SENATE SPECIAL COMMITTEE ON OIL & GAS March 17, 1993 5:05 p.m. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Rick Halford Senator Bert Sharp Senator Judith Salo Senator Al Adams MEMBERS ABSENT All Present COMMITTEE CALENDAR SENATE BILL NO. 134 "An Act establishing credits for purchasers of state royalty oil for expenditures made by those purchasers on qualifying capital investments to be applied against liquidated purchase arrearages established in contracts, settlements, or final judgments; and providing for an effective date." PREVIOUS ACTION No previous action to record. WITNESS REGISTER Senator Mike Miller State Capitol Juneau, Alaska 99801-1822 POSITION STATEMENT: Sponsor of SB 134. Gene Burden, Vice President Tesoro 3230 C Street Anchorage, Alaska 99510 POSITION STATEMENT: Supported SB 134. Jonathan Tillinghast, Attorney Tesoro One Sealaska Plaza #301 Juneau, Alaska 99801 POSITION STATEMENT: Supported SB 134. Attorney General Cole Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Strongly opposed SB 134. Richard Cline Cline's Texaco 442 Gamble Anchorage, Alaska 99501 POSITION STATEMENT: Strongly opposed SB 134. Bernie Smith, Senior Engineer Tesoro Refinery P. O. Box 3369 Kenai, Alaska 99611 POSITION STATEMENT: Said he would testify tomorrow. Chris Gabriel Big G Electric P.O. Box 4257 Soldotna, Alaska 99669 POSITION STATEMENT: Supported SB 134. Ray Hutchison 9499 Brayton Dr., #55 Anchorage, Alaska 99507 POSITION STATEMENT: Opposed SB 134. John Torgeson Kenai, Alaska 99611 POSITION STATEMENT: Did not comment. ACTION NARRATIVE TAPE 93-6, SIDE A Number 001 SENATOR LEMAN called the Special Committee on Oil and Gas meeting to order at 5:05 p.m. and announced SB 134 CREDITS AGAINST PURCHASE OF ROYALTY OIL to be up for consideration. SENATOR MILLER, sponsor, said he thought SB 134 was good public policy. He said that additional costs are always passed on to the consumer. This bill would help create more jobs in Alaska and the Commissioner of the Department of Commerce and Economic Development would have to sign off on these projects. He noted that a poll had been done of 515 people statewide who mostly favored in-state processing and refining of Alaskan oil and also favored value added industries in Alaska. The amount of money the state wants to collect from in- state refiners for past taxes is over $300 million covering a period from the past 10 years. When asked about this issue in the poll, thirty nine percent responded they should pay the claim. Forty two percent said they should not have to pay the claim; nineteen percent said they were unsure. Another option, SENATOR MILLER said, would be for the state to provide incentive for Alaska's in-state refiners to expand by allowing them to satisfy the state's claim with invest in new projects in Alaska. The poll asked what their response would be if these new projects provided new jobs and new taxes. Seventy six percent favored that proposal. Number 162 SENATOR ADAMS said it was bad policy to put the bill before the legislature. He said he could word another questionnaire so he could get a different percentage. He said he didn't see that the bill created jobs for Alaskans. SENATOR ADAMS asked, regarding page 2, lines 11-15, how we measure the benefit to the Alaskan economy. SENATOR MILLER answered that the Commissioner might find there is a benefit created by new jobs within the state. SENATOR LEMAN said he appreciated Senator Adam's comments, but asked him to reserve additional comments for tomorrow so they could get comments from the other participants. SENATOR ADAMS said he would reserve his questions for tomorrow. Number 206 GENE BURDEN, Vice President, Tesoro, supported SB 134. He said the value-added refiners represented by TESORO, MAPCO, and PETROSTAR employ a total of 1,000 people in Alaska. Approximately 200,000 barrels of oil a day goes through the refineries. He said the refineries represent one of the success stories of the state in development of its natural resources. Number 245 MR. BURDEN explained that the refiners had contracts with provisions that gave rise to claims of retroactive price adjustments for a very long period of time, in excess of 10 years in some cases. Waiting for disposition of the final outcome of the royalty oil case, known as Amerada Hess, the parties have collaborated in the matters of economics and business relations. Neither the royalty owners nor the refiners knew what price would be attached to the oil until settlement of the case recently. Their companies are not able to go back to their customer and make up the difference. TESORO's interest in having capital credits has been a long term interest which has been brought up frequently in negotiating a settlement. He pointed out that capital projects would increase tax revenues to the state. Number 515 JON TILLINGHAST, representing Tesoro, said the legislature should recognize that most of the legislation passed is special interest in that it benefits or hurts some Alaskans more than others. He noted there is no tax in Alaska that everyone pays. Every tax is tailored to a specific industry. He said the Department of Law is advocating legislation that would grant credits against royalty liability for the producers, but not the refiners (SB 151 OIL & GAS EXPLORATION INCENTIVE CREDITS). The Hickel administration recognizes granting credits against royalty payments is an effective way to encourage new economic activity in the state. It also recognizes that the incentive has to be tailored to fit the particular industry as in SB 151. SB 134 confines its coverage to in-state. The refiners are being asked to pay one third of the Amerada Hess bill, but that misses the different abilities of the two industries to spread the impacts of Amerada Hess throughout their product. The refiners get all of the State's share of North Slope oil, but it's only one eighth of the total. Another inequity is the royalty oil sold to major oil companies in the early 1980's that was then shipped out of state. Those sales had no Amerada Hess clause in them. So that royalty oil went out of state and those companies aren't being asked to pay any Amerada Hess surcharge. MR. TILLINGHAST noted that the producers' liability under Amerada Hess is about $700 million, but it represents about 6% of their assets based in Alaska. On the other hand the $100 million each from Tesoro and Mapco represents in each instance almost 100% of their asset base in Alaska. The ability of the industry to withstand the tax and still prosper is a legitimate consideration for the legislature. A policy unique to the refining industry is the state using royalty oil management as a tool to create and foster an in- state refining industry. This has been a remarkably successful policy. SB 134 further polishes this policy. He presented the Committee with a page of examples of how the state has foregone money to encourage a particular industry -the fisheries business tax credit (discontinued in 1991), a special tax credit in the corporate income tax that allowed certain types of economic activity to take a much higher percentage of their federal investment tax credit than other tax payers got to take in order to encourage the creation of those activities (also discontinued), and the generous tax credit to the mining industry which exempts them from paying license taxes for three and one half years to induce them to open up new mines (current policy). The oil companies get to take a credit against royalty payments to drill exploratory wells, also. MR. TILLINGHAST said the test was under the "public purpose clause" of the Alaska Constitution - whether a private entity benefits, whether the expenditure will directly enhance the general welfare of the community, or whether it resolves energy problems. He noted that the legislature makes the decision whether the public purpose clause has been filled. He said it does appear that passage of this law would yield benefits that are at least commensurate with the amount of the credits being given, most likely greater. He noted SB 134 has safeguards in it that the other credit bills don't have. It can be disapproved by the Commissioner of DCED and the credits have to be used within a certain period of time. He said the Permanent Fund clause applies to funds that are received by the state. The dictionary say that means "to come in possession of." So until the state comes in possession of these funds, they are not subject to the requirement for deposit to the Permanent Fund. Number 552 ATTORNEY GENERAL COLE said SB 134 created a new section under Title 38.05.183, Subsection (i). Subsection (f), or the legislative approval of a contract for the sale of royalty oil that would appreciably reduce the consideration received by the state, would no longer be applicable if this were enacted. Subsection 1 is applicable to a capital project. Nothing requires the construction of any improvement to even be related to the oil industry. TAPE 93-6, SIDE A Number 580 He pointed out there was not much limitation imposed on the Commissioner of the Department of Commerce and Economic Development when deciding about the credits. Commenting on the phrase that the capital credit must yield a benefit to the economy that is "commensurate with the amount of the credit" Attorney General Cole said that wasn't much of a test. "Commensurate with" is a very wishy washy phrase enabling them to slip by anything. It is also a negative test. In Section (2) (A) taking the credit against any other obligation the purchaser may owe, means the state would allow them to take the credit against any obligation, taxes, for instance, and to take the credits at any time within a poetential 15 year period. ATTORNEY GENERAL COLE also noted the "if applicable" language was vague. He noted the finite period of time in which to pay the taxes to be very indefinite. This issue could be litigated for 5 - 7 years, he explained, and then the purchaser has the right to claim that credit within the next 10 years. ATTORNEY GENERAL COLE said the industry knew when this contract was entered into for the purchase of state royalty oil that there was a disagreement between the state and purchasers over the value of the state royalty oil. They agreed by contract to be bound by the outcome of that litigation. They, therefore, should have no excuse for not taking a reserve to guard against the final outcome of that litigation. They now say they don't have the money to pay this. They have known for years that large sums were being claimed by the state and they agreed to be bound by the result. Number 475 This bill excuses the party from a debt or obligation to pay money under a written contract if it spends the money for a capital investment within the state, ATTORNEY GENERAL COLE explained. He repeated, "This bill says a party doesn't have to pay money to the state that a court found was due and owing." This is grossly unfair to people within the state who have agreed to pay the state money under contract and are willing to pay their obligations and do not dispute them. He said the State routinely takes action to foreclose upon those who have received agricultural loans from the state. These people receive no relief for creating employment. They leave farms they have lived on for 10 or 15 years. Here, in this legislation, we tell corporations who have paid their shareholders tens of millions of dollars in dividends which they could have reserved, you don't have to pay money you owe the state if you just make a capital investment commensurate with what you owe. This bill would also be grossly unfair to the competitors - the gasoline and convenience stores. Furthermore, this bill is not limited to past obligations. Basically, SB 134 presents a flawed public policy. The legislature itself should make decisions on the public purposes of expenditures of monies due and payable to the state treasury. "Why should corporations have the ability to decide what capital projects serve the greatest public interest?" he asked. Even if the corporations built projects, where would the benefits go? They would go to the shareholders of Mapco, Tesoro, etc., not the state. Mapco has distributed $125 million in the last several years to its shareholders and if this legislation passes, they will be able to pay even more dividends to their shareholders. Why should not the state be receiving the return on the capital investments? If we are, in fact, building a refinery with this money for Tesoro, then Tesoro should pay the state rent on the refinery the state money built for Tesoro. In conclusion, he said, if this legislation becomes law he is not prepared as Attorney General to go to "big oil" and say, "Pay, you owe money to the state." He said the negotiations are so delicate, that the bargaining relationship would be drastically changed. Lastly, ATTORNEY GENERAL COLE said, he was authorized to say the Governor would veto this bill if it passed the legislature in substantially its current form.. Number 356 RICHARD CLINE, Anchorage, opposed SB 134. He asked the Committee to look at how many jobs this bill would create and to then look at how many jobs it would eliminate, because of the unfair competition it would create at the retail level. He couldn't compete against a corporation that owned all phases of the product. He thought it was an anti-trust violation. Number 308 BERNIE SMITH, Senior Engineer, Tesoro Refinery, said he would testify tomorrow because of the time limit today. NUMBER 292 CHRIS GABRIEL, Big G Electric, Soldotna, supported SB 134, because we would benefit from the increased investment through creation of more jobs. Number 273 RAY HUTCHISON, Anchorage, opposed SB 134, because it would be unfair to an independent business person. JOHN TORGESON, Kenai Peninsula Borough Assembly, presented a resolution passed by the Assembly which SENATOR LEMAN said was already part of the record. Number 251 JIM EASON, Director, Division of Oil and Gas, said he would present his testimony at tomorrow's meeting. Number 240 SENATOR LEMAN adjourned the meeting at 6:25 p.m.