Legislature(2015 - 2016)HOUSE FINANCE 519

03/31/2016 05:00 PM FINANCE

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Audio Topic
05:08:48 PM Start
05:10:10 PM HB247
07:20:56 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
- Dept. of Revenue
- Dept. of Natural Resources:
Corri Feige, Director, Division of Oil & Gas
Paul Decker, Petroleum Geologist I, Division of
Oil & Gas
+ 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."                                                                                                                     
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
asked  if  there  were  any questions  on  the  fiscal  note                                                                    
section of the presentation.                                                                                                    
                                                                                                                                
Co-Chair  Thompson informed  the  committee  that Mr.  Alper                                                                    
would be available  to visit each member's  office to review                                                                    
the presentation  slides that were  discussed in  the 1:30pm                                                                    
meeting.                                                                                                                        
                                                                                                                                
5:11:06 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced himself.                                                                                                             
                                                                                                                                
5:11:25 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  continued  his   presentation  from  the  1:30pm                                                                    
meeting. He began with Slide 45:                                                                                                
                                                                                                                                
   Introduction to Scenario Analysis                                                                                            
                                                                                                                                
     · The Tax Division has developed a new model, looking                                                                      
        at project life cycles                                                                                                  
     · Cash flow over the 30-40 year life of a project, for                                                                     
        the state's production tax and credits, all state                                                                       
        revenue, the producer's cash flow, and discounted                                                                       
        (NPV)                                                                                                                   
     · Scenarios Analyzed at $40, $60, $80, and Fall                                                                            
        Forecast oil price                                                                                                      
     · Status quo modeled vs. Governor's original bill                                                                          
     · Two full presentations on BASIS from previous                                                                            
        committee                                                                                                               
                                                                                                                                
Mr.  Alper  explained  that when  modeling  credit  and  tax                                                                    
changes in  the past  the tendency had  been to  look across                                                                    
the North  Slope as  if it  were one  entity, which  did not                                                                    
capture   the  individuality   of  different   projects.  He                                                                    
highlighted that  the modeling reflected the  life cycles of                                                                    
specific projects.  He said  that House  Resources Committee                                                                    
had  seen several  presentations  on the  status quo  model,                                                                    
versus the  Governor's Original  bill, which  were available                                                                    
on BASIS.                                                                                                                       
                                                                                                                                
5:12:55 PM                                                                                                                    
                                                                                                                                
Mr. Alper turned to Slide 46:                                                                                                   
                                                                                                                                
     Introduction to Scenario Analysis                                                                                          
                                                                                                                                
     Fields Analyzed:                                                                                                         
          North Slope Scenarios:                                                                                                
            · 50 million barrel North Slope Oil                                                                                 
             · 750 million barrel North Slope Oil (20% GVR)                                                                     
          Cook Inlet Scenarios                                                                                                  
             · 50 million barrel Cook Inlet Oil (with and                                                                       
               without tax caps)                                                                                                
          Supplemental Scenarios                                                                                                
             · 750 million barrel North Slope Oil (30% GVR)                                                                     
             · 750 million barrel North Slope Oil (50%                                                                          
               Private Royalty)                                                                                                 
             · 670 bcf Cook Inlet Gas                                                                                           
             · 670 bcf Middle Earth Gas                                                                                         
                                                                                                                                
Mr. Alper explained  that the 50 million  barrel North Slope                                                                    
oil was  analogous to the  smaller, newer projects  that had                                                                    
developed  10   years  ago  at  Oooguruk,   Nikaitchuq,  and                                                                    
projects  by Brooks  Range Petroleum;  the economics  of the                                                                    
smaller fields  that existed among the  bigger, older fields                                                                    
in the North  Slope. He relayed that the  750 million barrel                                                                    
North  Slope Oil  economics were  equivalent to  projects by                                                                    
Armstrong  or  Repsol. He  said  that  for Cook  Inlet,  the                                                                    
smaller oil field  economics applied, as no  one expected to                                                                    
find  large fields  in that  area. He  highlighted that  the                                                                    
numbers   had  not   been  based   on  anyone's   individual                                                                    
economics, but on stylized projects,  and the department had                                                                    
examined what was  perceived to be the  typical and expected                                                                    
economics  of  projects in  those  areas  of the  state.  He                                                                    
explained the supplemental scenarios.  He relayed that under                                                                    
SB 21, the GVR was a  20 percent tax reduction was standard,                                                                    
but if the field in question  was a very high royalty field,                                                                    
with  leases greater  than 12.5  percent, the  company would                                                                    
receive  a  30  percent  GVR.   He  noted  that  there  were                                                                    
documents in  committee packets  that explained  how royalty                                                                    
sharing  worked in  different areas  of the  state. He  said                                                                    
that  the  state received  the  production  tax anywhere  in                                                                    
Alaska; the royalty that was  collected was very specific to                                                                    
the state  being the landowner.  He said that the  state had                                                                    
been  fortunate that  past  geologists  had been  thoughtful                                                                    
enough  to  select  the Central  North  Slope  at  statehood                                                                    
securing Prudhoe  Bay on  state land.  He noted  thatHe said                                                                    
that the  royalties that the  state collected  were specific                                                                    
He added that royalty  sharing arrangements with the federal                                                                    
government varied  around the different areas  of the state.                                                                    
He revealed that  the department had done a  modeling run in                                                                    
order  to forecast  what  would happen  if  the North  Slope                                                                    
field  were  half  state,  and   half  private  royalty.  He                                                                    
explained that the state did  not receive private royalties;                                                                    
for  example, if  there  was an  oil  development on  Native                                                                    
Corporation land, they did not  have any obligation to share                                                                    
their royalties with  the state. He said that  the state did                                                                    
have a  tax on  the royalty,  which was  5 percent  of their                                                                    
gross royalty. He  relayed that at 12.5  percent royalty the                                                                    
state received the equivalent of  six-tenths of 1 percent of                                                                    
tax on  the royalty.  He furthered that  if the  royalty was                                                                    
12.5  percent, whatever  the royalty  dollar was,  the state                                                                    
would  collect  a  5  percent tax  on  the  royalty  dollar;                                                                    
effectively, the state's  revenue would be 5  percent of the                                                                    
12.5, slightly  over six-tenths of  1 percent. He  said that                                                                    
gas fields in  Cook Inlet and in Middle Earth  had also been                                                                    
modeled.                                                                                                                        
                                                                                                                                
Mr. Alper turned to Slide  47, "Sample of Scenario Analysis:                                                                    
North Slope- 50 mmbo Status  Quo, $60/bbl." He said that the                                                                    
slide reflected  the status  quo analysis  of a  North Slope                                                                    
small oil field. He pointed to  the slide on the upper left,                                                                    
which charted the production tax  cash flow. He relayed that                                                                    
there had been 5 to  6 years of development of construction,                                                                    
and  as companies  spent money  they were  eligible for  tax                                                                    
credits from the  state. He stated that under  the model the                                                                    
North Slope was getting a  35 percent operating loss credit;                                                                    
if  the  company  was  spending $125  million  per  year  to                                                                    
develop their field, they would  earn a 35 percent operating                                                                    
loss  credit.   He  said  that  years   of  production  were                                                                    
represented in blue bars.                                                                                                       
                                                                                                                                
Mr. Alper  spoke to  the upper right  hand bar  graph, which                                                                    
charted annual state net gains  and losses at 20 percent GVR                                                                    
at  the  $60  and  price.  The  chart  on  the  upper  right                                                                    
reflected  the  annual state  net  gains  and losses  at  20                                                                    
percent  GVR   at  the  $60   ANS  price.  The   green  bars                                                                    
represented the  production tax,  the blue  bars represented                                                                    
the royalties,  the red bars  represented property  tax, and                                                                    
the purple  bars represented state corporate  income tax. He                                                                    
said that  the lower left  hand graph illustrated  the total                                                                    
producer cash flows at 20 percent  GRV at the $60 ANS price.                                                                    
The box in the lower  right hand corner summarized the three                                                                    
data sets on the slide:                                                                                                         
                                                                                                                                
     Life Cycle Totals                  $Millions                                                                           
     Production Tax Credits Cashed           162                                                                                
     Production Tax Paid                     183                                                                                
     Net Production Tax                       21                                                                                
     Production Tax NPV 6.15%                -37                                                                                
                                                                                                                                
     Total Annual State Losses               121                                                                                
     Total Annual State Gains                501                                                                                
     Net State Gain (Loss)                   380                                                                                
     State NPV 6.15%                         136                                                                                
                                                                                                                                
     Total Producer Cash Out                 327                                                                                
     Total Producer Cash In                  731                                                                                
     Net Producer Cash Flow                  404                                                                                
     Producer Cash NPV 6.15%                 112                                                                                
                                                                                                                                
Mr. Alper  said that  scenarios had  been run  using $40/bbl                                                                    
and  that  all  resulted  in   lost  money,  which  led  the                                                                    
administration  to  believe that  no  one  would sanction  a                                                                    
substantial project in  the state at $40/bbl.  He noted that                                                                    
at $60/bbl  the state  would break  even, and  things looked                                                                    
more robust at $80/bbl.                                                                                                         
                                                                                                                                
5:22:05 PM                                                                                                                    
                                                                                                                                
Co-Chair Thompson  queried the  most efficient way  that the                                                                    
committee could ask questions about the scenario slides.                                                                        
                                                                                                                                
Mr. Alper responded that the  slide came in pairs: before HB                                                                    
247, and  after HB 247,  and that now  would be a  good time                                                                    
for questions.                                                                                                                  
                                                                                                                                
Vice-Chair  Saddler   asked  about   the  timeline   of  the                                                                    
scenarios.                                                                                                                      
                                                                                                                                
Mr.  Alper  responded  that  the  timeline  began  when  the                                                                    
company started spending money on  the project. He said that                                                                    
the upper  left box  was unique to  just the  production tax                                                                    
system,  both taxes  and credits,  and did  not capture  the                                                                    
lease bonus payment.                                                                                                            
                                                                                                                                
5:23:37 PM                                                                                                                    
                                                                                                                                
Representative Gara  spoke to the  calculation of  the gross                                                                    
revenue  exclusion  for the  bigger  fields,  and the  gross                                                                    
value reduction for  the smaller fields. He  asked whether a                                                                    
gross value reduction field was  represented in the top left                                                                    
hand corner.                                                                                                                    
                                                                                                                                
Mr. Alper answered  that it was a gross  reduction field. He                                                                    
furthered that  the assumption  in all  of the  modeling was                                                                    
that if  it was a  new field on  the North Slope,  where the                                                                    
GVR was  the law of the  land, it would qualify  for the GVR                                                                    
because it was designed to benefit new fields.                                                                                  
                                                                                                                                
5:24:30 PM                                                                                                                    
                                                                                                                                
Representative  Gara noted  that he  had a  report from  the                                                                    
department  that  said  that for  production  taxes  on  GVR                                                                    
fields (post  2002) the state  did not receive  a production                                                                    
tax until approximately $73/bbl.  He wondered why the slides                                                                    
reflected production tax revenue at $60/bbl.                                                                                    
                                                                                                                                
Mr. Alper  replied that he  would get back to  the committee                                                                    
with the  information. He  noted that  the numbers  were not                                                                    
particularly large for  an entire oil field  over the course                                                                    
of  a  year,  but  that   they  were  positive  numbers.  He                                                                    
suggested  that  Mr.  Stickle   could  further  explain  the                                                                    
numbers.                                                                                                                        
                                                                                                                                
5:26:14 PM                                                                                                                    
                                                                                                                                
DAN  STICKLE,   CHIEF  ECONOMIST,  DEPARTMENT   OF  REVENUE,                                                                    
explained  that  the  analysis   that  had  been  previously                                                                    
provided to  the committee  had looked  at all  GVR eligible                                                                    
fields on  the North  Slope in the  aggregate. He  said that                                                                    
the fields included a mix  of companies that were operating,                                                                    
as  well as  investing  in capital  expenditures. He  stated                                                                    
that the  slide reflected a development  scenario where most                                                                    
of the  capital expenditures  took place up  front, followed                                                                    
by   a   period  of   time   of   spending  only   operating                                                                    
expenditures. He relayed that  the structure of the spending                                                                    
profile brought the break-even down from the mid-70s level.                                                                     
                                                                                                                                
Representative Gara remained confused.                                                                                          
                                                                                                                                
Mr.  Alper offered  to rephrase  the response.  He explained                                                                    
that  the field  in the  scenario  was specific  to a  field                                                                    
where  the  spending was  "front  loaded".  He said  it  the                                                                    
capital spending in the oil  field was spread evenly over 30                                                                    
years,  there would  be capital  spending in  2010-13, which                                                                    
would  be enough  to offset  the tax  and drive  it down  to                                                                    
zero. He  stated that  when doing  an aggregate  analysis of                                                                    
many  different fields,  in different  stages of  their life                                                                    
cycle,  one  groups  capital spending  would  always  offset                                                                    
another groups taxes. The slide  did not reflect any capital                                                                    
offsetting of  the earnings  for the  later years,  so taxes                                                                    
were paid at a lower oil price.                                                                                                 
                                                                                                                                
Representative Gara understood that  averaging out the early                                                                    
spending and the later revenues  would show negative returns                                                                    
for the state  in the beginning and  positive returns later,                                                                    
and a zero production tax over the life of the field.                                                                           
                                                                                                                                
Mr.  Alper responded  that  the  analysis included  multiple                                                                    
fields at  multiple stages  in their  life cycles.  He added                                                                    
that some of  the fields had a lot of  capital spending that                                                                    
when taken  all together would  offset the taxes  from those                                                                    
that were paying taxes.                                                                                                         
                                                                                                                                
5:29:43 PM                                                                                                                    
                                                                                                                                
Mr. Alper  scrolled to  Slide 48. He  stated that  Slides 47                                                                    
and 48 were the same exact  field, but Slide 48 included the                                                                    
changes that had been in the  original version of HB 247. He                                                                    
said that  the most substantial  change to the  economics of                                                                    
the  projects was  the per  company cap  of $25  million. He                                                                    
pointed to  the chart in  the upper left, which  showed that                                                                    
the production tax credits cashed/payments  did not go below                                                                    
$25 million  but they  could be applied  for more  years. He                                                                    
spoke to  the chart  in the lower  right, which  offered the                                                                    
life cycle totals in millions:                                                                                                  
                                                                                                                                
     Life Cycle Totals                  $Millions                                                                           
     Production Tax Credits Cashed           101                                                                                
     Production Tax Paid                     155                                                                                
     Net Production Tax                      54                                                                                 
     Production Tax NPV 6.15%                -10                                                                                
                                                                                                                                
     Total Annual State Losses               59                                                                                 
     Total Annual State Gains                470                                                                                
     Net State Gain (Loss)                   412                                                                                
     State NPV 6.15%                         163                                                                                
                                                                                                                                
     Total Producer Cash Out                 362                                                                                
     Total Producer Cash In                  746                                                                                
     Net Producer Cash Flow                  384                                                                                
     Producer Cash NPV 6.15%                 93                                                                                 
                                                                                                                                
Co-Chair  Thompson  requested  that members  to  hold  their                                                                    
questions until the end of the presentation.                                                                                    
                                                                                                                                
Mr.  Alper turned  to  Slide 49,  which  reflected a  sample                                                                    
scenario of North  Slope oil at 750 mmbo, under  HB 247, and                                                                    
Co-Chair Thompson $80/bbl. He said  that the scenario on the                                                                    
slide was analogous with the  Armstrong field, and peaked at                                                                    
roughly 120,000  barrels per day.  He said that $80  oil had                                                                    
been used because that was  the price point needed to secure                                                                    
the investment.  He shared that  spending by investors  on a                                                                    
new oil  field was viewed  in terms of  capital expenditures                                                                    
per dollar,  per barrel of  oil that would be  produced. For                                                                    
example,  if the  field  was going  to  produce 750  million                                                                    
barrels,  at approximately  $13 of  capital expenditure  per                                                                    
barrel;  the  result  was  $10   billion  worth  of  capital                                                                    
spending on  the North Slope  to produce the field.  He felt                                                                    
that  it was  important  that the  committee understood  the                                                                    
state's commitment  to investors  under the status  quo law.                                                                    
He relayed  that once spending was  made in the range  of $1                                                                    
billion,  or more,  per year,  the state  would be  spending                                                                    
many  hundreds  of millions  of  dollars  in refundable  tax                                                                    
credits.  He said  that  was simply  the  way things  worked                                                                    
under the 35  percent operating loss credit.  He pointed out                                                                    
to the  committee that the red  bars in the upper  left hand                                                                    
graph   reached  over   $800  million   in  peak   years  of                                                                    
construction on the  project. He indicated the  slide on the                                                                    
upper right of  the slide, and relayed  that once production                                                                    
was underway, the  state would receive over  $1 billion, per                                                                    
year,  in   revenue.  He  insisted  that   $80/bbl  oil  was                                                                    
necessary for  the state to  get their $1 billion  per year,                                                                    
and  that he  held  out hope  that the  price  of oil  would                                                                    
bounce back.  He added  that the slide  reflected a  40 year                                                                    
time cycle,  which meant  that the  time line  would require                                                                    
patience.  He spoke  to the  box on  the lower  right, which                                                                    
listed the life cycle totals  related to the scenario on the                                                                    
slide:                                                                                                                          
                                                                                                                                
     Life Cycle Totals                  $Millions                                                                           
     Production Tax Credits Cashed           2,830                                                                              
     Production Tax Paid                     8,923                                                                              
     Net Production Tax                      6,093                                                                              
     Production Tax NPV 6.15%                869                                                                                
                                                                                                                                
     Total Annual State Losses               2,553                                                                              
     Total Annual State Gains                16,623                                                                             
     Net State Gain (Loss)                   14,069                                                                             
     State NPV 6.15%                         3,527                                                                              
                                                                                                                                
     Total Producer Cash Out                 5,247                                                                              
     Total Producer Cash In                  17,933                                                                             
     Net Producer Cash Flow                  12,686                                                                             
     Producer Cash NPV 6.15%                 2,216                                                                              
                                                                                                                                
Mr. Alper  turned to Slide  51, which incorporated  into the                                                                    
scenario  the  changes  proposed   by  the  legislation.  He                                                                    
revealed  that the  numbers indicated  that the  $25 million                                                                    
cap  on  spending  would greatly  reduce  the  state's  cash                                                                    
outlay,  and there  would be  a significant  level of  carry                                                                    
forward  credit. He  said that  once  production began,  the                                                                    
built up, carry forward  credits would cancel out production                                                                    
taxes and would  eventually result in the  loss of operating                                                                    
loss credits  for companies. He  highlighted that  the total                                                                    
production tax credits cashed would  drop from $2.8 billion,                                                                    
to $109  million, and the state's  production tax discounted                                                                    
cash flow would be double what  it was under the scenario on                                                                    
Slide 50.  He pointed to the  box on the lower  right of the                                                                    
slide,  which   reflected  life   cycle  totals   under  the                                                                    
scenario:                                                                                                                       
                                                                                                                                
     Life Cycle Totals                  $Millions                                                                           
     Production Tax Credits Cashed      109                                                                                     
     Production Tax Paid                6,533                                                                                   
     Net Production Tax                 6,424                                                                                   
     Production Tax NPV 6.15%           1,743                                                                                   
                                                                                                                                
     Total Annual State Losses          100                                                                                     
     Total Annual State Gains           14,479                                                                                  
     Net State Gain (Loss)              14,379                                                                                  
     State NPV 6.15%                    4,388                                                                                   
                                                                                                                                
     Total Producer Cash Out            7,832                                                                                   
     Total Producer Cash In             20,317                                                                                  
     Net Producer Cash Flow             12,485                                                                                  
     Producer Cash NPV 6.15%            1,415                                                                                   
                                                                                                                                
Mr.   Alper  admitted   that  the   scenario  was   slightly                                                                    
overstated; no  single company was  going to come  to Alaska                                                                    
and  spend  $10  billion.  He  furthered  that  any  company                                                                    
interested in a project of  that size would seek out several                                                                    
partners. He  said that  if 4 partners  were to  develop the                                                                    
project,  using  the  Governor's   bill  as  the  underlying                                                                    
system,  it would  result  in $100  million  in credits  per                                                                    
year. He disclosed  that the state had learned  that the $25                                                                    
million  cap could  work for  smaller fields,  but it  would                                                                    
need to be altered in order to accommodate larger fields.                                                                       
                                                                                                                                
5:37:49 PM                                                                                                                    
                                                                                                                                
Mr. Alper continued to Slide  51, which offered a summary of                                                                    
the North Slope  scenarios. He said that field  size and tax                                                                    
regime numbers, the  first two columns, had  been modeled in                                                                    
the  scenarios on  the previous  slides.  He reiterated  the                                                                    
numbers  as they  related  to  the taxes  at  $40, $60,  and                                                                    
$80/bbl oil, under both the status  quo and HB 247, with the                                                                    
varying  field sizes.  He relayed  that the  House Resources                                                                    
Committee  had  heard  the slide  presentation  in  February                                                                    
2016.  He  turned to  Slide  52,  which reflected  the  same                                                                    
variables  using the  Cook Inlet  scenarios. He  opined that                                                                    
the  problem with  Cook Inlet  was  that there  would be  an                                                                    
impending  moment in  2022, when  the  statutory zero  taxes                                                                    
went away, and a fork in  the road was created. He said that                                                                    
two different options were created:  option A would have the                                                                    
tax caps  sunset and revert to  the base tax of  35 percent,                                                                    
with no  per barrel  credit or GVR;  the alternate  was that                                                                    
the caps did not sunset  and the future legislature chose to                                                                    
maintain a zero  tax in Cook Inlet. He said  that the answer                                                                    
would lie somewhere between the  two scenarios. He continued                                                                    
to   the  supplemental   North   Slope   Scenario  and   the                                                                    
Supplemental  Cook  Inlet  and  Middle  Earth  Scenarios  on                                                                    
Slides 53 and 54.                                                                                                               
                                                                                                                                
Co-Chair  Thompson  asked  that the  Department  of  Revenue                                                                    
remain in  the room  until after  the Department  of Natural                                                                    
Resources completed their presentation.                                                                                         
                                                                                                                                
5:44:27 PM                                                                                                                    
                                                                                                                                
PAUL DECKER,  PETROLEUM GEOLOGIST, DIVISION OF  OIL AND GAS,                                                                    
DEPARTMENT OF  NATURAL RESOURCES, introduced  the PowerPoint                                                                    
Presentation:  "Alaska's Oil  and Gas  Industry; Overview  &                                                                    
Activity Update." He turned to Slide 2, "Overview":                                                                             
                                                                                                                                
     North Slope:                                                                                                               
        · Resources and Reserves                                                                                                
        · Current Activity & New Developments                                                                                   
        · Who's Working the North Slope?                                                                                        
        · Leasing Activity                                                                                                      
                                                                                                                                
     Cook Inlet:                                                                                                                
        · Resources and Reserves                                                                                                
        · Current Activity & New Developments                                                                                   
        · Who's Working the Cook Inlet?                                                                                         
        · Leasing Activity                                                                                                      
                                                                                                                                
     Frontier Basins:                                                                                                           
        · Resources and Reserves                                                                                                
        · Current Activity & New Development                                                                                    
        · Who's Working the Frontier Basins?                                                                                    
        · Exploration Licensing & Lease Conversion                                                                              
                                                                                                                                
5:46:17 PM                                                                                                                    
                                                                                                                                
Mr.  Decker  turned  to  Slide  3,  "North  Slope  Resources                                                                    
Overview." The slide  provided an overview map  of the North                                                                    
Slope.  He  noted  that  the  area  shown  on  the  map  was                                                                    
approximately 500 miles from west  to east. He said that the                                                                    
3  miles into  the Chukchi  and Beaufort  Seas were  federal                                                                    
Outer  Continental  Shelf  (OCS)  and were  managed  by  the                                                                    
Bureau  of Ocean  Energy Management  (BOEM). He  pointed out                                                                    
that  the   green  areas  to  the   south  were  permanently                                                                    
protected  federal  land.  He furthered  that  the  National                                                                    
Petroleum  Reserve-Alaska (NPRA)  was  also federally  owned                                                                    
and  run by  the Bureau  of Land  Management (BLM).  He said                                                                    
that  the Alaska  National Wildlife  Refuge (ANWR)  1002 was                                                                    
not  permanently  protected,  but  could be  by  an  act  of                                                                    
Congress.                                                                                                                       
                                                                                                                                
5:47:30 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  pointed  out that  the  OCS  was                                                                    
further than 3 miles out.                                                                                                       
                                                                                                                                
Mr. Decker agreed that the  shelf extended much farther than                                                                    
3  miles.  He  clarified  that the  state's  ownership  only                                                                    
extended from the  shoreline to 3 miles out.  He returned to                                                                    
the  map on  the slide.  He  spoke the  central North  Slope                                                                    
state  lands;  the state's  3  area  wide lease  sales  were                                                                    
outlined in red  on the slide. He said that  there was a lot                                                                    
of private  ownership within the  foothills. He  stated that                                                                    
the  main oil  fields were  shown in  green and  were strung                                                                    
along the  shoreline of  the Central  North Slope.  He added                                                                    
that there  were a number  or oil  and gas fields  along the                                                                    
coastline, mostly  gas fields near  the foothills.  He spoke                                                                    
to the black dots, which  represented all of the exploration                                                                    
wells  that had  been drilled,  to  date, on  the slope.  He                                                                    
believed that  the map showed  a lot  of room for  growth in                                                                    
the area of exploration.                                                                                                        
                                                                                                                                
5:49:54 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  understood that  the dark  green area                                                                    
on the  map included  oil accumulations  that were  known to                                                                    
exist, but had not been produced.                                                                                               
                                                                                                                                
Mr. Decker  responded that there were  several non-producing                                                                    
fields contained  within the dark  green area,  most notably                                                                    
Hammerhead and Kuvlum in the eastern Beaufort Sea.                                                                              
                                                                                                                                
Representative Pruitt  understood that the dark  green areas                                                                    
of the map were expected to increase.                                                                                           
                                                                                                                                
Mr. Decker  replied that if  the projects  became sanctioned                                                                    
and  went into  development, the  dark green  area would  be                                                                    
expanded.                                                                                                                       
                                                                                                                                
Representative Pruitt  asked whether there were  other areas                                                                    
that held resources that were not in dark green on the map.                                                                     
                                                                                                                                
Mr.  Decker   responded  that  there  were   very  few  such                                                                    
examples. He  reiterated that the  intent of the map  was to                                                                    
show land that had been "discovered by the drill bit".                                                                          
                                                                                                                                
Mr.  Decker turned  to Slide  4:  "Arctic Alaska  Oil &  Gas                                                                    
Resources." The  slide offered a  table of what  the federal                                                                    
government  would  estimate  for  undiscovered,  technically                                                                    
recoverable  conventional  resources  in Arctic  Alaska.  He                                                                    
said that  the slide was not  meant to indicate that  all of                                                                    
the volumes  would be commercially recoverable,  but rather,                                                                    
would  the  volumes exist  in  accumulations  that could  be                                                                    
recoverable  given the  technology in  current practice.  He                                                                    
pointed  out  to the  committee  that  the slide  showed  40                                                                    
billion barrels of  oil, and 207 billion cubic  feet of gas.                                                                    
He furthered  that the gas  was equally  distributed between                                                                    
OCS waters and onshore state  lands and waters. The mean oil                                                                    
estimate reflected that  there was more oil  in the offshore                                                                    
than in the onshore.                                                                                                            
                                                                                                                                
5:53:25 PM                                                                                                                    
                                                                                                                                
Mr. Decker  continued to Slide  5, "Arctic Alaska Oil  & Gas                                                                    
Resources":                                                                                                                     
                                                                                                                                
     Gas Reserves:                                                                                                            
        · Approximately   30   trillion    cubic   feet   of                                                                    
          associated  gas  is  estimated to  be  recoverable                                                                    
          from producing  or developing North  Slope fields,                                                                    
          mostly at  Prudhoe Bay & Point  Thomson. Without a                                                                    
          pipeline, most  of that gas  is best  described as                                                                    
          contingent resource, not reserves.                                                                                    
        · Approximately 5.9 trillion cubic feet of proved                                                                       
          associated gas reserves estimated in Alaska,                                                                          
          virtually all on North Slope (Energy Information                                                                      
          Administration(EIA),2014)                                                                                             
                                                                                                                                
     Oil Reserves:                                                                                                            
        · Approximately 2.8 BBO of proved oil reserves                                                                          
         estimated on the North Slope (EIA, 2014)                                                                               
                                                                                                                                
Mr. Decker stated that tis subset of gas would be used for                                                                      
making natural gas liquids that could be sold to the Trans-                                                                     
Alaska Pipeline System (TAPS), and minor gas sales thorough                                                                     
local markets.                                                                                                                  
                                                                                                                                
5:55:00 PM                                                                                                                    
                                                                                                                                
Mr. Decker discussed Slide 6, "North Slope Current Activity                                                                     
and New Developments":                                                                                                          
                                                                                                                                
   · Accumulate Energy                                                                                                        
       · Franklin Bluffs area shale play evaluation                                                                             
             · Drilled Icewine #1 well in October-December                                                                      
               2015                                                                                                             
             · Seismic survey of lease area this winter                                                                         
                                                                                                                                
   · AEX (ASRC)                                                                                                               
        · Placer Unit                                                                                                           
             · Currently drilling Placer #3 well -spud in                                                                       
               late January 2016                                                                                                
                                                                                                                                
   · BP                                                                                                                       
        · Prudhoe Bay Unit                                                                                                      
             · Completed 8 new wells, 46 new sidetracks,                                                                        
               ~420 well workovers in Initial Participating                                                                     
               Area (IPA), 2015                                                                                                 
             · Completed first wells in Lisburne PA in 9                                                                        
               years, 2015                                                                                                      
             · Completed 3D seismic program in North                                                                            
               Prudhoe, 2015                                                                                                    
                                                                                                                                
5:56:51 PM                                                                                                                    
                                                                                                                                
Mr.  Decker  advanced  to  Slide  7,  "North  Slope  Current                                                                    
Activity & New Developments":                                                                                                   
                                                                                                                                
   · Caelus Natural Resources                                                                                                 
        · Oooguruk Unit                                                                                                         
             · On-going development (4-5 wells/year; all                                                                        
               long-reach & frac'd)                                                                                             
                                                                                                                                
        · Nuna                                                                                                                  
             · First production from Nuna Torok Phase 1 in                                                                      
               late 2018(?)                                                                                                     
             · No construction activity this winter                                                                             
                                                                                                                                
        · Smith Bay Exploration (shallow water ice pad)                                                                         
             · Second of two exploration wells nearly                                                                           
               complete                                                                                                         
                                                                                                                                
   · Conoco Phillips                                                                                                          
        · Colville River Unit                                                                                                   
             · Initiated first production at CD5 in 2015                                                                        
             · Plan for a total of 8 new wells in 2016                                                                          
                                                                                                                                
        · Greater Mooses Tooth Unit (Federal/NPRA)                                                                              
             · Approved funding for $900MM GMT1 project                                                                         
             · Plan to drill two Tinmiaq exploration wells                                                                      
               in western part of unit                                                                                          
                                                                                                                                
Mr. Decker elaborated that PA  meant participating area; the                                                                    
subset  of  the leases  within  a  unit that  were  actively                                                                    
contributing  to  production. He  added  that  MI stood  for                                                                    
miscible injection, a method used  for enhanced oil recovery                                                                    
purposes. He said that Caelus  had slowed the development of                                                                    
the Nuna project due to the slump in oil prices.                                                                                
                                                                                                                                
He went on to explain  Conoco Phillips' activity on slide 8,                                                                    
"North Slope Current Activity and New Developments":                                                                            
                                                                                                                                
   · Conoco Phillips                                                                                                          
        · Kuparuk River Unit                                                                                                    
             · First wells  came online at Kuparuk  DS-2S in                                                                    
               2015                                                                                                             
             · Significant  drilling  planned  in  2016  for                                                                    
               Kuparuk PA, Tarn PA and West SakPA during                                                                        
               2015-16                                                                                                          
                                                                                                                                
   · ExxonMobil                                                                                                               
        · Point Thomson Unit                                                                                                    
             · Completion  of Initial  Production System  in                                                                    
               2016                                                                                                             
             · Completed   22    mile   liquid   hydrocarbon                                                                    
               pipeline from Point Thomson to Badami Field,                                                                     
               which connects to TAPS                                                                                           
             · Start-up  expected  by mid-May  2016  (10,000                                                                    
               bpd condensate)                                                                                                  
                                                                                                                                
   · Great Bear Petroleum                                                                                                     
             · Currently acquiring large  3D seismic dataset                                                                    
               (~450 sq miles)                                                                                                  
             · Planning for additional work  at Alkaid #1 in                                                                    
               2017                                                                                                             
                                                                                                                                
6:01:43 PM                                                                                                                    
                                                                                                                                
Mr. Decker discussed Slide 9, "North Slope Current Activity                                                                     
and New Developments":                                                                                                          
                                                                                                                                
   · Hilcorp                                                                                                                  
        · Northstar Unit                                                                                                        
             · Returned 2 wells to production                                                                                   
        · Milne Point Unit                                                                                                      
             · Drilled 3  new wells,  started new  G&I plant                                                                    
               construction in 2015                                                                                             
             · Plan to  drill 10  new wells and  complete 16                                                                    
               workovers in 2016                                                                                                
                                                                                                                                
   · Repsol/Armstrong                                                                                                         
        · Pikka Unit (Nanushuk Project Development)                                                                             
             · Drilled 3 exploration wells & sidetracked 1                                                                      
                in 2015 (total of 12 wells & sidetracks                                                                         
                since 2012)                                                                                                     
             · Commenced the project EIS under NEPA in June                                                                     
                2015                                                                                                            
             · Plan to drill 1 additional exploration well                                                                      
                in 2017                                                                                                         
                                                                                                                                
6:03:12 PM                                                                                                                    
                                                                                                                                
Mr. Decker turned to Slide 10, "North Slope Wells Drilled                                                                       
and Seismic Acquired":                                                                                                          
                                                                                                                                
   · New Exploration and Development Wells Drilled 2004-                                                                      
     2014                                                                                                                     
        · 110 Exploratory Wells and Well Branches                                                                               
        · 1,646 Development & Service Wells and Well                                                                            
          Branches                                                                                                              
                                                                                                                                
                                                                                                                                
   · 2D & 3D Seismic Data Acquired (Tax Credit Data) 2004-                                                                    
     2014                                                                                                                     
        · Line Miles 2D (onshore/shorezoneice)~ 870                                                                             
        · Square Miles 3D (onshore/shorezoneice)~ 9,945                                                                         
                                                                                                                                
Mr. Decker categorized the activity on the North Slope as                                                                       
steady over the past decade.                                                                                                    
                                                                                                                                
6:04:20 PM                                                                                                                    
                                                                                                                                
Mr. Decker advanced to Slide 11, "Who's Working North                                                                           
Slope?":                                                                                                                        
                                                                                                                                
     Large Majors (>$40B Market Cap):                                                                                         
        · BP Exploration, Inc.                                                                                                  
        · Chevron USA, Inc.                                                                                                     
        · ConocoPhillips Alaska                                                                                                 
        · Eni                                                                                                                   
        · Exxon Mobil Corporation                                                                                               
        · Shell Offshore, Inc.                                                                                                  
                                                                                                                                
     Large Independents & Mid-Sized Companies:                                                                                
        · Armstrong Oil and Gas/70 & 148 LLC                                                                                    
        · Anadarko E&P Onshore LLC                                                                                              
        · BG Alaska E&P Inc.                                                                                                    
        · Caelus Natural Resources Alaska LLC                                                                                   
        · Halliburton Energy Services                                                                                           
        · Hilcorp Alaska, LLC                                                                                                   
        · Repsol                                                                                                                
Mr. Decker relayed that there were three categories of                                                                          
companies working on the North Slope: large majors, large                                                                       
independents & mid-sized companies, and small independents.                                                                     
                                                                                                                                
6:05:35 PM                                                                                                                    
                                                                                                                                
Mr. Alper advanced to Slide 12, which listed the small                                                                          
independent companies on the slope:                                                                                             
                                                                                                                                
     · Small Independents:                                                                                                    
     · Accumulate Energy Alaska, Inc.                                                                                           
     · Alaska, LLC                                                                                                              
     · Alaskan Crude Corp.                                                                                                      
     · ASRC Exploration LLC                                                                                                     
     · Aubris Resources, LP                                                                                                     
     · AVCG, LLC                                                                                                                
     · Brooks Range Development Corporation                                                                                     
     · Burgundy Xploration LLC                                                                                                  
     · Caracol Petroleum LLC                                                                                                    
     · Chap-KDL, Ltd.                                                                                                           
     · Colt Alaska LLC                                                                                                          
     · Dewline Petroleum LLC                                                                                                    
     · Donkel Oil & Gas, LLC                                                                                                    
     · Eastland Property and Minerals                                                                                           
     · GMT Exploration Company LLC                                                                                              
     · Great Bear Petroleum Ventures                                                                                            
     · MEP Alaska, LLC                                                                                                          
     · Mustang Operations Center 1, LLC                                                                                         
     · NordAq Energy Inc.                                                                                                       
     · Pacific Lighting Gas Development                                                                                         
     · Petro-Hunt, LLC                                                                                                          
     · Pinta Real Development, LLC                                                                                              
     · Petro-Hunt, LLC                                                                                                          
     · Pinta Real Development, LLC                                                                                              
     · Ramshorn Investments, Inc.                                                                                               
     · Red Technology Alliance, LLC                                                                                             
     · Renaissance Umiat, LLC                                                                                                   
     · Royale Energy, Inc.                                                                                                      
     · Samson Offshore, LLC                                                                                                     
     · Savant Alaska, LLC                                                                                                       
     · Sunlite International Inc.                                                                                               
     · The Eastland Oil Company                                                                                                 
     · TP North Slope Development, LLC                                                                                          
     · Transworld Oil & Gas Ltd.                                                                                                
     · Ultrastar Exploration LLC                                                                                                
     · URSA Major Holdings LLC                                                                                                  
     · Woodbine Petroleum, Inc.                                                                                                 
     · Woodstone Resources, LLC                                                                                                 
                                                                                                                                
Mr. Decker explained that 7 or  8 of the companies listed on                                                                    
the slide  were actively  exploring on  the slope,  but most                                                                    
were lease  holders waiting for  activity to occur  and were                                                                    
not leading in the exploration of their leases.                                                                                 
                                                                                                                                
6:05:58 PM                                                                                                                    
                                                                                                                                
Representative Gara  pointed out  that there  were companies                                                                    
listed, but not listed as having any activity.                                                                                  
                                                                                                                                
Mr.  Decker  replied  that  the  activity  slides  were  not                                                                    
entirely comprehensive.  He admitted that the  slide did not                                                                    
reflect Eni's continuing development  at Nikaitchuq. He said                                                                    
that  they  were  actively  expanding  in  the  area,  doing                                                                    
"prudent operator" work.                                                                                                        
                                                                                                                                
6:06:43 PM                                                                                                                    
                                                                                                                                
Mr. Decker  turned to  Slides 13, 14,  and 15,  "North Slope                                                                    
Leasing Activity  Trends." Each slide contained  a bar graph                                                                    
that  illustrated the  number of  tracts  that had  received                                                                    
either single or  multiple bids on area wide  lease sales in                                                                    
the North Slope, Beaufort Sea,  and Foothills areas. He said                                                                    
that the area were held open  for area wide leasing and that                                                                    
everything that  was open came  up for lease every  year. He                                                                    
referred to  Slide 13, which  pertained to the  North Slope.                                                                    
He  pointed  out  to  the  committee  that  there  had  been                                                                    
aggressive leasing activity in 2014;  Caelus had put in over                                                                    
100 bids  for leases  along the  Barrow Arch,  and Armstrong                                                                    
had  purchased approximately  100 leases  in the  same lease                                                                    
sale.                                                                                                                           
                                                                                                                                
6:08:14 PM                                                                                                                    
                                                                                                                                
Representative  Wilson whether  the companied  were required                                                                    
to act on  the leases in a certain amount  of time, or could                                                                    
they  bide their  time  while  paying a  fee  to retain  the                                                                    
leases.                                                                                                                         
                                                                                                                                
Mr.  Decker stated  that some  of the  leases that  had been                                                                    
issued  had been  accompanied by  certain work  commitments.                                                                    
Generally,  the  lease hold  in  Alaska  required an  annual                                                                    
rental fee that escalated  considerably after several years,                                                                    
which worked as  an incentive to either develop  or drop the                                                                    
leases in a timely manner.                                                                                                      
                                                                                                                                
6:09:19 PM                                                                                                                    
                                                                                                                                
Mr. Decker moved to Slide 14.  He noted that 2006 had been a                                                                    
big year for leasing in the area, and in 2011.                                                                                  
                                                                                                                                
Mr. Decker  spoke to  Slide 15.  He noted  that in  2001 and                                                                    
2002,  there had  been a  burst of  activity that  coincided                                                                    
with  interest in  natural  gas potential  in  the area.  He                                                                    
noted  the next  burst in  2006,  but felt  that since  then                                                                    
investors  had decided  to wait  until further  progress was                                                                    
made  on the  gasline. He  informed the  committee that  the                                                                    
area  was  gas  prone,  and  not oil  prone,  and  that  its                                                                    
fortunes would be linked to a gasline.                                                                                          
                                                                                                                                
6:11:25 PM                                                                                                                    
                                                                                                                                
Mr.  Decker pointed  to  Slide 16,  "Cook  Inlet Resource  &                                                                    
Reserves Overview."  The slide pictured a  map showing where                                                                    
the  U.S. Geological  Survey had  assess  the resources.  He                                                                    
said  that  the  federal estimates  were  the  undiscovered,                                                                    
technically recoverable resource of oil and gas:                                                                                
                                                                                                                                
     · Undiscovered, Technically Recoverable Oil and Gas                                                                      
        (USGS, 2011):                                                                                                         
                                                                                                                                
          · mean conventional oil 599 MMBO                                                                                      
          · mean conventional gas 13.7 TCF                                                                                      
          · mean unconventional gas 5.3 TCF                                                                                     
                                                                                                                                
     · Natural Gas Reserves (ADNR, 2015)                                                                                      
       1.18 TCF (Proved and Probable)                                                                                           
                                                                                                                                
     · 1.2 TCF additional mean resource assessed in OCS                                                                         
        waters (BOEM, 2011)                                                                                                   
                                                                                                                                
Mr. Decker elaborated on the unconventional gas areas.                                                                          
                                                                                                                                
6:13:08 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  asked how  much  gas  the state  was                                                                    
expected to  produce in  the future in  Cook Inlet.  He also                                                                    
queried how  much gas  had been produced  out of  Cook Inlet                                                                    
over the past 40 years.                                                                                                         
                                                                                                                                
Mr.  Decker  believed  that approximately  8  TCF  had  been                                                                    
produced in  Cook Inlet to-date.  He said that the  1.18 TCF                                                                    
remaining  proved and  probably  reserve  was a  significant                                                                    
fraction of the available gas.  He added that the number had                                                                    
not  dropped, and  was higher  than previous  estimates from                                                                    
2010.  He   said  that   with  activity,   exploration,  and                                                                    
aggressive  development  companies  had been  able  to  book                                                                    
additional reserves. He was encouraged  that there was still                                                                    
a  significant  lifespan  of resource,  but  that  it  would                                                                    
depend on  the rate of investment  in getting it out  of the                                                                    
ground.                                                                                                                         
                                                                                                                                
Mr. Decker addressed Slide 17,  "Cook Inlet Current Activity                                                                    
& New Developments":                                                                                                            
                                                                                                                                
     Apache Alaska Corporation:                                                                                               
             · Ceasing all seismic acquisition and other                                                                        
              exploration activity in Alaska                                                                                    
             · Intend to hold leases until expiration                                                                           
                                                                                                                                
     Conoco Phillips:                                                                                                         
             · Recent sale of interest in Beluga River Unit                                                                     
                                                                                                                                
     Furie Operating Alaska                                                                                                   
        · Kitchen Lights Unit:                                                                                                  
             · Set monopod platform in 2015;                                                                                    
             · Completed onshore gas facilities & pipeline                                                                      
               in 2015                                                                                                          
             · Commenced production in December 2015                                                                            
             · Randolf Yost, 2ndjack-up rig, arrived in                                                                         
               Homer early March, plan to drill two                                                                             
               development wells in 2016                                                                                        
                                                                                                                                
     BlueCrest Energy, Inc.                                                                                                   
        · Cosmo Unit:                                                                                                           
             · Planned arrival of new land-based drill rig                                                                      
               for oil development in 2016                                                                                      
             · Plan 1st oil in mid-2016 (oil production                                                                         
               will be from onshore)                                                                                            
             · Possible offshore drilling for gas (Spartan                                                                      
               151 jack-up rig) in 2016                                                                                         
                                                                                                                                
Mr. Decker  stated that Apache Alaska  Corporation had hoped                                                                    
to develop  prospects to be  drilled in the next  few years,                                                                    
but were  ceasing exploration activity  in the state  due to                                                                    
low oil  prices. He said  that a skeleton crew  would remain                                                                    
in Anchorage offices  in order to maintain  their assets. He                                                                    
said that Conoco Phillips had  been slowly exiting the basin                                                                    
gradually. They had sold their  share of the interest in the                                                                    
Beluga  River Unit  to Chugach  Electric  and the  Anchorage                                                                    
Municipal  Light and  Power (ML&P),  increasing ML&Ps  share                                                                    
making them the dominant owner.  He furthered that Furie was                                                                    
currently selling  gas to  Homer Electric  and had  plans to                                                                    
drill more wells within the coming year.                                                                                        
                                                                                                                                
6:18:05 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked whether companies  were relying                                                                    
on tax  credits when securing financing  for exploration and                                                                    
whether the  department knew when the  credits switched from                                                                    
exploration to development credits.                                                                                             
                                                                                                                                
Mr. Decker  replied that there  were different types  of tax                                                                    
credits.  He said  that in  Cook Inlet  most of  the credits                                                                    
that  had been  used  had applied  to  both exploration  and                                                                    
development; the  023(l) well lease expenditure  credits. He                                                                    
added  that  many  companies  were  dependent  on  receiving                                                                    
timely  reimbursements from  credits  in order  to use  that                                                                    
money in the next phase of exploration or development.                                                                          
                                                                                                                                
Representative  Wilson assumed  that  companies filed  plans                                                                    
with DNR  before beginning their process.  She asked whether                                                                    
part  of   the  plan   covered  financing,  or   if  finance                                                                    
discussion were limited to DOR.                                                                                                 
                                                                                                                                
Mr. Decker answered that the  main plans that were submitted                                                                    
to the  state had to  do with  obtaining permits to  use the                                                                    
land, or  in a  unitized area  the Division  of Oil  and Gas                                                                    
would be  tasked with overseeing  a plan of  development. He                                                                    
said  that  DOR  would  had   additional  insight  into  the                                                                    
financial aspects.                                                                                                              
                                                                                                                                
6:20:35 PM                                                                                                                    
                                                                                                                                
Mr. Decker moved  to Slide 18, "Cook  Inlet Current Activity                                                                    
& New Developments":                                                                                                            
     Hilcorp Alaska, LLC:                                                                                                     
        · Cannery Loop Unit:                                                                                                    
             · Completed 2 new wells in 2015                                                                                    
             · Planned 2 workovers in 2016                                                                                      
                                                                                                                                
        · Deep Creek Unit:                                                                                                      
             · Drilled 1 new well in 2015 and 2nd is                                                                            
               planned for 2016                                                                                                 
                                                                                                                                
        · Ninilchik Unit:                                                                                                       
             · Completed 3 new gas wells in 2015 and 7 new                                                                      
               gas wells in 2014                                                                                                
                                                                                                                                
        · Trading Bay Unit:                                                                                                     
             · 19 workover jobs in 2015 and 3 new wells in                                                                      
               2016                                                                                                             
                                                                                                                                
        · Purchased XTO Energy, Inc. assets in southern                                                                         
          Cook Inlet                                                                                                            
        · Projected ~$120 MM investment in Cook Inlet in                                                                        
          2016                                                                                                                  
                                                                                                                                
Mr.  Decker  said  that  Hilcorp  Alaska  was  the  dominant                                                                    
operator  in the  Cook  Inlet basin.  He  stated that  there                                                                    
would not be as much  progress witnessed in the Cannery Loop                                                                    
Unit had a less assertive  and ambitious producer taken over                                                                    
the fields when they came up  for sale. He said that Hilcorp                                                                    
projected spend for 2016 was $120 million.                                                                                      
                                                                                                                                
Mr. Decker advanced  to Slide 19, "Cook  Inlet Wells Drilled                                                                    
& Seismic Acquired":                                                                                                            
                                                                                                                                
     New Exploration & Development Wells Drilled 2010-2014                                                                      
        · 24 Exploratory Wells and Well Branches                                                                                
        · 65 Development & Service Wells and Well Branches                                                                      
                                                                                                                                
     2D & 3D Seismic Data Acquired (Tax Credit Data) 2004-                                                                      
     2014                                                                                                                       
        · Line Miles 2D (onshore/offshore) ~ 725                                                                                
        · Square Miles 3D (onshore/offshore) ~ 660                                                                              
                                                                                                                                
Mr. Decker noted that the time  window used on the slide had                                                                    
been used  because that was a  time when the basin  had been                                                                    
perceived to be in crisis.                                                                                                      
Mr.  Decker  scrolled  to  Slide  20,  "Who's  Working  Cook                                                                    
Inlet":                                                                                                                         
                                                                                                                                
     · Large Majors (>$40B Market Cap):                                                                                       
          o ConocoPhillips Alaska                                                                                               
                                                                                                                              
     · Mid-Sized Independents:                                                                                                
          o Hilcorp Alaska, LLC                                                                                                 
          o Apache Alaska Corp.                                                                                                 
                                                                                                                              
     · Small Independents & LLCs:                                                                                             
          o Alaska Energy Alliance Inc.                                                                                         
          o AIX Energy LLC                                                                                                      
          o Alaska LLC                                                                                                          
          o Aurora Gas LLC                                                                                                      
          o Aurora Exploration LLC                                                                                              
          o BlueCrest Energy Inc.                                                                                               
          o CIRI Production Company                                                                                             
          o Cook Inlet Energy LLC                                                                                               
          o Cornucopia Oil & Gas Company LLC                                                                                    
          o Corsair Oil & Gas Company LLC                                                                                       
          o Furie Operating Alaska LLC                                                                                          
          o New Alaska Energy LLC                                                                                               
          o NordAq Energy LLC                                                                                                   
          o Taylor Minerals LLC                                                                                                 
          o Woodstone Resources LLC                                                                                             
                                                                                                                                
Mr.  Decker relayed  that Hilcorp  would remain  active, but                                                                    
that Apache would not. He  reiterated that some of the small                                                                    
independents were actively exploring,  but most were holding                                                                    
their lease positions and waiting  to see what happened with                                                                    
the price of  oil. He turned to Slide 22,  which contained a                                                                    
bar graph of  Cook Inlet area wide lease  sale results, 1999                                                                    
through 2015. The slide reflected  2011 as the biggest year,                                                                    
since then participation had declined.                                                                                          
                                                                                                                                
6:24:39 PM                                                                                                                    
                                                                                                                                
Mr. Decker turned  to Slide 23: "Frontier  Basins Tax Credit                                                                    
Areas." He  relayed that the basins  were sometimes referred                                                                    
to  as "Middle  Earth".  He  said that  the  terms could  be                                                                    
confused and  were not  always interchangeable.  He detailed                                                                    
that  the map  showed the  5 regions  in which  the Frontier                                                                    
Basin  Tax  Credit  [43.55.025(a)(6-7)], a  form  of  super-                                                                    
credit  for seismic  and well  drilling,  could be  claimed.                                                                    
Under current statute the credits would sunset in 2016.                                                                         
                                                                                                                                
6:26:12 PM                                                                                                                    
                                                                                                                                
Mr. Decker turned to Slide 24, "Statewide Resource                                                                              
Assessments    -Undiscovered,     Technically    recoverable                                                                    
resource."                                                                                                                      
                                                                                                                                
     Region      Mean Oil Estimate  Mean Gas Estimate                                                                         
                      (Million Barrels)     (Billion Cubic Feet)                                                                
     Onshore Arctic        15,908            98,960                                                                           
     Offshore Arctic       23,750                     108,180                                                                 
     Interior Basins*         234                       5,641                                                                   
     (only partially                                                                                                            
     assessed)                                                                                                                  
     Upper Cook Inlet         599                      19,037                                                                 
     Other Southern Alaska** 2,859                     23,458                                                                 
     TOTAL                 43 BBO                    255 TCF                                                                
                                                                                                                                
     *Includes  Yukon  Flats   and  Kandik  basins  (Nenana,                                                                    
     Kotzebue, Copper  River, Holitna, & Susitna  basins not                                                                    
     assessed)                                                                                                                  
     **Mainly  federal   OCS  waters,  minor   AK  Peninsula                                                                    
     onshore                                                                                                                    
                                                                                                                                
6:27:12 PM                                                                                                                    
                                                                                                                                
Mr. Decker scrolled to Slide 25, "Exploration License                                                                           
Program":                                                                                                                       
                                                                                                                                
     ·  The program  supplements  the  state's oil  and  gas                                                                    
        leasing efforts & encourages exploration outside of                                                                     
        known oil & gas provinces                                                                                               
     ·  Every  April,  DNR  accepts   proposals  to  conduct                                                                    
        exploratory activity outside existing leasing areas                                                                     
     ·  The DNR Commissioner  may issue a  notice requesting                                                                    
        proposals to explore a designated area (encourages                                                                      
        competition)                                                                                                            
     ·  The applicant  has up  to  90 days  to submit  their                                                                    
        proposal                                                                                                                
     ·  Three exploration  licenses have  been converted  to                                                                    
        lease: Susitna II, Copper River, & Nenana                                                                               
                                                                                                                                
6:28:17 PM                                                                                                                    
                                                                                                                                
Mr. Decker advanced to Slide 26: "Who's Working The                                                                             
Frontier Basins?":                                                                                                              
                                                                                                                                
     Ahtna                                                                                                                    
        · Copper River Basin, Tolsona Exploration License:                                                                      
             · Reprocessed  2D seismic  data &  acquired new                                                                    
               Tolsona 2D seismic in spring 2014                                                                                
             · Plan  to  drill  Tolsona #1  gas  exploration                                                                    
               well in early 2016; follow up to the Ahtna                                                                       
               #1-19 well drilled in 2007-2009 (Rutter &                                                                        
               Wilbanks)                                                                                                        
                                                                                                                                
     Doyon                                                                                                                    
        · Nenana Basin:                                                                                                         
             · Drilled Nunivak #1  and #2 exploratory wells,                                                                    
               2009-2013                                                                                                        
             · Acquired   2D   and  3D   seismic,   gravity,                                                                    
               magnetics, and lakebed geochemical surveys,                                                                      
               2005 -2014                                                                                                       
             · Converted   exploration  license   to  leases                                                                    
               between 2013 & 2014                                                                                              
            · Additional 2D seismic in progress                                                                                 
             · Plan to spud Toghotthele #1 this June                                                                            
                                                                                                                                
Mr. Decker continued to Slide 27, "Who's Working The                                                                            
Frontier Basins?":                                                                                                              
                                                                                                                                
     Doyon                                                                                                                    
        · Yukon Flats Basin:                                                                                                    
             · Acquired 2D seismic,  gravity, magnetics, and                                                                    
               lakebed geochemical surveys                                                                                      
                                                                                                                                
     NANA                                                                                                                     
        · Kotzebue Basin:                                                                                                       
             · Evaluating and  marketing prospects  based on                                                                    
               legacy industry seismic                                                                                          
                                                                                                                                
     Usibelli Coal Mine Inc.                                                                                                  
        · Healy Basin Gas-Only Exploration License:                                                                             
             · Drilled one shallow exploration well in 2014                                                                     
                                                                                                                                
Mr. Decker stated that Doyon  had not drilled any wells, but                                                                    
had  conducted geophysical  and  geochemical surveys.  Doyon                                                                    
owned much of  the land, which meant that there  would be no                                                                    
expiration license in the Yukon Flats.                                                                                          
                                                                                                                                
6:30:28 PM                                                                                                                    
                                                                                                                                
Mr. Decker moved on to Slide 28: "Frontier Basins Wells                                                                         
Drilled & Seismic Acquired":                                                                                                    
     New Exploration Wells Drilled 2004-2014                                                                                  
        · 7 Exploratory Wells and Well Branches                                                                                 
                                                                                                                                
     2D & 3D Seismic Data Acquired (Tax Credit Data) 2004-                                                                    
     2014                                                                                                                     
        · Line Miles 2D (onshore)~ 1,220                                                                                        
        · Square Miles 3D (onshore)~ 340                                                                                        
                                                                                                                                
Mr. Decker  believed that 3  of the 7 exploratory  wells had                                                                    
been in the  Nenana Basin, 3 in the Copper  River Basin, and                                                                    
1 in Healy.                                                                                                                     
                                                                                                                                
6:31:13 PM                                                                                                                    
                                                                                                                                
Mr. Decker  reviewed Slide  29, "Frontier  Basin Exploration                                                                    
Licenses",  which listed  the 5  locations for  each license                                                                    
and  the details  of: ADL  file  number, acres,  commitment,                                                                    
effective  date, term,  and status.  He  revealed that  Cook                                                                    
Inlet Energy  had relinquished their  Susitna 5  license due                                                                    
to bankruptcy.                                                                                                                  
                                                                                                                                
6:32:38 PM                                                                                                                    
                                                                                                                                
CORRI FEIGE,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF NATURAL RESOURCES (via  teleconference), pointed out that                                                                    
the  slides that  showed the  smaller  companies working  in                                                                    
Cook Inlet and  on the North Slope had  business models that                                                                    
differed  greatly from  the models  of the  lager and  major                                                                    
companies. She noted that on  the North Slope, several small                                                                    
companies  at  a  time  could  join  together  on  a  single                                                                    
project. She  said that companies often  bundled together in                                                                    
groups  in order  to  spread the  investment  and raise  the                                                                    
capital necessary to undertake the project.                                                                                     
                                                                                                                                
6:34:32 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
6:42:28 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Thompson indicated that  Mr. Alper and Commissioner                                                                    
Hoffbeck were available for questions.                                                                                          
                                                                                                                                
Mr. Alper stated that the remainder  of the slides had to do                                                                    
with implementation  of the legislation. He  turned to Slide                                                                    
56, "Implementation: Transition":                                                                                               
                                                                                                                                
     ·  Original bill was written with an  effective date of                                                                    
        7/1/16 for nearly all changes                                                                                           
     ·  CS moves  most  changes  to  1/1/17, with  the  full                                                                    
        repeal of the Well Lease Expenditure credit on                                                                          
        1/1/18                                                                                                                  
     ·  The bill's  original  fiscal  note included  a  fund                                                                    
        capitalization for $926,575.0 to the .028 fund.                                                                         
     ·  This is  the  difference  between  what  is  in  the                                                                    
        operating budget and $1 billion.                                                                                        
     ·  This  would   have  covered   all  expected   credit                                                                    
        liability before the effective date.                                                                                    
     ·  With  the  changes   made  in  the   CS,  additional                                                                    
        appropriation will be needed                                                                                            
                                                                                                                                
6:45:35 PM                                                                                                                    
                                                                                                                                
Mr.  Alper discussed  Slide 57:  "Implementation: Connection                                                                    
to Fiscal Plan":                                                                                                                
                                                                                                                                
     ·  HB247  was  introduced  as  one  of  10  bills  that                                                                    
        comprised the governor's fiscal plan.                                                                                   
     ·  All  the  bills  taken  together,  with  anticipated                                                                    
        budget cuts, proposed a balanced budget by FY19                                                                         
     ·  The broader  fiscal package,  and  the specific  tax                                                                    
        credit  bill,  are  intended  to  add  certainty  to                                                                    
        industry  regarding  what  support   the  state  can                                                                    
        provide and how we're  going to continue to  pay for                                                                    
        government                                                                                                              
     ·  Original bill  also assumed  companion "AIDEA  Loan"                                                                    
        bill to help with projects that lost funding with                                                                       
        credit changes                                                                                                          
     ·  HB246 would create a  new "fourth fund" at  AIDEA to                                                                    
        concentrate on oil and gas development loans, for                                                                       
        proven reserves                                                                                                         
     · Envisioned $200 million initial fund capitalization                                                                      
                                                                                                                                
Mr. Alper relayed  that in the first  committees of referral                                                                    
for the initial hearings on  all of the governor's bills the                                                                    
administration had  worked to  put the  bills in  context of                                                                    
each other.  HB 247 was one  of 10 bills that  comprised the                                                                    
governor's   overall  fiscal   plan:   the  Permanent   Fund                                                                    
Protection  Act  (SB 128),  the  income  tax bill(SB  134/HB                                                                    
250),  the  AIDEA  loan  bill(SB   129/HB  246),  the  three                                                                    
consumption tax bills - alcohol,  tobacco, and motor fuel(SB                                                                    
131/HB  248; SB  133/HB 248;  SB 132/HB  249, and  the three                                                                    
business tax bills - mining,  fisheries, and the cruise ship                                                                    
head tax(SB  137/HB 253; SB  135/HB 251; SB 136/HB  252). He                                                                    
solicited questions from committee members.                                                                                     
                                                                                                                                
6:48:25 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  queried the required criteria  for loans                                                                    
from the AIDEA development fund.                                                                                                
                                                                                                                                
Mr. Alper  responded that  the loan  would be  for up  to 50                                                                    
percent of a  projects value. He said that  there would need                                                                    
to be  a proven reserve  and a resource  evaluation obtained                                                                    
by  AIDEA from  an  external consulting  service that  would                                                                    
prove the legitimacy of the  project. He added that the cost                                                                    
of the services  would be rolled into the loan  and would be                                                                    
paid  back.  He deferred  further  explanation  to an  AIDEA                                                                    
representative.                                                                                                                 
                                                                                                                                
Co-Chair Thompson  understood that  a proven  reserve needed                                                                    
to  exist  in  an  effort to  move  toward  development  and                                                                    
production.                                                                                                                     
                                                                                                                                
Mr. Alper  explained that to  the extent that the  state was                                                                    
still  providing  credits,  those  credits  could  focus  on                                                                    
exploration  work; the  state should  not  be lending  money                                                                    
against a project that might not be able to pay it back.                                                                        
                                                                                                                                
Vice-Chair  Saddler  clarified  that   Mr.  Alper  had  been                                                                    
speaking to 50 percent of the project cost.                                                                                     
                                                                                                                                
Mr. Alper replied in the affirmative.                                                                                           
                                                                                                                                
6:50:14 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  about the relevance of  the AIDEA                                                                    
loan concept  to the version  of the  bill that came  out of                                                                    
House Resources Committee.                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck  responded  that  it  would  be  less                                                                    
relevant because  of the intent  that it would  replace some                                                                    
of the  cash credits with a  loan program. He said  that the                                                                    
credits were being  used to leverage loans  for projects. He                                                                    
said  that the  legislation  would make  for  a more  direct                                                                    
loan, at  rates that  were competitive.  He stated  that the                                                                    
state would  not expect repayment  on the debt  until actual                                                                    
production began,  which would be attractive  to developers.                                                                    
He expressed  the desire  to see  companies move  toward the                                                                    
loan  program,  versus  direct   credits.  He  relayed  that                                                                    
initial provisions  in HB 246  stipulated that if  a company                                                                    
took the  loans then  they would no  longer be  eligible for                                                                    
the credits.                                                                                                                    
                                                                                                                                
6:51:46 PM                                                                                                                    
                                                                                                                                
Representative   Guttenberg  surmised   that  the   original                                                                    
version of HB 247 had included  the loans, but that they had                                                                    
been replaced by the direct credits.                                                                                            
                                                                                                                                
Mr.  Alper  clarified  that  the original  HB  247  had  not                                                                    
directly  referenced   the  loan  program,  they   had  been                                                                    
introduced  as a  package. He  said that  the original  bill                                                                    
greatly reduced the expected  credit support, which prompted                                                                    
the need for the new loan program.                                                                                              
                                                                                                                                
Representative  Guttenberg probed  the difference  between a                                                                    
loan  package  and a  direct  payout.  He wondered  how  the                                                                    
state's fiscal situation  would be affected if  there was no                                                                    
return to  the state with a  direct payout, and if  the loan                                                                    
package would became a revolving loan fund.                                                                                     
                                                                                                                                
Commissioner  Hoffbeck  commented that  that  administration                                                                    
had viewed  the legislation as  a long-term solution  to the                                                                    
fiscal crisis.  He said that  the revolving loan  fund would                                                                    
need   to  be   endowed  to   begin  with,   and  additional                                                                    
appropriation   would   be   necessary  depending   on   the                                                                    
popularity of the program. He  stated that the capital would                                                                    
return  to  the state  eventually,  and  then could  be  re-                                                                    
loaned. He  noted that  a direct  cash payout  would require                                                                    
continual appropriations.                                                                                                       
                                                                                                                                
Co-Chair Thompson reminded the committee  that HB 247 was on                                                                    
the meeting agenda  and that HB 246 would  be debated during                                                                    
a different committee meeting.                                                                                                  
                                                                                                                                
Representative  Guttenberg rebutted  that  the evolution  of                                                                    
the bills  was relevant to  discussion on HB 247  and direct                                                                    
credits. He said  that he was curious about  the solvency of                                                                    
the state with  money "going out the door with  no return on                                                                    
it."                                                                                                                            
                                                                                                                                
6:55:01 PM                                                                                                                    
                                                                                                                                
Representative   Gara   understood   that   the   governor's                                                                    
intention in Cook Inlet was  to allow the net operating loss                                                                    
to continue for  companies that had not made  money in order                                                                    
to encourage them  to explore, but to  eliminate the capital                                                                    
expenditure   and  well   lease   expenditure  credits   for                                                                    
companies  that were  making a  profit and  were not  paying                                                                    
production taxes. He summarized  that credits would be given                                                                    
to companies  that were not  making money and no  credits to                                                                    
companies that were making money.                                                                                               
                                                                                                                                
Mr.  Alper explained  that  the credits  were  not meant  as                                                                    
encouragement for exploration, but more  of a support to the                                                                    
companies while  they were under development.  He added that                                                                    
as originally  proposed the net operating  loss credit meant                                                                    
that the state would be  refunding 25 percent of a company's                                                                    
costs up to the point of profitable production.                                                                                 
                                                                                                                                
6:56:28 PM                                                                                                                    
                                                                                                                                
Representative Gara surmised that  companies that were doing                                                                    
work, but not  making money, would be supported  by a credit                                                                    
in Cook Inlet;  companies that were producing,  but were not                                                                    
paying  production  taxes  in Cook  Inlet,  would  lose  the                                                                    
capital and well lease expenditure credits.                                                                                     
                                                                                                                                
Mr. Alper responded in the affirmative.                                                                                         
                                                                                                                                
Representative  Gara   understood  that  the   governor  had                                                                    
proposed limiting  the annual credit payment  to $25 million                                                                    
per company.                                                                                                                    
                                                                                                                                
Mr. Alper responded  yes. He added that  current statute did                                                                    
not contain a defined limit.                                                                                                    
                                                                                                                                
Representative Gara summarized that  the other proposal from                                                                    
the  governor was  to  have  a hard  minimum  tax floor  for                                                                    
fields that  paid the minimum  tax. He contended  that there                                                                    
was currently  no minimum tax  for GVR fields, but  that the                                                                    
pre-2003 fields would floor that  could not be lowered using                                                                    
the net operating loss credit.                                                                                                  
                                                                                                                                
Mr. Alper  replied that for  new oil that enjoyed  the gross                                                                    
value  reduction,  and  could currently  pay  at  zero,  the                                                                    
intention was to  make them pay at  zero. The administration                                                                    
hoped to harden  the floor so that an  operating loss credit                                                                    
would not  result in  reducing payments  to below  the floor                                                                    
for the legacy fields that already paid at the floor.                                                                           
                                                                                                                                
Representative Gara continued to interpret the legislation.                                                                     
Mr.  Alper  responded  that Representative  Gara  seemed  to                                                                    
understand the major provisions of the legislation.                                                                             
                                                                                                                                
Representative  Gara  asked  whether   there  would  be  any                                                                    
ongoing costs to the state related to the AIDEA loans.                                                                          
                                                                                                                                
Mr. Alper  did not believe  that any ongoing costs  would be                                                                    
added by passage  of the legislation. He  furthered that the                                                                    
bill would  create the statutory  authority for a  new fund,                                                                    
with separate  management, and  a fourth  parallel structure                                                                    
inside  the governing  AIDEA law.  He said  that the  fiscal                                                                    
note attached to  the bill would establish  the initial $200                                                                    
million to begin issuing loans.                                                                                                 
                                                                                                                                
7:00:07 PM                                                                                                                    
                                                                                                                                
Representative Gara spoke of what  the state could expect in                                                                    
production taxes  over the  next several  years if  the bill                                                                    
did not pass.  He asked, if the bill did  not pass, what the                                                                    
state  was projected  to receive  in production  taxes after                                                                    
tax credits were deducted.                                                                                                      
                                                                                                                                
Mr.  Alper responded  that the  production taxes  were quite                                                                    
low at present,  and were expected to drop  further. He said                                                                    
that it was  expected that all of the  major producers would                                                                    
have operating losses in 2016,  and the production tax would                                                                    
drop to  zero by 2018. He  said that there was  $825 million                                                                    
in estimated  production tax  cost for  FY 17,  updated from                                                                    
the spring forecast; $450 million in FY 18; $375 in FY 19.                                                                      
                                                                                                                                
7:01:26 PM                                                                                                                    
                                                                                                                                
Representative  Gara wondered  whether  tax credit  payments                                                                    
would exceed  all oil revenue  if thing remained  the status                                                                    
quo.                                                                                                                            
                                                                                                                                
Mr.  Alper clarified  that when  the  governor released  the                                                                    
spring forecast  the revenue  for unrestricted  general fund                                                                    
of all  oil and gas  sources added up  to a number  that was                                                                    
expected to  be less than  the anticipated credit  spend. He                                                                    
added that  this was  unique to  FY 17, in  FY 18  the state                                                                    
would again be in the black.                                                                                                    
                                                                                                                                
7:02:42 PM                                                                                                                    
                                                                                                                                
Co-Chair  Thompson understood  that the  current version  of                                                                    
the bill had a $200 million credit limit per company.                                                                           
Mr. Alper responded in the affirmative.                                                                                         
                                                                                                                                
Co-Chair Thompson  hypothesized that 4 companies  could come                                                                    
together to work on one project,  on one pad, and could each                                                                    
receive the  $200 million credit,  totaling $800  million in                                                                    
credits.                                                                                                                        
                                                                                                                                
Mr. Alper  replied yes. He added  that in order for  that to                                                                    
happen  the companies  would  have to  be  spending over  $2                                                                    
billion.                                                                                                                        
                                                                                                                                
7:03:16 PM                                                                                                                    
                                                                                                                                
Representative   Wilson  understood   that  the   governor's                                                                    
original  bill  would  eliminate  gas tax  credits  in  Cook                                                                    
Inlet.                                                                                                                          
                                                                                                                                
Mr.  Alper responded  that the  governor's  bill would  have                                                                    
eliminated the  20 percent capital  credit (QCE) and  the 40                                                                    
percent well  lease expenditure credit  (WLE). He  said that                                                                    
those were  the credits  tied to  expenditure that  could be                                                                    
stacked with  the operating loss credit.  The operating loss                                                                    
credit  was left  intact at  25 percent.  He explained  that                                                                    
from  the  point  of  view  of  a  company  that  was  under                                                                    
development, the  current 60 percent level  of state support                                                                    
would be reduced  to 25 percent state  support. He furthered                                                                    
that  the  company  that  was  generating  profit  would  be                                                                    
receiving no credit support from the state.                                                                                     
                                                                                                                                
Representative  Wilson  asked  whether  any  of  the  credit                                                                    
expenditures had been written into SB 21.                                                                                       
                                                                                                                                
Mr. Alper replied  that SB 21 did not touch  upon any of the                                                                    
credits outside of the North Slope.                                                                                             
                                                                                                                                
Representative Wilson thought that now  could be a good time                                                                    
to  review  the  credits.  She noted  that  there  would  be                                                                    
another review in 2022.                                                                                                         
                                                                                                                                
Mr. Alper responded that he  had spoken to Senator Giessel's                                                                    
resource working group  over the interim about  the idea of,                                                                    
"maybe in Cook  Inlet it's time to declare  victory and move                                                                    
on." He  said that  there had been  push back  regarding the                                                                    
sentiment.  He believed  that Representative  Wilson made  a                                                                    
valid point; the  issues of supply anxiety  were less severe                                                                    
than they  had been 7 years  ago, and the sponsors  of SB 21                                                                    
had admitted that  enhanced credits for Cook  Inlet had been                                                                    
an  extreme measure,  meant to  sound an  alarm. He  thought                                                                    
that the mission had been  partially accomplished because it                                                                    
had spurred conversation about ramping down the credits.                                                                        
                                                                                                                                
7:05:52 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  wondered   how  much  money  further                                                                    
ramping down of the credits would save the state.                                                                               
                                                                                                                                
Mr.  Alper  believed  that  the  original  fiscal  note  had                                                                    
reflected approximately $150 million.                                                                                           
                                                                                                                                
Representative Wilson requested a  chart that would show the                                                                    
tax credits  that were in  SB 21  that would be  affected by                                                                    
the legislation,  versus how the  credits that had  not been                                                                    
in SB 21 would be affected.                                                                                                     
                                                                                                                                
Mr. Alper pointed  out that the department  had presented to                                                                    
the Joint Resources  Committee in June, a  document that had                                                                    
the information  that Representative Wilson sought.  He said                                                                    
he would supply  the document to the  committee. He believed                                                                    
he  had  sent  it  to the  Co-Chair's  office  the  previous                                                                    
evening.                                                                                                                        
                                                                                                                                
7:06:59 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  referred to Slide 47.  He requested that                                                                    
the department provide  the analysis to $20,  $30, $110, and                                                                    
$120/bbl.                                                                                                                       
                                                                                                                                
Mr. Alper clarified that the  information could be provided.                                                                    
He asked  whether Vice-Chair Saddler wanted  the Cook Inlet,                                                                    
small field scenario, or a wider range of scenarios.                                                                            
                                                                                                                                
Vice-Chair  Saddler   referred  to  Slide  51.   He  thought                                                                    
modeling of the same could be  done using the numbers he had                                                                    
requested.                                                                                                                      
                                                                                                                                
Mr. Alper agreed  to provide the information.  He added that                                                                    
just  a $40/bbl  showed red  on the  chart, $20  and $30/bbl                                                                    
would reflect even less optimistic numbers.                                                                                     
                                                                                                                                
Vice-Chair Saddler asked whether  the capital expenditure of                                                                    
$18/bbl was averaged  over the 30 year lifespan  used in the                                                                    
models.                                                                                                                         
                                                                                                                                
Mr. Alper responded  that the numbers were  drawn from model                                                                    
fields  that provided  known information.  He said  that any                                                                    
new oil  field would had  a lot  of capital spending  in the                                                                    
first several years. He continued  to say that the operating                                                                    
expenditures  tended  to be  ongoing  as  the field  was  in                                                                    
production, and was attached to  the per barrel charge, from                                                                    
year to year.  He stated that each of the  sets of scenarios                                                                    
had a full slide of  assumptions. He clarified that what was                                                                    
being looked  at, specific to the  field on Slide 47,  was a                                                                    
field where all of the oil  produced over the entire 30 year                                                                    
lifespan  would add  up to  50  million barrels  of oil.  He                                                                    
added that 50  multiplied by $18/bbl would be  equal to $900                                                                    
million dollars,  which meant that  the total  capital spend                                                                    
to get the project going was $900 million.                                                                                      
                                                                                                                                
Vice-Chair  Saddler  confirmed  that   the  net  state  gain                                                                    
reflected  on the  slide included  royalties, property  tax,                                                                    
production tax, and corporate income tax.                                                                                       
                                                                                                                                
Mr. Alper responded in the affirmative.                                                                                         
                                                                                                                                
7:11:03 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  asked  about  the  first  bullet  under                                                                    
"Interest Rate Reform"  on Slide 34. He asked  why the error                                                                    
was considered technical.                                                                                                       
                                                                                                                                
Mr. Alper answered  that the original version of  SB 21 that                                                                    
had  been proposed  by Governor  Parnell intended  to reduce                                                                    
the  interest rate  from 11  percent to  3 percent  over the                                                                    
federal  discount  rate.  He added  that  previous  law  had                                                                    
compound interest,  and the original  version of SB  21 kept                                                                    
the compound interest. He stated  that when the bill made it                                                                    
to the  Senate Floor,  and passed with  the 3  percent, over                                                                    
discount  rate,  compound  interest.  He  relayed  that  the                                                                    
contentious legislation  failed to garner an  effective date                                                                    
vote  on the  Senate Floor.  The bill  made its  way to  the                                                                    
House  Resources   Committee,  which  crafted   a  committee                                                                    
substitute that  included work around language  to deal with                                                                    
the lack of  an effective date. He  summarized that drafting                                                                    
errors  pertaining   to  the  interest  rate   and  compound                                                                    
interest  would be  changes to  better reflect  the original                                                                    
intent of the legislation.                                                                                                      
7:13:57 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt wondered  whether the  department had                                                                    
communicated with  other oil resource states  about how they                                                                    
were addressing the downturn in oil prices.                                                                                     
                                                                                                                                
Commissioner  Hoffbeck   replied  that  tax   structures  in                                                                    
various states  had been examined.  He said that  Alaska was                                                                    
unique in  its net  tax, other  states were  on a  gross tax                                                                    
basis.  He  relayed that  the  Oil  and Gas  Competitiveness                                                                    
Review Board had  not spoken to the issue  to-date, and that                                                                    
some provision changes had occurred in other states.                                                                            
                                                                                                                                
Mr. Alper explained that the  other states that produced oil                                                                    
in America were all on the  gross, Alaska was the only state                                                                    
on the  net. He added  that Alaska  was also the  only state                                                                    
that  offered   refundable  cash   credits.  He   said  that                                                                    
companied were  losing money in Oklahoma,  North Dakota, and                                                                    
Texas  right now  because that  price  of oil  was the  same                                                                    
there as  it was  in Alaska,  and they  were paying  a gross                                                                    
severance  tax  to those  state  of  up  to 11  percent.  He                                                                    
asserted  that Alaska  had  a  4 percent  gross  tax at  the                                                                    
current  oil price,  the net  tax was  a theoretical  upside                                                                    
should prices recover.                                                                                                          
                                                                                                                                
7:15:50 PM                                                                                                                    
                                                                                                                                
Representative Pruitt stated that  effectively the state was                                                                    
increasing its tax  by reducing the tax  credit. He wondered                                                                    
which other  states were increasing  taxes during  this time                                                                    
of low oil prices.                                                                                                              
                                                                                                                                
Commissioner   Hoffbeck   contended   that   there   was   a                                                                    
fundamental  disagreement  on  whether   the  removal  of  a                                                                    
subsidy  should be  considered an  increase of  the tax.  He                                                                    
asserted that  a tax was  a demand from a  government entity                                                                    
for repayment, but  in this case the state  was paying money                                                                    
out and reducing the amount of  subsidy that it paid. He did                                                                    
not believe  it should  be classified  as an  increased tax,                                                                    
rather a subsidy reduction.                                                                                                     
                                                                                                                                
Representative Pruitt  argued that  the bill would  not only                                                                    
adjust the  credits but  would also  increase to  5 percent,                                                                    
and harden, the floor. He asked his question again.                                                                             
                                                                                                                                
Commissioner  Hoffbeck stated  that he  did not  believe any                                                                    
other  state  was raising  the  tax.  He admitted  that  the                                                                    
hardening of the floor at  5 percent could be categorized as                                                                    
a tax increase.                                                                                                                 
Mr.   Alper   continued   to  Slide   59:   "Implementation:                                                                    
Administration":                                                                                                                
                                                                                                                                
     · The changes anticipated in this bill still require                                                                       
        somewhat  substantial   reprogramming  of   the  Tax                                                                    
        Revenue Management System (TRMS)  and Revenue Online                                                                    
        (ROL) which  allows  a  taxpayer  to file  a  return                                                                    
      online and update the current tax return forms                                                                            
     · We have received a preliminary estimate from the                                                                         
        software developer, and currently assume a one-time                                                                     
       cost of about $1.2 million to accomplish this                                                                            
     · We do not anticipate any additional costs to                                                                             
        administer the tax program                                                                                              
     · There will also be a need for substantial amendments                                                                     
        to existing regulations to fully implement the                                                                          
        changes                                                                                                                 
                                                                                                                                
SB  247  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
7:19:58 PM                                                                                                                    
                                                                                                                                
Representative Gara  pointed out that there  was a statutory                                                                    
formula for  what the state was  required to pay on  all tax                                                                    
credits, under  current law.  He requested  documentation of                                                                    
what  the  state was  statutorily  required  to pay  on  tax                                                                    
credits.                                                                                                                        
                                                                                                                                
Mr.  Alper   agreed  to  provide  the   information  to  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Co-Chair Thompson discussed housekeeping                                                                                        
                                                                                                                                

Document Name Date/Time Subjects
HB 247 NEW FN DOR TT 032916.pdf HFIN 3/31/2016 5:00:00 PM
HB 247
HB 247 20160331_Oil&GasIndustryInAlaska_HFIN.PDF HFIN 3/31/2016 5:00:00 PM
HB 247
HB 247 Fiscal Impact of Cook Inlet Production Tax Limitations 2007 to 2013_20150327.pdf HFIN 3/31/2016 5:00:00 PM
HB 247
HB 247 Copy of credit table basic 6-15 (003).pdf HFIN 3/31/2016 5:00:00 PM
HB 247
HB 247 credit table basic 3-16.pdf HFIN 3/31/2016 5:00:00 PM
HB 247