Legislature(2015 - 2016)HOUSE FINANCE 519

03/31/2016 01:30 PM FINANCE

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Audio Topic
01:35:17 PM Start
01:35:57 PM HB247
03:26:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
Introduction - Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 247                                                                                                            
                                                                                                                                
     "An  Act relating  to  confidential information  status                                                                    
     and  public   record  status  of  information   in  the                                                                    
     possession of  the Department  of Revenue;  relating to                                                                    
     interest  applicable  to  delinquent tax;  relating  to                                                                    
     disclosure  of  oil  and   gas  production  tax  credit                                                                    
     information; relating  to refunds  for the  gas storage                                                                    
     facility tax credit, the  liquefied natural gas storage                                                                    
     facility  tax credit,  and the  qualified in-state  oil                                                                    
     refinery   infrastructure   expenditures  tax   credit;                                                                    
     relating to  the minimum  tax for  certain oil  and gas                                                                    
     production;  relating to  the  minimum tax  calculation                                                                    
     for  monthly  installment  payments of  estimated  tax;                                                                    
     relating  to interest  on monthly  installment payments                                                                    
     of  estimated  tax;  relating to  limitations  for  the                                                                    
     application  of tax  credits; relating  to oil  and gas                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures;     relating    to     limitations    for                                                                    
     nontransferable  oil  and  gas production  tax  credits                                                                    
     based on oil production  and the alternative tax credit                                                                    
     for oil  and gas  exploration; relating to  purchase of                                                                    
     tax  credit  certificates  from the  oil  and  gas  tax                                                                    
     credit fund; relating  to a minimum for  gross value at                                                                    
     the   point   of    production;   relating   to   lease                                                                    
     expenditures  and tax  credits for  municipal entities;                                                                    
     adding    a   definition    for   "qualified    capital                                                                    
     expenditure";  adding  a  definition  for  "outstanding                                                                    
     liability  to   the  state";  repealing  oil   and  gas                                                                    
     exploration    incentive    credits;   repealing    the                                                                    
     limitation on  the application  of credits  against tax                                                                    
     liability  for   lease  expenditures   incurred  before                                                                    
     January 1,  2011; repealing  provisions related  to the                                                                    
     monthly installment payments for  estimated tax for oil                                                                    
     and gas produced before January  1, 2014; repealing the                                                                    
     oil  and  gas  production   tax  credit  for  qualified                                                                    
     capital  expenditures  and certain  well  expenditures;                                                                    
     repealing   the    calculation   for    certain   lease                                                                    
     expenditures applicable before  January 1, 2011; making                                                                    
     conforming amendments;  and providing for  an effective                                                                    
     date."                                                                                                                     
                                                                                                                                
1:36:48 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:38:33 PM                                                                                                                    
RECONVENED                                                                                                                      
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
introduced  the PowerPoint  presentation, "New  Alaska Plan:                                                                    
Pulling  Together to  Build Our  Future  - Oil  and Gas  Tax                                                                    
Credit  Reform  -  CS   HB247(RES),  Department  of  Revenue                                                                    
Presentation  to  the  House Finance  Committee,  March  31,                                                                    
2016" (copy on file). He addressed Slide 2:                                                                                     
                                                                                                                                
     What We'll Be Discussing                                                                                                   
                                                                                                                                
     1. History and Development of Credits                                                                                      
     2. Credits- What Worked, What Didn't?                                                                                      
     3. Credit Cost in Perspective                                                                                              
     4. Overview of the Tax & Credit Calculations                                                                               
     5. Bill Summary- What is in the CS?                                                                                        
     6. Changes from Governor's to Resources                                                                                    
     Version                                                                                                                    
     7. Fiscal Impact of Changes                                                                                                
     8. Summary of Scenario Analysis and Life Cycle                                                                             
     Modeling: Economics of Changes                                                                                             
     9. Implementation                                                                                                          
                                                                                                                                
1:41:00 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed Slide 4:                                                                                                    
                                                                                                                                
     History of Oil and Gas Production Tax Credits                                                                              
                                                                                                                                
     •   First  "modern"   Oil  and   Gas  credit   was  the                                                                    
     Alternative  Credit  for   Exploration  (AS  43.55.025)                                                                    
     passed  in 2003  while Alaska  still had  the "Economic                                                                    
     Limit Factor" (ELF) Gross Tax                                                                                              
     • Several added in 2006 with passage of the "Petroleum                                                                     
     Production  Tax"  (PPT)  and   switch  to  net  profits                                                                    
     taxation.                                                                                                                  
     Included  Cook Inlet  tax  caps as  well  as the  first                                                                    
     "state repurchase" provisions                                                                                              
     •  Credits  substantially   modified  with  passage  of                                                                    
     "Alaska's                                                                                                                  
     Clear  and  Equitable  Share"  (ACES)  in  2007;  state                                                                    
     repurchase made more open-ended                                                                                            
     • Cook  Inlet Recovery  Act and related  legislation in                                                                    
     2010                                                                                                                       
     • Frontier Basin credits added in 2012                                                                                     
     •  SB 21  passed  in 2013,  dramatically changed  North                                                                    
     Slope credits,  replacing "spending"  with "production"                                                                    
     focus                                                                                                                      
                                                                                                                                
Mr.  Alper elaborated  up until  2006 Alaska's  oil and  gas                                                                    
production tax had  been based on gross value  and was known                                                                    
as the  Economic Limit  Factor, or ELF.  During the  ELF era                                                                    
the   legislature  added   credits,  most   prominently  the                                                                    
exploration credit,  which was  a percentage of  a company's                                                                    
expenses  that could  be off-set  from their  taxes if  they                                                                    
performed  a   desired  activity.  The  credit   regime  was                                                                    
expanded in 2006, when the  legislature passed the Petroleum                                                                    
Production Tax (PPT), which  switched to net-profit taxation                                                                    
and added  new credits as well  as the Cook Inlet  tax caps.                                                                    
The caps were a hold-harmless  provision that was built into                                                                    
PPT that  kept the  Cook Inlet taxes  what they  were before                                                                    
the effective date  of the tax bill. He said  that the state                                                                    
began  to cash  out certain  credits at  that time.  He said                                                                    
that the  Alaska Clear  and Equitable  Share (ACES)  bill in                                                                    
2007 substantially  increased taxes and was  the moment when                                                                    
the repurchase  of credits by  the state  became open-ended.                                                                    
Prior  to that  there had  been a  cap of  $25 million,  per                                                                    
company, per year. In 2010,  the Cook Inlet Recovery Act and                                                                    
related legislation were passed.  The act tried to encourage                                                                    
new  exploration and  development in  Cook Inlet,  mostly in                                                                    
light of  supply shortfalls. Similar  credits were  added to                                                                    
the frontier areas in order  to encourage people to look for                                                                    
and  develop   oil  in  undeveloped  areas   of  the  state,                                                                    
primarily the  interior. He  said that  the North  Slope oil                                                                    
tax  rewrite,  or SB  21,  passed  in 2013,  eliminated  the                                                                    
spending credits. All  of the capital credits  for the North                                                                    
Slope  were  replaced  with  a per  barrel  credit  tied  to                                                                    
production.                                                                                                                     
                                                                                                                                
1:43:37 PM                                                                                                                    
                                                                                                                                
Mr. Alper  turned to  Slide 5 and  continued to  address the                                                                    
history of oil and gas production tax credits:                                                                                  
                                                                                                                                
     · Credits initially added to encourage certain desired                                                                     
        behaviors, tied to anxiety over declining production                                                                    
        and a need for new investment                                                                                           
     · Later credits were added as core components /                                                                            
        offsets of the net profits system                                                                                       
     · At times credits were layered on top of each other,                                                                      
        creating unanticipated circumstances                                                                                    
     · Credits can either be used against tax liability,                                                                        
     · sold / transferred to a taxpayer, or cashed out                                                                          
        ("repurchased") by the state                                                                                            
     · Per AS 43.55.028(e)(4), a company producing over                                                                         
        50,000 bbl/day cannot have their credits repurchased                                                                    
        by the state                                                                                                            
                                                                                                                                
Mr. Alper relayed  that the passage of SB 21  had been based                                                                    
on the  desire for more  exploration and putting new  oil in                                                                    
the  system.  He  said  that  the hope  had  been  that  new                                                                    
companies  would  invest  in   Alaska.  He  elaborated  that                                                                    
eventually  the new  credits became  "baked in"  to the  tax                                                                    
formula; higher taxes  were designed to be  off-set by large                                                                    
credits tied to capital  expenditures or base production. He                                                                    
noted that the cashing out,  or repurchasing, of the credits                                                                    
was the  primary focus of HB  247. He noted that  there were                                                                    
currently 4  major companies working  at the  50,000 bbl/day                                                                    
in the state.                                                                                                                   
                                                                                                                                
1:45:50 PM                                                                                                                    
                                                                                                                                
Mr. Alper  moved to Slide 6,  which listed a summary  of the                                                                    
major credits in AS 43.55:                                                                                                      
                                                                                                                                
   Major Credits Available (current law):                                                                                       
     · .023(b) Net Operating Loss (25-45%)                                                                                      
        This is the main refundable credit on the North                                                                         
        Slope and the largest statewide credit. "Stackable"                                                                     
     · .024(i&j) Per-Taxable Barrel ($0 to $8)                                                                                  
        Only on North Slope                                                                                                     
        Only can be used against tax liability                                                                                  
     · .023(a&l) Capital and Well Expend (20-40%)                                                                               
        Only outside North Slope, usually refunded                                                                              
     · .025(var) Exploration Credit (30-40%)                                                                                    
        Expires 7/16 in North Slope and Cook Inlet                                                                              
        Extended in Interior / Frontier Areas until 2022                                                                        
     · .024(c) Small Producer Credit (up to $12 mil)                                                                            
        Closed to new applicants in 5/16                                                                                        
                                                                                                                                
Co-Chair  Thompson  asked Mr.  Alper  to  avoid the  use  of                                                                    
acronyms, or to explain them.                                                                                                   
                                                                                                                                
1:49:39 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  pointed to  the spreadsheet  provided by                                                                    
the department, "Table  of Tax Credits under AS  43.55 - The                                                                    
Alaska  Oil  and  Gas  Production   Tax  and  Comparison  to                                                                    
Proposed  Changes  in HB  247"  dated  March 2016  (copy  on                                                                    
file). He  asked whether  QCE was  an acronym  for Qualified                                                                    
Capital  Expenditures,  and WLE  stood  for  the Well  Lease                                                                    
Expenditure.                                                                                                                    
                                                                                                                                
Mr. Alper replied in the  affirmative. He clarified that the                                                                    
.023(l) was the suite of  well lease expenditure credits and                                                                    
the .023(a) was the QCE, or capital expenditure credits.                                                                        
                                                                                                                                
Vice-Chair Saddler noted  that consistent nomenclature would                                                                    
help to limit confusion while discussing the bill.                                                                              
                                                                                                                                
Mr.  Alper   noted  that  the  spreadsheet   referenced  the                                                                    
proposed changes to  the bill and the  credits; however, the                                                                    
spreadsheet  had   not  been   updated  for   the  committee                                                                    
substitute currently before members.                                                                                            
                                                                                                                                
Representative Edgmon  referred to  Slide 6. He  requested a                                                                    
breakdown of  the 5 credit  categories in terms of  what the                                                                    
state was liable for monetarily in the FY 17 budget                                                                             
                                                                                                                                
1:51:37 PM                                                                                                                    
                                                                                                                                
Mr. Alper referred  to Page 2 of  the document, "Preliminary                                                                    
Spring 2016 Forecast Production  Tax Credits Detail, FY 2007                                                                    
to FY 2025" (copy on file).  He explained that over the past                                                                    
few  years the  credits  had been  50/50  between the  North                                                                    
Slope and Cook  Inlet. He said that the  North Slope credits                                                                    
were comprised  of approximately  90 percent  operating loss                                                                    
credits,  the   rest  were  exploration   and  miscellaneous                                                                    
credits. The  credits in Cook  Inlet were split  between the                                                                    
operating  loss credits  and  the  capital/well credits,  in                                                                    
addition  to  a  small  amount of  exploration  credits.  He                                                                    
stated that the credits used  against liability in the North                                                                    
Slope were the per taxable  barrel credit and a small amount                                                                    
of  small  producer  credit.  In  Cook  Inlet,  because  the                                                                    
underlying taxes were so low  due to the statutory tax caps,                                                                    
there  were   very  little   actual  credits   used  against                                                                    
liability.                                                                                                                      
                                                                                                                                
Representative Edgmon asked for a  rough ball park number of                                                                    
the total that the state would pay in oil credits in FY 17.                                                                     
                                                                                                                                
Mr. Alper  replied that  he could try  to provide  a number,                                                                    
but that  the per  taxable barrel  credit was  contingent on                                                                    
the price of oil. He noted that  the price in FY 14 had been                                                                    
$600  million,  but  would  be  $28 million  in  FY  16.  He                                                                    
asserted  that  it  would  be  easier  to  "carve  out"  the                                                                    
refunded credits  from credits against liability,  of those,                                                                    
three-quarters were operating loss credits. Approximately                                                                       
20 percent were the capital and well credits and less than                                                                      
5 percent were exploration credits.                                                                                             
                                                                                                                                
Co-Chair Thompson welcomed Commissioner Hoffbeck to the                                                                         
testifier table.                                                                                                                
                                                                                                                                
1:54:20 PM                                                                                                                    
                                                                                                                                
Mr. Alper turned to Slides 7 and 8:                                                                                             
                                                                                                                                
     Credits - What Worked, What Didn't?                                                                                        
                                                                                                                                
     Some Credits have Never Been Claimed                                                                                     
     · Middle Earth "New Areas" $6 million Credit                                                                               
        (AS 43.55.024(a); part of HB3001/PPT, 2006)                                                                             
     · Cook Inlet "Jack Up Rig" 100% Credit                                                                                     
        (AS 43.55.025(m); part of SB309, 2010)                                                                                  
     · Frontier Basin 80% Drilling Credit                                                                                       
        (AS 43.55.025(n); part of SB23, 2012)                                                                                   
                                                                                                                                
     Companies did some of the activities incentivized by                                                                     
     these, but were able to get better results from                                                                          
     "stacking" other credits                                                                                                 
                                                                                                                              
     All of these programs are sunsetting in 2016                                                                             
                                                                                                                                
Mr. Alper turned to Slide 9:                                                                                                    
                                                                                                                                
     Credits- What Worked, What Didn't?                                                                                         
                                                                                                                              
     To-date cost of Sunsetting Credits                                                                                       
     Exploration Credits (various) 2007-sunset                                                                                
     • North Slope Refunded: $270 million                                                                                       
     • North Slope Against Liability: $190 million                                                                              
     • Non-North Slope Refunded: $160 million                                                                                   
     • Non-North Slope Against Liability: $0                                                                                    
     Small Producer Credits 2007-2016                                                                                         
     • North Slope Against Liability: $340 million                                                                              
     • Non-North Slope Against Liability: $60 million                                                                           
     • (these cannot be refunded)                                                                                               
     Total: slightly over $1 billion                                                                                          
                                                                                                                                
                                                                                                                                
Mr. Alper continued to Slide 10:                                                                                                
                                                                                                                                
     Credits- What Worked, What Didn't?                                                                                         
        Credits Remaining if HB247 Passes                                                                                     
     · Carried-Forward Annual Loss Credit                                                                                     
        (also called "net operating loss")                                                                                      
        o 35% on North Slope and 25% in Cook Inlet and                                                                          
          elsewhere (non-NS reduced to 10% by H(RES))                                                                           
     · Non-North Slope Drilling Credits                                                                                       
        o "QCE" and "WLE" were repealed in governor's bill;                                                                     
          maintained at 20% in H(RES) version                                                                                   
     · Exploration Credits outside North Slope and Cook                                                                       
        Inlet  ("middle earth exploration")                                                                                   
        o 30-40% depending on location                                                                                          
        o Sunset January 1, 2022                                                                                                
                                                                                                                                
Mr. Alper addressed Slide 11:                                                                                                   
                                                                                                                                
     Credits- What Worked, What Didn't?                                                                                         
     · Cook Inlet Tax Caps                                                                                                    
        Oil tax of zero, gas tax averages 17 cents / mcf                                                                        
        Sunset January 1, 2022                                                                                                  
     · Middle Earth Tax Caps                                                                                                  
        4% of gross value (first seven years of production                                                                      
        that begins before 2027)                                                                                                
     · LNG Storage Facility Credit                                                                                            
        Lesser of 50% of cost or $15 million                                                                                    
     · Refinery Infrastructure Credit                                                                                         
        40% of cost up to $10 million/year per refinery,                                                                        
        before 2020                                                                                                             
                                                                                                                                
Mr. Alper expounded that, as the  state went about a new tax                                                                    
regime on the North Slope under  PPT, it had been written in                                                                    
statute that  the tax  rates and  the price  of oil  and gas                                                                    
stay as they  were in the year before the  effective date of                                                                    
PPT; the  period between  April 2005  and March  2006, which                                                                    
was what was  used to establish the tax rate  on oil and gas                                                                    
in Cook Inlet.  He noted that HB 247(RES)  would establish a                                                                    
working group that  would explore a new tax  regime for Cook                                                                    
Inlet, and other  areas of the state, that  will replace the                                                                    
sunsetting Cook Inlet  tax caps. He elaborated  that the LNG                                                                    
Storage Facility  Credit would provide state  assistance for                                                                    
major tanks for the Interior gas utility.                                                                                       
                                                                                                                                
2:00:18 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler queried the  evaluation criteria that the                                                                    
department used to determine which  credits worked and which                                                                    
had not.                                                                                                                        
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
replied  that  there were  three  categories  that had  been                                                                    
determined: credits that  had not been used  at all, credits                                                                    
that  had worked  and had  served their  purpose, and  those                                                                    
that had  an ongoing  need and were  incentivizing activity;                                                                    
the governor had left those intact within the bill.                                                                             
                                                                                                                                
Vice-Chair  Saddler agreed  that it  was possible  to assume                                                                    
that a credit  that had never been claimed did  not work. He                                                                    
asked  about the  second category.  He  wondered whether  an                                                                    
analysis could be  done to determine the  effects of credits                                                                    
that had "served their purpose."                                                                                                
                                                                                                                                
Commissioner Hoffbeck  answered that the department  had not                                                                    
parsed out  what portion  of the  credit's success  had been                                                                    
due to lifting Regulatory  Commission of Alaska restrictions                                                                    
on price, versus an increased  price environment, versus the                                                                    
credits themselves.  He said that the  department had worked                                                                    
to determine the best places to continue to invest.                                                                             
                                                                                                                                
2:04:43 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  lamented that  the department  could not                                                                    
provide  an  analysis  on  how  they  determined  the  areas                                                                    
affected  by the  credits and  the extent  of effect  of the                                                                    
credits.                                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck replied  that all  of the  changes in                                                                    
the  Regulatory   Commission  of  Alaska   restrictions  had                                                                    
occurred  in a  tight timeframe,  and  it would  be hard  to                                                                    
determine which  credit drove gas exploration.  He said that                                                                    
the $6 to $8 dollar price  point for gas in Cook Inlet would                                                                    
be  sufficient to  incentivize  exploration and  development                                                                    
anywhere  in the  world, and  would not  need an  underlying                                                                    
credit structure at that price point.                                                                                           
                                                                                                                                
Vice-Chair  Saddler  spoke  to  the  goal  of  incentivizing                                                                    
without spending more than necessary.  He hoped for evidence                                                                    
of  a precise  methodology  that allowed  the  level of  the                                                                    
credit to be set.                                                                                                               
                                                                                                                                
Mr. Alper  interjected that the overarching  theory that the                                                                    
governor  had  hoped  to maintain  in  the  modified  system                                                                    
moving forward was  to protect the concept  of the operating                                                                    
loss credit,  which provided a  level playing  field between                                                                    
the incumbent and  the new players. He said  that the caveat                                                                    
of the fields in Cook  Inlet being profitable was that there                                                                    
would  be somewhere  to sell  the  gas. He  said that  there                                                                    
would  be no  problem if  enough wells  could be  drilled to                                                                    
produce the  gas from  the new fields  correctly. But,  if a                                                                    
well  needed to  be drilled  every three  years for  lack of                                                                    
customers, the economics of the  fields would be problematic                                                                    
and could result in the need for additional credit support.                                                                     
                                                                                                                                
2:08:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Neuman  queried the  market conditions  within Cook                                                                    
Inlet and exporting to Japan.                                                                                                   
                                                                                                                                
Mr. Alper replied that the  base utility consumption in Cook                                                                    
Inlet  was approximately  80 to  90 billion  cubic feet  per                                                                    
year. He said  that a trillion cubic feet  was nearly enough                                                                    
to last  12 years for the  utility market in Cook  Inlet. He                                                                    
said that  the exporting  from the Conoco  Phillips facility                                                                    
was sporadic and had no  regular deliver schedule. He stated                                                                    
that the  proven reserves held  nearly a 15 year  supply for                                                                    
that market, and  those which had been claimed  to be proven                                                                    
by producers  would add  several years  to that.  He thought                                                                    
that  once  drilling began  there  would  be more  than  was                                                                    
initially  claimed.  He  said  that there  was  1.2  to  1.6                                                                    
trillion cubic  feet that  was known of  in the  ground, and                                                                    
much more  was theorized: possibly  10 to 15  trillion cubic                                                                    
feet of gas.                                                                                                                    
                                                                                                                                
Co-Chair Neuman probed  whether the state was  getting a net                                                                    
loss or  a net benefit from  the credits. He hoped  that the                                                                    
department could  provide information on the  measured value                                                                    
of the credits.                                                                                                                 
                                                                                                                                
Representative Gara  spoke to the different  types of fields                                                                    
that a paid  profits tax, but that also got  to write-off 35                                                                    
percent from their taxable income.                                                                                              
                                                                                                                                
Mr. Alper answered  that with the assumption  that the price                                                                    
of oil  was higher and the  net profit tax was  in play, the                                                                    
capital and operating spending would  be subtracted from the                                                                    
price that  was received  from selling  the oil.  He relayed                                                                    
that  the newer  fields  that were  eligible  for the  gross                                                                    
value reduction had a further  reduction from that figure on                                                                    
adjusted net; a  35 percent tax was taken  from the adjusted                                                                    
figure.                                                                                                                         
                                                                                                                                
2:12:11 PM                                                                                                                    
                                                                                                                                
Representative  Gara referred  to  a  past discussion  about                                                                    
whether  credits  would  work  to get  gas  to  Southcentral                                                                    
Alaska.  He asked  what portion  of the  credits were  being                                                                    
paid for that  had not been intended, mainly oil  and gas in                                                                    
Cook Inlet that was being exported by Conoco Phillips.                                                                          
                                                                                                                                
Mr. Alper answered that part  of how Cook Inlet had adjusted                                                                    
to  the supply  uncertainty  had been  to  downsize to  base                                                                    
needs.  He said  that  approximately one-third  of the  Cook                                                                    
Inlet credits had supported  oil development, and two-thirds                                                                    
gas development.                                                                                                                
                                                                                                                                
Representative Gara understood that  the state received $.17                                                                    
per million cubic feet for gas exported by Conoco Phillips.                                                                     
                                                                                                                                
Mr.  Alper replied  in  the affirmative.  He  said that  all                                                                    
production  from Cook  Inlet  was subject  to  the $.17  per                                                                    
million cubic  feet price. He  added that most  producers in                                                                    
Cook Inlet  fell into the  category that qualified  them for                                                                    
the  small producer  credit, which  could  off-set the  $.17                                                                    
down to zero.                                                                                                                   
                                                                                                                                
Representative  Gara stated  that one-third  of the  credits                                                                    
were paid for oil.  He wondered whether year-to-year figures                                                                    
of the  portions of the  credits for gas that  were exported                                                                    
to Asia could be provided by the department.                                                                                    
                                                                                                                                
Commissioner Hoffbeck responded that  gas wells preferred to                                                                    
have a steady  state of production. He said  that the excess                                                                    
summer  production  did not  have  a  market demand,  versus                                                                    
something  specifically  developed  for export.  He  thought                                                                    
that it  would be  difficult to  attribute credits  that may                                                                    
have been wrongly  applied to summer gas and  that the wells                                                                    
could not simply be shut off.                                                                                                   
                                                                                                                                
Representative  Gara  contended  that   the  intent  of  the                                                                    
credits  had  been  to   incentivize  local  production.  He                                                                    
wondered how much  money was being spent  for producers that                                                                    
were exporting the gas.                                                                                                         
                                                                                                                                
Mr.  Alper  replied  that the  department  could  study  the                                                                    
issue.   He  asserted   that  looking   at  the   demand  in                                                                    
Southcentral  Alaska monthly,  rather than  annually, showed                                                                    
that it could  be 10 times as  high in January as  it was in                                                                    
July because people were heating their homes.                                                                                   
                                                                                                                                
2:15:49 PM                                                                                                                    
Vice-Chair  Saddler felt  that it  was important  to discuss                                                                    
the dynamics of  natural gas production. He said  it was not                                                                    
a zero sum game, and  wondered whether the production of gas                                                                    
that was exported  benefitted the production of  gas for the                                                                    
state.                                                                                                                          
                                                                                                                                
Commissioner Hoffbeck answered in the affirmative.                                                                              
                                                                                                                                
Vice-Chair  Saddler asked  whether  a  distinction could  be                                                                    
made   between  incentives   used   to   generate  gas   for                                                                    
consumption in-state versus what was exported.                                                                                  
                                                                                                                                
Mr.  Alper replied  that he  was unsure  that a  distinction                                                                    
could be  made other  than applying  the multiplier  that he                                                                    
referenced  earlier. He  said that  there  was a  successful                                                                    
credit  that  had  yet  to be  mentioned:  the  Gas  Storage                                                                    
Facility Credit. The credit had  been part of the Cook Inlet                                                                    
Recovery  Act, and  had provided  economic support  to build                                                                    
underground storage that had enabled seasonal stability.                                                                        
                                                                                                                                
Representative  Pruitt spoke  to credits  in Cook  Inlet. He                                                                    
asked whether any stipulations to  gain the credits included                                                                    
listing gas as  the specific resource. He  believed both oil                                                                    
and gas  would be  produced in Cook  Inlet, he  worried that                                                                    
the credit might only be applied to gas.                                                                                        
                                                                                                                                
Mr. Alper  answered that no  stipulation had been  made; oil                                                                    
versus  gas  had  not  been specified.  He  said  that  once                                                                    
drilling  began the  drilling  credits  became eligible  for                                                                    
work-overwork,  where  and  active well  is  modernized  and                                                                    
improved.  He asserted  that  companies  understood the  way                                                                    
that the credit worked.                                                                                                         
                                                                                                                                
2:19:18 PM                                                                                                                    
                                                                                                                                
Representative   Gara  asked   whether  the   administration                                                                    
thought that  the $0.17/mcf, or  lower, tax on  exported gas                                                                    
was fair to residents of the state.                                                                                             
                                                                                                                                
Mr. Alper clarified that the  tax had been $0.17 since 2005,                                                                    
and had a 15 year lifespan  written in to statute. He shared                                                                    
that the  legislature had  chosen to no  change it.  He said                                                                    
that in the  development of the bill, the  Governor had been                                                                    
careful not to  change the Cook Inlet  Tax Caps prematurely;                                                                    
although, Cook Inlet  taxes on oil and gas would  need to be                                                                    
comprehensively  examined, and  a long-term  tax regime  for                                                                    
Cook Inlet would need to be established.                                                                                        
Commissioner  Hoffbeck reference  the discussion  with Vice-                                                                    
Chair Saddler about  credits that had not  performed as well                                                                    
as expected.  He expounded  that oil  was still  "king" even                                                                    
though  gas  was  important  to  the  state;  oil  was  more                                                                    
important  than  gas  from  the  perspective  of  for-profit                                                                    
resource  development.  He stated  that  the  fact that  the                                                                    
credits could  be used to  incentivize oil production,  in a                                                                    
regime where an  oil tax was not being  paid, was reflective                                                                    
of how the credits could be problematic.                                                                                        
                                                                                                                                
Representative  Guttenberg   reminded  the   committee  that                                                                    
Alaskan's  paid  very high  home  heating  prices, the  most                                                                    
recent mild  winter being  an exception,  and felt  that the                                                                    
credits  should   be  targeted   towards  in-state   use  of                                                                    
affordable, long-term  energy. He  assumed that  the credits                                                                    
had been  designed to affect  the behavior of  the industry.                                                                    
He noted  that some people wondered  about the effectiveness                                                                    
and  transparency of  the credits.  He wondered  whether the                                                                    
department  would delineate  which aggregated  credits would                                                                    
monetarily benefit the state.                                                                                                   
                                                                                                                                
2:23:20 PM                                                                                                                    
                                                                                                                                
Mr. Alper  responded that  life-cycle modeling  was included                                                                    
at  the end  of the  presentation,  and would  speak to  the                                                                    
question of what  the state would receive,  even without the                                                                    
production, and what  would be the net benefit  to the state                                                                    
over time.  He opined  that as  prices fell  the possibility                                                                    
that the state might never  recoup money became an issue. He                                                                    
felt that  the state could  benefit in areas other  than the                                                                    
treasury, such  as employment and energy  security. He added                                                                    
that  the department  faced challenges  when addressing  the                                                                    
nuances of  the credits using the  normally employed methods                                                                    
of analysis.                                                                                                                    
                                                                                                                                
Representative Guttenberg requested that  the range of costs                                                                    
used  in  price models  be  included  in future  tax  credit                                                                    
related presentations.                                                                                                          
                                                                                                                                
Mr. Alper  replied that  the numbers  would be  provided. He                                                                    
asserted  that the  administration had  worked to  avoid the                                                                    
politics that usually surrounded the  issue of oil taxes. He                                                                    
stated that  part of  the reason the  state found  itself in                                                                    
the  current fiscal  climate was  because  prices were  very                                                                    
low,  and past  participants had  not adequately  considered                                                                    
what  might  happen  with  the  tax  structure  when  prices                                                                    
plunged  for a  prolonged  period of  time.  He shared  that                                                                    
there were oddities  to the system at very  low prices; when                                                                    
ACES  had been  before the  body in  2007, people  failed to                                                                    
examine what would happen when  the price reached over $70 -                                                                    
$80 per/bbl.  He stressed that  what the  administration was                                                                    
attempting to  do was to put  in place a system  that worked                                                                    
at all plausible rage of prices.                                                                                                
                                                                                                                                
2:25:41 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  understood that  the  administration                                                                    
was endorsing  Section 31, which  would establish  a working                                                                    
group that would evaluate whether  or not adjustments should                                                                    
be  made  with  Cook  Inlet  credits.  He  wondered  whether                                                                    
discussing those credits now was  necessary since they would                                                                    
be analyzed by the working group in summer 2016.                                                                                
                                                                                                                                
Mr.  Alper  responded  that right  now,  state  support  for                                                                    
ongoing  development work  in Cook  Inlet  was at  50 to  60                                                                    
percent. The  state had  spent $404  million on  credits for                                                                    
the inlet in 2015. He said  that gaining the support for the                                                                    
short-term  desire of  ramping down  the Cook  Inlet credits                                                                    
was necessary  and important. However, even  with the change                                                                    
it would still  be important to discover what  the tax would                                                                    
be in 2022,  when the caps went away. He  concluded that the                                                                    
primary  purpose  for  the  working  group  was  for  future                                                                    
planning and not for immediate gratification.                                                                                   
                                                                                                                                
Representative Pruitt  asked whether  the working  group had                                                                    
been  included in  the legislation  by  the House  Resources                                                                    
Committee.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck   replied  in  the   affirmative.  He                                                                    
thought that the  language had been included  in response to                                                                    
credits  being  put  back  into the  system.  He  felt  that                                                                    
reviewing the credits was urgent.  He pointed out that there                                                                    
had already been several working  groups that had met on the                                                                    
subject,  and   felt  that  the   issues  had   been  fairly                                                                    
established. He hoped  that all action would  not be delayed                                                                    
until 2017 simply to accommodate another working group.                                                                         
                                                                                                                                
Representative  Pruitt  asked  whether the  House  Resources                                                                    
Committee   would    concur   with    the   administration's                                                                    
summarization of  the working  group established  in Section                                                                    
31.                                                                                                                             
                                                                                                                                
Commissioner Hoffbeck  interpreted that the  House Resources                                                                    
Committee had felt  that a working group  would be necessary                                                                    
in order to further understand how to proceed with the                                                                          
credits in the future.                                                                                                          
                                                                                                                                
2:29:18 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler stated  that  the  legislature had  been                                                                    
criticized for  not forecasting  a drop  in oil  prices when                                                                    
establishing  the  credits.  He  thought that  it  would  be                                                                    
beneficial to research the credits thoroughly.                                                                                  
                                                                                                                                
2:29:53 PM                                                                                                                    
                                                                                                                                
Mr. Alper spoke to Slide 13:                                                                                                    
                                                                                                                                
          Credit Cost in Perspective                                                                                            
                                                                                                                                
          FY 2007 thru 2016, $8.0 Billion in Credits                                                                          
          North Slope                                                                                                         
       · $4.4 billion credits against tax liability                                                                             
             o Major producers; mostly 20% capital credit                                                                       
               in ACES and per-taxable-barrel credit in                                                                         
               SB21                                                                                                             
        · $2.3 billion refunded credits                                                                                         
             o New producers and explorers developing new                                                                       
               fields                                                                                                           
          Non-North Slope (Cook Inlet & Middle Earth)                                                                         
       · $0.1 billion credits against tax liability                                                                             
             o Another $500 to $800 million Cook Inlet tax                                                                      
               reductions (through 2013) due to the tax cap                                                                     
               still tied to ELF                                                                                                
        · $1.2 billion refunded credits (most since 2013)                                                                       
                                                                                                                                
Mr. Alper continued to Slide 14:                                                                                                
                                                                                                                                
     Credit Cost in Perspective                                                                                                 
                                                                                                                                
     Of the $3.0 billion in state-refunded credits through                                                                    
     the end of FY15:                                                                                                         
          • $1.45 billion went to six North Slope projects                                                                      
          that now have production                                                                                              
          • $650 million went to 13 North Slope projects                                                                        
          that do not have any production. Some of these                                                                        
          are abandoned, and some are in process                                                                                
          • $450 million went to six non-North Slope                                                                            
          projects that have production                                                                                         
     • $450 million went to eight non-North Slope projects                                                                      
     that do not have any production                                                                                            
                                                                                                                                
2:32:47 PM                                                                                                                    
                                                                                                                                
Mr. Alper advanced to Slide 15:                                                                                                 
                                                                                                                                
     Credit Cost in Perspective                                                                                                 
                                                                                                                              
     North Slope Refundable Credits                                                                                           
     Of the $1.45 billion that was spent between FY07-                                                                          
     FY15 supporting six producing projects:                                                                                    
        · Total production through end of FY15 is 38.5                                                                          
          million barrels                                                                                                       
        · Total credits = $37.30 / barrel                                                                                     
             o This number will decrease over time due to                                                                       
               additional production from these fields                                                                          
        · Lease expenditures for these projects, through                                                                        
          FY15, were $4.94 billion                                                                                              
             o Credit support was 29% of lease expenditures                                                                   
                                                                                                                                
Mr. Alper turned to Slide 16:                                                                                                   
                                                                                                                                
     Credit Cost in Perspective                                                                                                 
                                                                                                                                
     Cook Inlet Refundable Credits                                                                                            
     Of the $450 million that was spent between FY07-                                                                           
     FY15 supporting six producing projects:                                                                                    
        · Total production through end of FY15 is 55.9                                                                          
          million BOE (much of this was gas)                                                                                    
        · Total credits = $7.80 / BOE or about $1.30 / mcf                                                                  
             o This number will decrease over time due to                                                                       
               additional production from these fields                                                                          
        · Lease expenditures for these projects, through                                                                        
          FY15, were $1.09 billion                                                                                              
             o Credit support was 40% of lease expenditures                                                                   
                                                                                                                                
2:34:42 PM                                                                                                                    
                                                                                                                                
Mr. Alper explained Slide 17:                                                                                                   
                                                                                                                                
     Credit Cost in Perspective                                                                                                 
                                                                                                                                
     Cook Inlet Tax Caps                                                                                                      
        · Estimated value to industry $550-$850 over the                                                                        
          years 2007-2013                                                                                                       
        · Total Production Estimate                                                                                             
             o Gas: ~ 250 million cubic feet / day for                                                                          
               seven years = 640 BCF of gas or 106 million                                                                      
               BOE                                                                                                              
             o Oil: ~ 10,000 barrels / day for seven years                                                                      
               = 26 million BOE                                                                                                 
             o Total Production = 132 million BOE                                                                               
        · Using midpoint $700 million estimate, value of                                                                        
          caps = $5.30 / barrel or $0.88 / mcf                                                                              
                                                                                                                                
Mr. Alper stated that adding up  the Cook Inlet tax caps and                                                                    
the  direct  credits  reflected  a  $2.18  total  for  state                                                                    
support of  gas development  in Cook Inlet  over the  past 8                                                                    
years.                                                                                                                          
                                                                                                                                
2:35:47 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  queried  the  total value  of  the  oil                                                                    
produced  for which  the credits  were earned  from 2007  to                                                                    
2015. He wondered whether the  ratios of the total values to                                                                    
the  value of  the  tax  credits could  be  provided to  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Mr.  Alper replied  in the  affirmative. He  understood that                                                                    
Vice-Chair  Saddler  was  requesting the  specific  resource                                                                    
that was incentivized thorough the  credits; the oil and gas                                                                    
produced by the companies that received the tax credits.                                                                        
                                                                                                                                
Vice-Chair Saddler asked for both options.                                                                                      
                                                                                                                                
Mr.  Alper replied  that he  would provide  numbers for  all                                                                    
production; the $4.4 billion would  be a function of a great                                                                    
bulk of the  oil that was sold for  Alaskans livelihood, the                                                                    
refunded  credits would  consist  of  the targeted,  smaller                                                                    
numbers referred to in subsequent slides.                                                                                       
                                                                                                                                
Vice-Chair Saddler asked whether  the state retained seismic                                                                    
3-D and  2-D work  and well  data from  wells that  had been                                                                    
drilled using credits.                                                                                                          
                                                                                                                                
Mr.  Alper  replied in  the  affirmative;  if the  work  was                                                                    
incentivized with  an exploration  credit the data  was made                                                                    
public  after  10 years,  which  the  Department of  Natural                                                                    
Resources (DNR) used for marketing  of state lands to entice                                                                    
future new investment.                                                                                                          
                                                                                                                                
Vice-Chair  Saddler  understood  that  the  information  was                                                                    
retained in the Geologic  Material Center, and was available                                                                    
to help  the state in  marketing for future lease  sales and                                                                    
drilling programs.                                                                                                              
                                                                                                                                
Mr. Alper understood that DNR had  the data and could use it                                                                    
immediately   for   modeling   and   internal   confidential                                                                    
purposes. He  reiterated that  the information  would become                                                                    
available to the public after 10 years.                                                                                         
                                                                                                                                
Vice-Chair   Saddler  believed   that  explorers   who  were                                                                    
interested   in  doing   business  in   Alaska  would   sign                                                                    
confidentiality agreements  and visit the center  to examine                                                                    
well logs and other data before making a bid.                                                                                   
                                                                                                                                
Mr. Alper  said that  the commissioner of  DNR had  tried to                                                                    
value  the  seismic  and  other  data  that  the  state  had                                                                    
received.  He  said  that  the issue  of  seismic  data  was                                                                    
somewhat tied up in the  impending sunset of the exploration                                                                    
credits. He said that depending  on what the legislature did                                                                    
with  the credits,  the hope  was  to write  into statute  a                                                                    
continuing mechanism to ensure that  the state could get the                                                                    
data should the exploration credits eventually end.                                                                             
                                                                                                                                
2:39:29 PM                                                                                                                    
                                                                                                                                
Representative Pruitt noted that the  tax regime under SB 21                                                                    
was in  its infancy. He  reference Slide 13, and  probed the                                                                    
credit amount under ACES, versus SB 21.                                                                                         
                                                                                                                                
Mr. Alper responded  that the type of company  that had been                                                                    
eligible  for refunded  credits  during the  final years  of                                                                    
ACES,  was  receiving  approximately  45  percent  of  their                                                                    
expenses repurchased. He said that  SB 21 had eliminated the                                                                    
capital  credit   and  replaced  it  with   the  35  percent                                                                    
operating  loss credit  and the  sliding  scale. He  relayed                                                                    
that concern that a reduction  from 45 percent to 35 percent                                                                    
could  harm  projects, a  two-year  hold  harmless had  been                                                                    
built into  SB 21,  which increased  the net  operating loss                                                                    
credit to 45  percent for calendar years 2014  and 2015. All                                                                    
of the credits that had  been repurchased, to-date, from the                                                                    
North Slope had  been at the 45 percent rate.  He added that                                                                    
the  credits against  liability was  the 20  percent capital                                                                    
credit  under ACES,  which  was $3-4  million  on a  typical                                                                    
year,  and allowed  companies between  $1.5  billion and  $2                                                                    
billion,  per year,  in allowable  capital expenditures.  He                                                                    
said that  a comparable  credit since the  passage of  SB 21                                                                    
was the  per barrel credit,  which was over $500  million in                                                                    
FY 14 and 15 the two years  it was in effect. The credit had                                                                    
dropped  with   oil  prices;  the  per   barrel  credit  was                                                                    
estimated at $28 million in 2016, and $16 million in 2017.                                                                      
                                                                                                                                
Representative Pruitt  asked whether the state  could expect                                                                    
the refundable credits to decrease in the future.                                                                               
                                                                                                                                
Mr.  Alper  replied that  the  department  had expected  the                                                                    
credits  to  remain  the  same;  most  companies  that  were                                                                    
receiving  the loss  credit were  also  getting the  capital                                                                    
credit, holding  the credits  at the 45  percent level.   He                                                                    
said  that  the  credits  were expected  to  decline  to  35                                                                    
percent and  that the department's  forecasted a  decline in                                                                    
repurchase credit numbers.                                                                                                      
                                                                                                                                
Representative Pruitt spoke of  the hold harmless carry-over                                                                    
from ACES  to the  current structure under  SB 21.  He asked                                                                    
whether credits would be further reduced under SB 21.                                                                           
                                                                                                                                
2:43:31 PM                                                                                                                    
                                                                                                                                
Mr. Alper  responded that  the numbers  had been  rising. He                                                                    
said that  $628 million had  been paid  in FY 15,  which was                                                                    
the largest  number of refunded  credits the state  had ever                                                                    
paid. He  believed it was fair  to say that the  North Slope                                                                    
credits had been on a downward trend the last 3 to 4 years.                                                                     
                                                                                                                                
Representative  Pruitt pointed  to  Slide 14  and the  $1.45                                                                    
billion that  had gone into  the six producing  projects. He                                                                    
queried the total amount that was spent on the projects.                                                                        
                                                                                                                                
Mr. Alper responded $4.94 billion.                                                                                              
                                                                                                                                
Representative Pruitt asked how  much the state could expect                                                                    
to receive for the $4.94 billion investment.                                                                                    
                                                                                                                                
Mr.  Alper replied  that  it was  highly  contingent on  the                                                                    
price of oil.  He said that low prices  were forecasted over                                                                    
the next 8  to 10 years, with very little  revenue coming to                                                                    
the  state  from  those  smaller fields  that  had  the  tax                                                                    
reductions.                                                                                                                     
                                                                                                                                
Commissioner  Hoffbeck  thought  that it  was  difficult  to                                                                    
separate the credit related oil from the non-credit.                                                                            
                                                                                                                                
Representative  Pruitt   whether  the  credit   related  oil                                                                    
included production tax, royalties, and property tax.                                                                           
                                                                                                                                
2:46:51 PM                                                                                                                    
                                                                                                                                
Mr. Alper replied in the  affirmative. He explained that the                                                                    
modeling explored  3 different analysis: the  production tax                                                                    
credits,  the  total  state  take  of  royalties,  corporate                                                                    
income tax, and property tax, and the producer's economics.                                                                     
                                                                                                                                
Representative  Pruitt pointed  to Slide  16. He  understood                                                                    
that  there had  been  no qualifying  capital expenses  from                                                                    
2007 to  2010. He wondered why  there had still been  a fear                                                                    
of brown-outs  in areas of  the state  when a boom  had been                                                                    
going on in Cook Inlet.                                                                                                         
                                                                                                                                
Mr. Alper  answered that at  the time PPT was  being debated                                                                    
in  the   legislature,  the  Cook  Inlet   "Gas  Wars"  were                                                                    
underway. He understood  that much of the  conflict had been                                                                    
with the  RCA; at the  time the Southcentral  facilities had                                                                    
been used  to a long history  of very low prices,  but there                                                                    
had been  a boom  in prices  in the  Lower 48.  He continued                                                                    
that proposals for  gas sales contracts had  been brought to                                                                    
the RCA,  in order to try  to match Cook Inlet  to the Henry                                                                    
Hub price.  He said that  the RCA  had rejected some  of the                                                                    
contracts, which  had led to  disinvestment. He  stated that                                                                    
the  stage  had been  set  for  pricing  issues of  the  gas                                                                    
supply. He said that brown  out conversations made a storage                                                                    
facility essential in order to  solve the seasonality issues                                                                    
in Southcentral Alaska.                                                                                                         
                                                                                                                                
Co-Chair  Thompson asked  members  to  hold their  questions                                                                    
until the end of the presentation.                                                                                              
                                                                                                                                
2:50:44 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed Slide 19:                                                                                                   
                                                                                                                                
     Overview of Tax and Credit Calculations                                                                                    
                                                                                                                              
     How the Production Tax Works at $100 oil                                                                                 
    Tax on a single barrel of taxable North Slope oil.                                                                          
     We currently have about 160 million taxable barrels /                                                                      
     year                                                                                                                       
                                                                                                                                
     Market Price $100                                                                                                          
     Transport Cost $10                                                                                                       
     Gross Value $90                                                                                                            
     Lease Expenditures $35                                                                                                   
     Production Tax Value $55                                                                                                   
     Tax @ 35%   $19.25                                                                                                         
     Per-Barrel Credit $6.00                                                                                                  
     Net Payment $13.25                                                                                                         
     Minimum Tax Gross x 4% $3.60                                                                                               
     Higher Of (Actual Tax) $13.25                                                                                          
     Approx. Annual Revenue $2.1 billion                                                                                      
                                                                                                                                
Mr. Alper turned to Slide 20:                                                                                                   
                                                                                                                                
     Overview of Tax and Credit Calculations                                                                                    
                                                                                                                              
     At $70 Oil, the "minimum tax" takes over                                                                                 
                                                                                                                                
     Market Price $70                                                                                                           
     Transport Cost $10                                                                                                       
     Gross Value $60                                                                                                            
     Lease Expenditures $35                                                                                                   
     Production Tax Value $25                                                                                                   
     Tax @ 35% $8.75                                                                                                            
     Per-Barrel Credit $8.00                                                                                                  
     Net Payment $0.75                                                                                                          
     Minimum Tax Gross x 4% $2.40                                                                                               
     Higher Of (Actual Tax) $2.40                                                                                           
     Approx. Annual Revenue $380 million                                                                                      
                                                                                                                                
Mr. Alper continued to Slide 21:                                                                                                
                                                                                                                                
     Overview of Tax and Credit Calculations                                                                                    
     At $40 Oil, producers have operating losses                                                                              
                                                                                                                                
     Market Price $40                                                                                                           
     Transport Cost $10                                                                                                       
     Gross Value $30                                                                                                            
     Lease Expenditures $35                                                                                                   
     Production Tax Value ($5)                                                                                                  
     Approx. Operating Loss $800 million                                                                                        
     Tax @ 35% ($1.75)                                                                                                          
     Per-Barrel Credit $8.00                                                                                                  
     Net Payment ($9.75)                                                                                                        
     Minimum Tax Gross x 4% $1.20                                                                                               
     Higher Of (Actual Tax) $1.20                                                                                           
     Approx. Annual Revenue $190 million                                                                                      
     Carried Forward Loss Credit 35% $280 million                                                                               
                                                                                                                                
2:55:15 PM                                                                                                                    
                                                                                                                                
Mr. Alper spoke to Slide 22:                                                                                                    
                                                                                                                                
     Overview of Tax and Credit Calculations                                                                                    
                                                                                                                                
     $40 for second year means Operating Loss credits can                                                                     
     be used to reduce payments below the minimum tax                                                                         
                          Year 1       Year 2                                                                                   
     Market Price           $40         $40                                                                                     
     Transport Cost         $10         $10                                                                                   
     Gross Value            $30         $30                                                                                     
     Lease Expenditures     $35         $35                                                                                   
     Production Tax Value  ($5)        ($5)                                                                                     
     Approx. Operating Loss $800 million $800 million                                                                           
     Tax @ 35%             ($1.75)     ($1.75)                                                                                  
     Per-Barrel Credit      $8.00       $8.00                                                                                 
     Net Payment           ($9.75)     ($9.75)                                                                                  
     Minimum Tax Gross x 4% $1.20       $1.20                                                                                   
     Higher Of (Actual Tax) $1.20       $1.20                                                                                 
     Approx. Annual                                                                                                             
     Revenue                $190 million $190 million                                                                           
     Less Carried-Forward                                                                                                       
     Loss Credit                        ($190 million)                                                                          
     Actual Tax Payment    $190 million  $0                                                                                   
     Carried-Forward                                                                                                            
     Loss Credit 35%       $280 million  $370 million                                                                           
                                                                                                                                
Mr. Alper  relayed that the slide  reflected the calculation                                                                    
of the high operating loss  credit carry forward due to many                                                                    
years of expected  low prices, which had  been forecasted in                                                                    
the  department's 2016  spring forecast.  He qualified  that                                                                    
this  was the  baseline  scenario for  legacy  oil from  the                                                                    
North Slope. He spoke to slide 23:                                                                                              
                                                                                                                                
        · This is just the "baseline" scenario, for legacy                                                                      
          oil from the North Slope.                                                                                             
        · Does not account for the fact that roughly 9% of                                                                      
          production qualifies for the "Gross Value                                                                             
          Reduction" new oil tax break                                                                                          
        · Can also provide example calculations for North                                                                       
          Slope GVR Eligible Production as well as Cook                                                                         
          Inlet scenarios                                                                                                       
                                                                                                                                
Mr.  Alper explained  that 91  percent of  the oil  from the                                                                    
North Slope used the above  calculation, the other 9 percent                                                                    
was new  oil that  qualified for  the Gross  Value Reduction                                                                    
(GVR), the  difference being that  at higher prices  the tax                                                                    
would be  lower. The  new oil  would not  be subject  to the                                                                    
minimum tax and could pay zero under current law.                                                                               
                                                                                                                                
Mr. Alper addressed Slide 25:                                                                                                   
                                                                                                                                
     Bill Summary - What is in the H(RES) CS?:                                                                                  
                                                                                                                                
               Exploration Credits                                                                                            
                                                                                                                              
          HB247 Proposed / Kept in CS                                                                                         
        · Allowing    the   .025(a)    "alt.   credit    for                                                                    
          exploration" to expire on 7/1/16, for North Slope                                                                     
          and Cook Inlet                                                                                                        
             o 025(a) credits remain for "Middle Earth"                                                                         
               until 2022                                                                                                       
        · Also allowing the "Jack up Rig" and "Frontier                                                                         
         Basin" credits to expire at the same time                                                                              
        · Preemptively repeal other exploration credit                                                                          
          programs that are not currently being used, in AS                                                                     
          38.05.180(i) and AS 41.09.                                                                                            
                                                                                                                                
2:58:53 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed Cook Inlet credits on Slides 26 and 27:                                                                     
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
                                                                                                                                
     Cook Inlet Credits, Current Conditions                                                                                   
     New Field Developer                                                                                                        
        · Currently receives a 25% Net Operating Loss (NOL)                                                                     
          credit stacked with either the 20% Capital (QCE)                                                                      
          or 40% Well (WLE) credit. Generally a weighted                                                                        
          average of the two "spending / drilling" credits                                                                      
        · State typically refunds 50-60% of costs                                                                               
     Existing Producer                                                                                                        
        · Currently pays low to zero taxes due to Cook                                                                          
          Inlet tax caps, yet is eligible for 20% Capital                                                                       
          or 40% Well Lease Expenditure credits                                                                                 
        · State typically refunds 25%-35% of costs                                                                              
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
                                                                                                                              
     Cook Inlet Credits, Changes in CS                                                                                        
     New Field Developer                                                                                                      
        · NOL (Loss) credit reduced from 25% to 10% in 2017                                                                     
        · WLE (Well) credit reduced to 30% in 2017 and 20%                                                                      
          in                                                                                                                    
        · 2018 (effectively repealing it)                                                                                       
        · QCE   (Capital)   credit    remains   until   2022                                                                    
          (anticipating sunset of Cook Inlet tax caps)                                                                          
        · State will typically refund 35% of costs in 2017                                                                      
          and 30% in 2018 and beyond                                                                                            
     Existing Producer                                                                                                        
        · Tax caps remain until 2022. Continuation of 20%                                                                       
          QCE credit means state will continue to refund                                                                        
          20% of capital spending                                                                                               
     CS sets path for broader Cook Inlet tax reform by 2022                                                                   
                                                                                                                                
3:01:49 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed repurchase limits on Slide 28:                                                                              
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
                                                                                                                              
               Repurchase Limits                                                                                              
                                                                                                                              
     Changes in Committee Substitute                                                                                          
             · Adds an annual "cap" on per-company credit                                                                       
               repurchases of $200 million                                                                                      
             · Multiple partners in the same project can                                                                        
               each claim                                                                                                       
             · $200 million. However, a single company                                                                          
               cannot artificially split themselves to                                                                          
               multiply the benefit                                                                                             
             · Cash flow protection in the case of a large                                                                      
               "outlier" project such as proposed by                                                                            
               Armstrong                                                                                                        
                  o Modeling showed annual credits from a                                                                       
                    similar project of up to $800 million                                                                       
                                                                                                                                
Mr. Alper continued to Slide 29:                                                                                                
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
          Repurchase Limits (cont'd)                                                                                          
     Historic Notes on large annual credits:                                                                                  
                                                                                                                                
     Over the 2007-2016 history of the tax credit program:                                                                      
        · There has only been one instance of a company who                                                                   
          ever received > $200 million in a single year                                                                       
        · Five times ever when one company received between                                                                   
          $100 -$200 million in one year                                                                                      
        · 11 times ever when one company received between                                                                     
          $50 - $100 million in one year                                                                                      
                                                                                                                                
Mr. Alper turned to Slide 30:                                                                                                   
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
          Remove Exceptions / Loopholes                                                                                       
     CS   retains   two    proposed   changes   to   prevent                                                                  
     artificially inflated net operating losses                                                                               
        · Can't use GVR (new oil value reduction) to                                                                            
          increase  the size  of a  Net Operating  Loss (has                                                                    
         led to credits greater than 100% of loss)                                                                              
        · If a municipal entity owns production and sells                                                                       
          only a  portion of  that production to  an outside                                                                    
          party, only the pro-rata  share of expenses can be                                                                    
          deducted against revenue                                                                                              
                                                                                                                                
3:05:49 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed slide 31:                                                                                                   
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
     Brief explanation of GVR / NOL Problem                                                                                   
     (Sec. 12; AS 43.55.23(b)(2))                                                                                             
        · CSHB 247 would prohibit the gross value reduction                                                                     
          (GVR)  from being  used to  increase  size of  net                                                                    
          operating loss and by extension, the NOL credit                                                                       
        · In the low oil price / low cost example shown on                                                                      
          the  next page,  the net  operating loss  would be                                                                    
          limited to the  net value before GVR,  which is $6                                                                    
          per barrel instead of $12 per barrel                                                                                  
        · The resulting credit is 35% of the actual net                                                                         
          operating loss,  reducing the credit  liability to                                                                    
          the  State  by 50%.    For  a GVR-field  producing                                                                    
          10,000 taxable barrels per  day, the difference is                                                                    
          $7.6 million                                                                                                          
                                                                                                                                
Mr. Alper  elaborated on the  topic of current  law allowing                                                                    
the gross value  reduction to increase a  net operating loss                                                                    
credit (Slide 32).                                                                                                              
                                                                                                                                
3:08:18 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  turned   to  Slide  33  and   provided  a  brief                                                                    
explanation  of municipal  utility problem.  If a  municipal                                                                    
utility owned a  portion of a gas field and  used all of the                                                                    
gas  to  generate  its  own  power, the  gas  would  not  be                                                                    
taxable. However,  if a portion  of that  gas was sold  to a                                                                    
third  party,  those sales  would  be  taxable. Current  law                                                                    
allowed  all lease  expenditures to  be used  to offset  the                                                                    
comparably small  amount of  sales, which  could potentially                                                                    
generate late  credits. HB 247  proposed to limit  the lease                                                                    
expenditure calculation  to just  the pro-rate share  of the                                                                    
expenditures equal  to the  proportion of  the gas  that had                                                                    
been sold.                                                                                                                      
                                                                                                                                
Mr.   Alper  turned   to  Slide   34  and   addressed  other                                                                    
provisions:                                                                                                                     
                                                                                                                                
     Bill Summary- What is in the H(RES) CS?                                                                                    
               Other Provisions                                                                                               
     Interest Rate Reform                                                                                                     
        · Fixes  a technical  error  in  SB21 that  prevents                                                                    
          compound    interest    on    underpayments    and                                                                    
          assessments. Since 2014 we have collected only                                                                        
          simple interest                                                                                                       
        · Interest  rate remains  3% above  federal discount                                                                    
          rate                                                                                                                  
     Bankruptcy & Debt Protection                                                                                             
        · Credit  certificates   can  be  used   to  satisfy                                                                    
          obligations to the state for the company's oil                                                                        
          and gas business before repurchase                                                                                    
        · Surety  bond   of  $250,000  for   developers,  to                                                                    
          protect unsecured creditors in event of default                                                                       
                                                                                                                                
Mr. Alper                                                                                                                       
                                                                                                                                
3:12:07 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed the changes  made from the Governor's to                                                                    
the  House Resource  Committee version  of the  bill to  the                                                                    
bill beginning on Slides 36:                                                                                                    
                                                                                                                                
     Changes made in House Resources                                                                                            
                                                                                                                                
        · Kept  and improved  many of  the technical  fixes,                                                                    
          including inadvertent "double dip" credit for new                                                                     
          oil on the North Slope                                                                                                
        · Reduced   Cook  Inlet   credits,  with   different                                                                    
          emphasis and delayed phase-out                                                                                        
        · Increased  repurchase "cap,"  limiting its  impact                                                                    
          to just very large 'outlier' projects                                                                                 
        · Removed  all  changes   to  minimum  tax  "floor,"                                                                    
          transparency provisions, interest rate increase,                                                                      
          and several smaller provisions                                                                                        
        · New legislative working group to review tax                                                                           
          regimes outside the North Slope                                                                                       
                                                                                                                                
Mr. Alper moved to slide 37, which addressed Cook Inlet                                                                         
credits:                                                                                                                        
                                                                                                                                
     Changes made in House Resources                                                                                            
               Cook Inlet Credits                                                                                             
     Original proposal was to repeal 20% Capital (QCE) and                                                                    
     40% Well (WLE) credits on 7/1/16, while maintaining                                                                      
     the 25% Operating Loss (NOL)                                                                                             
        · Effectively, three substantial changes:                                                                               
          1. Timing:  CS phased in the changes over 18                                                                          
           months, taking full effect on 1/1/18                                                                                 
          2. Total:  CS retained a 30% level of development                                                                     
             support vs. 25% in original bill                                                                                   
          3. Applicability:  CS maintained 20% credit                                                                           
             support for producers who earn a profit, vs. no                                                                    
             support in original version. Means additional                                                                      
             companies will still qualify for cash credits                                                                      
                                                                                                                                
Mr. Alper continued to Slide 38:                                                                                                
                                                                                                                                
     Changes made in House Resources                                                                                            
               Repurchase Limits                                                                                              
    Original proposal added four limits to repurchase:                                                                        
          · Per-company / per-year cap of $25 million                                                                           
          · Large companies, with annual revenue over $10                                                                       
             billion, are ineligible for credit repurchase                                                                      
          · Percentage of repurchase tied to percentage of                                                                      
             Alaska resident hire                                                                                               
          · 10-year carry forward sunset                                                                                        
     Impact of Changes                                                                                                        
          · A large percentage of projected savings were in                                                                     
             these provisions,  although tighter  repurchase                                                                    
             limits  would  increase  the  total  amount  of                                                                    
             "carried forward"  credits  that  could  offset                                                                    
             future production                                                                                                  
                                                                                                                                
3:16:38 PM                                                                                                                    
                                                                                                                                
Mr. Alper turned to Slide 39 and continued to address                                                                           
changes made to the bill in the prior committee:                                                                                
                                                                                                                                
     Changes made in House Resources                                                                                            
               Strengthen Minimum Tax                                                                                         
    CS eliminated- items that impact legacy producers:                                                                        
          · Can't use an operating loss credit, to reduce                                                                       
             payments below the 4% floor                                                                                        
          · This was the largest "added revenue" component                                                                      
          · Prevent per-taxable-barrel credits earned in                                                                        
             one month from being used against another                                                                          
             month's taxes at true-up                                                                                           
          · Increase in minimum tax from 4% to 5%                                                                               
    CS eliminated- items that impact new oil producers:                                                                       
          · Extend minimum tax to GVR-eligible "new" oil                                                                        
          · Not allow small producer credit to reduce tax                                                                       
             payments below the floor                                                                                           
                                                                                                                                
Co-Chair Thompson                                                                                                               
                                                                                                                                
Mr. Alper addressed the fiscal  impact of the bill beginning                                                                    
on Slides  40. He noted  that the  fiscal note for  the bill                                                                    
was 5 pages.  He said that the provisions of  the bill could                                                                    
be  broken out  into  three main  sections:  two related  to                                                                    
spending,  and one  to increased  revenue.  He relayed  that                                                                    
when originally  proposed the  bill would  have had  a total                                                                    
fiscal impact of $500 million,  but the number had increased                                                                    
to $785 million after the  spring forecast. He said that the                                                                    
bill would have little impact in  FY 17 because it would not                                                                    
take effect  until January 1,  2017, which would  be halfway                                                                    
through the fiscal year. He  stated that the provisions that                                                                    
deferred credits  and hardened  the floor had  been removed.                                                                    
He said that  the $200 million cap was  the remaining credit                                                                    
deferring provision  in the  current bill,  and did  show as                                                                    
fiscal impact in the fiscal  note because the department had                                                                    
not predict any companies would  earn $200 million, or more,                                                                    
in the 6  year period covered by the note.  He noted that FY                                                                    
18 offered  a more  appropriate comparison because  the bill                                                                    
would  be  more fully  implemented.  He  concluded that  the                                                                    
numbers  on the  slide  reflected larger  and more  detailed                                                                    
fiscal note, with  all of the associated  narrative that had                                                                    
been previously provided to the committee.                                                                                      
                                                                                                                                
3:22:27 PM                                                                                                                    
                                                                                                                                
Mr. Alper  spoke to the  spring forecast and the  reason the                                                                    
numbers differed from fall 2015 to spring 2016 (Slide 42):                                                                      
                                                                                                                                
     Fiscal Impact                                                                                                              
     Impact of Changes from Fall 15 to                                                                                        
     Preliminary Spring 16 Forecast                                                                                           
       · Much lower prices for longer period means:                                                                             
             o Larger company operating losses                                                                                  
             o Status quo, production tax goes to near zero                                                                     
               as all of it is offset by NOL credits                                                                            
             o Large carried-forward NOL's, $630 million                                                                        
               after FY17                                                                                                       
        · Refundable credit estimate for FY17 increases by                                                                      
          $200 mil                                                                                                              
             o Larger company operating losses                                                                                  
             o Higher than expected work on exploration                                                                         
               projects, before expected sunset this year                                                                       
               (up to 85% on NS)                                                                                                
                                                                                                                                
Mr. Alper turned to Slide 43:                                                                                                   
                                                                                                                                
     In future years, our "status quo" credit forecast                                                                        
     appears to decrease.                                                                                                     
     This can't really be built into future budgets.                                                                          
        · Our credit forecast only includes "known"                                                                             
          projects                                                                                                              
        · Most "new" projects would add to the amount of                                                                        
          projected credits                                                                                                     
        · Credit projections use the same conservative                                                                          
         methodology as DOR's production forecast                                                                               
                                                                                                                                
Mr.  Alper  noted   that  the  numbers  would   need  to  be                                                                    
recalculated  if  Armstrong  continued  forward  with  their                                                                    
project.  He suggested  continuing the  next section  of the                                                                    
presentation when more time could be made available.                                                                            
                                                                                                                                
Co-Chair Thompson discussed housekeeping.                                                                                       
                                                                                                                                

Document Name Date/Time Subjects
HB247 DOR for HFIN 3-31-16 (002).pdf HFIN 3/31/2016 1:30:00 PM
HB 247
HB 247 Applicability by geography and owner_v2_ 3-14.pdf HFIN 3/31/2016 1:30:00 PM
HB 247
HB 247 AS 43 55 Credits Table with HB 247 changes 3-7-16.pdf HFIN 3/31/2016 1:30:00 PM
HB 247
HB 247 Table 8-4_PRELIMINARY Spring 2016 Forecast_MGM_20160329.pdf HFIN 3/31/2016 1:30:00 PM
HB 247