SENATE RESOURCES COMMITTEE April 26, 1995 3:45 p.m. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Steve Frank Senator Rick Halford Senator Robin Taylor Senator Georgianna Lincoln Senator Lyman Hoffman COMMITTEE MEMBERS ABSENT All members present COMMITTEE CALENDAR SENATE JOINT RESOLUTION NO. 27 Endorsing development of the Fall Creek hydropower project. SENATE BILL NO. 164 "An Act approving the sale of Prudhoe Bay Unit royalty oil by the State of Alaska to Tesoro Alaska Petroleum Company; and providing for an effective date." CS FOR HOUSE BILL NO. 197(RES) "An Act providing for exploration incentive credits for activities involving locatable and leasable mineral and coal deposits on certain land in the state; and providing for an effective date." CS FOR HOUSE BILL NO. 207(FIN) am "An Act relating to adjustments to royalty reserved to the state to encourage otherwise uneconomic production of oil and gas; and providing for an effective date." SENATE JOINT RESOLUTION NO. 22 Requesting research on fisheries and marine mammals in the Bering Sea. PREVIOUS SENATE COMMITTEE ACTION SJR 27 - No previous action to record. SB 164 - No previous action to record. HB 197 - See Resources minutes dated 4/19/95. HB 207 - See Resources minutes dated 4/22/95. SJR 22 - No previous action to record. WITNESS REGISTER Senator Fred Zharoff State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Prime Sponsor of SJR 27 Richard Levitt, President Gustavus Electric Company P.O. Box 102 Gustavus, AK 99826 POSITION STATEMENT: Testified in support of SJR 27 John Shively, Commissioner Department of Natural Resources 400 Willoughby Ave. Juneau, AK 99801 POSITION STATEMENT: Testified in support of SB 164 and commented on CSHB 207(FIN) am JOHN WALSH, Staff to Representative Richard Foster State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Offered information on SCS CSHB 197(RES) David Rogers Council of Alaska Producers P.O. Box 33930 Juneau, AK 99803 POSITION STATEMENT: Offered information on SCS CSHB 197(RES) Jules Tileston, Director Division of Mining & Water Management Department of Natural Resources 3601 C St., Suite 800 Anchorage, AK 99503-5935 POSITION STATEMENT: Supports SCS CSHB 197(RES) Deborah Vogt, Deputy Commissioner Department of Revenue P.O. Box 110400 Juneau, AK 99811-0400 POSITION STATEMENT: Department has some concerns with SCS CSHB 197(RES) Roy Bowdre P.O. Box 2 Delta Junction, AK 99737 POSITION STATEMENT: Opposes CSHB 207(FIN) am Leonard Efta P.O. Box 353 Kenai, AK 99611 POSITION STATEMENT: Opposes CSHB 207(FIN) am Keith Burke 4220 B St., #208 Anchorage, AK 99503 POSITION STATEMENT: Has concerns with proposed Resources SCS for HB 207 Jim Branch, Production Manager Exxon Co., USA P.O. Box 196601 Anchorage, AK 99519 POSITION STATEMENT: Commented on CSHB 207(FIN) am Kevin Tabler, Land Manager Union Oil Co. of California P.O. Box 196247 Anchorage, AK 99519 POSITION STATEMENT: Has concerns with proposed Resources SCS for HB 207 Chuck Sullivan, Manager, Contracts/Administration Parker Drilling P.O. Box 112070 Anchorage, AK 999516 POSITION STATEMENT: Commented on CSHB 207(FIN) am Richard Fineberg P.O. Box 416 Ester, AK 99725 POSITION STATEMENT: Hold over CSHB 207(FIN) am for work during interim Geron Bruce, Legislative Liaison Department of Fish & Game P.O. Box 25526 Juneau, AK 99802-5526 POSITION STATEMENT: Testified in support of SJR 22 Dean Paddock Bristol Bay Drift Netter's Association P.O. Box 20312 Juneau, AK 99801 POSITION STATEMENT: Testified in support of SJR 22 Kim Metcalfe-Helmar, Special Assistant Department of Community & Regional Affairs P.O. Box 112100 Juneau, AK 99811-2100 POSITION STATEMENT: Testified in support of SJR 22 ACTION NARRATIVE TAPE 95-49, SIDE A Number 001 SJR 27 ENDORSING FALL CREEK HYDROPOWER PROJECT  CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 3:45 p.m., and introduced SJR 27 as the first order of business. SENATOR FRED ZHAROFF, prime sponsor of SJR 27, explained the resolution was introduced to help address the long-term energy needs of Gustavus and the Glacier Bay area. The stream, known as Fall Creek, lends itself to harnessing a power generation. It is located within the boundary of the Glacier Bay National Park, and, therefore, it will take congressional action to change the land designation. Alaska's congressional delegation plans to address this issue soon, and they have indicated that a strong endorsement will aid them in that effort. SJR 27 gives endorsement for the project. Senator Zharoff noted that at the present time there are two separate diesel power generating plants, one for Gustavus and one for the park's headquarters. However, neither generating facility is adequate to meet the long-term needs of the area and Fall Creek has been identified as a site that could be developed to meet the needs of the growing community and the national park with relatively small impact on the surrounding area. He also pointed out that the hydropower project would result in sufficient cost savings to the state, as well as lower power costs to the users. Senator Zharoff directed attention to several letters of support for the project from the Gustavus area. Number 045 SENATOR LEMAN asked if there has been discussion with people from the Department of Fish and Game relating to any possible effects of the project on the habitat of Fall Creek. RICHARD LEVITT, President of Gustavus Electric Company, responded that they have been working with Fish & Game for several years on this project and it has been determined that the project is feasible and the fish can be taken care of. Number 055 SENATOR LEMAN directed attention to a proposed committee substitute and asked for a motion for its adoption as a working document. SENATOR FRANK moved that CSSJR 27(RES) be adopted as a working document. Hearing no objection, the motion carried. SENATOR ZHAROFF voiced his support for the committee substitute. SENATOR LEMAN asked the cost of the project and how it will be financed. RICHARD LEVITT answered that the project will cost $1.8 million and it will be privately financed through the electric company and investors. Number 080 There being no further testimony on SJR 27, SENATOR LEMAN asked for the pleasure of the committee. SENATOR FRANK moved and asked unanimous consent that CSSJR 27(RES) be passed out of committee with individual recommendations. Hearing no objection, it was so ordered. SB 164 APPROVE TESORO ROYALTY OIL AGREEMENT Number 090 SENATOR LEMAN brought SB 164 back before the committee. COMMISSIONER JOHN SHIVELY, Department of Natural Resources, informed the committee that the department has completed the hearing process on the contract and the testimony before the Royalty Oil & Gas Development Advisory Board, which approved the contract, was largely positive. There being no further testimony on SB 164, SENATOR LEMAN asked for the pleasure of the committee. SENATOR TAYLOR moved that SB 164 be passed out of committee with individual recommendations. Hearing no objection, it was so ordered. CSHB 197(RES) MINERAL EXPLORATION INCENTIVE CREDITS  Number 140 SENATOR LEMAN brought CSHB 197(RES) before the committee as the next order of business. He noted there was a draft committee substitute and asked for a motion for its adoption as a working document. SENATOR HALFORD moved that SCS CSHB 197(RES) (version "Z") be adopted as a working document. Hearing no objection, the motion carried. JOHN WALSH, staff to Representative Richard Foster, said in the drafting of the committee substitute, they took into consideration the testimony of the Department of Revenue in the computation of the credit with respect to the Alaska Corporate Income Tax for mining activity, resolving their major concern. They will not have to compute the credit using AS 43.20, which was a problem with the Department of Revenue because of the apportionment (water's edge) income method of calculation. The computation comes from the mining license tax, which is sited specific. Another change made in the legislation was that the credit will not go against rents because of the fear of potential litigation, which is agreeable to industry, as well as the Department of Natural Resources, which gets program receipts off of that rent. There is a provision in the legislation that clarifies the procedure for abandoned mines that are now back into production and the credits that may exist to get that mine back into production. The wording of "application" for a tax credit was changed to "request" for a tax credit. It clarifies that an operation would request credits annually with the Department of Natural Resources, certify those expenses for that year, and accumulate those until shifting into a production mode, whereby they would then start to deduct those credits against the taxes due. Mr. Walsh noted that the legislation provides that a credit can be carried forward to and applied during a subsequent tax year or royalty payment period. An exploration incentive credit must be applied within 15 tax years or royalty payment periods after the taking of the credit is approved, but they need not be 15 consecutive years. After 15 years of usage, the credits on the table at that point would expire. The legislation also allows the credits of a mine being assigned to the new interest holder when the mine is sold. Some confusing language in a previous draft of that section of the bill was deleted to make the intent of the section clearer. The bill further provides that it is up to the applicant to keep track of how its credits were used in the past and be able to at any time verify how he has applied those in previous years. Concluding his comments, Mr. Walsh stated he believes the new committee substitute is an improvement and he encourages its passage. Number 260 DAVID ROGERS, representing the Council of Alaska Producers, pointed out that at the request of the Department of Natural Resources, the bill now contains a definition of "mining operation." Number 270 SENATOR HALFORD asked what kind of retroactive incentive is being created for investment that may or may not have occurred after December 31, 1994. MR. ROGERS responded that rather than having it take effect in June or July, the decision was made to have it take effect at the beginning of 1995. SENATOR HALFORD added that he would encourage that this not apply to investments made before the start of the legislature and that it be changed to a later date. SENATOR HALFORD moved to change "December 31, 1994" to "May 15, 1995." Hearing no objection, SENATOR LEMAN stated the amendment to the Resources SCS was adopted. Number 290 JULES TILESTON, Director, Division of Mining & Water Management, Department of Natural Resources, testified from Anchorage in support of the changes made in the Resources SCS. Number 297 DEBORAH VOGT, Deputy Commissioner, Department of Revenue, stated the Resources SCS is a technical improvement over the previous version, but the department still has some philosophical problems of a fiscal nature which might be more appropriately adjusted in the Senate Finance Committee. Number 300 SENATOR TAYLOR moved that SCS CSHB 197(RES), as amended, and the Letter of Intent be passed out of committee with individual recommendations. Hearing no objection, it was so ordered. CSHB 207(FIN) am ADJUSTMENTS TO OIL AND GAS ROYALTIES  Number 325 SENATOR LEMAN brought CSHB 207(FIN) am before the committee as the next order of business. He stated the committee would be addressing a proposed Resources SCS, version "S." COMMISSIONER SHIVELY, Department of Natural Resources, commented that substantial changes have been made in the new committee substitute, and the department is not sure that the bill will be as valuable a tool for managing royalties as they originally thought. The department will work with committee staff and the industry to see exactly what the new wording means, and they will be prepared to offer more comments on it at the next meeting of the committee on Friday. Number 359 ROY BOWDRE, testifying from Delta Junction, stated he was strongly opposed to HB 207 because it gives the commissioner complete secrecy and it does not make him be responsible to any person or committee. The state already has the power to lower royalties, and the bill allows it to be done in complete secrecy. He urged defeat of the legislation. Number 366 LEONARD EFTA, testifying from Kenai, agreed the bill gives the commissioner too much power. He is also opposed to language on page 5, line 32 and page 6, lines 1 - 3 which provides that the commissioner's final findings and determination regarding royalty reduction is final and not appealable to the court. Number 375 KEITH BURKE, testifying for the Alliance in Anchorage, voiced their support for the ability of the commissioner to adjust the royalty provisions on marginal fields because they believe it is the quickest way to create jobs and to create some additional revenues for the state to alleviate some of the fiscal gap problems that are being faced. However, in looking at the draft committee substitute, he is concerned about some of the financial parameters that are placed in the bill, the sunset provisions, and the additional reviews and approval requirements by the legislative body. Number 407 JIM BRANCH, Production Manager, Exxon Co., testifying from Anchorage, said the state is seriously trying to improve the investment climate for the oil and gas industry. He said the investment reception and confidence in our state must be improved if we are to be successful in the worldwide competition for oil and gas investment dollars. He emphasized that the state's number one priority should be budget discipline. Fiscal reform, primarily to extending reductions, will send the strongest signal to investors. Number 437 KEVIN TABLER, Land Manager for Union Oil Co. in Anchorage, expressed the company's pleasure that the state is looking into ways in which to work with industry and provide for a better future for Alaska. Mr. Tabler said UNOCAL supported the version of HB 207 that passed the House, but they have not had an opportunity to fully digest the contents of the new Resources SCS. However, in looking at it, they do not support its sunset provisions and have concerns with other language in it. Number 488 SENATOR LEMAN commented that a split or dual sunset for existing fields in production and for new fields might be considered. He said the intent of the committee was to stimulate some activity by having this be open for the next two to two and one-half years, and then the legislature could address that sunset at some time in the future. He added that he could see how this might affect UNOCAL with existing fields, and he suggested Mr. Tabler come back with another proposal for existing fields and how that sunset may apply to them. Number 495 CHUCK SULLIVAN, Manager, Contracts/Administration, Parker Drilling, testifying from Anchorage, said the company has been in Alaska since 1969 and has had as many as 10 oil rigs operating in the state. Currently, they have one rig operating that provides 55 jobs directly with the rig. He said the business environment in Alaska and throughout the world has changed with more competition for investment dollars. He applauded the legislature's efforts to try to make Alaska's fields more competitive worldwide by encouraging additional investments in the oil industry. Number 516 RICHARD FINEBERG, testifying from Fairbanks, said he has not yet had an opportunity to review the new Resources SCS, but he pointed out that there have been two major international comparisons of fiscal systems for petroleum exploration and production completed recently, and there has been no discussion or analysis of these studies in relation to HB 207. He suggested holding over the legislation for the interim for the kind of major study it deserves. TAPE 95-49, SIDE B Number 005 SENATOR LEMAN said it was his intent to move a version of HB 207 out of committee within the next few days, and he suggested that any additional comments on the legislation be forwarded to the committee as soon as possible. There being no further testimony on HB 207, he closed the public hearing and stated it would be back before the committee at its Friday meeting. SJR 22 FISH & MARINE MAMMAL RESEARCH BERING SEA  SENATOR LEMAN brought SJR 22 before the committee as the final order of business. He said it has been suggested that a resolve clause be added to say that such research be coordinated so that efforts are not duplicated. SENATOR HOFFMAN, prime sponsor of SJR 22, said because the committee had lost its quorum, he would delay his overview until the next meeting, but he added that he didn't have a problem with adding the suggested language. Number 065 GERON BRUCE, Legislative Liaison, Department of Fish & Game, stated the department's support for SJR 22. The Bering Sea is an extremely productive system that is very important to Alaska. He said information needs to be developed because we do not have a very good understanding of the entire system and the interaction of the various biological forces within it. Number 078 SENATOR LEMAN requested that Mr. Bruce work with committee staff on language that efforts not be duplicated, that the funds be used efficiently in getting information that will help in the management of that resource. MR. BRUCE agreed to work with staff in crafting some language, but he also pointed out that all of the research that the department does is directed towards specific management questions in managing these fisheries, and the kind of research that this resolution is requesting would not duplicate anything that is being done by the Department of Fish & Game at this time. Number 095 DEAN PADDOCK, representing the Bristol Drift Netter's Association, voiced their strong support for the resolution, and he commended Senator Hoffman for its introduction. Although the Bristol salmon fishermen would not be the direct recipients of the benefits of research of this type, they feel that they would benefit indirectly because so little is known and anything that is learned will filter down to them. He believes that the beneficiaries will be the crab fishermen, the cod fishermen, the rock sole fishermen, etc. Number 155 SENATOR HOFFMAN noted that Senator Ted Stevens and Representative Don Young are asking for input from people throughout Alaska on the Magnuson Act, and he thinks the healthiness of the Bering Sea is directly related to that along with the fine bullet points that they are urging for a healthy fishery. Number 170 KIM METCALFE-HELMAR, Special Assistant, Department of Community & Regional Affairs, said that department is involved in management of the CDQ pollack program, and a healthy pollack fisheries is essential for continuation of this program that brings about $20 million in annual income to 56 Western Alaska communities. The department urges the committee's support of SJR 22. There being no further testimony on SJR 22, SENATOR LEMAN stated it would be back before the committee at its next meeting. There being no further business to come before the committee, SENATOR LEMAN adjourned the meeting at 3:40 p.m.