Legislature(2009 - 2010)BARNES 124

01/29/2010 01:00 PM House RESOURCES

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01:02:36 PM Start
01:02:36 PM HB217
02:14:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
1:02:36 PM                                                                                                                    
CO-CHAIR JOHNSON  announced that  the only  order of  business is                                                               
HOUSE BILL  NO. 217, "An  Act relating  to the tax  applicable to                                                               
the  production of  natural  gas used  in the  state  as fuel  or                                                               
feedstock in producing a manufactured end product."                                                                             
1:03:23 PM                                                                                                                    
REPRESENTATIVE NEUMAN,  sponsor of HB  217, stated that  the bill                                                               
deals with  the five  percent production  tax for  gas, including                                                               
liquefied natural  gas (LNG)  for in-state  electrical generation                                                               
and  home heating  [AS 43.55.900(24)].   It  is an  effort to  do                                                               
everything  possible  to  provide  opportunities  for  an  anchor                                                               
tenant for  an in-state  gas pipeline,  such as  a gas-to-liquids                                                               
(GTL) plant  or natural gas  liquid (NGL)  export.  Thus,  HB 217                                                               
would provide a production tax rate  of five percent for gas that                                                               
is used to create jobs in  Alaska rather than the current rate of                                                               
25 percent plus progressivity.                                                                                                  
1:05:32 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether  this would apply  to all                                                               
basins across the state.                                                                                                        
REPRESENTATIVE NEUMAN answered, "If it is in Alaska."                                                                           
REPRESENTATIVE  SEATON asked  how the  proposed differential  tax                                                               
rate on  gas would work as  far as the allocation  of costs under                                                               
the State's  current production tax credits  and production taxes                                                               
for wells that are both oil and gas on the North Slope.                                                                         
REPRESENTATIVE  NEUMAN replied  that the  production profits  tax                                                               
(PPT) applies  to oil, whereas  the tax  rate under HB  217 would                                                               
apply to  gas production.   Currently,  there are  many different                                                               
rates,  deductions,  and credits  depending  upon  whether it  is                                                               
downstream, midstream, upstream, or  what field the production is                                                               
from.   If the gas is  put into a  factory to create jobs  in the                                                               
state, then HB 217 would provide  a lower production tax rate for                                                               
that gas.                                                                                                                       
1:08:11 PM                                                                                                                    
REPRESENTATIVE SEATON  noted he is not  opposed to HB 217,  he is                                                               
just trying  to figure out how  it would work.   He asked whether                                                               
the term manufactured would apply  to liquefied natural gas under                                                               
HB 217.                                                                                                                         
REPRESENTATIVE  NEUMAN responded  that liquefied  natural gas  is                                                               
gas, and under current law  the production tax rate for liquefied                                                               
natural  gas  that  is  used   for  home  heating  or  electrical                                                               
generation is five percent.                                                                                                     
CO-CHAIR  JOHNSON  interjected  that [electrical]  generation  is                                                               
already in statute,  and HB 217 would add "or  used as fuel stock                                                               
in manufacturing."                                                                                                              
1:09:10 PM                                                                                                                    
REPRESENTATIVE  SEATON said  he  is asking  for clarification  on                                                               
whether  conversion of  gas  to liquefied  natural  gas (LNG)  is                                                               
considered a manufacturing process.                                                                                             
CO-CHAIR JOHNSON referred the question to Gary Rogers.                                                                          
GARY  ROGERS,  Oil  &  Gas   Revenue  Specialist,  Tax  Division,                                                               
Department of  Revenue (DOR), explained that  under current State                                                               
law, LNG is not treated as  a manufactured product; it is treated                                                               
as  gas, and  it is  netted  back from  its ultimate  disposition                                                               
point or sales delivery point.   The conversion of natural gas to                                                               
LNG is presently considered a transportation process.                                                                           
1:10:25 PM                                                                                                                    
REPRESENTATIVE SEATON inquired whether  that is an interpretation                                                               
or a  statutory definition.   He said  he is concerned  the State                                                               
could get  into the argument of  an LNG export facility  that has                                                               
very  little  tax rate  on  it,  which  he  believes is  not  the                                                               
sponsor's intention.                                                                                                            
MR.  ROGERS answered  he believes  it  is in  regulation and  the                                                               
State's past  history of  practice, but is  not statutory.   That                                                               
would  be  an  item  that  would  certainly  be  recommended  for                                                               
clarification, he added.                                                                                                        
1:11:40 PM                                                                                                                    
REPRESENTATIVE TUCK offered his support  for the intent of HB 217                                                               
and  the  encouragement  of  manufacturing  in  the  state.    He                                                               
requested  a review  the areas  that Representative  Neuman would                                                               
like to see promoted under this bill.                                                                                           
REPRESENTATIVE NEUMAN  said he would  like to see HB  217 provide                                                               
the opportunity  to create jobs  in Alaska by being  an incentive                                                               
to inspire gas  operations, such as a  gas-to-liquids plant doing                                                               
alternative fuels.   A  specific purpose is  to create  an anchor                                                               
tenant  for an  in-state gas  pipeline as  a pipeline  would help                                                               
create jobs.   Another  possibility is gas  to Donlin  Creek Gold                                                               
Mine  as  he understands  the  mine  owners  may not  go  forward                                                               
because  of  the  lack  of  energy supply.    This  is  just  the                                                               
beginning of the discussion of what can be done, he noted.                                                                      
1:13:16 PM                                                                                                                    
REPRESENTATIVE   NEUMAN  returned   to  Representative   Seaton's                                                               
previous line  of questioning.   He explained  that in  regard to                                                               
manufacturing  there   is  the   law  and  there   is  dictionary                                                               
terminology.   Manufacturing is described as  a molecular change.                                                               
Export  of   LNG  would  compete   against  the   Alaska  Gasline                                                               
Inducement  Act   (AGIA)  and  exports  from   a  large  diameter                                                               
pipeline, and this is not what is  being talked about here.  In a                                                               
manufacturing process  the gas  would be  changed into  a product                                                               
other  than gas.   In  the  case of  a gas-to-liquids  processing                                                               
plant it would go through  a Fischer-Tropsch process to create an                                                               
alternative fuel, such as a jet, diesel, or marine fuel.                                                                        
1:14:07 PM                                                                                                                    
REPRESENTATIVE  TUCK understood  that  the conversion  of gas  to                                                               
fertilizer  is  a feedstock  situation  which  would be  included                                                               
under  HB 217.    He  asked whether  a  smelter  plant that  uses                                                               
natural gas  for the  heating process  already receives  the five                                                               
percent production tax rate under current statute.                                                                              
REPRESENTATIVE NEUMAN deferred [to Mr. Rogers].                                                                                 
MR.  ROGERS replied  that [DOR]  issued an  advisory bulletin  in                                                               
February 2009  in response to  a company asking whether  gas used                                                               
as part of  the feedstock in manufacturing qualifies  as gas used                                                               
in-state, and the  answer is no, it does not.   However, gas used                                                               
as fuel to generate electricity,  run equipment, or generate heat                                                               
does qualify as used in-state.                                                                                                  
1:16:31 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI noted  that Fairbanks  has a  production                                                               
plant for  jet fuel.  He  asked how this plant  would be affected                                                               
by HB  217.  For example,  this plant currently uses  portions of                                                               
the oil to generate heat.                                                                                                       
CO-CHAIR JOHNSON pointed out that  HB 217 affects natural gas and                                                               
the  aforementioned plant  uses oil.   He  said that  plant would                                                               
love to have the opportunity to use natural gas.                                                                                
REPRESENTATIVE  NEUMAN understood  that the  aforementioned plant                                                               
purchases it  electricity from Golden Valley  Electric and Golden                                                               
Valley Electric  has a  gas pipeline that  delivers gas  used for                                                               
electrical generation.                                                                                                          
1:18:04 PM                                                                                                                    
DAN  STICKEL, Petroleum  Economist, Tax  Division, Department  of                                                               
Revenue (DOR), stated that he,  Deputy Commissioner Marcia Davis,                                                               
and Gary Rogers are available to answer questions.                                                                              
1:18:40 PM                                                                                                                    
REPRESENTATIVE  SEATON inquired  how HB  217 would  influence the                                                               
credits and  deductions for the  expenses of a North  Slope field                                                               
that is both oil and gas.                                                                                                       
MR. STICKEL responded  that [DOR] has not  looked specifically at                                                               
how HB 217 would relate to a facility on the North Slope.                                                                       
MR.  ROGERS   explained  that  because   gas  used   in-state  is                                                               
considered  a  favored tax  rate  under  Section 43.55.011(o)  of                                                               
Alaska's  Clear and  Equitable Share  (ACES),  the allocation  of                                                               
costs  is not  based on  credits or  tax rates,  but is  based on                                                               
equivalent British  Thermal Unit  (BTU) barrels.   So, in  a unit                                                               
with both oil and gas, costs  would be allocated based on the BTU                                                               
equivalents of each.  In regard  to credits, some credits such as                                                               
the exploration  tax credit, might  have a reduction.   There are                                                               
some tax  savings due to  the favored tax  rate for gas  used in-                                                               
state and that  could limit a company on the  application of some                                                               
of its credits  if it had unused tax credits  under AS 43.55.025.                                                               
Other than that there is not much effect.                                                                                       
1:20:57 PM                                                                                                                    
REPRESENTATIVE SEATON understood Mr.  Rogers' answer to mean that                                                               
the  allocation of  lease costs  is then  on the  BTU of  what is                                                               
coming out  of the  well as oil  or gas and  not on  the monetary                                                               
value of oil and gas.                                                                                                           
MR. ROGERS answered correct.                                                                                                    
CO-CHAIR JOHNSON  added that ACES  has a BTU equivalent  to treat                                                               
oil and  gas similarly, which is  something that will have  to be                                                               
dealt with in the future.                                                                                                       
1:21:35 PM                                                                                                                    
REPRESENTATIVE  SEATON  noted  he  is trying  to  understand  the                                                               
consequences.    He asked  whether  it  would  be a  positive  or                                                               
negative  incentive for  a  field that  has  credits or  upstream                                                               
costs if  the BTU equivalent is  6:1 and the value  difference is                                                               
15:1, which is about where it is today.                                                                                         
MR. ROGERS replied he does not have  an answer off the top of his                                                               
head because this would require some  modeling.  He said there is                                                               
also  a  provision  under [43.55.011(m)]  of  ACES  that  affects                                                               
credits  and he  does  not  believe that  ACES  specified how  to                                                               
allocate costs  between oil and  gas.  He  thinks the use  of BTU                                                               
equivalent barrels was established by [DOR] regulation.                                                                         
1:23:24 PM                                                                                                                    
CO-CHAIR JOHNSON inquired whether Mr.  Rogers is saying [DOR] has                                                               
the regulations written.                                                                                                        
MR. ROGERS responded  that some regulations were  written, and he                                                               
thinks it was one of the  very first packages of regulations that                                                               
[DOR] did.                                                                                                                      
1:23:39 PM                                                                                                                    
REPRESENTATIVE  SEATON   requested  that  members   receive  this                                                               
information for background as the bill is considered further.                                                                   
CO-CHAIR JOHNSON  said it is his  intention to hold HB  217 today                                                               
and to  bring it up  again on Monday  [February 1] and  report it                                                               
from committee provided a major problem is not found.                                                                           
1:25:14 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG asked  whether  there are  regulations                                                               
defining exactly what a feedstock is.                                                                                           
MR.  ROGERS  answered  that  [DOR]  does  not  presently  have  a                                                               
regulatory definition of what a feedstock  is; more or less it is                                                               
a term commonly used in the industry.                                                                                           
REPRESENTATIVE GUTTENBERG interjected, "You  know it when you see                                                               
MR. ROGERS said yes.                                                                                                            
1:26:12 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG inquired whether  there is any conflict                                                               
with the  "commerce clause"  given this deals  with both  oil and                                                               
gas used in-state.                                                                                                              
MR. ROGERS  pointed out  that the used  in-state only  applies to                                                               
gas used  in-state under  AS 43.55.011(o), and  this is  the only                                                               
used in-state reduced tax rate; oil is not included.                                                                            
1:27:20 PM                                                                                                                    
MARCIA DAVIS,  Deputy Commissioner,  Office of  the Commissioner,                                                               
Department of Revenue, in  response to Representative Guttenberg,                                                               
explained  that [AS  43.55.011] of  ACES establishes  all of  the                                                               
various tax rates.  Subsection (o)  was added late in the process                                                               
and was  a specific  provision targeting only  gas that  was used                                                               
in-state; it was  put in place to provide some  mitigation of the                                                               
costs of  use of gas  for the citizens  of Alaska.   She recalled                                                               
that at the  time subsection (o) was inserted,  the Department of                                                               
Law discussed the constitutionality  of this particular provision                                                               
and determined that it is a  privileges and immunities type of an                                                               
argument that  makes this provision perhaps  somewhat vulnerable.                                                               
However,  at  that time  it  was  concluded  that until  gas  was                                                               
exported and used  as fuel outside of the state,  such that there                                                               
were people  who could claim  disparity or unequal  protection of                                                               
the laws, there were no  fouls being committed by this particular                                                               
section.   For that  reason a  sunset was  put on  subsection (o)                                                               
which requires it to go away at the end of calendar year 2021.                                                                  
1:29:26 PM                                                                                                                    
REPRESENTATIVE  SEATON posed  a  scenario on  the allocation  for                                                               
expenses  that  a  company  would  get to  write  off  for  lease                                                               
expenses  for tax  credit on  a  gas and  oil well  on the  North                                                               
Slope.  He asked if he is  correct in understanding that if it is                                                               
an oil  well, the  company would  be looking  at the  tax credit,                                                               
plus the tax  rate on the oil,  including progressivity depending                                                               
on profits, and  if it is on  gas and the tax rate  is 5 percent,                                                               
that basically  the maximum  the company could  get is  5 percent                                                               
plus its  tax credit instead  of having State  participation such                                                               
as  45-50  percent  in  the   well  drilling  process  and  lease                                                               
MS. DAVIS  replied that  this particular  provision says  that if                                                               
gas from a  location other than Cook Inlet is  burned and used as                                                               
fuel in-state it  will have the lower tax rate.   That means that                                                               
a North  Slope producer that has  gas that is burned  as heat for                                                               
the Deadhorse airport  or elsewhere on the North  Slope will have                                                               
the  lower tax  rate.    She pointed  out  that  gas consumed  to                                                               
produce the  oil and gas is  not taxed as  it is a cost  of doing                                                               
business.   She  said  she therefore  is not  sure  how it  would                                                               
detriment  the  operations  on  the North  Slope  or  impact  the                                                               
State's calculations of  credits and so forth in  the overall oil                                                               
and gas production operation on the North Slope.                                                                                
1:32:33 PM                                                                                                                    
MR.  ROGERS added  that the  tax  rate is  the lower  of the  tax                                                               
calculated by  taking the  value less  the lease  expenditures or                                                               
the five  percent tax rate on  gas used in-state.   A significant                                                               
difference between the ACES tax rate  on the value less the lease                                                               
expenditures  - i.e.  the  25 percent  progressivity,  and the  5                                                               
percent  tax  rate  on  gas   used  in-state  -  may  reduce  the                                                               
availability of  some of the  tax credits that the  company could                                                               
otherwise  apply that  year.    However, there  is  not a  direct                                                               
impact on  lease expenditures themselves  of the 5  percent used-                                                               
in-state tax rate.                                                                                                              
1:33:46 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that the general  philosophy of ACES                                                               
was that  there would  be a  fairly high  profits tax  and really                                                               
good credits,  and those two  things added together would  give a                                                               
lot of State  participation in the lease expenditures.   He asked                                                               
whether  a production  tax  rate  of 5  percent  would limit  the                                                               
State's participation to 20 percent  tax credit for drilling plus                                                               
5 percent, so  that the maximum incentive that the  State gives a                                                               
company to explore and drill, as long  as it is not over 25 miles                                                               
away,  is then  25 percent  participation rather  than the  60-65                                                               
percent participation  that has occurred in  some exploration and                                                               
development wells.   He  said he wants  to understand  whether by                                                               
doing this  the incentive is  actually lowered for  investment in                                                               
the field.                                                                                                                      
MR. ROGERS  responded he  thinks it  is just  the opposite.   The                                                               
State is  providing an incentive  by telling a producer  that its                                                               
tax rate is limited to five  percent on gas that is used in-state                                                               
that  meets  the  qualifications  proposed  by HB  217.    It  is                                                               
difficult  to  produce  the exact  incentive  in  numbers  unless                                                               
scenarios  are  modeled  with prices,  price  levels,  and  lease                                                               
expenditure levels,  but if a  company has gas used  in-state the                                                               
tax may  not exceed  the 5  percent limitation  rate and  that in                                                               
itself is an incentive compared to  the ACES tax rate which is 25                                                               
percent  base plus  progressivity,  which depends  on a  combined                                                               
production tax value of oil and  gas.  Lease expenditures are not                                                               
being  lost, they  would  still  be there.    While  some of  the                                                               
credits  might  have   to  be  deferred,  they   would  still  be                                                               
1:37:11 PM                                                                                                                    
REPRESENTATIVE SEATON  said he is  still unclear on  this because                                                               
when the [ACES]  system was created he understood  that while the                                                               
25 percent  base tax  rate with progressivity  was a  fairly high                                                               
tax rate,  a company got to  deduct that tax rate  from its lease                                                               
expenditures  which could  result in  the State  participating at                                                               
60-70 percent or  even over 100 percent  under certain scenarios.                                                               
While a  company would [still]  get its  full tax credit  for its                                                               
lease  expenditures   [under  HB   217],  it  seems   that  State                                                               
participation is based on the PPT or the ACES tax rate.                                                                         
CO-CHAIR  JOHNSON offered  his  understanding  that the  in-field                                                               
expenditure is based  on the expenses using a  sliding scale, not                                                               
the tax  rate.   Basically, HB  217 would  treat North  Slope gas                                                               
just like Cook Inlet gas.                                                                                                       
1:38:59 PM                                                                                                                    
REPRESENTATIVE TUCK  understood that  under current law  the same                                                               
deal that is applied to Cook  Inlet gas is also applied to others                                                               
as  long as  the  gas is  consumed  within state  as  fuel or  to                                                               
generate electricity.   Under HB  217, this tax benefit  would be                                                               
extended to gas used in  the manufacturing process.  However, the                                                               
company  doing the  manufacturing  may not  be  the same  company                                                               
producing the gas.   Given that the tax cap  is for the producer,                                                               
not the manufacturer,  he asked if the hope under  HB 217 is that                                                               
the manufacturer will have a preferred  gas supply due to the tax                                                               
break offered to the producer.                                                                                                  
CO-CHAIR JOHNSON responded that HB  217 would lower the price and                                                               
lowering the  price would give  the incentive for  a manufacturer                                                               
to come in, which  would create jobs.  He said  he does not think                                                               
"a ConocoPhillips, or  BP, or an Exxon" will come  in and build a                                                               
gas-to-liquids plant; rather, a third  party would be able to buy                                                               
that fuel  at a  lesser rate  because the State  is giving  a tax                                                               
reduction to the producer.  So,  the price will flow down, and if                                                               
it does not, then a third  party would not build and the producer                                                               
would not have that market.                                                                                                     
1:40:51 PM                                                                                                                    
KEVIN  BANKS, Director,  Division  of Oil  &  Gas, Department  of                                                               
Natural  Resources, said  he understands  Representative Seaton's                                                               
questions and concerns.   He offered to  meet with Representative                                                               
Seaton privately to provide further response and explanation.                                                                   
REPRESENTATIVE  SEATON  agreed  and requested  that  all  members                                                               
receive  diagrams  depicting the  consequences  of  HB 217.    He                                                               
reiterated he is not unsupportive.                                                                                              
1:42:00 PM                                                                                                                    
MS. DAVIS,  in response  to Co-Chair  Johnson, agreed  to prepare                                                               
information  comparing the  situation of  a North  Slope producer                                                               
providing gas with and without the  HB 217 incentive.  This would                                                               
show the economics, and how  it would appear from the perspective                                                               
of  a North  Slope producer,  which should  answer Representative                                                               
Seaton's question.                                                                                                              
REPRESENTATIVE SEATON said  he wants to ensure  that members look                                                               
at the  effect on the  incentives for drilling and  production as                                                               
well as just the sale of gas that a producer has.                                                                               
MS.  DAVIS agreed,  saying  she  understands that  Representative                                                               
Seaton's  dominant  concern  is  what  HB 217  would  do  to  the                                                               
inherent incentives that were the structure of ACES.                                                                            
REPRESENTATIVE SEATON replied correct.                                                                                          
1:43:11 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG said  he shares Representative Seaton's                                                               
concerns  about unintended  consequences.   In  reference to  the                                                               
situation brought up by Representative  Tuck, he pointed out that                                                               
it is  the producer,  not the manufacturer,  that is  getting the                                                               
break and  he is therefore  concerned the manufacturer  might not                                                               
see  that break.   For  example,  Fairbanks has  an oil  pipeline                                                               
going through  it and  residents there  do not get  a break.   He                                                               
suggested that  in HB  217, "use" for  consumption might  be more                                                               
appropriate than "delivered" for consumption.                                                                                   
CO-CHAIR JOHNSON agreed to come back  to this, but said he thinks                                                               
that is  a commercial arrangement  that needs to be  made between                                                               
the manufacturer and the producer;  HB 217 provides an incentive.                                                               
[The  legislature]   should  not   get  involved   in  commercial                                                               
agreements  unless   something  comes  up.     There  are  people                                                               
genuinely interested  in doing business  in Alaska who  need this                                                               
natural gas but  who cannot function under the  current tax rate.                                                               
This would  provide incentive and  send a message that  the State                                                               
is open for business, which is not currently the case.                                                                          
1:46:36 PM                                                                                                                    
REPRESENTATIVE  TUCK   inquired  whether  there  are   any  other                                                               
statutes  that  could  potentially  be affected  by  HB  217  and                                                               
whether anything beyond natural gas could be affected.                                                                          
CO-CHAIR JOHNSON deferred to Ms. Davis.                                                                                         
MS. DAVIS responded that [DOR] has  looked at this, and it should                                                               
be okay as  long as the manufacturing process  is thought through                                                               
to ensure  that the characteristics  of the gas are  not changed;                                                               
for example,  conversion to  LNG is merely  changing the  form of                                                               
the gas  for transportation.   One area  needing more  thought is                                                               
the gas-to-liquids type of process  where gas is transformed into                                                               
a  diesel  product;  that transformation  process  needs  further                                                               
consideration to  determine whether it  is more analogous  to the                                                               
LNG situation.   While that  is truly a  molecular transformation                                                               
into another  product, it has the  manufacturing characteristics,                                                               
so it must  be thought through as  to how to value that.   One of                                                               
the challenges is  whether to look at  it as gas sold  and if the                                                               
point of production  is looked at, then how should  it be valued.                                                               
As far as other standard  manufacturing, [DOR] has already gotten                                                               
its arms  around the  use of gas  as fuel.   There may  be issues                                                               
about liquefied  petroleum gas  (LPG) in which  gas is  taken off                                                               
and  transformed  into  propane.    However, as  long  as  it  is                                                               
understood which side of the  fence the extraction of the various                                                               
forms of liquids falls on, it should  be okay.  She said she does                                                               
not see HB 217 reaching  into any other statutory structures like                                                               
credits or allocation of costs.                                                                                                 
1:49:42 PM                                                                                                                    
MS. DAVIS, in  further response to Co-Chair  Johnson, agreed that                                                               
she,  too, thinks  of manufacturing  as changing  one thing  into                                                               
another.  However,  she has found that  people very knowledgeable                                                               
about the  petroleum industry may  see a particular process  as a                                                               
transformation  process  rather  than  a  manufacturing  process.                                                               
Therefore,  she would  like  to  step back  and  make sure  [DOR]                                                               
thinks this  through with the  experts and  draws a line  that is                                                               
clear enough  for the taxpayers  to understand which side  of the                                                               
line they are on in regard to the various processes.                                                                            
1:50:23 PM                                                                                                                    
REPRESENTATIVE SEATON inquired whether  there is already in place                                                               
a good  definition of natural  gas which distinguishes  the point                                                               
at which propane is or is not natural gas.                                                                                      
MS. DAVIS  replied that Section  43.55.900(8), of  ACES describes                                                               
gas  as:   all  hydrocarbons  that  are recovered  by  mechanical                                                               
separation  of  well  fluids  or  by  gas  processing  in  a  gas                                                               
processing plant, and exist in  a gaseous phase at the completion                                                               
of the  mechanical separation  in any  gas processing.   [Section                                                               
43.55.900(9)]  identifies   gas  processing  as   something  that                                                               
involves  use  of   absorption,  adsorption,  externally  applied                                                               
refrigeration,  artificial  compression   followed  by  adiabatic                                                               
expansion  using the  Joule-Thomson effect,  or another  physical                                                               
process that is  not mechanical separation.  She  said she thinks                                                               
that externally applied refrigeration picks up the LNG.                                                                         
1:51:55 PM                                                                                                                    
REPRESENTATIVE  SEATON   asked  whether  propane   is  considered                                                               
natural gas.                                                                                                                    
MS. DAVIS answered  she thinks propane is clearly  gas because it                                                               
is pulled out  due to chilling and  compression processes applied                                                               
to  the gas  stream.   Gas-to-liquids is  a different  thing, she                                                               
continued,  and  she  is  unsure   whether  it  falls  under  gas                                                               
processing or  manufacturing, so [DOR]  needs to look at  this to                                                               
see what  can be  done to  provide more clarity  as to  where the                                                               
line is drawn.   In response to Co-Chair Johnson,  she said [DOR]                                                               
may not be  able to look at this by  Monday [2/1/10] as expertise                                                               
from people in the industry will need to be brought in.                                                                         
1:53:15 PM                                                                                                                    
REPRESENTATIVE TUCK said it is  important that members understand                                                               
the  manufacturing definition  as  it applies  to liquid  natural                                                               
gas.   If gas that is  turned into liquid natural  gas is defined                                                               
as being manufactured, then under  this provision that definition                                                               
would also apply  to liquid natural gas that  is manufactured for                                                               
export.  He  offered his belief that if LNG  is excluded from the                                                               
definition of manufacturing, then LNG  can still be used for fuel                                                               
for power generation and for other  needs based on the first part                                                               
of AS 43.55.900(24).                                                                                                            
1:54:20 PM                                                                                                                    
CO-CHAIR  JOHNSON  asked  whether  it  is  Representative  Tuck's                                                               
intention that  gas sold as jet  fuel and flown out  of the state                                                               
be exported.                                                                                                                    
REPRESENTATIVE TUCK responded that in  that case the gas would be                                                               
a feedstock  for a manufactured  process because that would  be a                                                               
gas-to-liquids  process and  he  would  hope that  gas-to-liquids                                                               
would fall into the definition  of manufacturing.  Liquid natural                                                               
gas is the one he is concerned  about because it could be more of                                                               
a transport definition than manufacturing.                                                                                      
1:55:00 PM                                                                                                                    
CO-CHAIR JOHNSON opened public testimony.                                                                                       
BILL NOLL  testified that HB 217  looks like a proper  and useful                                                               
tool  to  prospective  manufacturers and  developers  around  the                                                               
world.  How to move  Alaska's tremendous natural gas resource has                                                               
been a puzzle ever since the  discovery of oil on the North Slope                                                               
in   1968.     Although   there   may   be  unexpected   negative                                                               
consequences,  there might  be unexpected  positive consequences.                                                               
The bill  would provide an  opportunity to monetize some  of that                                                               
tremendous  asset.   The benefits  in terms  of jobs,  other tax-                                                               
based development,  indirect jobs, transportation,  and marketing                                                               
are easy  to enumerate.   He  said he  therefore enthusiastically                                                               
supports HB  217.  At  Co-Chair Johnson's request, Mr.  Noll said                                                               
his  background experience  includes  his  current membership  in                                                               
Alaska  Ratepayers, a  nonprofit that  is seeking  ways to  level                                                               
rates  for   ratepayers,  particularly  those  residing   in  the                                                               
Railbelt.   He was also  commissioner and deputy  commissioner of                                                               
the  Department of  Commerce, Community,  & Economic  Development                                                               
during   the  Murkowski   Administration,  as   well  as   deputy                                                               
commissioner under  the Hickel Administration.   He  listed other                                                               
private and  public positions  he has  held over  the years.   He                                                               
added that he  sees this as a giant  economic development project                                                               
that  is quite  different from  the  pipeline to  Alberta or  the                                                               
conversion  of   gas  to  LNG   for  export  to  Asia.     Should                                                               
legislators,  producers, and  developers  get this  on line,  the                                                               
state  could easily  be looking  at 1,000  jobs for  a very  long                                                               
period of time, which he greatly encourages.                                                                                    
2:00:35 PM                                                                                                                    
CO-CHAIR JOHNSON closed public  testimony after ascertaining that                                                               
no one  else wished  to testify.   He  agreed that  HB 217  is an                                                               
economic opportunity  because there are people  looking at Alaska                                                               
but  the State's  tax  structure  is standing  in  the  way.   He                                                               
announced that he is holding over HB 217.                                                                                       
REPRESENTATIVE  NEUMAN  said  he  worked  hand-in-hand  with  the                                                               
administration  while drafting  HB 217.   He  noted that  many of                                                               
Representative  Seaton's  questions have  to  do  with ACES,  the                                                               
Alaska Gasline Inducement Act (AGIA),  and other legislation, and                                                               
HB 217 has  nothing to do with  that.  He reiterated  that HB 217                                                               
would provide  for using  gas as a  feedstock which  would supply                                                               
jobs.    He  reiterated  that manufacturing  is  described  as  a                                                               
molecular  change.   He further  noted  that the  Fischer-Tropsch                                                               
process  is the  fuel of  the  future and  has strong  world-wide                                                               
MS.  DAVIS,  in response  to  Representative  Olson and  Co-Chair                                                               
Johnson, said [DOR] will strive to  have a fiscal note for HB 217                                                               
by Monday [2/1/10].                                                                                                             
2:05:39 PM                                                                                                                    
REPRESENTATIVE  TUCK  asked  whether  it is  possible  to  create                                                               
difficulty  for  ratepayers  by  having  the  incentive  increase                                                               
demand so  much that it  ends up raising the  rates.  He  said he                                                               
wants to  ensure that the  gas is not  just shipped out  and that                                                               
there is enough supply.                                                                                                         
CO-CHAIR  JOHNSON  explained that  without  this  kind of  anchor                                                               
tenant for  any kind of  in-state gas pipeline the  tariffs would                                                               
be huge  and would double  or triple the  current cost of  gas in                                                               
Anchorage.   Regardless of  the tax  structure, an  anchor tenant                                                               
would result  in the taking  of enough  gas to lower  the tariffs                                                               
and generate  a savings to the  consumers.  The desire  with this                                                               
tax break is  to attract anchor tenants which would  allow an in-                                                               
state gas  pipeline to go  from 250  [million cubic feet  per day                                                               
(MMcfd)] to 500 MMcfd, which would lower the tariff.                                                                            
REPRESENTATIVE TUCK concurred  that an anchor is the  key as this                                                               
is what would bring the  volume.  However, this legislation alone                                                               
may not  be enough and other  things may still need  to be looked                                                               
at so as to benefit Alaskans to the maximum.                                                                                    
2:08:51 PM                                                                                                                    
CO-CHAIR  JOHNSON said  that HB  217, coupled  with "Agrium"  and                                                               
export, might get the state where it  needs to be.  All the doors                                                               
need to be kept open and HB 217  is the first step to get serious                                                               
players  into  Alaska  to  allow the  economics  of  an  in-state                                                               
pipeline to work.                                                                                                               
REPRESENTATIVE NEUMAN stated he  is available to answer questions                                                               
at any time.   He pointed out that right now  the fiscal note for                                                               
HB 217 is zero.                                                                                                                 
2:10:20 PM                                                                                                                    
REPRESENTATIVE   SEATON   said   he   fully   agrees   with   the                                                               
aforementioned,  but HB  217 is  about a  production tax,  not an                                                               
anchor tenant.   This tax rate would not go  to the manufacturer,                                                               
it would  go to  the producer,  and that is  why he  is concerned                                                               
about the  effects of the bill.   A 5 percent  production tax has                                                               
been in  effect in Cook Inlet  for 20 years, yet  there still has                                                               
not been the exploration.   Other types of credits and incentives                                                               
have  also been  implemented and  still  there has  not been  the                                                               
exploration.   He advised that  as the program goes  forward, the                                                               
legislature  will  have  to  come  back  to  see  whether  it  is                                                               
accomplishing the  goal.  He said  he is not arguing  against the                                                               
bill, he is pointing out that  lowering the tax does not mean the                                                               
profit margin will be there.                                                                                                    
CO-CHAIR JOHNSON agreed  that those are valid  points and members                                                               
will have a  chance to look at some spread  sheets to see exactly                                                               
what HB 217 has.                                                                                                                
2:12:07 PM                                                                                                                    
REPRESENTATIVE  OLSON related  that [a  potential] anchor  tenant                                                               
come  down  to  the  Kenai   Peninsula  three  years  ago.    The                                                               
[potential] tenant met  with numerous people and  the borough had                                                               
vacant land available along with  existing infrastructure and gas                                                               
lines.   However,  the conversation  ended  when the  [potential]                                                               
tenant learned  that 1 billion cubic  feet per day (Bcfd)  of gas                                                               
for  the next  10 years  was not  available.   He concurred  with                                                               
Representative  Neuman  that an  in-state  gasline  must carry  a                                                               
surplus of at least 1 Bcfd to attract an anchor tenant.                                                                         
2:13:20 PM                                                                                                                    
REPRESENTATIVE NEUMAN again urged members to come talk to him.                                                                  
MS. DAVIS, in response to  Co-Chair Johnson, said [DOR] will work                                                               
on the  modeling that will  respond to the concerns  about impact                                                               
to the current incentives under ACES.                                                                                           
CO-CHAIR JOHNSON  encouraged members to  talk to the  sponsor and                                                               
to Ms. Davis directly.                                                                                                          
2:14:18 PM                                                                                                                    
MR. ROGERS,  in response  to Co-Chair  Johnson, pointed  out that                                                               
the reference [in  today's conversation] has been to  a 5 percent                                                               
tax rate.   However, it is  5 percent times a  value, which works                                                               
out to 17.7 cents per Mcf [thousand  cubic feet].  It is not like                                                               
5 percent  on the gross value,  it is 5 percent  times an average                                                               
historical value of  about $3.65, so 17.7 cents is  the 5 percent                                                               
that is being talked about here and that is fairly low.                                                                         
[HB 217 was held over.]                                                                                                         
2:14:55 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 2:15 p.m.                                                                 

Document Name Date/Time Subjects
HB 217.pdf HRES 1/29/2010 1:00:00 PM
HB 217
HB 217 Sponsor Statement.pdf HRES 1/29/2010 1:00:00 PM
HB 217
HB 217 Back Up Information.pdf HRES 1/29/2010 1:00:00 PM
HB 217
HB 217 Unemployment Information.pdf HRES 1/29/2010 1:00:00 PM
HB 217
HB 217 Fiscal Note-REV.pdf HRES 1/29/2010 1:00:00 PM
HB 217
HB 217 Fiscal Note-DNR.pdf HRES 1/29/2010 1:00:00 PM
HB 217