPATRICK, Commercial Analyst, Division of Oil and Gas, Department of Natural Resources (DNR), Anchorage, Alaska, thanked Senator Kiehl for taking time to discuss the amendment with the division. He offered his understanding that the intent of Amendment 2 was to require separate accounting for oil and gas for the purpose of calculating net profit shares if a contract modification is granted. He opined that the analogous provision in the oil and gas production tax statutes was different in that that it creates different tax rates for oil and gas. Oil is taxed at 35 percent of the production tax value and gas is taxed at 13 percent of the gross value. By contrast, oil and gas would still be subject to the same net profit share percentage. The percentage would not be an issue but there is potential for some timing issues with regard to when the revenues are received. Nevertheless, they should equate over time. MR. FITZPATRICK said the division does not have a particular opinion on the amendment but it does not create complications. He added that he did want to clarify his understanding that the intent was that the division would be expected to include in the Best Interest Finding the mechanism for dividing the oil expenses from the gas expenses when a contract is being modified. 4:39:36 PM SENATOR KIEHL confirmed the intent is that the mechanism would be part of the Best Interest Finding that the public can see and is presented to LB&A. He said it is important to understand that DNR's Commercial Analysis Section will set it up after a thorough commercial and fiscal analysis and negotiation process with the leaseholder. He said the bill provides the commercial analysts tremendous say in the structure and the amendment does not change that except to say the lease would need to decouple oil and gas. He opined that the timing of when the money comes is important when trying to pay for state services. 4:40:35 PM SENATOR STEVENS asked if there was a fiscal note attached to the CS, and whether the amendment would require one. MS. TANGEMAN said the CS did not have a new fiscal note but one will likely be forthcoming. CHAIR REVAK noted the bill goes to finance next and he believes it will pick up a fiscal note. SENATOR MICCICHE commented that the reason for the bill is to prolong the life of a very marginal development, and he views the amendment as an unnecessary complication that would add costs. 4:42:54 PM CHAIR REVAK stated agreement and maintained his objection. He asked for a roll call vote. 4:43:23 PM A roll call vote was taken. Senators Kawasaki and Kiehl voted in favor of Amendment 2 and Senators Stevens, Micciche, and Chair Revak voted against it. Therefore, Amendment 2 failed by a 2:3 vote. CHAIR REVAK found no further amendments and asked the will of the committee. 4:44:11 PM SENATOR MICCICHE moved to report the CS for SB 61, work order 32-GS1706\B as amended, from committee with individual recommendations and attached fiscal note(s). 4:44:29 PM SENATOR KAWASAKI objected. He said he tried to figure out how to improve the bill and he though Senator Kiehl's amendment was appropriate. He said there are 26 active net profit share leases on the North Slope, and at a time when the legislature is trying to balance the budget, it is difficult to relinquish control over future net profit share leases to a commissioner and then the Legislative Budget and Audit Committee. He said he would continue to object to the bill. 4:45:31 PM SENATOR MICCICHE withdrew the motion to report SB 61 from committee. He said this will give members time for further discussion and perhaps the bill could move at a later date. 4:45:48 PM CHAIR REVAK announced he would hold SB 61 in committee for future consideration.