Legislature(2015 - 2016)HOUSE FINANCE 519

04/04/2016 08:30 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
08:32:58 AM Start
08:33:36 AM HB247
08:34:14 AM Industry Testimony
10:51:26 AM 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
+ Industry Testimony: TELECONFERENCED
- Doyon
- Ahtna
- Furie Operating Alaska
- Great Bear Petroleum
- BlueCrest Energy
+ 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."                                                                                                                     
                                                                                                                                
8:33:36 AM                                                                                                                    
                                                                                                                                
^INDUSTRY TESTIMONY                                                                                                           
                                                                                                                                
8:34:14 AM                                                                                                                    
                                                                                                                                
BRUCE  WEBB,  VICE  PRESIDENT,  FURIE,  provided  background                                                                    
information on the company that  began producing natural gas                                                                    
in  November  2015 in  Alaska.  He  remarked that  the  most                                                                    
recent  oil  and  gas  tax  restructuring  had  enabled  the                                                                    
company to raise a significant amount of capital.                                                                               
                                                                                                                                
8:36:04 AM                                                                                                                    
                                                                                                                                
DAVID  ELDER, CFO,  FURIE, relayed  that the  company viewed                                                                    
the tax credits as vital to  the industry and the state. The                                                                    
company  had invested  over $700  million; the  company only                                                                    
had  11 employees.  He  believed the  tax  credits had  done                                                                    
exactly  what they  had  been designed  to  do. They  helped                                                                    
lower  the  price  of  gas to  the  residents  of  Southeast                                                                    
Alaska. He  spoke to the  return provided to the  state; the                                                                    
company had  employed over 300  individuals on  the project.                                                                    
Without  continued support  through the  tax credit  program                                                                    
the  company would  have to  cut back  significantly on  its                                                                    
lease acreage.                                                                                                                  
                                                                                                                                
Representative  Gattis   asked  for  clarification   on  the                                                                    
location.                                                                                                                       
                                                                                                                                
Mr. Elder  clarified that he  meant Southcentral  Alaska. He                                                                    
discussed the House Resources  Committee Substitute. The tax                                                                    
credits   were  important   to   small  companies'   overall                                                                    
financing; to repay their lenders.                                                                                              
                                                                                                                                
Mr. Elder stated that the  project had been an investment in                                                                    
the state. The company had  taken on a significant amount of                                                                    
risk  and was  ready to  begin  paying back  the state.  The                                                                    
company  helped  to  bring back  Nikiski  and,  the  service                                                                    
companies  relied on  the  project that  had  used over  100                                                                    
local  suppliers.  He  spoke   about  property  taxes.  They                                                                    
estimated the royalties they would  pay to the state at $300                                                                    
million.  They  had  brought  prices   down  to  //  on  the                                                                    
contracts.                                                                                                                      
                                                                                                                                
8:43:47 AM                                                                                                                    
                                                                                                                                
Representative Wilson  asked if the company  understood that                                                                    
the credits were not necessarily paid in the present year.                                                                      
                                                                                                                                
Mr. Elder replied in the affirmative.                                                                                           
                                                                                                                                
Representative  Wilson remarked  that  the  state was  still                                                                    
meeting its obligations, but may  pay four years out. If the                                                                    
state did  not have the  funding currently, the  tax credits                                                                    
remained good.                                                                                                                  
                                                                                                                                
Mr. Elder answered  that the company relied  on the existing                                                                    
program.  The  company  did  not  anticipate  that  the  tax                                                                    
program  would begin  in the  current year.  If the  company                                                                    
knew  with certainty  what the  future was  they could  plan                                                                    
around it. To  make a change in the middle  of their process                                                                    
would be difficult.                                                                                                             
                                                                                                                                
Representative Wilson stated that no changes had been made.                                                                     
                                                                                                                                
Mr. Elder  replied that the  company always  understood that                                                                    
it was a  risk, if the change  was going to be  made, it was                                                                    
hard in  midstream to  have the  change. It  would not  be a                                                                    
problem if they knew what to expect.                                                                                            
                                                                                                                                
8:47:38 AM                                                                                                                    
                                                                                                                                
Representative Wilson  spoke about  SB 21.  She asked  if it                                                                    
was time for Cook Inlet to  pay its share, as similar to the                                                                    
North Slope structure.                                                                                                          
                                                                                                                                
Mr.  Elder answered  that he  was not  as familiar  with the                                                                    
North  Slope tax  structure. He  there had  been significant                                                                    
consolidation in Cook Inlet.                                                                                                    
                                                                                                                                
Representative Gara  appreciated the importance of  the work                                                                    
and what  was provided to  Cook Inlet. He thought  the money                                                                    
that was provided to the  companies went to paying very high                                                                    
interest rates.                                                                                                                 
                                                                                                                                
Mr. Elder answered  that the money was not going  to pay the                                                                    
debts;  it had  enabled them  to take  the credits  and make                                                                    
them liquid. He shared that  the company had begun financing                                                                    
the project in 2014-2015.                                                                                                       
                                                                                                                                
8:51:35 AM                                                                                                                    
                                                                                                                                
Representative Gara spoke to statutory  terms related to the                                                                    
requirements the  state would pay  in tax credits.  When the                                                                    
company applied for the financing  he gathered the state was                                                                    
aware of the  statute, and remarked that  everyone would not                                                                    
get paid in the current year.                                                                                                   
                                                                                                                                
Mr. Elder  replied that the  company always  understood that                                                                    
there was  appropriation risk. The  company was  only asking                                                                    
for transition. The company relied  upon the tax credits and                                                                    
had applied  for the  tax credits and  received them  in six                                                                    
months. The  company understood the pressures  and knew that                                                                    
things would get  scaled back. He spoke to the  high cost of                                                                    
investing in the state.                                                                                                         
                                                                                                                                
Representative  Gara  clarified  that   the  state  was  not                                                                    
honoring its appropriations;  it had a statute  on the books                                                                    
that  he  wanted to  ensure  the  company would  inform  its                                                                    
lenders about.                                                                                                                  
                                                                                                                                
Mr.  Elder replied  that  the company  understood  it was  a                                                                    
risk; however, it had not  anticipated that the change would                                                                    
occur so rapidly.                                                                                                               
                                                                                                                                
Representative Gara  sympathized with  the company,  but the                                                                    
state did  not anticipate the  change would come  so rapidly                                                                    
either.  He  asked  what  was   wrong  with  the  governor's                                                                    
proposal to switch to a  financing structure of low interest                                                                    
loans  in the  marketplace. He  spoke to  the state's  tight                                                                    
budget situation.                                                                                                               
                                                                                                                                
8:57:15 AM                                                                                                                    
                                                                                                                                
Mr.  Elder responded  that the  governor's  proposal of  $25                                                                    
million  would  not  benefit  the  company  that  much;  its                                                                    
capital program would  slow. He asked the  committee to keep                                                                    
in mind that the company had  spent over $300 million in the                                                                    
past two years.                                                                                                                 
                                                                                                                                
Representative Gara  felt that the company  would not really                                                                    
be  paying  production taxes,  but  rather  would be  paying                                                                    
royalty of  roughly 12.5  percent. He  asked if  the company                                                                    
believed it was fair to his company and to the state.                                                                           
                                                                                                                                
Mr. Webb  answered that Cook  Inlet was unique and  not like                                                                    
the North  Slope. He remarked  that, in 2014,  the Anchorage                                                                    
Chamber of Commerce drafted a  report on the benefits of oil                                                                    
and gas  to the Cook  Inlet region. That report  stated that                                                                    
the benefits were more than  production tax. The industry in                                                                    
the Cook Inlet  was approximately $2.5 billion  per year. He                                                                    
remarked that Anchorage  was the economic hub  in the state.                                                                    
He  stated that  all  oil  produced in  the  Cook Inlet  was                                                                    
converted  into diesel  fuel and  jet fuel,  which supported                                                                    
the Port  of Anchorage, airport, military  base, and locally                                                                    
used  natural gas.  He  remarked that  the  benefits of  the                                                                    
production would be  much higher than the  production tax to                                                                    
the state.                                                                                                                      
                                                                                                                                
Representative Gara felt that  not imposing a production tax                                                                    
in the  Cook Inlet  require the other  residents who  do not                                                                    
receive that revenue to pay for that difference.                                                                                
                                                                                                                                
9:00:58 AM                                                                                                                    
                                                                                                                                
Representative Guttenberg  remarked state  received economic                                                                    
activity,  but  that happened  anyway.  He  asked about  the                                                                    
company's confidentiality plan.                                                                                                 
                                                                                                                                
Mr. Elder answered that he  had concern about disclosing the                                                                    
company's   confidential  information.   The  financing   as                                                                    
proposed did not help it  to transition out. He reminded the                                                                    
committee that they were structuring plans two years out.                                                                       
                                                                                                                                
9:07:13 AM                                                                                                                    
                                                                                                                                
Representative Guttenberg stated that  the credits were like                                                                    
grants. He spoke to the value  of providing the money to the                                                                    
companies.  He noted  that  there were  many  people in  the                                                                    
state  who did  not see  an  effect from  the companies.  He                                                                    
stated that his  region did not see  the impact. Determining                                                                    
the value  of the credit  program was a challenge.  He asked                                                                    
how the company defined transition.                                                                                             
                                                                                                                                
Mr. Elder  asked that any  changes not go into  effect until                                                                    
January 1,  2016. He was  not concerned about  credits being                                                                    
paid  out  over one  or  two  years;  they had  based  their                                                                    
financing on a practice that had been in place.                                                                                 
                                                                                                                                
Co-Chair Thompson stated  that there had been  a shortage of                                                                    
supply. The  credits had worked  to increase  production. He                                                                    
remarked  that the  State of  Alaska is  a big  business and                                                                    
needed to stop the bleeding.                                                                                                    
                                                                                                                                
9:12:29 AM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  asked for the company's  royalty rate on                                                                    
its leases.                                                                                                                     
                                                                                                                                
Mr. Elder answered that the royalty rate was 12.5 percent.                                                                      
                                                                                                                                
Vice-Chair  Saddler queried  the  impact of  the tax  credit                                                                    
regime in the current version.                                                                                                  
                                                                                                                                
Mr.  Elder  replied  that  it  would  enable  completion  of                                                                    
development, and meet the obligations.  He stated that there                                                                    
would be some reductions in development.                                                                                        
                                                                                                                                
Vice-Chair  Saddler queried  the impact  of the  prospect of                                                                    
the tax holiday ending in 2022.                                                                                                 
                                                                                                                                
Mr.  Elder  responded  that  the  tax  holiday  allowed  for                                                                    
planning  time.   He  pointed   out  that  there   was  some                                                                    
technology that may  be used to bring gas to  other parts of                                                                    
Alaska. He shared  that there was technology  to deliver gas                                                                    
other than  Liquid Natural Gas  (LNG). He remarked  that his                                                                    
company was not able to  begin selling gas until the current                                                                    
year.  The next  contract that  would be  in the  nineteenth                                                                    
time  frame. He  stressed  that it  was  important that  his                                                                    
company rely on the payments.                                                                                                   
                                                                                                                                
Vice-Chair  Saddler asked  how the  tax credit  regime would                                                                    
impact the in the industry overall.                                                                                             
                                                                                                                                
Mr. Elder  replied that he  would tell industry  that Alaska                                                                    
was a great place to do business.                                                                                               
                                                                                                                                
9:16:47 AM                                                                                                                    
                                                                                                                                
PAT  GALVIN, CCO,  GENERAL COUNSEL,  GREAT BEAR,  provided a                                                                    
PowerPoint presentation titled  "Great Bear Petroleum: House                                                                    
Finance,  HB 247"  dated April  4, 2016  (copy on  file). He                                                                    
turned to slide 3:                                                                                                              
                                                                                                                                
        · Original Target -> North Slope Shale Play (aka                                                                        
          "source rock play", aka "unconventional play")                                                                        
       · Soon Faced an "Alaska Shale Play Catch-22"                                                                             
        · Not economic without cost reductions                                                                                  
        · Costs reduction requires a critical mass of                                                                           
          drilling activity, such as that generated by a                                                                        
          shale play                                                                                                            
        · Re-directed focus to extensive conventional                                                                           
          prospectivity                                                                                                         
        · Still believe a North Slope unconventional play                                                                       
          can be                                                                                                                
        · economic following a conventional play build-out                                                                      
        · New  Management  Team  - focus  on  performance  -                                                                    
          expanding                                                                                                             
        · technical capabilities                                                                                                
                                                                                                                                
Mr. Galvin addressed slide 4  titled "Great Bear - Leasehold                                                                    
Position and Activities (2012-Present)."  He stated that the                                                                    
wells had been targeting  the unconventional shale play, and                                                                    
there was  a conventional exploration well  that was located                                                                    
on  an ice  pad  about three  miles off  the  haul road.  He                                                                    
remarked that Great Bear had only been able to finish one.                                                                      
                                                                                                                                
9:23:51 AM                                                                                                                    
                                                                                                                                
Mr.  Galvin turned  to slide  5 and  discussed Great  Bear's                                                                    
immediate work plan.                                                                                                            
                                                                                                                                
        1. Complete our seismic program                                                                                         
        2. Complete our prospect inventory                                                                                      
        3. Execute  a  multi-year,   multi-well  exploration                                                                    
          program                                                                                                               
        4. Secure cost-effective   services  by   using  the                                                                    
          multi-well commitment                                                                                                 
                                                                                                                                
Mr. Galvin moved  to slide 6 and addressed  four myths about                                                                    
North Slope exploration companies:                                                                                              
                                                                                                                                
        · Exploration companies are "financed" by                                                                               
          Alaska tax credits.                                                                                                   
        · Exploration  companies  don't  have "skin  in  the                                                                    
          game".                                                                                                                
        · Alaska  could get  the same  level of  exploration                                                                    
          activity with lower exploration tax credits.                                                                          
        · Tax  credit payments  can be  delayed with  little                                                                    
          impact to exploration companies.                                                                                      
                                                                                                                                
Mr. Galvin  addressed the  first of  the "myths"  related to                                                                    
financing.                                                                                                                      
                                                                                                                                
9:26:44 AM                                                                                                                    
                                                                                                                                
Mr. Galvin turned  to slide 8 and addressed  the second myth                                                                    
related to companies with skin in the game:                                                                                     
                                                                                                                                
        · Total Gross Spend of Approximately $220 Million                                                                       
        · Approximately   $140M   has   been  or   will   be                                                                    
          reimbursed by State of                                                                                                
        · Alaska                                                                                                                
        · Net Operating Loss Credits (25 percent -> 45                                                                          
          percent -> 35 percent)                                                                                                
        · 40 percent Exploration Incentive Credit for                                                                           
          Seismic                                                                                                               
        · 30 percent Exploration Incentive Credit for Wells                                                                     
        · Great Bear Petroleum and Partners have spent                                                                          
          approximately $80M that will not be recovered                                                                         
          through tax credits                                                                                                   
        · As a result, Great Bear has been very prudent and                                                                     
          deliberate in what activities we have conducted                                                                       
        · Tax Credits bought valuable exploration data -                                                                        
          State now has extensive new data about its                                                                            
          resources on the Great                                                                                                
        · Bear leases                                                                                                           
                                                                                                                                
9:28:39 AM                                                                                                                    
                                                                                                                                
Mr. Galvin spoke to slide  9 titled "How tax credits dictate                                                                    
exploration drilling  volume." The slide stated  that if the                                                                    
state offered a  higher tax credit it would  see much higher                                                                    
exploration.  In order  to understand  the role  of the  tax                                                                    
credit in the  exploration process it was  necessary to know                                                                    
that   exploration  was   risky.   The   program  had   been                                                                    
implemented  because   Alaska  had  not  been   seeing  high                                                                    
exploration; the state wanted to lower the hurdle.                                                                              
                                                                                                                                
Representative  Guttenberg pointed  to  slide 9.  He was  an                                                                    
advocate for  strong exploration activity. He  wondered when                                                                    
an exploration well became a development well.                                                                                  
                                                                                                                                
Mr. Galvin responded that there  was a proxy for determining                                                                    
exploration. He  explained that more  than three  miles from                                                                    
and preexisting well, then the  well would be eligible for a                                                                    
30 percent credit. He stated that  a well that was both more                                                                    
than three miles  from a preexisting well, and  more than 25                                                                    
miles  from a  unit, the  well would  be eligible  for a  40                                                                    
percent  credit.  Additionally,  the Department  of  Natural                                                                    
Resources  (DNR) needed  to make  a  determination before  a                                                                    
company drilled.                                                                                                                
                                                                                                                                
Representative  Guttenberg wondered  if a  new well  near an                                                                    
exploration well would keep  that explorations well's status                                                                    
intact.                                                                                                                         
                                                                                                                                
Mr. Galvin responded that it would no longer be considered                                                                      
an exploration well.                                                                                                            
                                                                                                                                
9:34:19 AM                                                                                                                    
                                                                                                                                
Mr. Galvin addressed slide 10 related to the impact of tax                                                                      
credit payment uncertainty:                                                                                                     
                                                                                                                                
   · Delay in tax credit  payments will result in increasing                                                                    
     financing costs for explorers                                                                                              
  · Additional interest payments & higher interest rates                                                                        
   · Less  money goes  into the  ground -  more goes  to the                                                                    
     banks                                                                                                                      
   · Uncertainty or surprises in tax  credit payments by the                                                                    
     state causes financing sources to leave the market or                                                                      
     freeze existing credit agreements                                                                                          
   · Makes  tax  credit  financing far  more  expensive,  or                                                                    
     completely unavailable                                                                                                     
   · Dramatically reduces  the exploration activity  that is                                                                    
     bought by the tax credits                                                                                                  
                                                                                                                                
Mr. Galvin discussed tax credits - keep what is working                                                                         
(slide 11):                                                                                                                     
                                                                                                                                
   · Alaska Has Emphasized North  Slope Exploration in State                                                                    
     Oil and Gas                                                                                                                
   · Policy for the Past 15 Years                                                                                               
        o Area wide Leasing Program                                                                                             
       o Exploration Incentive Credit (EIC) Program                                                                             
        o Net Operating Loss Credits                                                                                            
        o Tax Credit Certificate Payments                                                                                       
        o Collateralization of Tax Credit Certificates                                                                          
   · It  Took  A  While,  But That  Effort  is  Now  Showing                                                                    
     Success                                                                                                                    
       o Diversified Group of North Slope Explorers                                                                             
        o Recent Discoveries                                                                                                    
        o New Production Coming On-Line                                                                                         
   · Elimination/Reduction of Credits Will Be Costly                                                                            
        o Likely to Slow Down or Stop Exploration                                                                               
        o Lower Likelihood of New Discoveries                                                                                   
   · Getting Momentum Back Will Take A Long Time                                                                                
                                                                                                                                
9:39:45 AM                                                                                                                    
                                                                                                                                
Mr. Galvin addressed a summary on slide 12:                                                                                     
                                                                                                                                
   · Great Bear is a highly active North Slope explorer                                                                         
   · Great Bear's investment to date has been substantial                                                                       
     and well spent                                                                                                             
   · Great Bear's pace and volume of future exploration                                                                         
     activity will be directly related to tax credit                                                                            
     program                                                                                                                    
   · Risk is reduced, and likelihood of success is                                                                              
     increased by more exploration                                                                                              
   · Reducing exploration risk of Alaska's North Slope                                                                          
     resources is a good investment for the State of Alaska                                                                     
   · The Exploration Incentive Credit Program ("025                                                                             
     Credits") is a valuable catalyst for North Slope                                                                           
     exploration activities                                                                                                     
                                                                                                                                
Representative Guttenberg  wondered about a slowdown  in the                                                                    
rest of the world on  industry investments. He asked how the                                                                    
state would  look at  the state  curtailing the  credits. He                                                                    
believed the state was acting prudently.                                                                                        
                                                                                                                                
Mr.   Galvin   distinguished    the   two   decisions   that                                                                    
Representative  Guttenberg  had  combined. It  was  not  the                                                                    
state's role to look  at individual investment decisions. He                                                                    
noted the  self-correcting aspect of the  credit program; if                                                                    
an  investment was  not good,  it would  preserve the  state                                                                    
from having to  make a payment. If the  exploration bar cost                                                                    
for an  explorer was  raised, the  explorers would  make the                                                                    
decision on whether or not to invest in exploration.                                                                            
                                                                                                                                
9:46:32 AM                                                                                                                    
                                                                                                                                
Representative Guttenberg  remarked that most  companies did                                                                    
not do  exploration because it  was too risky, and  asked if                                                                    
the  state should  be involved  at that  point. He  surmised                                                                    
that at that  point credits should become  loans. He thought                                                                    
at that point the risk was downgraded to moderate.                                                                              
                                                                                                                                
Mr.  Galvin replied  that there  were positive  and negative                                                                    
conversations regarding  a credit program and  loan program.                                                                    
He  felt that  a  loan  program would  put  the  state in  a                                                                    
different position  as it  related to  the companies,  so it                                                                    
makes efforts  complicated. He felt that  the credit program                                                                    
allowed for the private industry  to make decisions based on                                                                    
a certain level of criteria.                                                                                                    
                                                                                                                                
Representative Guttenberg  noted that he had  been combining                                                                    
former Commissioner  Galvin's (former Department  of Revenue                                                                    
commissioner) role with his current role.                                                                                       
                                                                                                                                
Representative  Gara  wondered  when Mr.  Galvin  served  as                                                                    
commissioner for DOR.                                                                                                           
                                                                                                                                
Mr. Galvin replied that he  had been commissioner of DOR for                                                                    
about a month after Great Bear had come in - 2010.                                                                              
                                                                                                                                
Representative Gara surmised that the  Great Bear had one of                                                                    
the  best  shale plays  in  the  country  at one  point.  He                                                                    
wondered  if  that  assertion had  been  overly  optimistic,                                                                    
because of the many years of paid tax credits.                                                                                  
                                                                                                                                
Mr. Galvin replied that Great  Bear began looking at a shale                                                                    
play. Soon  the company realized  that the shale  play would                                                                    
not be  economic without conventional  work. He  stated that                                                                    
the  company had  invested  about $80  million  to get  $220                                                                    
million of  exploration information. He shared  that current                                                                    
seismic  data could  be used  to  identify the  conventional                                                                    
plays  that  the  company  believed  would  be  economically                                                                    
producible.  He shared  that there  would  be a  significant                                                                    
amount  of  risk  capital  to  explore  and  determine  that                                                                    
possibility.  He  stressed  that  the tax  credits  were  an                                                                    
overwhelming catalyst  to the amount of  activity Great Bear                                                                    
was able  to achieve,  and advance  the state's  interest in                                                                    
developing  that acreage.  He  shared that  there were  only                                                                    
eleven exploration wells in 600,000 prior to Great Bear.                                                                        
                                                                                                                                
Representative Gara  asked if Mr.  Galvin had  any realistic                                                                    
calculations of  how much production  would come out  of the                                                                    
area.                                                                                                                           
                                                                                                                                
Mr.  Galvin  replied that  Great  Bear  had confidence  that                                                                    
there  was an  overwhelming  amount of  hydrocarbons in  the                                                                    
acreage. He stressed that there  was a concern whether those                                                                    
hydrocarbons  could be  drawn  from the  type  of rock  that                                                                    
would  facilitate  economic  development. He  stressed  that                                                                    
there were  many unknown variables  that would not  be known                                                                    
until  the  wells  were  drilled.  He  shared  that  he  was                                                                    
optimistic  that  a  significant  amount  of  oil  would  be                                                                    
development from the acreage, but  more work was required to                                                                    
determine the absolute outcome.                                                                                                 
                                                                                                                                
9:52:53 AM                                                                                                                    
                                                                                                                                
Representative Gara  surmised that companies  invested based                                                                    
on a positive  net present value rather than  a negative net                                                                    
present value.  He queried any  issue with a tax  that might                                                                    
be  better than  no production  tax  up to  $73 dollars  per                                                                    
barrel  with  the  knowledge   of  application  for  royalty                                                                    
relief. He  shared that  royalty relief  could be  used with                                                                    
proof.                                                                                                                          
                                                                                                                                
Mr.  Galvin accepted  the premise  that the  state needed  a                                                                    
return on  production. He suggested that  the assertion that                                                                    
there  would  be  no  money  back  up  to  $73  dollars  was                                                                    
simplistic. He  stressed that there were  many variable, and                                                                    
the  picture would  have  to include  an  evaluation of  all                                                                    
variables.                                                                                                                      
                                                                                                                                
Representative Gara understood that  the $73 estimate may be                                                                    
altered  for  different fields.  He  remarked  that the  DVR                                                                    
level  was generous  to companies.  He  queried any  problem                                                                    
with  a modest  tax change,  knowing  that there  may be  an                                                                    
option for royalty relief.                                                                                                      
                                                                                                                                
Mr. Galvin  replied that the  companies did not  negotiate a                                                                    
tax rate  with the state.  He stressed that the  state would                                                                    
set  the tax  rate, and  the companies  would determine  how                                                                    
much production could  occur at what cost.  He remarked that                                                                    
the tax  policy set the  framework to determine  whether the                                                                    
company could meet the hurdle,  and then decide to apply for                                                                    
royalty relief.                                                                                                                 
                                                                                                                                
Vice-Chair Saddler asked Mr. Galvin  to address the argument                                                                    
that if oil required a tax  credit in order to be developed,                                                                    
it  was uneconomic.  Therefore, it  should not  be developed                                                                    
until a profit could be made.                                                                                                   
                                                                                                                                
Mr.  Galvin  replied  that  it  was  a  valid  position.  He                                                                    
referred  to  conversation  years  back  about  turning  off                                                                    
production from  Trans-Alaska Pipeline System  (TAPS) during                                                                    
low prices.  He believed  the program  was an  investment by                                                                    
the state and important for the economy in the state.                                                                           
                                                                                                                                
9:59:50 AM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler asked if Great  Bear understood the risks                                                                    
that the credits were subject to appropriation.                                                                                 
                                                                                                                                
Mr.  Galvin  replied  in  the  affirmative,  and  he  had  a                                                                    
different memory of the statute  when it had been formed and                                                                    
its intent. The expectation was  that tax for the fund would                                                                    
be a "placeholder"  to keep funds flowing  through the fund,                                                                    
so the annual  appropriation process could be  based on that                                                                    
placeholder.  He felt  that  it was  intended  to begin  the                                                                    
appropriations process.                                                                                                         
                                                                                                                                
Representative  Guttenberg asked  on  what  evidence he  had                                                                    
related to the topic.                                                                                                           
                                                                                                                                
Mr. Galvin  responded that he  had been present when  it had                                                                    
been written,  as the  commissioner of DOR  at the  time. He                                                                    
shared  that he  advised  his staff  to  determine the  fund                                                                    
level in order to keep the fund functional.                                                                                     
                                                                                                                                
Vice-Chair Saddler  asked about the proposal  to have Alaska                                                                    
Industrial Development and Export  Authority (AIDEA) // loan                                                                    
program.                                                                                                                        
                                                                                                                                
Mr. Galvin  stated that  there could not  be a  loan program                                                                    
during the  exploration phase because  there was  nothing to                                                                    
loan against.                                                                                                                   
                                                                                                                                
Vice-Chair  Saddler   asked  about  the   current  Committee                                                                    
Substitute and how it would impact the company.                                                                                 
                                                                                                                                
Mr.  Galvin  answered that  it  would  not have  significant                                                                    
impact on  the company's  activity, except  that it  did not                                                                    
include an extension of the exploration incentive program.                                                                      
                                                                                                                                
Representative   Wilson   wondered   whether   the   company                                                                    
anticipated the state's current budget position.                                                                                
                                                                                                                                
Mr. Galvin replied  that he did not  believe anyone expected                                                                    
the current  fiscal climate. He  remarked that there  was an                                                                    
expectation at  the time of  the creation of  the structure,                                                                    
it was thought  that the state would have  enough in savings                                                                    
to provide the tax credits.                                                                                                     
                                                                                                                                
Representative  Wilson stressed  that "timely"  may be  seen                                                                    
differently between the legislature and industry.                                                                               
                                                                                                                                
10:06:55 AM                                                                                                                   
                                                                                                                                
J. BENJAMIN  JOHNSON, PRESIDENT  AND CEO,  BLUECREST ENERGY,                                                                    
spoke  about the  company  and its  presence  in Alaska.  He                                                                    
shared   information  about   the  company   executives.  He                                                                    
provided a PowerPoint presentation dated April 4, 2016                                                                          
(copy on file). He read from a prepared statement:                                                                              
                                                                                                                                
     Thank you for  the opportunity to comment  on this very                                                                    
     important  issue of  proposed changes  to Alaska's  oil                                                                    
     and gas tax laws.                                                                                                          
                                                                                                                                
     For the  record, my  name is  J. Benjamin  Johnson, and                                                                    
     I'm  the president  and CEO  of  BlueCrest Energy  Inc.                                                                    
     Although  BlueCrest is  based in  Texas, we  definitely                                                                    
     have  Alaskan roots.  My family  first moved  to Anchor                                                                    
     Point in the early 1950's.                                                                                                 
                                                                                                                                
     I grew  up in  Kenai and  graduated from  Kenai Central                                                                    
     High. I  worked my  way through  college on  Cook Inlet                                                                    
     platforms  and at  Prudhoe Bay.  Then after  college, I                                                                    
     came  back home  to  Alaska, doing  some  of the  early                                                                    
     engineering work  for ARCO on Prudhoe  Bay and Kuparuk.                                                                    
     In  total,  BlueCrest  senior management  has  over  40                                                                    
     years of collective experience  working in Alaska's oil                                                                    
     and gas  industry. Since BlueCrest only  has operations                                                                    
     in the  Cook Inlet at this  time, I will only  speak to                                                                    
     the  issues  particular  to  the  Cook  Inlet,  with  a                                                                    
     specific focus on the following points:                                                                                    
                                                                                                                                
     First,  I want  to  emphasize  that, specifically  with                                                                    
     regard to  what BlueCrest is  doing in the  Cook Inlet,                                                                    
     the tax  credit program is  a very good  investment for                                                                    
     the  State. And  I want  to strongly  encourage you  to                                                                    
     consider that any changes made  to the system (whatever                                                                    
     they may  be) need  to be  well-planned with  regard to                                                                    
     the  long-term  consequences  and done  in  an  orderly                                                                    
     progression over time.                                                                                                     
                                                                                                                                
     BlueCrest has  not been involved in  drilling "wildcat"                                                                    
     exploratory   wells.  We   have  focused   on  low-risk                                                                    
     development of  previously-identified resources  of oil                                                                    
     and gas.  In the  process of  delineating the  field in                                                                    
     2013, we discovered several new  oil and gas zones that                                                                    
     added to  the total reserves, but  the underlying basis                                                                    
     of the  oil and gas  accumulation was already  known at                                                                    
     that  time.  The  bottom  line   is  that  the  State's                                                                    
     investment in development of known  reserves has a much                                                                    
     lower   risk  factor   than  support   for  higher-risk                                                                    
     exploratory drilling.                                                                                                      
                                                                                                                                
     BlueCrest Energy was formed by  a group of former major                                                                    
     oil  company executives,  each of  whom have  extensive                                                                    
     experience  in developing  and managing  large oil  and                                                                    
     gas  assets. Our  original business  plan  was to  find                                                                    
     some  oil and  gas  properties with  already-identified                                                                    
     reserves that  could potentially be improved  using our                                                                    
     backgrounds  and knowledge  of industry  technology. We                                                                    
     evaluated  dozens of  acquisition opportunities  around                                                                    
     the US  (offshore California, Gulf of  Mexico, Wyoming,                                                                    
     Colorado, Texas,  Louisiana and Alaska).  Alaska's huge                                                                    
     handicap  was  -  and  continues   to  be  -  that  the                                                                    
     exploration,  development and  operating  costs in  the                                                                    
     State are at  least three hundred percent  of any other                                                                    
     major hydrocarbon  basin in the  US. But  we ultimately                                                                    
     decided  to  invest  in  Alaska  because,  through  the                                                                    
     credit programs, the                                                                                                       
     State was  investing in itself,  and that  investment -                                                                    
     the State's credits - somewhat  offset the higher costs                                                                    
     of drilling and development.                                                                                               
                                                                                                                                
     BlueCrest is  in Alaska today  directly as a  result of                                                                    
     the State's incentives programs.  And it is the State's                                                                    
     investment   through   the   tax   credits   that   has                                                                    
     facilitated success in the  Cosmopolitan Unit, which we                                                                    
     are now  moving into  its first  production. As  I will                                                                    
     demonstrate   today,   these   credits   will   provide                                                                    
     substantial  future positive  value to  the State.  I'm                                                                    
     going to show  you that the State's  investments in the                                                                    
     Cosmopolitan  tax  credits  will provide  high  returns                                                                    
     even  at  low  oil  prices. In  fact,  the  tax  credit                                                                    
     investments  under   the  current  laws   can  actually                                                                    
     provide higher  rates of return  to the State  than the                                                                    
     average investments in the Permanent Fund.                                                                                 
                                                                                                                                
     Second, I'd  like to give  you a quick overview  of the                                                                    
     Cosmopolitan  Unit, or  "Cosmo" as  we call  it. And  I                                                                    
     will show  you the calculations made  by both BlueCrest                                                                    
     and  the  DOR  showing the  very  favorable  investment                                                                    
     returns to the State as a result of the tax credits.                                                                       
                                                                                                                                
     And  finally,  I  will address  the  direct  impact  to                                                                    
     BlueCrest of  critical specific factors  in HB  247 and                                                                    
     the CS.                                                                                                                    
                                                                                                                                
10:12:21 AM                                                                                                                   
                                                                                                                                
Mr. Johnson turned to slide 2:                                                                                                  
                                                                                                                                
     The  Cosmopolitan Unit  is  located  about three  miles                                                                    
     offshore  in  the Cook  Inlet,  a  few miles  north  of                                                                    
     Anchor Point.  All of the  productive area in  the unit                                                                    
     is on  State leases.  We also  have an  onshore surface                                                                    
     lease that  contains the production facilities  and the                                                                    
     drill sites for drilling  wells to the offshore leases.                                                                    
     For  the interest  of  time, I  won't  repeat my  prior                                                                    
     testimony  to House  Resources  concerning the  lengthy                                                                    
     Cosmo history.  But suffice  it to  say that  the field                                                                    
     was originally  discovered in 1967.  BlueCrest acquired                                                                    
     the leases in 2012, and  we are about to finally start-                                                                    
     up  the initial  production  this month.  We drilled  a                                                                    
     very critical  well in 2013 and  gained new information                                                                    
     that  has  allowed  us to  finally  develop  the  field                                                                    
     employing technology currently available today.                                                                            
                                                                                                                                
Mr. Johnson addressed slide 3:                                                                                                  
                                                                                                                                
     The   Cosmopolitan  Unit   actually  consists   of  two                                                                    
     separate development  projects. The oil zones  are deep                                                                    
     enough that  they can  all be  reached from  an onshore                                                                    
     drill site,  using a very powerful  land-based drilling                                                                    
     rig.                                                                                                                       
                                                                                                                                
     We  are  now proceeding  with  development  of the  oil                                                                    
     zones from  onshore, but  the offshore  gas development                                                                    
     is on  hold due  to economic  limitations on  costs and                                                                    
     confirmation   of   sufficient   market   demand.   The                                                                    
     Cosmopolitan gas  zones are simply too  shallow to make                                                                    
     drilling from  onshore a possibility. So  the gas zones                                                                    
     will  need  to  be  developed  by  drilling  gas  wells                                                                    
     offshore with  a jack-up rig and  setting small dry-gas                                                                    
     production platforms over the  wells. The gas will then                                                                    
     be piped  through sub-sea pipelines from  the platforms                                                                    
     to  the onshore  oil production  facility. This  is, of                                                                    
     course, quite  expensive. The Cook Inlet  gas market is                                                                    
     quite unique,  in that the  limited current  demand for                                                                    
     the gas (without some larger  user such as Agrium) does                                                                    
     not facilitate development of large  new gas field like                                                                    
     Cosmopolitan  to  spend all  the  money  to get  it  on                                                                    
     production  and then  shut it  in. It  is important  to                                                                    
     understand  that, although  we  know there  is a  large                                                                    
     quantity of gas,  it will take several years  to get it                                                                    
     developed.  And we  are faced  with another  particular                                                                    
     challenge,   in  that   the  one   currently  available                                                                    
     offshore rig we could use  cannot afford to sit idle in                                                                    
     the Cook Inlet for years  into the future without being                                                                    
     put to work  now. Once that rig leaves, it  may be very                                                                    
     difficult  (and will  certainly be  very expensive)  to                                                                    
     bring in another rig in the future.                                                                                        
                                                                                                                                
     But with  regard to the  oil development that  we could                                                                    
     start  right away  and given  the success  of our  2013                                                                    
     drilling  program,   we  were   then  faced   with  the                                                                    
     challenge  of how  to pay  for development  of the  new                                                                    
     field. Right now, BlueCrest is  a small private company                                                                    
     with a  singular focus  of developing  the Cosmopolitan                                                                    
     Unit.  The  members of  our  management  team all  have                                                                    
     extensive   technical   and  business   experience   in                                                                    
     developing projects like this,  but the potential costs                                                                    
     far  exceeded our  personal financial  capabilities. So                                                                    
     we teamed  with a group  of oil industry  investors who                                                                    
     have much  greater financial capabilities, and  we very                                                                    
     carefully created our plan with  them for financing the                                                                    
     development of Cosmopolitan.                                                                                               
                                                                                                                                
10:15:40 AM                                                                                                                   
                                                                                                                                
Mr. Johnson turned to slide 4:                                                                                                  
                                                                                                                                
     Now I'd  like to digress  for just a minute  to explain                                                                    
     something that's  really important to  understand about                                                                    
     oil and gas developments.  This next chart figuratively                                                                    
     shows the cumulative cash flow  over time for a typical                                                                    
     life  cycle of  a  successful oil  or gas  development.                                                                    
     When the curve goes down,  it means that the company is                                                                    
     spending more cash  in a month than it  is bringing in.                                                                    
     When the curve is rising,  it means that the company is                                                                    
     receiving  more revenues  than it  is spending.  But as                                                                    
     long  as the  curve is  below the  horizontal axis,  it                                                                    
     means  that the  company  has  cumulatively spent  more                                                                    
     money than  it has  received on  the project.  When the                                                                    
     curve  (hopefully)  eventually  goes  above  the  axis,                                                                    
     that's  when the  company finally  begins to  receive a                                                                    
     return  on  its investment.  There  can  be no  profits                                                                    
     whatsoever  until  the curve  is  above  the axis.  And                                                                    
     prudent oil or  gas developers will never  begin such a                                                                    
     project  unless they  believe that  it will  eventually                                                                    
     provide  enough future  revenues to  justify the  large                                                                    
     initial expenditures.                                                                                                      
                                                                                                                                
     What is important to note  about this chart is that the                                                                    
     successful development of  a new oil or gas  field is a                                                                    
     very long  process and  requires a lot  of money  to be                                                                    
     spent before any profits can  be generated. You can see                                                                    
     that  the  very  first  stage   is  spending  money  to                                                                    
     explore.  At this  stage, there  is  no assurance  that                                                                    
     anything will  be found. The  only way to know  that an                                                                    
     area will  be productive is  to spend lots of  money to                                                                    
     drill expensive wells,  and then test them  if it looks                                                                    
     like there may be some  potential. The vast majority of                                                                    
     exploration  prospects are,  in fact,  dry holes  - the                                                                    
     money spent  will never be recovered.  Just because you                                                                    
     might drill  a lot of  wells does not  guarantee you're                                                                    
     going to discover anything.                                                                                                
                                                                                                                                
     But  in the  minority situation  where the  exploration                                                                    
     process  is successful,  then the  really huge  cost of                                                                    
     developing  the field  comes into  play. In  many other                                                                    
     basins around the world, producers  can just simply set                                                                    
     up a  tank and  start flowing  a new  oil well  into it                                                                    
     with the  produced gas either  being flared  or venting                                                                    
     into  the  atmosphere.  In  Alaska,  however,  we  have                                                                    
     higher standards. BlueCrest takes  a very strong stance                                                                    
     on safety and protecting  the environment, and it costs                                                                    
     a lot of  money to do it right. Before  we can sell the                                                                    
     first barrel of oil from a  new well, we have to have a                                                                    
     way  to collect  all the  associated gas  and water  to                                                                    
     make  sure   that  nothing  makes  its   way  into  the                                                                    
     atmosphere or the  environment. That means construction                                                                    
     of   drilling   sites  and   sophisticated   production                                                                    
     facilities   with   the   ability  to   safely   handle                                                                    
     everything that comes out of  the wells. So you can see                                                                    
     that,  after the  discoveries have  already been  made,                                                                    
     this curve  starts to go  very negative.  Whenever this                                                                    
     curve goes  lower, it  means that we  have had  to come                                                                    
     out of pocket to put  more investment into the project.                                                                    
     In  our  case  with  developing  the  Cosmopolitan  oil                                                                    
     zones, we expect that we  will have to spend about $525                                                                    
     million dollars before we can  - hopefully - get to the                                                                    
     point that we are  finally generating enough money from                                                                    
     sales of  the oil to  cover the monthly costs.  It will                                                                    
     have taken  decades to get  from the  first exploratory                                                                    
     well to the point where  we don't have to keep spending                                                                    
     more money than we are receiving.                                                                                          
                                                                                                                                
Mr. Johnson continued to address slide 4:                                                                                       
                                                                                                                                
     Now, what  a lot  of people get  confused with  is this                                                                    
     point at  the bottom  of the curve  where it  begins to                                                                    
     turn up for the first  time. That simply means that the                                                                    
     project is finally  paying out more money  on a monthly                                                                    
     basis than  we are putting  into it. But that  DOES NOT                                                                    
     mean  that  any profits  have  been  made or  that  the                                                                    
     project has  broken even. No  profits can  be generated                                                                    
     until the curve  comes all the way back up  to the zero                                                                    
     point. The zero line here  is the break-even point. Or,                                                                    
     in other words,  all of the investments  over time have                                                                    
     been repaid at that point  but no profits have yet been                                                                    
     generated.                                                                                                                 
                                                                                                                                
     To  further complicate  the issue  is that  we have  to                                                                    
     consider   the   fact   that  this   curve   represents                                                                    
     development  of a  successful exploratory  prospect. In                                                                    
     fact,  the  vast  majority (anywhere  from  2/3  to  90                                                                    
     percent) of  exploration projects do not  find economic                                                                    
     oil or  gas. So, for  the industry to survive,  we have                                                                    
     to at least  be able to generate enough  profits on the                                                                    
     successful developments  to pay  for the losses  on the                                                                    
     exploration failures.                                                                                                      
                                                                                                                                
10:20:02 AM                                                                                                                   
                                                                                                                                
Mr. Johnson addressed slide 5:                                                                                                  
                                                                                                                                
     So  let's talk  more  specifically about  Cosmopolitan.                                                                    
     Right now,  we are just  days away from the  very first                                                                    
     commercial  production  of  oil that  will  begin  with                                                                    
     minor production  from one of  the old wells.  Next, we                                                                    
     have to bring  in our new specialized  drilling rig and                                                                    
     start spending  over $40 million  per well to  bring on                                                                    
     the new  production that can  finally start  paying off                                                                    
     the  loans.  And  that  can't   happen  until  we  have                                                                    
     finished   the   drill   sites   and   the   production                                                                    
     facilities, which will occur  mostly in the second half                                                                    
     of this year and the first half of 2017.                                                                                   
                                                                                                                                
     These  photos show  the progress  we have  made so  far                                                                    
     with the onshore Cosmo  production facility after about                                                                    
     two years of construction. The  total site is 38 acres,                                                                    
     and contains  the drill  sites for up  to 20  wells and                                                                    
     the facilities  to process  up to  approximately 10,000                                                                    
     barrels  per  day  of  new  oil  production.  The  site                                                                    
     includes a  50-person camp  for housing  our operations                                                                    
     and  drilling workers,  and  we  are already  connected                                                                    
     into the EnStar gas line for  sales of our gas into the                                                                    
     Southcentral gas supply. We are  also designed to allow                                                                    
     expansion  of   this  facility  as  needed   to  handle                                                                    
     additional  production  increases  in  the  future.  Of                                                                    
     course that's  going to depend  on the  performance and                                                                    
     number  of new  wells that  we  can drill.  We are  now                                                                    
     almost  complete in  our construction  process, and  we                                                                    
     are now running the final  operational tests of all the                                                                    
     components. We  are on schedule for  starting the first                                                                    
     oil production later this month.                                                                                           
                                                                                                                                
Mr. Johnson turned to slide 6:                                                                                                  
                                                                                                                                
     So  let's  look   at  what  the  tax   credits  from  a                                                                    
     successful   development   project  like   Cosmopolitan                                                                    
     actually mean to Alaska. When  the tax credits are used                                                                    
     for development  of new proven  reserves in  the State,                                                                    
     they  are  - without  question  -  a valuable  low-risk                                                                    
     investment.  Speaking of  the credits  as a  cost or  a                                                                    
     "give-away"  completely ignores  the substantial  value                                                                    
     that is  received by  the State.  The tax  credits make                                                                    
     new projects work, and they  bring new sources of long-                                                                    
     term  revenues  to  the  State  for  decades  into  the                                                                    
     future.                                                                                                                    
                                                                                                                                
     At Cosmo, we are sitting  on a large proven resource of                                                                    
     future oil and gas  that now simply requires additional                                                                    
     new  investments to  bring it  to  full production.  On                                                                    
     February  19,  the DOR  provided  its  analysis of  the                                                                    
     financial impact to  the State on development  of a new                                                                    
     Cook  Inlet oil  field,  assuming that  no changes  are                                                                    
     ever  made  to the  existing  tax  laws (including  tax                                                                    
     credits  and  production  tax  rates).  DOR's  analysis                                                                    
     modeled an  example Cook Inlet  field that  is somewhat                                                                    
     more  expensive and  less  productive  than the  actual                                                                    
     Cosmopolitan    oil   development.    So   the    DOR's                                                                    
     calculations are, in fact, conservative.                                                                                   
                                                                                                                                
Mr. Johnson moved to slide 7:                                                                                                   
                                                                                                                                
     This chart  is a  summary of  the calculations  the DOR                                                                    
     provided.  It  includes  a summary  of  the  total  net                                                                    
     benefit  received  by  the  State  and  municipalities,                                                                    
     including  taxes  and  royalties,   as  a  function  of                                                                    
     various  future  oil  prices. It  shows  that,  if  oil                                                                    
     prices over  the entire field  life average  only about                                                                    
     $35 per  barrel, the State  would break-even.  In other                                                                    
     words, the State would receive  back 100 percent of its                                                                    
     investments in the tax  credits (unchanged from current                                                                    
     law for many  years into the future). At  about $47 per                                                                    
     barrel average oil price, the  State would receive back                                                                    
     double  the  amount  of  its   investment  in  the  tax                                                                    
     credits.  And  at  about $59  per  barrel  average  oil                                                                    
     price,  the   State  would  receive  back   triple  its                                                                    
     investment in the tax credits.                                                                                             
                                                                                                                                
Mr. Johnson pointed to slide 8:                                                                                                 
                                                                                                                                
     The DOR  also provided  their calculations  showing the                                                                    
     impact of the tax credits  as a pure investment, with a                                                                    
     head-to-head  comparison  to  the  investments  by  the                                                                    
     Permanent  Fund. According  to the  DOR, the  Permanent                                                                    
     Fund's September  2015 earnings  were 6.15  percent. So                                                                    
     if  an alternative  investment  earned  less than  6.15                                                                    
     percent,  it would  have a  worse performance  than the                                                                    
     average  investments  in  the Permanent  Fund.  On  the                                                                    
     other hand,  if an  alternative investment  earned more                                                                    
     than  6.15 percent,  it would  be  a better  investment                                                                    
     than what the Permanent Fund  had in place in September                                                                    
     2015. This  chart shows  that, even  in the  case where                                                                    
     there are  never any changes  to the tax system  in the                                                                    
     Cook Inlet (that is, all  tax credits stay in place and                                                                    
     there  are no  oil  production taxes  until 2022),  the                                                                    
     State's  investment  in  those   tax  credits  for  the                                                                    
     example  field   is  still  better  than   the  average                                                                    
     investment in the Permanent Fund  as long as oil prices                                                                    
     over the  next 30  years average  only $44  per barrel.                                                                    
     Now  I'd like  to  provide our  additional comments  on                                                                    
     particular portions  of the bill specific  to BlueCrest                                                                    
     and the Cosmopolitan Unit.                                                                                                 
                                                                                                                                
Mr. Johnson addressed slide 9:                                                                                                  
                                                                                                                                
     First  of all,  termination  of the  023(a) and  023(l)                                                                    
     credits would result in a  significant reduction in our                                                                    
     ability  to continue  making investments  in the  Cosmo                                                                    
     oil  wells, resulting  in less  future revenues  to the                                                                    
     State.   The   Governor's  original   bill   completely                                                                    
     eliminated   the   023(l)  (Well   Lease   Expenditure)                                                                    
     credits,  effective  immediately. The  House  Resources                                                                    
     Committee  Substitute temporarily  retained the  023(l)                                                                    
     credit  but effectively  scaled it  down to  20 percent                                                                    
     over two years from the  current 40 percent and reduced                                                                    
     the NOL credit from 25 percent to 10 percent.                                                                              
                                                                                                                                
10:25:22 AM                                                                                                                   
                                                                                                                                
Mr. Johnson discussed slide 10:                                                                                                 
                                                                                                                                
     We've done  some interesting analyses  of the  value to                                                                    
     the  State  in  keeping  both  the  023(a)  and  023(l)                                                                    
     credits  as they  apply to  Cosmopolitan. We  looked at                                                                    
     the effective  return to the  State using a  simple and                                                                    
     conservative    calculation    including    only    the                                                                    
     incremental  royalty for  each single  new Cosmopolitan                                                                    
     oil  well  drilled.  This  calculation  does  not  even                                                                    
     include the  production taxes that would  be paid after                                                                    
     2022  nor does  it include  property taxes.  The bottom                                                                    
     line is that, in periods  of low oil prices, the 023(a)                                                                    
     and 023(l)  credits allow us  to continue  drilling the                                                                    
     Cosmopolitan oil  wells at approximately $10  lower oil                                                                    
     prices than without  the credits. This is  likely to be                                                                    
     an important factor in our 2017 capital program.                                                                           
                                                                                                                                
     This  next   chart  shows  the  calculated   return  on                                                                    
     investment to the State  (including ONLY the royalties)                                                                    
     from the 023(a)  and (l) credits. A  100 percent return                                                                    
     on investment means that 100  percent of the tax credit                                                                    
     would  be repaid  out of  increased royalties  over the                                                                    
     life of  the well at an  average oil price of  only $24                                                                    
     per barrel. At  $40 per barrel, the  total return would                                                                    
     be  about  170 percent,  and  at  $60 per  barrel,  the                                                                    
     return would be about 250  percent. So you can see that                                                                    
     these credits, at  least for Cosmo, are likely  to be a                                                                    
     very good investment for the State.                                                                                        
                                                                                                                                
Mr. Johnson referred to slide 11:                                                                                               
                                                                                                                                
     Another  factor  in the  original  bill  was setting  a                                                                    
     limitation in  the amount  of the  credits that  can be                                                                    
     paid  annually.  While the  CS  provided  for a  larger                                                                    
     limit  (that  probably   would  not  negatively  affect                                                                    
     BlueCrest),   it   still   does   not   recognize   the                                                                    
     differences in qualified  investments made by different                                                                    
     parties.  If  this  limit  is  too  low,  it  would  be                                                                    
     particularly   damaging   to   small   companies   like                                                                    
     BlueCrest  who have  already  invested  in good  faith,                                                                    
     based on  the tax policy  in existence when  we entered                                                                    
     into the  commitments for our  investments. We  came to                                                                    
     Alaska based on the credits.  We invested our cash, and                                                                    
     we  have  borrowed a  lot  of  money and  committed  to                                                                    
     spending a  lot more  - all based  on the  tax credits.                                                                    
     And the  timing of  the receipt  of those  payments for                                                                    
     the credits  is paramount  in our  ability to  make the                                                                    
     payments   on   the   loan  used   for   making   those                                                                    
     investments.                                                                                                               
                                                                                                                                
Mr. Johnson discussed slide 12:                                                                                                 
                                                                                                                                
     Most important of any of  these provisions to BlueCrest                                                                    
     is  the  timing  of   implementation  of  any  changes,                                                                    
     whatever  they  may  be.  It  is  now  April,  and  the                                                                    
     proposed changes in the original  HB247 are supposed to                                                                    
     take place  on July  1. The Committee  Substitute moved                                                                    
     that  date back,  which certainly  helped but  does not                                                                    
     completely solve the problem.                                                                                              
                                                                                                                                
     BlueCrest  has  been  very  careful  in  its  financial                                                                    
     planning  process.  Before  we  ever  started  the  oil                                                                    
     development project,  we made  sure that we  would have                                                                    
     enough funds  to allow us  to complete  construction of                                                                    
     the  onshore drill  site, production  facilities, bring                                                                    
     in the  most powerful  drilling rig  in Alaska,  and to                                                                    
     drill  at  least  the  first  two  new  oil  wells.  We                                                                    
     calculated  that  we   would  need  approximately  $525                                                                    
     million to  reach the point of  self-sufficiency (where                                                                    
     we no  longer have  to keep borrowing  additional money                                                                    
     to put  into the  project). And  we expect  that should                                                                    
     happen  in the  first half  of 2017.  In order  to make                                                                    
     that  work,  our  shareholders  invested  approximately                                                                    
     $200  million in  cash. We  have  borrowed $30  million                                                                    
     from AIDEA for  a loan on the drilling  rig. We secured                                                                    
     a $150 million high-interest  development loan. We have                                                                    
     received $24  million to date  in tax credits.  And the                                                                    
     remaining $121 million was to  come from credits earned                                                                    
     for 2015 and 2016 spending  under the current tax laws.                                                                    
     We have spent a lot of  money to get to the point where                                                                    
     we  can now  start  drilling these  new  wells, but  an                                                                    
     abrupt termination of the tax  credits on which we have                                                                    
     based   our   entire   financial  planning   would   be                                                                    
     devastating.                                                                                                               
                                                                                                                                
     We have finally  reached the point -  by completing all                                                                    
     this  work and  spending all  this money-  to where  we                                                                    
     will  finally have  our  drill site  and  rig ready  to                                                                    
     drill in the second half  of 2016 and the first quarter                                                                    
     of  2017. We  need the  production from  the first  new                                                                    
     wells to pay for the costs  we have spent so far. Those                                                                    
     drilling costs - at least  through early 2017 - are all                                                                    
     based  upon the  assumption  that we  will  be able  to                                                                    
     obtain  the  credits  under   existing  law  for  those                                                                    
     investments. We have  done all this work  and spent all                                                                    
     this money  to date, and  it seems only  reasonable for                                                                    
     us to  be able  to claim the  existing credits  for the                                                                    
     spending that is the result  of our investments made in                                                                    
     good  faith based  on the  expectation  that the  State                                                                    
     would honor  its share of  the investments. We  need to                                                                    
     be able  to be able to  get to the finish  line. If the                                                                    
     date  for  changes in  the  original  bill (just  three                                                                    
     months from now) was reinstated,  we would not have the                                                                    
     full  funding for  finishing the  initial  part of  the                                                                    
     project, although  we have basically  already committed                                                                    
     those  investments. Not  paying the  credits that  were                                                                    
     the  basis  for  the  investments we've  made  is  like                                                                    
     saying "you  can spend the  money for a new  house, but                                                                    
     now you just can't ever move into it."                                                                                     
                                                                                                                                
Mr. Johnson concluded with slide 13:                                                                                            
                                                                                                                                
     In conclusion,  I'd like to reemphasize  the importance                                                                    
     of  phasing-into any  changes  over  a reasonable  time                                                                    
     period. Everyone  in this  room today  understands that                                                                    
     when we  are driving  on slippery  icy roads  (like the                                                                    
     State of  Alaska and Alaska's  oil and gas  industry is                                                                    
     faced with today),  the most dangerous thing  we can do                                                                    
     is suddenly slam on the brakes.                                                                                            
                                                                                                                                
     We  appreciate  your  careful  consideration  of  these                                                                    
     important   issues   that    will   have   far-reaching                                                                    
     implications into Alaska's future.                                                                                         
                                                                                                                                
10:32:21 AM                                                                                                                   
                                                                                                                                
Representative Wilson wondered  if the presentation referred                                                                    
to the change in tax credits or the payment in cash.                                                                            
                                                                                                                                
Mr.  Johnson replied  he was  referring to  payments of  the                                                                    
credits  earned to  date; and  also what  his company  would                                                                    
earn  through  the  end  of  the year  and  into  early  the                                                                    
following year.  He stressed that the  investments were made                                                                    
based  upon the  current  law. He  stated  that the  company                                                                    
would  later decide  to invest,  based  on the  law at  that                                                                    
point.                                                                                                                          
                                                                                                                                
Representative  Wilson stressed  that the  law had  not been                                                                    
changed. She  was tired  of hearing that  the state  was not                                                                    
honoring its  commitments because  it was untrue.  She asked                                                                    
how a  delay of payment  for one  to two years  would impact                                                                    
the company's development.                                                                                                      
                                                                                                                                
Mr. Johnson  replied that  it would have  a major  impact on                                                                    
the company. He understood that  the law did not require the                                                                    
payment, but it had been the state's practice.                                                                                  
                                                                                                                                
Representative  Wilson asked  if $121  million was  what the                                                                    
company  believed it  was owed  by  the end  of the  current                                                                    
year.                                                                                                                           
                                                                                                                                
Mr. Johnson answered in the affirmative.                                                                                        
                                                                                                                                
Representative  Gara spoke  to  the primary  purpose of  the                                                                    
Cook  Inlet  tax credits  was  to  bring  gas to  the  local                                                                    
region, but  the credits were  paid for oil. He  queried the                                                                    
position of  Mr. Johnson, should  the state decide to  put a                                                                    
fair production tax on the oil in Cook Inlet.                                                                                   
                                                                                                                                
Mr.  Johnson replied  that if  there was  a tax  on oil  the                                                                    
company would pay  it and would have to include  the cost in                                                                    
its future plan.                                                                                                                
                                                                                                                                
Representative Gara  stated that  legislators found  it hard                                                                    
to believe  that no one was  aware of the limit  required to                                                                    
pay on  tax credits, based  on the amount of  production tax                                                                    
in  a given  year.  He  noted a  debate  about limiting  the                                                                    
payments to  statutory amounts in  2015. He wondered  if Mr.                                                                    
Johnson made the investments in  2016, with the knowledge of                                                                    
the payment limits.                                                                                                             
                                                                                                                                
Mr. Johnson  replied that the  company had committed  to the                                                                    
work prior to the governor's  veto. The company would adjust                                                                    
to the situation, but it  was important to receive the funds                                                                    
over the next year or two.                                                                                                      
                                                                                                                                
10:38:25 AM                                                                                                                   
                                                                                                                                
MATT BLOCK,  GENERAL COUNSEL, AHTNA, introduced  himself. He                                                                    
stressed that  the tax  credit program  was critical  to the                                                                    
company.  He  introduced  a PowerPoint  presentation  titled                                                                    
"Frontier Basins Tax  Credits" dated April 4,  2016 (copy on                                                                    
file). He  explained that  the company  would not  be moving                                                                    
forward without the tax credits.                                                                                                
                                                                                                                                
CHRIS COOK, DIRECTOR OF FINANCE, AHTNA, shared that the                                                                         
company was using the credits for risk mitigation. He moved                                                                     
to slide 2 titled "Frontier Basins Experience"                                                                                  
                                                                                                                                
   · AS.43.55.025(a)(6)  & (7)  originally  created in  2012                                                                    
     under HB 276 and merged with SB23                                                                                          
   · Intent   of  Legislature   -incentivize  oil   and  gas                                                                    
     exploration in under explored Basins                                                                                       
   · Reduce the  risk of development  of local  rural energy                                                                    
     to Alaskans                                                                                                                
   · Create local energy source for rural residents                                                                             
   · Reduce or  eliminate the Power Cost  Equalization (PCE)                                                                    
     subsidies                                                                                                                  
                                                                                                                                
Mr. Cook addressed slide 3:                                                                                                     
                                                                                                                                
   · AS  43.55.025(a)(6) -The  first  two exploration  wells                                                                    
     drilled inside each of the six Frontier Basins                                                                             
     receives 80 percent credit or up to $25M of qualified                                                                      
     expenditures                                                                                                               
   · AS   43.55.025(a)(7)   -The   first   seismic   project                                                                    
     performed inside each of the six Frontier Basins                                                                           
     receives 75 percent credit up to $7.5M of qualified                                                                        
     expenditures                                                                                                               
   · Ahtna  would not  consider  any exploration  activities                                                                    
     without tax credits                                                                                                        
                                                                                                                                
Mr. Cook addressed specific Frontier Basin regulations on                                                                       
slide 4:                                                                                                                        
                                                                                                                                
   · ADNR-DOG  pre-qualification  approval for  seismic  and                                                                    
     well                                                                                                                       
   · Various well depth and set back from previous wells                                                                        
  · Submission of all data to ADNR prior to credit award                                                                        
   · Public data disclosure of all data after 2 years                                                                           
   · Must provide energy source for rural energy needs!                                                                         
   · The  AS.43.55.025(a)(6)  &  (7)  tax  credits  are  not                                                                    
     eligible for stacking                                                                                                      
                                                                                                                                
Mr. Cook addressed Ahtna's exploration program history on                                                                       
slide 5:                                                                                                                        
                                                                                                                                
  · April 2012 Ahtna applies for SOA Exploration License                                                                        
   · May 2012 Legislature approves SB 23                                                                                        
   · December  2013   Ahtna  receives   Tolsona  Exploration                                                                    
     License                                                                                                                    
   · June 2014  receive ADNR  Commissioner pre-qualification                                                                    
     approval for seismic                                                                                                       
   · December  2014 completes  40-miles of  2D seismic  over                                                                    
     exploration area                                                                                                           
   · April  2015  completed  reprocessing  of  seismic  data                                                                    
    identifying 12-sq. mile potential oil and gas trap                                                                          
   · May 2015 submit seismic data to ADNR-DOG                                                                                   
   · September   2015   receive   ADNR   Commissioner   pre-                                                                    
     qualification approval of new well                                                                                         
   · February 2016 -majority of permits approved                                                                                
   · March  2016 final  stages of  new well  engineering and                                                                    
     design                                                                                                                     
                                                                                                                                
10:44:19 AM                                                                                                                   
                                                                                                                                
Mr. Cook looked at a map of the Copper River Basin on slide                                                                     
6:                                                                                                                              
                                                                                                                                
  · Proposed Tolsona well depth of 4,500' Vertical hole.                                                                        
   · Targeted structure is the Nelchina sandstone.                                                                              
   · 11 wells drilled in the basin since 1960's.                                                                                
   · Most recent well -drilled by Rutter in 2005-2008.                                                                          
  · Natural gas shows (approximately 94 percent methane).                                                                       
   · Tolsona  number  1 potential  for  a  great local  fuel                                                                    
     source.                                                                                                                    
                                                                                                                                
Mr. Cook addressed the purpose and need for gas in the                                                                          
Copper River Basin on slide 7:                                                                                                  
                                                                                                                                
   ...To conduct exploration  within the  license area  on a                                                                    
   single natural gas well,  Tolsona #1, with  the potential                                                                    
   to develop  natural gas  production  for distribution  to                                                                    
   local residents and electric utilities...                                                                                    
                                                                                                                                
   Community and Economic Development Benefits:                                                                                 
   · Potential Opportunities for Local Employment                                                                               
   · Economic Benefits, Expanding Local Business                                                                                
   · Lowering High Energy Cost for Our Rural Economy                                                                            
   · Reducing Out-migration                                                                                                     
   · Building Infrastructure in the Region                                                                                      
                                                                                                                                
Mr.  Cook  turned  to  slide   10  related  to  the  project                                                                    
schedule. He concluded with slide 11:                                                                                           
                                                                                                                                
   · Our Request: It is critical to our project that the                                                                        
     Frontier  Basin AS  43.55.025(a)(6) &  (7) credits  are                                                                    
     extended  from  June  30th2016 to  a  future  date,  we                                                                    
     recommend   2022   to   coincide  with   other   credit                                                                    
     expiration dates.                                                                                                          
                                                                                                                                
        o This will greatly help the Tolsona Project that                                                                       
          is under way with a committed investment and a                                                                        
          very tight schedule.                                                                                                  
                                                                                                                                
   · Ahtna also supports the AS 43.55.023 and 025(a)(1-4)                                                                       
     Middle Earth  tax credits  to be kept  in place,  as an                                                                    
     incentive  to   the  Frontier  Basin   exploration  and                                                                    
     development  efforts by  explorers who  have taken  the                                                                    
     risk   and   committed   investment  based   on   these                                                                    
     incentives.                                                                                                                
                                                                                                                                
Representative Wilson pointed to  the timetable on slide 10.                                                                    
She queried  the extension  to 2020.  She wondered  if there                                                                    
were other targets not included in the chart.                                                                                   
                                                                                                                                
Mr. Cook replied  in the affirmative and  relayed that there                                                                    
were additional targets.                                                                                                        
                                                                                                                                
Representative Wilson queried the  type of resource provided                                                                    
by his company.                                                                                                                 
                                                                                                                                
Mr. Cook answered that it would be commercial gas.                                                                              
                                                                                                                                
Representative Gara  stated that most of  the companies were                                                                    
paying no  production taxes  to the state.  He asked  if the                                                                    
company paid a production tax.                                                                                                  
                                                                                                                                
Mr.  Cook   was  unclear  and  believed   the  company  paid                                                                    
production taxes. He would follow up.                                                                                           
                                                                                                                                
Co-Chair  Thompson relayed  that there  was a  provision for                                                                    
production tax.                                                                                                                 
                                                                                                                                
Vice-Chair  Saddler  asked  if   there  was  any  formal  or                                                                    
informal  understanding   of  who  would  be   the  ultimate                                                                    
purchaser of the gas.                                                                                                           
                                                                                                                                
Mr. Cook answered  that the company did  not have commercial                                                                    
commitments in place. The plan  was to provide the resource,                                                                    
and  to  evaluate  whether  there  was  enough  resource  to                                                                    
provide for the  local community. He stated  that the intent                                                                    
of the well was to provide energy for the local community.                                                                      
                                                                                                                                
HB 247 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Thompson discussed the schedule for the following                                                                      
meeting.                                                                                                                        
                                                                                                                                

Document Name Date/Time Subjects
HB 247 2016.04.04 - Great Bear - House Finance Testimony - Final.pdf HFIN 4/4/2016 8:30:00 AM
HB 247
HB 247 Ahtna House Finance Committee 4 4 2016_FINAL.pdf HFIN 4/4/2016 8:30:00 AM
HB 247
HB 247 04-01-2016 V3 Draft BlueCrest testimony to House Finance 04-04-16.pdf HFIN 4/4/2016 8:30:00 AM
HB 247
HB 247 BlueCrest Testimony Slides 04-04-2016 Final.pdf HFIN 4/4/2016 8:30:00 AM
HB 247
HB 247-Weissler Comments.pdf HFIN 4/4/2016 8:30:00 AM
HB 247