Legislature(2021 - 2022)ADAMS 519

03/03/2021 01:30 PM FINANCE

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01:34:15 PM Start
01:35:31 PM Presentation: Order of Operations by the Department of Revenue
03:00:46 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Order of Operations by TELECONFERENCED
- Dept. of Revenue
- Dan Stickel, Chief Economist, Economic Research
Group, Tax Div.
<Bill Hearing Canceled>
<Bill Hearing Canceled>
+ Presentation: FY 21 Supplemental Budget by TELECONFERENCED
- Office of Management & Budget
- Neil Steininger, Director, Office of the
<Above Item Removed from Agenda>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       March 3, 2021                                                                                            
                         1:34 p.m.                                                                                              
1:34:15 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 1:34 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Kelly Merrick, Co-Chair                                                                                          
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Bryce Edgmon                                                                                                     
Representative DeLena Johnson                                                                                                   
Representative Andy Josephson                                                                                                   
Representative Bart LeBon                                                                                                       
Representative Sara Rasmussen (via teleconference)                                                                              
Representative Steve Thompson                                                                                                   
Representative Adam Wool                                                                                                        
MEMBERS ABSENT                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
Dan Stickel, Chief Economist, Economic Research Group, Tax                                                                      
Division, Department of Revenue; Colleen Glover, Director,                                                                      
Tax Division, Department of Revenue.                                                                                            
PRESENTATION: ORDER OF OPERATIONS BY THE DEPARTMENT OF                                                                          
Co-Chair Foster reviewed the meeting agenda. He remarked                                                                        
that the presentation was not meant to spur an oil tax                                                                          
policy debate.                                                                                                                  
^PRESENTATION:  ORDER OF  OPERATIONS  BY  THE DEPARTMENT  OF                                                                  
1:35:31 PM                                                                                                                    
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT   OF  REVENUE   (via  teleconference),                                                                    
provided   a  PowerPoint   presentation  titled   "Order  of                                                                    
Operations  Presentation:  House Finance  Committee,"  dated                                                                    
March 3, 2021 (copy on file).                                                                                                   
Co-Chair Foster  observed that  the PowerPoint  was complex,                                                                    
and  the  committee  would  take  questions  throughout  the                                                                    
presentation. He asked committee  members to be cognizant of                                                                    
the time.                                                                                                                       
1:36:41 PM                                                                                                                    
Mr. Stickel shared that the  purpose of the presentation was                                                                    
to present  a high-level  overview of  how Alaska's  oil and                                                                    
gas  production tax  worked for  the North  Slope. He  noted                                                                    
that  the  discussion  was  likely   a  refresher  for  some                                                                    
committee members,  but the  hope was  to help  viewers less                                                                    
familiar  with oil  taxes to  better understand  the current                                                                    
system.  He moved  to slide  2  showing a  list of  acronyms                                                                    
pertaining to the  oil and gas industry. He  shared that the                                                                    
industry and tax  system tended to have a lot  of jargon and                                                                    
he  would try  to minimize  them  as much  as possible.  The                                                                    
slide acted as a reference of terms.                                                                                            
Mr. Stickel turned to slide  3 and reviewed the presentation                                                                    
agenda. He noted  that the presentation was  not intended to                                                                    
talk  about policy,  but  to  make sure  there  was a  solid                                                                    
understanding  of how  the existing  tax  system worked  for                                                                    
North  Slope oil.  He would  begin by  reviewing all  of the                                                                    
sources for oil and gas revenue  to the state, followed by a                                                                    
detailed  explanation of  each  step of  the production  tax                                                                    
calculation. The  presentation would look  at FY 22  per the                                                                    
fall 2020 forecast.  The end of the  presentation included a                                                                    
five-year overview from FY 19 to FY 23.                                                                                         
1:38:51 PM                                                                                                                    
Mr. Stickel  turned to  a disclaimer on  slide 4.  He shared                                                                    
that  the analysis  was attempting  to break  a complex  tax                                                                    
system down  into understandable pieces. He  elaborated that                                                                    
the  analysis   was  based  on   aggregated  data   and  the                                                                    
Department  of  Revenue  (DOR) fall  forecast  estimates  of                                                                    
various items in  the tax calculation. He  clarified that he                                                                    
was  an economist,  not an  auditor; therefore,  anything he                                                                    
said   was  not   an   official   tax  interpretation.   The                                                                    
presentation  was  a  review  of  the  revenue  forecast  to                                                                    
illustrate the tax calculation.                                                                                                 
Mr. Stickel advanced to slide  5 titled "Oil and Gas Revenue                                                                    
Sources." He  highlighted that Alaska  received oil  and gas                                                                    
revenue from four primary  sources [state royalty, corporate                                                                    
income  tax,  property  tax,   and  production  tax].  State                                                                    
royalty  was received  for any  production from  state land.                                                                    
Alaska also received  a share of royalty  from production on                                                                    
federal land.  Corporate income tax  was based  on worldwide                                                                    
income  apportioned to  Alaska, which  applied to  many, but                                                                    
not all  of the companies  operating in the  state. Property                                                                    
tax  applied  to all  property  anywhere  in the  state  and                                                                    
within the state's three-mile limit.  Production tax was the                                                                    
severance  tax  on  Alaska's  oil and  gas.  He  noted  that                                                                    
production  tax  also  applied to  all  production  anywhere                                                                    
within  the state  and within  the state's  three-mile limit                                                                    
Mr.  Stickel  added  that  with  a  couple  of  the  revenue                                                                    
sources, royalty  in particular, not  all oil was  the same.                                                                    
He relayed there was a slide  at the end of the presentation                                                                    
focused on how production  from different categories of land                                                                    
was treated for revenue purposes.                                                                                               
1:40:38 PM                                                                                                                    
Mr. Stickel moved to a table  on slide 6 showing a five-year                                                                    
comparison  of  state  revenue  from  oil  and  gas  revenue                                                                    
sources from FY 19 to FY  23. He noted that the property tax                                                                    
reflected on  the slide represented  the state's  share only                                                                    
(an   additional   amount   of    property   tax   went   to                                                                    
municipalities  including  the  North  Slope  Borough).  The                                                                    
corporate income  tax applied only  to C  corporations under                                                                    
federal tax  law. There were  some temporary impacts  to the                                                                    
corporate income tax  in FY 20 through FY 22  that had to do                                                                    
with the federal tax law  changes in the federal Coronavirus                                                                    
Aid, Relief, and Economic Security  (CARES) Act discussed in                                                                    
the DOR fall forecast presentation several weeks earlier.                                                                       
Representative Wool  referenced corporate  income tax  and C                                                                    
corporations.  He remarked  that BP  had  been sold  as a  C                                                                    
corporation  to  Hilcorp, which  was  an  S corporation.  He                                                                    
asked if Hilcorp  was the only notable S  corporation in the                                                                    
oil production  world. He  asked if  there were  other small                                                                    
corporations that were not at the forefront like Hilcorp.                                                                       
Mr. Stickel answered that the  department could not speak to                                                                    
whether any  specific company was  a taxpayer or  what their                                                                    
corporate status was due  to taxpayer confidentiality rules.                                                                    
He relayed that  there were multiple producers  in the state                                                                    
that  were  not  C  corporations and  would  be  passthrough                                                                    
entities. Those  producers represented  about 30  percent of                                                                    
the total oil and gas production in Alaska.                                                                                     
Representative Wool  asked for verification that  all of the                                                                    
S  corporations   accounted  for  30  percent   of  the  oil                                                                    
production  on  the  North  Slope.   He  believed  that  Mr.                                                                    
Stickel's  statements  meant  there  was  more  than  one  S                                                                    
corporation.  He  understood  that  Mr.  Stickel  would  not                                                                    
disclose  confidential information.  He noted  that some  of                                                                    
the companies were common knowledge.                                                                                            
Mr.  Stickel  clarified  that  the  30  percent  represented                                                                    
production  from  companies that  were  not  subject to  the                                                                    
corporate   income  tax.   The  group   encompassed  various                                                                    
passthrough   entities   including    S   corporations   and                                                                    
Mr. Stickel continued to review  a table showing a five-year                                                                    
comparison  of state  revenue  on slide  6.  The third  line                                                                    
showed production  tax, which was  the focus of most  of the                                                                    
presentation. The fourth line  showed state royalties, which                                                                    
included  royalty revenue  in addition  to related  bonuses,                                                                    
rents, and interest. The table  reflected total royalties to                                                                    
the state,  which included the  share of royalties  going to                                                                    
the  Permanent Fund  and school  fund  [Public School  Trust                                                                    
Fund]. The  fifth line showed Constitutional  Budget Reserve                                                                    
(CBR)  Fund settlements,  based on  assessments or  disputes                                                                    
regarding  any prior  year production  tax royalty  or other                                                                    
oil and gas  taxes; the funds were deposited to  the CBR per                                                                    
the state constitution. The last  oil and gas revenue source                                                                    
was  shared  revenue  from the  Natural  Petroleum  Reserve-                                                                    
Alaska (NPRA).  He detailed  that 50 percent  of any  of the                                                                    
federal  royalties  and  related  revenues  from  NPRA  were                                                                    
shared  back  to the  state.  He  noted there  were  special                                                                    
provisions outlining  how the  funds could  be spent  by the                                                                    
state. He  added that revenue  from the NPRA  was relatively                                                                    
small currently;  however, as new developments  came online,                                                                    
it was expected to become  a larger revenue source in future                                                                    
1:45:09 PM                                                                                                                    
Mr. Stickel addressed the fiscal  system order of operations                                                                    
on slide  7 as follows: royalties,  property tax, production                                                                    
tax,  state  corporate  income tax,  and  federal  corporate                                                                    
income  tax. Royalties  were  first and  were  based on  the                                                                    
ownership of the land. He  detailed that landowners received                                                                    
their share  of the  resource off the  top before  any taxes                                                                    
were applied.  Property tax  came second  - state  and local                                                                    
property  taxes  were  considered  lease  expenditures  that                                                                    
could  be applied  against  production  tax. Production  tax                                                                    
came  after   royalties  were  subtracted  and   it  allowed                                                                    
property  tax as  a deduction.  State  corporate income  tax                                                                    
used  worldwide income  as part  of the  tax base.  He noted                                                                    
that property  tax and production  taxes were  excluded from                                                                    
the  state  income  tax base.  Last  was  federal  corporate                                                                    
income  tax, which  allowed all  state  taxes including  the                                                                    
state corporate income tax, to  be deducted when calculating                                                                    
the federal corporate income tax.                                                                                               
Representative Johnson  asked if  there would be  a separate                                                                    
overview on  royalties and deductions  that were  taken from                                                                    
the state's royalty share.                                                                                                      
Co-Chair  Foster asked  Mr. Stickel  if the  information was                                                                    
included in the presentation.                                                                                                   
Mr.  Stickel   answered  that  the  focus   of  the  current                                                                    
presentation was on  production tax. The purpose  of slide 7                                                                    
was to put  production tax in context. He  believed in prior                                                                    
years  the   Department  of  Natural  Resources   (DNR)  had                                                                    
provided a  similar overview  presentation on  royalties. He                                                                    
deferred to DNR on the royalty calculation.                                                                                     
1:47:20 PM                                                                                                                    
Mr.  Stickel moved  to a  table showing  the production  tax                                                                    
order  of operations  for  FY  22 on  slide  8.  Due to  the                                                                    
abundance of information in the  table, there were a handful                                                                    
of slides  on the  topic [slides 8  through 13].  He relayed                                                                    
the table  was based on  the income statement in  Appendix E                                                                    
of  the DOR  Revenue Sources  Book. He  began with  the fall                                                                    
forecast  average  oil  price  of $48  per  barrel  and  the                                                                    
forecasted daily production of  439,600 barrels to calculate                                                                    
the annual  barrels and the  dollar value of  production. He                                                                    
reported that  the focus for  the next several  slides would                                                                    
be on the total annual value  of $7.7 billion and how it was                                                                    
split and taxed. He pointed  out that the information was an                                                                    
aggregation  of  the tax  calculation  for  the North  Slope                                                                    
only.  He  noted that  the  North  Slope accounted  for  the                                                                    
largest portion of the production tax revenue.                                                                                  
Mr. Stickel  reviewed the income  statement on slide  9. The                                                                    
first  step was  calculating  taxable  barrels. He  detailed                                                                    
that any  royalty barrels were subtracted  regardless of the                                                                    
ownership of  the barrels. Typical  royalty rates  were one-                                                                    
eighth  (12.5  percent)  or one-sixth  (16.67  percent).  He                                                                    
noted that rates  varied by field. Federal  and private land                                                                    
royalty  was subtracted  in addition  to state  royalty. The                                                                    
adjustment  also subtracted  any production  not subject  to                                                                    
tax  located  in  federal waters,  which  included  a  small                                                                    
portion of  North Star production  and fields  like Liberty.                                                                    
The department  was estimating  141 million  taxable barrels                                                                    
for a total taxable value of $6.8 billion.                                                                                      
Representative Wool  looked at  the total  annual production                                                                    
value highlighted  on slide 9.  He stated  his understanding                                                                    
that  royalty  value had  been  deducted.  He did  not  know                                                                    
whether  the  slide  showed a  deduction  of  one-eighth  or                                                                    
other.  He  surmised that  royalty  was  deducted because  a                                                                    
certain  percentage  of the  oil  produced  belonged to  the                                                                    
state  and   was  calculated  in   barrels.  He   asked  for                                                                    
verification that the barrels  were converted to dollars and                                                                    
the value  of the oil was  deducted from the $48  per barrel                                                                    
price  to  arrive  at  a   price  of  $38.  He  thought  the                                                                    
calculation  reverse  engineered  the  price  based  on  the                                                                    
deduction of barrels paid in royalty.                                                                                           
1:50:38 PM                                                                                                                    
Mr.  Stickel  reiterated  that the  calculation  of  taxable                                                                    
barrels began with the total  annual production estimated at                                                                    
160 million barrels; of the  total, DOR estimated 19 million                                                                    
barrels would  be royalty [and federal]  barrels, which were                                                                    
not  subject  to  production   tax.  The  resulting  taxable                                                                    
barrels  came out  to 141  million. Given  an estimated  oil                                                                    
price of  $48 per barrel,  the total value was  estimated at                                                                    
$6.8 billion. He  noted that the calculation  was limited to                                                                    
determining the tax base for the production tax.                                                                                
Mr. Stickel turned to slide  10 and reviewed the calculation                                                                    
for  the  gross value  at  point  of production  (GVPP).  He                                                                    
shared that the  term was used widely in  production tax and                                                                    
royalty and was  also know as the wellhead value.  To get to                                                                    
the  GVPP,  transportation  costs  (also  known  as  netback                                                                    
costs) were  subtracted. He  began with  the sales  price at                                                                    
market of  $48 per barrel and  subtracted the transportation                                                                    
cost to  determine the  wellhead value.  The $48  per barrel                                                                    
price was  at the West  Coast at major destinations  of Long                                                                    
Beach,  CA  and  Anacortes,  WA. He  explained  that  marine                                                                    
tanker  costs, Trans-Alaska  Pipeline System  (TAPS) tariff,                                                                    
any   feeder  pipeline   tariffs,   and  other   [inaudible]                                                                    
adjustments were  subtracted from  the per barrel  price. In                                                                    
FY 22, transportation  costs of just under  $10 [per barrel]                                                                    
resulted in an average GVPP  of $38.09 per barrel. The total                                                                    
worked out to $5.4 billion GVPP.                                                                                                
1:53:28 PM                                                                                                                    
Mr. Stickel turned  to slide 11, which began  the process of                                                                    
getting to the production tax  value. The production tax was                                                                    
essentially a  modified net profits  tax. He  explained that                                                                    
companies  were   able  to  deduct  capital   and  operating                                                                    
expenditures   when   calculating   their  tax   base.   The                                                                    
department  used Internal  Revenue Service  (IRS) guidelines                                                                    
to  define what  constituted  a  capital expense.  Companies                                                                    
were  not required  to use  any depreciation  for production                                                                    
tax;  companies  received  an  immediate  deduction  of  all                                                                    
capital costs  in the year incurred.  Operating expenditures                                                                    
were  any  allowable  expenditures other  than  the  capital                                                                    
expenditures.  Generally,   operating  costs   included  the                                                                    
ongoing costs of operations and labor.                                                                                          
Mr. Stickel  highlighted the terms allowable  and deductible                                                                    
lease  expenditures. Allowable  lease expenditures  included                                                                    
any cost of  a unit directly associated  with producing oil.                                                                    
He  noted  that  not  everything   was  allowable,  such  as                                                                    
financing costs, lease  acquisition costs, litigation costs,                                                                    
dismantlement, removal,  restoration, and  other. Deductible                                                                    
lease expenditure  was a  term of art  developed by  DOR for                                                                    
presentation purposes. He  noted that the term  was not part                                                                    
of any statute or  regulation. Deductible lease expenditures                                                                    
were the  portion of allowable lease  expenditures that were                                                                    
applied in the  tax calculation in the year  incurred, up to                                                                    
the  gross  value.  He clarified  that  nondeductible  lease                                                                    
expenditures  included any  allowable expenditures  beyond a                                                                    
company's   gross  value,   which  could   be  turned   into                                                                    
carryforwards  that  could  be potentially  used  to  offset                                                                    
production taxes in future years.                                                                                               
1:55:37 PM                                                                                                                    
Representative  Josephson looked  at slide  11. He  recalled                                                                    
that  in   HB  111  several  years   back,  the  legislature                                                                    
effectively  said  that  if  a  company  had  operating  and                                                                    
capital expenditures and no production,  it could deduct the                                                                    
expenditures  against  future  production for  a  period  of                                                                    
seven to  ten years. He  remarked that a company  would need                                                                    
to  be  fairly  confident  that it  would  begin  production                                                                    
relatively soon or it may be  stuck with the costs. He asked                                                                    
if his statements were accurate.                                                                                                
Mr. Stickel  replied in the  affirmative. He  explained that                                                                    
the situation  described by  Representative Josephson  was a                                                                    
nuance   of   the   carryforward  lease   expenditures.   He                                                                    
elaborated that  if a company earned  the carryforward lease                                                                    
expenditures, the  expenditures began  to decrease  in value                                                                    
beginning  in  the  eighth  or  eleventh  year  after  being                                                                    
Representative Josephson  stated that one of  the impacts of                                                                    
the reform was  that companies needed to  have confidence in                                                                    
their production plan and have good geologists.                                                                                 
Mr.  Stickel responded  that before  HB 111,  a company  had                                                                    
been able to  get a credit for lease  expenditures that were                                                                    
not applicable  against a tax  liability. He  explained that                                                                    
the credit  could in some ways  be cashed out by  the state.                                                                    
The   current  system   gave   companies   the  ability   to                                                                    
carryforward  lease  expenditures.  Depending on  whether  a                                                                    
company had  a future tax  liability, it  may or may  not be                                                                    
able  to receive  the  full value  of  the carryforward.  He                                                                    
stated  that the  system impacted  decision  making and  the                                                                    
economics of making investments.                                                                                                
Vice-Chair  Ortiz looked  at  the downstream  transportation                                                                    
costs category on  slide 11. He asked if  the amount varied.                                                                    
He believed  the number  reflected a  percentage of  the per                                                                    
barrel value.  He wondered if  any other factors  caused the                                                                    
transportation figure to change.                                                                                                
1:59:21 PM                                                                                                                    
Mr.  Stickel  replied  that  there  were  several  important                                                                    
variables  impacting  transportation  costs over  time.  One                                                                    
variable was  the overall level  of production.  Specific to                                                                    
TAPS, more production going through  the pipeline meant that                                                                    
fixed  operations  costs  were distributed  over  a  greater                                                                    
number  of  barrels,  which resulted  in  lower  per  barrel                                                                    
costs. He  relayed there was a  transportation cost variance                                                                    
between the different fields. He  expounded that some fields                                                                    
had feeder pipelines  and tariffs were paid  on those lines,                                                                    
whereas Prudhoe Bay  did not have a feeder  pipeline and oil                                                                    
went directly into TAPS.                                                                                                        
Representative  Wool  looked  at  the  deductible  operating                                                                    
expenditures   of  $2.3   billion  and   deductible  capital                                                                    
expenditures of $2  billion under the value  column on slide                                                                    
11. He  surmised that the  calculation included  dividing by                                                                    
the number  of barrels to  get the per  barrel expenditures.                                                                    
He  asked  for verification  that  no  one calculated  their                                                                    
expenditures per barrel initially.                                                                                              
Mr. Stickel replied in the affirmative.                                                                                         
Representative Wool  referenced Vice-Chair  Ortiz's question                                                                    
on transportation  [costs]. He remarked  that transportation                                                                    
costs depended on production because  the more oil produced,                                                                    
the cheaper  it was to move  per barrel. He wondered  if the                                                                    
value  of  the  pipeline  was used  as  a  production  cost,                                                                    
whether the  cost diminished over time  because the pipeline                                                                    
had been paid for "a few  times over." He wondered if it was                                                                    
cheaper to  move oil through  the pipeline over  time, aside                                                                    
from maintenance costs.                                                                                                         
2:01:49 PM                                                                                                                    
Mr. Stickel deferred the question  to a colleague. He stated                                                                    
the department could follow up.                                                                                                 
COLLEEN  GLOVER,  DIRECTOR,   TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE  (via teleconference),  replied that  common carrier                                                                    
pipelines were  regulated by federal and  state governments.                                                                    
There were  specific provisions on what  the pipelines could                                                                    
charge. She explained that a  cost of service model was used                                                                    
to recoup cost  and return on investment.  The return amount                                                                    
varied over time.  She stated that it was a  function of the                                                                    
cost  it  took  to  run  a pipeline  and  the  [oil]  volume                                                                    
traveling through.                                                                                                              
Representative  Thompson recalled  that  several years  back                                                                    
there  had  been  a  conversation  about  the  deduction  of                                                                    
capital or  operating expenses. He  believed there  may have                                                                    
been a move for worldwide  companies to try out new drilling                                                                    
methods or  ways to  extract more oil  from sands  in Alaska                                                                    
because they  could deduct all  of the costs from  taxes and                                                                    
production.  He asked  if he  was remembering  the situation                                                                    
Mr. Stickel  answered that Alaska  had been  through several                                                                    
oil tax  debates and there  had been discussion  in previous                                                                    
debates about  the motivations behind  some of  the spending                                                                    
that took  place. He communicated  that he would  prefer not                                                                    
to rehash the debate during  the current meeting if it could                                                                    
be avoided.                                                                                                                     
2:04:35 PM                                                                                                                    
Mr. Stickel addressed the production  tax value (PTV), which                                                                    
was  the tax  base for  the  production tax  (slide 12).  He                                                                    
detailed  that   the  PTV   is  calculated   by  subtracting                                                                    
deductible lease  expenditures from  the GVPP.  He explained                                                                    
that PTV  reflected the  net profit on  the North  Slope. He                                                                    
informed the committee that each  company calculated its PTV                                                                    
based  on all  of its  North Slope  activity, including  all                                                                    
fields   and   any   new  developments   the   company   was                                                                    
Mr.  Steininger advanced  to slide  13  and explained  there                                                                    
were two parallel calculations done  and the final tax ended                                                                    
up being  the higher  of the  two. In  addition to  the PTV,                                                                    
there  was a  tax calculation  of a  minimum tax  floor. The                                                                    
minimum floor  was 4  percent of GVPP  when oil  prices were                                                                    
greater than  $25 per barrel  for the year. He  relayed that                                                                    
if  oil prices  averaged less  than $25  per barrel  for one                                                                    
year, the minimum  tax rate would decrease  below 4 percent.                                                                    
For  FY 22,  the department  was forecasting  a minimum  tax                                                                    
rate of 4  percent applied to the GVPP of  $5.4 billion, for                                                                    
a total minimum tax floor of about $215.5 million.                                                                              
2:06:49 PM                                                                                                                    
Representative   Wool  asked   about  the   $74.5  [million]                                                                    
deduction in the net tax.                                                                                                       
Mr.  Stickel   answered  that   he  would   provide  further                                                                    
information in the upcoming slides.  He explained that slide                                                                    
13  focused  on the  two  side-by-side  calculations of  the                                                                    
minimum tax floor  and the net profits tax.  He would review                                                                    
both calculations.                                                                                                              
Mr.  Stickel   turned  to  slide  14   titled  "Gross  Value                                                                    
Reduction."  He explained  that  the  gross value  reduction                                                                    
(GVR) was an incentive for  new development that was enacted                                                                    
as  part  of   the  SB  21  (oil  and   gas  production  tax                                                                    
legislation  passed  in  2013).  The  GVR  was  a  temporary                                                                    
benefit used to refer to  oil from qualifying new fields. He                                                                    
detailed  that   the  GVR  expired  after   seven  years  of                                                                    
production or any three years  where oil prices exceeded $70                                                                    
per barrel.  The GVR allowed a  company to exclude 20  or 30                                                                    
percent of the  gross value from the  qualifying fields when                                                                    
calculating its production tax value,  which reduced the net                                                                    
tax calculation for  the fields. The 20 percent  was for new                                                                    
fields and the  30 percent applied if a  field was comprised                                                                    
exclusively of  state issued leases  with greater  than 12.5                                                                    
percent royalty.                                                                                                                
Mr.  Stickel continued  to review  the GVR  on slide  14. He                                                                    
stated  that another  wrinkle related  to the  GVR was  that                                                                    
eligible  production  received  a  flat  $5  per  barrel  of                                                                    
taxable production credit  that could be used  to reduce tax                                                                    
below the minimum tax for any  companies that did not take a                                                                    
sliding  scale  credit.  He would  address  the  distinction                                                                    
between the per barrel credits in several slides.                                                                               
Vice-Chair Ortiz  referred to slide  13 and the  minimum tax                                                                    
calculation of  $215.5 million, reflecting the  floor tax of                                                                    
4 percent.  He looked  at the bottom  of the  "Value" column                                                                    
and observed that  $163 million was actually  paid. He asked                                                                    
what  enabled a  company to  go below  the minimum  floor in                                                                    
actual taxes paid.                                                                                                              
Mr. Stickel  answered that he  had been planning  to address                                                                    
the  question  later  in  the  presentation,  but  he  would                                                                    
address it  at present.  He explained  that the  minimum tax                                                                    
floor  on slide  13 reflected  an aggregate  calculation. He                                                                    
clarified that  in reality, each company  calculated its own                                                                    
minimum tax.  He elaborated that  if a company chose  not to                                                                    
take any  sliding scale per  taxable barrel credits,  it may                                                                    
use  other  credits to  take  its  tax liability  below  the                                                                    
minimum tax. The minimum tax  was a hard floor for companies                                                                    
that  chose to  take the  sliding scale  per taxable  barrel                                                                    
credits; however,  if a company  opted to forgo  the sliding                                                                    
scale credits,  it could use  other credits to go  below the                                                                    
minimum  tax.  He  reported   that  DOR's  official  revenue                                                                    
forecast assumed that at $40  per barrel oil, some companies                                                                    
would elect  not to use  the sliding scale credits  in order                                                                    
to pay below the minimum tax.                                                                                                   
Mr.  Stickel  reviewed  the  calculation  of  the  net  tax,                                                                    
including  the GVR,  on slide  15. He  highlighted that  the                                                                    
headline  net tax  rate was  35  percent of  PTV. The  slide                                                                    
showed the  impact of  the GVR,  which applied  to companies                                                                    
with  a positive  production  tax value  that  were able  to                                                                    
reduce it  with the GVR  provision. The 35 percent  tax rate                                                                    
applied  to the  PTV after  GVR yielded  a net  tax of  $367                                                                    
million for FY 22.                                                                                                              
Mr.  Stickel   moved  on  to  review   tax  credits  against                                                                    
liability  on  slide 16.  The  major  credits were  the  per                                                                    
taxable  barrel credits,  which were  actually two  separate                                                                    
credits in statute.  The first was the $5  per barrel credit                                                                    
for  GVR eligible  oil and  the  other was  a sliding  scale                                                                    
credit for  non-GVR oil. The  vast majority was  the non-GVR                                                                    
credits, but  it could change  with major new  fields coming                                                                    
online in the  future. There was an $8  sliding scale credit                                                                    
for non-GVR production fields at  wellhead values of $80 and                                                                    
below.  The  credit  gradually   stepped  down  to  zero  at                                                                    
wellhead  values greater  than  $150 per  barrel of  taxable                                                                    
production.  He reiterated  his earlier  statement that  the                                                                    
non-GVR sliding  scale credits could  not be used  to reduce                                                                    
the tax  below the minimum tax.  Additionally, any companies                                                                    
claiming  the credit  could  not use  other  credits to  pay                                                                    
below the minimum tax.                                                                                                          
Mr. Stickel  stated that the GVR  eligible production credit                                                                    
could  be used  to reduce  tax  below the  minimum floor  if                                                                    
companies  did  not  take  any  sliding  scale  credits.  He                                                                    
reported that  the per taxable  barrel credits were  "use it                                                                    
or lose  it" and could  not be carried forward  or refunded.                                                                    
In  FY 22,  DOR  was  estimating that  $186  million in  per                                                                    
taxable barrel credits would be  deducted in calculating the                                                                    
tax  liability  even  though $1.1  billion  in  per  taxable                                                                    
barrel  credits  would  be   generated.  He  reiterated  his                                                                    
previous statements  that a company  could only  use credits                                                                    
to get down to the minimum  tax for the sliding scale and in                                                                    
some  instances to  go  below the  minimum  floor with  non-                                                                    
sliding scale  credits. Other tax credits  against liability                                                                    
included small producer credits.                                                                                                
2:15:37 PM                                                                                                                    
Mr. Stickel moved  to slide 17 and reviewed  other items and                                                                    
adjustments  in the  production tax  calculation. The  slide                                                                    
showed  a  reconciliation  of the  simple  calculation  with                                                                    
DOR's official  revenue forecast for FY  22. The adjustments                                                                    
number  included any  prior year  tax  payments or  refunds,                                                                    
private  landowner   royalty  interest,   hazardous  release                                                                    
surcharge or  "nickel per barrel  tax", any taxes on  gas on                                                                    
the North Slope,  any net tax liability from  Cook Inlet oil                                                                    
and gas, and any additional  company specific details in the                                                                    
tax calculation.  For FY 22, the  $163.3 million represented                                                                    
the fall forecast  of total cash into the  General Fund from                                                                    
the production  tax. The department  was also  estimating an                                                                    
additional $563 million  of nondeductible lease expenditures                                                                    
were expected  to be carried  forward and  would potentially                                                                    
be available to apply against future year tax liabilities.                                                                      
Mr. Stickel referenced an earlier question asked by Vice-                                                                       
Chair  Ortiz and  reiterated his  earlier answer.  He stated                                                                    
that some people  would look at the $163.3  million of total                                                                    
production tax  and ask  why it was  lower than  the minimum                                                                    
tax  of $215.5  million.  He explained  it  was because  the                                                                    
minimum tax  was applied on  a company-by-company  basis. He                                                                    
elaborated  that companies  could not  go below  the minimum                                                                    
tax  if  they used  any  sliding  scale per  taxable  barrel                                                                    
credits, but DOR was forecasting  that at $48 per barrel oil                                                                    
prices,  some companies  would choose  to forgo  the sliding                                                                    
scale  credits  and  use  other   credits  to  reduce  their                                                                    
payments below  the minimum tax.  Consequently, when  all of                                                                    
the companies were added together,  the net tax calculations                                                                    
collections   were   below   the   aggregate   minimum   tax                                                                    
calculation in the forecast.                                                                                                    
2:17:47 PM                                                                                                                    
Representative LeBon asked  if there was an  example of what                                                                    
qualified  as  other credits  a  company  could use  against                                                                    
Mr. Stickel answered  that the small producer  credit was an                                                                    
example of  other credits  against liability.  He elaborated                                                                    
that it  was a credit  of up to  $12 million per  company. A                                                                    
sunset had been  on the small producer  credit several years                                                                    
back  but  some  companies  still had  eligibility  for  the                                                                    
credit. Another  example was the  net operating  loss credit                                                                    
earned prior to 2018 that companies still had on the books.                                                                     
Representative   Wool  observed   that  after   taking  away                                                                    
royalties and  transportation, GVPP  was $5.38  billion, and                                                                    
the total paid  to the state was $163 million.  He could see                                                                    
why  people  were  scratching their  heads  related  to  the                                                                    
specific portion.  He asked if  the royalty of  $912 million                                                                    
went  to the  state in  its entirety.  He believed  it would                                                                    
bring the state take up to about $1 billion.                                                                                    
Mr. Stickel answered  that the majority of  the royalty went                                                                    
to the state. He referred back  to slide 6 and reported that                                                                    
DOR was estimating  that the state royalty  was $797 million                                                                    
plus an  additional $12 million  of shared royalty  from the                                                                    
NPRA.  The  $912.9  million included  state  royalties,  the                                                                    
value  of   federal  royalties   retained  by   the  federal                                                                    
government, and  the value  of private  landowner royalties.                                                                    
The  adjustment included  any production  in federal  waters                                                                    
beyond  the state's  three-mile limit,  which represented  a                                                                    
small share of production from the North Star field.                                                                            
Representative Wool stated his  understanding that the state                                                                    
received $163 million  plus royalties. He looked  at new net                                                                    
lease expenditures earned and carried  forward at a total of                                                                    
$562  million.  He  asked if  carryforwards  from  the  year                                                                    
before  had  been  or  would be  applied  towards  the  $163                                                                    
Mr.   Stickel   answered    there   would   potentially   be                                                                    
carryforwards earned in prior  years. The department was not                                                                    
estimating  that  any  prior  year  carryforwards  would  be                                                                    
applied in  FY 22.  He relayed  that any  carryforwards were                                                                    
applied at  the lease expenditure  stage. The idea  was that                                                                    
$562   million  became   a  potential   addition  to   lease                                                                    
expenditures in a future tax year.                                                                                              
2:21:49 PM                                                                                                                    
Representative  LeBon looked  at the  top of  slide 17  that                                                                    
showed royalty  and federal  barrels value  at approximately                                                                    
$913 million.  He remarked that  a portion of the  value was                                                                    
deposited into the Alaska Permanent  Fund. He understood the                                                                    
amount depended on the field  and which formula was used. He                                                                    
asked approximately how much of  the $913 million would flow                                                                    
to the Permanent Fund.                                                                                                          
Mr. Stickel  confirmed that a  portion of the  state royalty                                                                    
flowed to the  Permanent Fund. He explained  that the number                                                                    
was between  25 and 50  percent depending on when  the lease                                                                    
was  issued. He  reported  that the  average Permanent  Fund                                                                    
share  was   about  30  percent   of  state   royalties.  He                                                                    
referenced page 38 of the  DOR Fall Revenue Sources book and                                                                    
highlighted  the department's  forecast that  $199.2 million                                                                    
of oil  and gas  royalties and related  revenue would  go to                                                                    
the Permanent Fund in FY 22.                                                                                                    
Representative Josephson referenced  language "net new lease                                                                    
expenditures"  at  the bottom  of  slide  17. He  asked  for                                                                    
verification that  the new  lease expenditures  would appear                                                                    
under North Slope lease expenditures in a future year.                                                                          
Mr. Stickel replied, "That's correct, potentially."                                                                             
Representative Josephson  asked if the total  tax paid would                                                                    
be less than $163 million  in FY 22. Alternatively, he asked                                                                    
if  it  was hard  to  predict  because  there would  be  new                                                                    
production/revenue in addition to the expenditures.                                                                             
2:23:57 PM                                                                                                                    
Mr.  Stickel responded  that a  company could  opt to  carry                                                                    
forward  lease  expenditures. Generally,  companies  applied                                                                    
carried  forward  lease  expenditures  only  if  they  would                                                                    
expect to be paying above the  minimum tax in a future year.                                                                    
A company would have to  have sufficient future year revenue                                                                    
to  be   able  to  benefit  from   the  lease  expenditures.                                                                    
Additionally, in terms of production,  there was a provision                                                                    
that in  order to use  a carry forward lease  expenditure, a                                                                    
company  had to  have production  from the  field where  the                                                                    
lease expenditure was earned.                                                                                                   
Representative  Josephson  recalled   that  when  discussing                                                                    
state revenue  10 years back,  people talked about  tax, but                                                                    
royalty was an afterthought. He  remarked that the state had                                                                    
brought  in $6  billion  to  $7 billion  in  peak years  and                                                                    
currently it  was looking  at $163  million. He  asked about                                                                    
the accuracy of his statements.                                                                                                 
Mr. Stickel  replied that  it was  true that  production tax                                                                    
represented a significantly larger  share of the state's oil                                                                    
and gas revenue in prior  years. He reported that production                                                                    
tax generated  $6.1 billion in  FY 12 out of  slightly under                                                                    
$10 billion in total oil revenue that year.                                                                                     
Representative Josephson  stated that  no one  disputed that                                                                    
the [oil]  price was  lower [at  the present  day]; however,                                                                    
people disputed whether the economy  at large in the form of                                                                    
jobs  in  the private  sector,  benefitted  from SB  21  and                                                                    
whether  the  state  was encouraging  more  production  that                                                                    
would  not  be   there  "versus  the  change   in  tax."  He                                                                    
understood  that Mr.  Stickel did  not want  to revisit  the                                                                    
topic during the current meeting.                                                                                               
2:27:16 PM                                                                                                                    
Representative Wool  surmised that the  transportation costs                                                                    
changed over  time based on  the tanker charge.  He believed                                                                    
the pipeline cost was fairly  fixed. He referenced a time in                                                                    
the  past when  production had  been 1  million barrels  per                                                                    
day.  He  used  2012  as  an  example  and  asked  how  high                                                                    
production impacted transportation cost.                                                                                        
Mr. Stickel answered  that it would be necessary  to go back                                                                    
to the early 2000s to  reach production of 1 million barrels                                                                    
per day. He referenced a 10-year  history on page 105 of the                                                                    
DOR  Revenue Sources  Book.  He reported  that  in 2011  the                                                                    
total transportation  charge had  been $6.67 per  barrel. He                                                                    
stated  that the  transportation  charge  had been  somewhat                                                                    
lower at that point.                                                                                                            
Representative Wool  asked for the production  and the price                                                                    
of oil at the time.                                                                                                             
Mr. Stickel  replied that the  price of oil had  been $94.49                                                                    
per barrel  [in 2011]  and North  Slope production  had been                                                                    
about 600,000 barrels per day.  He explained that there were                                                                    
several costs that impacted  transportation costs over time.                                                                    
He elaborated  that for some  elements like TAPS,  the total                                                                    
production  level   was  a  very  important   factor.  Other                                                                    
elements moved  with price and  inflation. For  example, one                                                                    
of  the important  factors influencing  tanker cost  was the                                                                    
price of the fuel. Historically,  the general trend was that                                                                    
transportation   cost  had   increased   over  time,   while                                                                    
production had decreased. There  had been a stabilization of                                                                    
the transportation  cost over the past  several years, which                                                                    
had been  concurrent with a  stabilization of  production on                                                                    
the North Slope.                                                                                                                
2:30:24 PM                                                                                                                    
Representative  Wool  observed  that  price  of  fuel  would                                                                    
impact  tanker  cost. He  expected  the  tanker cost  to  be                                                                    
higher  at $94  per  barrel oil.  He  remarked that  600,000                                                                    
barrels  per   day  was  higher   than  the   current  daily                                                                    
production  of  500,000  barrels.   He  found  the  cost  of                                                                    
transportation interesting and stated  that on a $48 barrel,                                                                    
$10 went  to transportation. He  noted it was not  lost that                                                                    
the people who  owned the oil and the  pipeline likely owned                                                                    
the tankers  as well.  He commented  that it  was not  a bad                                                                    
thing that  the owners  could get a  good transport  fee for                                                                    
their oil.                                                                                                                      
Representative Thompson  stated that in the  past when there                                                                    
had been  much more  oil running  through the  pipeline, the                                                                    
oil  friction  would  heat  it up.  He  understood  that  at                                                                    
production  of 500,000  barrels per  day the  oil had  to be                                                                    
heated during  periods of cold  weather in order to  keep it                                                                    
flowing. He  asked if there  was a  fixed cost per  year for                                                                    
heating oil.                                                                                                                    
Mr.  Stickel  replied  in the  affirmative.  He  stated  his                                                                    
understanding  that   TAPS  had  added   additional  heating                                                                    
capacity and the  costs worked their way  through the tariff                                                                    
calculation and were eventually passed on to the shippers.                                                                      
2:32:18 PM                                                                                                                    
Representative LeBon  considered the price of  oil and where                                                                    
it had fallen since 2014.  He asked if aside from employment                                                                    
on the  North Slope  and the volume  of oil  running through                                                                    
the  pipeline,  whether  the  state   was  better  off  with                                                                    
production  tax  revenue under  SB  21  than under  Alaska's                                                                    
Clear and Equitable Share (ACES)  when considering the price                                                                    
of oil over the past six years.                                                                                                 
Mr. Stickel responded  that it was the  $1 million question.                                                                    
He was not  prepared to opine on an answer  to the question.                                                                    
His   goal  for   the  presentation   was   to  provide   an                                                                    
understanding of how the current tax calculations worked.                                                                       
Representative  LeBon  remarked  that  the  topic  had  been                                                                    
brought  up and  he had  wondered  if Mr.  Stickel had  some                                                                    
insight into whether the state  benefitted from SB 21 versus                                                                    
ACES at  an average  lower price  of oil  over the  past six                                                                    
Vice-Chair  Ortiz stated  he was  not a  tax accountant.  He                                                                    
asked if  it was  safe to  say that  under Alaska's  oil tax                                                                    
system,  the  effective  tax rate  was  different  for  each                                                                    
Mr. Stickel  replied in the  affirmative. He  expounded that                                                                    
each company  had a  separate tax  calculation based  on the                                                                    
different  fields and  developments it  was involved  in. He                                                                    
confirmed  that  the  effective   tax  rate  varied  between                                                                    
2:34:38 PM                                                                                                                    
Vice-Chair Ortiz asked about the  range of the effective tax                                                                    
rates paid by companies across the state.                                                                                       
Mr. Stickel responded  that he did not have  the analysis in                                                                    
front of him and he would follow up with the information.                                                                       
Mr. Stickel moved  to slide 18 showing  a five-year overview                                                                    
from FY 19  to FY 23. He detailed that  production tax value                                                                    
had  declined annually  from $5.1  billion in  FY 19  to the                                                                    
forecasted $1.1  billion in FY  22 and less than  $1 billion                                                                    
in FY 23. He reported that  FY 21 through 23 were forecasted                                                                    
as minimum tax years under  the fall forecast. He elaborated                                                                    
that  it meant  that generally  companies were  able to  use                                                                    
credits to bring  production tax down to  the minimum level.                                                                    
At  the  forecasted  oil prices,  DOR  estimated  that  some                                                                    
companies would  choose to forego the  sliding scale credits                                                                    
and  use other  credits to  pay  below the  minimum tax.  He                                                                    
added  that the  phenomenon was  seen  in all  three of  the                                                                    
years where  the estimated production  tax to the  state was                                                                    
below the calculated minimum tax floor.                                                                                         
Representative  Josephson noted  that in  the past,  the tax                                                                    
floor  had been  hardened by  either HB  111 or  HB 247.  He                                                                    
asked  for verification  there was  nothing that  prohibited                                                                    
the legislature  from hardening the floor  further. He asked                                                                    
for confirmation  there was no  contract doctrine  or common                                                                    
law  doctrine  that  would   prevent  the  legislature  from                                                                    
specifying that a 4 percent floor meant a 4 percent floor.                                                                      
Mr. Stickel replied affirmatively.                                                                                              
2:37:43 PM                                                                                                                    
Mr. Stickel relayed  that he had concluded the  main body of                                                                    
the presentation. There were  several additional slides that                                                                    
had been  requested when the presentation  had been provided                                                                    
to  the  other body.  He  turned  to  slide 19  showing  how                                                                    
revenue  would  be  impacted  by  different  levels  of  the                                                                    
sliding  scale  per  taxable barrel  credit.  Currently  the                                                                    
sliding scale credit  went up to $8 per  taxable barrel. The                                                                    
table  on slide  19 showed  what the  FY 22  tax calculation                                                                    
would look  like assuming a maximum  value of $5, $4,  or $3                                                                    
per taxable  barrel. He  explained that not  all of  the per                                                                    
taxable barrel credit  was used due to the tax  floor and in                                                                    
some cases,  companies could  use other  credits to  make up                                                                    
for a reduction in the  per barrel credits. He reported that                                                                    
an impact  on production  taxes from a  credit change  of $1                                                                    
was less  than $1  multiplied by the  number of  barrels. He                                                                    
detailed that  changing maximum  per taxable  barrel sliding                                                                    
scale  credit  from  $8  to   $5  would  increase  estimated                                                                    
production  tax revenue  from $163  million to  $180 million                                                                    
for  FY 22.  Production tax  revenue would  be $207  million                                                                    
under  a $4  maximum  credit  and $234  million  under a  $3                                                                    
maximum credit.                                                                                                                 
Mr.  Stickel clarified  that  DOR was  not  making a  policy                                                                    
suggestion, the department was  showing information that had                                                                    
been requested  by the other  body [Senate] in the  past. He                                                                    
remarked that any  changes in the credit  would have impacts                                                                    
on investment and the economics.                                                                                                
Mr. Stickel moved to slide  20 titled "Illustration Assuming                                                                    
a Single  North Slope Taxpayer:  FY 2022." He  remarked that                                                                    
the information on the slide  related to an earlier question                                                                    
asked  by Vice-Chair  Ortiz. He  stated that  currently some                                                                    
companies paid  at or  above the  minimum tax,  while others                                                                    
chose to forgo the sliding  scale credits to reduce payments                                                                    
below the  minimum tax. Consequently,  the FY  22 production                                                                    
tax  forecast  was  less  than  the  aggregate  minimum  tax                                                                    
calculation. Whereas  slide 20 reflected that  if there were                                                                    
only  one  taxpayer,  the department  expected  the  company                                                                    
would use sliding scale credits  to reduce its tax liability                                                                    
down to the  minimum tax (meaning it could not  go below the                                                                    
minimum tax).  Under the illustration, the  total production                                                                    
tax to the Treasury would be  $229 million in FY 22 compared                                                                    
to  the $163  million in  the official  forecast. The  slide                                                                    
highlighted the  impact of  individual company  economics on                                                                    
the  tax.  He  noted  that  each  company  had  a  different                                                                    
portfolio of operations and investments.                                                                                        
2:41:09 PM                                                                                                                    
Mr. Stickel  concluded on slide  21 titled  "State Petroleum                                                                    
Revenue by Land Type." The  slide showed how state petroleum                                                                    
revenues  varied  by land  type.  He  noted that  the  basic                                                                    
concept  was not  all oil  was  the same.  He detailed  that                                                                    
production,   corporate,   and    property   taxes   applied                                                                    
everywhere  in the  state except  for federal  waters beyond                                                                    
three  miles offshore,  regardless of  the ownership  of the                                                                    
land. Whereas the royalty varied  depending on the ownership                                                                    
of  the  land.  He  elaborated  that  there  were  different                                                                    
royalty provisions depending on  whether the land was state,                                                                    
private, or federal.                                                                                                            
Mr. Stickel  noted there  had been  a question  the previous                                                                    
day  about oil  prices that  he  would like  to address.  He                                                                    
shared that  the question  had pertained  to oil  prices and                                                                    
why  Alaska's  oil  prices had  diverged  from  Brent  crude                                                                    
prices in 2020.  He explained that Alaska  North Slope (ANS)                                                                    
was  not a  widely  traded crude;  therefore,  DOR liked  to                                                                    
compare  its price  to a  global  benchmark. The  department                                                                    
used  Brent crude  as the  closest comparison,  which was  a                                                                    
similar quality,  and both  had access  to world  markets by                                                                    
tanker  (also known  as  "waterborne").  Typically, ANS  and                                                                    
Brent  crude were  priced very  similarly  with only  slight                                                                    
differences  in value.  He noted  that ANS  may trade  for a                                                                    
dollar or two higher or lower than Brent at any given time.                                                                     
Mr. Stickel  elaborated that at  the end of March  2020, ANS                                                                    
and Brent had been near  parity; however, beginning in April                                                                    
the  estimated value  of  ANS dropped  below  Brent and  the                                                                    
discount got as  large as $28.25 per barrel on  April 20. He                                                                    
reported that it had been  the day ANS prices were estimated                                                                    
at  a negative  value,  the lowest  price  on record,  while                                                                    
Brent  prices  had remained  over  $25.  The divergence  had                                                                    
lasted through  April and the first  part of May and  by May                                                                    
20,  ANS prices  had been  back  to trading  in tandem  with                                                                    
Mr. Stickel addressed the reason  for the divergence between                                                                    
ANS  and   Brent  prices.  He   explained  there   had  been                                                                    
significant  turmoil in  the  oil market  in  the spring  of                                                                    
2020. There had been an  unprecedented demand drop as COVID-                                                                    
19  had  started  to  unfold  and  oil  storage  had  filled                                                                    
rapidly,  tremendous  uncertainty  in the  oil  markets  had                                                                    
occurred. The  department believed the  ANS/Brent divergence                                                                    
reflected West  Coast and Pacific specific  market dynamics.                                                                    
The  West Coast  and Pacific  had seen  some of  the largest                                                                    
drops in demand  and at the same time storage  in the market                                                                    
had been  filling rapidly. He  elaborated that at  one point                                                                    
there  had  been  dozens  of  oil  tankers  parked  offshore                                                                    
California  looking for  a place  to  put their  oil. For  a                                                                    
period of  time, when they  were trying  to sell ANS  it had                                                                    
been  selling   into  an  extremely   oversaturated  market.                                                                    
Eventually,  the markets  worked  through the  supply/demand                                                                    
and   ANS   prices   had  returned   to   their   historical                                                                    
relationship  with   Brent.  Unfortunately,  part   of  that                                                                    
supply/demand  balance had  involved temporary  curtailments                                                                    
in  Alaska production,  which  was one  example  of how  the                                                                    
markets came back into balance.                                                                                                 
2:45:30 PM                                                                                                                    
Representative  LeBon  stated  that  most of  the  oil  from                                                                    
Alaska  went to  the West  Coast. He  asked what  percentage                                                                    
went   east.   Additionally,   he  wondered   what   factors                                                                    
determined whether oil was shipped  to West Coast refineries                                                                    
or international markets.                                                                                                       
Mr. Stickel answered that historically  most ANS oil went to                                                                    
the West  Coast, which was  still the case. There  were some                                                                    
examples of oil being shipped  overseas to Asia markets. The                                                                    
department had  spoken with  several industry  experts about                                                                    
the  phenomenon  and  there   were  a  couple  of  potential                                                                    
factors. One was  the changing mix of oil  and gas producers                                                                    
in Alaska.  He elaborated that  the state was moving  from a                                                                    
situation where companies had  largely been fully integrated                                                                    
where  they owned  the oil  fields, production,  refineries,                                                                    
and  distribution.  He  reported that  some  companies  were                                                                    
moving away  from the model  and were opting to  limit their                                                                    
operations to  producing and selling product  to the market.                                                                    
Another  impact was  taking advantage  of pricing  trends in                                                                    
the U.S.  versus Asia.  He explained that  if a  company was                                                                    
selling  into  a market  and  did  not necessarily  own  the                                                                    
refinery,  it would  look to  where  it could  get the  best                                                                    
price;  sometimes the  best  price was  the  West Coast  and                                                                    
other times it was in Asia.                                                                                                     
Representative LeBon stated  that Alaska did not  have a say                                                                    
in where the oil went, whether  it was the West Coast or the                                                                    
Far East.  He asked if  Alaska was disadvantaged if  the oil                                                                    
went to an international destination versus the West Coast.                                                                     
2:47:57 PM                                                                                                                    
Mr. Stickel answered that the one  place the state had a say                                                                    
was in  state royalty oil,  some of  which was taken  by the                                                                    
Department  of Natural  Resources  and sold  to the  instate                                                                    
refineries. From  a tax perspective,  DOR assumed  a company                                                                    
would act  in its best  interest to  get the best  value for                                                                    
its oil. He  noted that the state benefitted  when a company                                                                    
received the best possible value for its oil.                                                                                   
Representative   Wool   thanked    Mr.   Stickel   for   the                                                                    
presentation.  He  referenced  a comment  by  Representative                                                                    
Josephson earlier related to incentives  and tax credits. He                                                                    
found  it  concerning  that the  production  curve  did  not                                                                    
appear to  be going  in the  right direction,  regardless of                                                                    
incentives.  He  observed  that  the  bottom  line  of  $163                                                                    
million  with $5.8  billion after  royalties  seemed like  a                                                                    
pittance. He  reasoned the price  was low and he  thought it                                                                    
was the  driver of  much of the  production "stuff."  He was                                                                    
interested   in   the  transportation   aspects,   including                                                                    
pipeline and tanker  costs, and hoped to go  more into depth                                                                    
on the  issue at  another time.  He speculated  that because                                                                    
much   of  the   transportation  was   owned  by   the  same                                                                    
corporations, perhaps  there was not  a lot of  incentive to                                                                    
lower  the  price. He  thought  there  was an  incentive  in                                                                    
Alaska. He thanked Mr. Stickel for his presentation.                                                                            
2:50:21 PM                                                                                                                    
Vice-Chair Ortiz  thanked Mr. Stickel for  his presentation.                                                                    
He  asked if  Mr. Stickel  had  always worked  with DOR.  He                                                                    
wondered if  he had  worked with  the Department  of Natural                                                                    
Resources (DNR) in the past.                                                                                                    
Mr.  Stickel answered  that he  had  been with  DOR for  his                                                                    
entire state career  beginning in 2004. He had  started as a                                                                    
non-petroleum  economist and  had subsequently  worked as  a                                                                    
petroleum economist. He reported that  he had shifted into a                                                                    
management role about 10 years back.                                                                                            
Vice-Chair Ortiz asked if the  Mr. Stickel's duties included                                                                    
production forecasting.                                                                                                         
Mr. Stickel  answered that he  was involved in  the process.                                                                    
He  explained that  DOR worked  collaboratively with  DNR on                                                                    
the production forecast, but DNR was the lead.                                                                                  
Vice-Chair  Ortiz  stated   that  the  production  forecasts                                                                    
looked like  they would  stay at  about 500,000  barrels per                                                                    
day for the  coming 10 years. He recalled  that in 2012/2013                                                                    
when SB  21 had  been debated  and eventually  passed, there                                                                    
had  been  talk about  increasing  production  to 1  million                                                                    
barrels  per day.  He asked  what had  changed in  the world                                                                    
situation or  Alaska's situation that had  caused production                                                                    
to be much lower, likely  around 500,000 barrels per day for                                                                    
the next ten years.                                                                                                             
2:52:31 PM                                                                                                                    
Mr. Stickel replied  that it was a topic  that could warrant                                                                    
its own  presentation. He believed that  the production goal                                                                    
of  1  million barrels  per  day  had been  aspirational  in                                                                    
nature.  Over  the  past  decade,   oil  prices  had  fallen                                                                    
significantly from  where they had  been in 2013.  There had                                                                    
been some potential  sources of new production  that had not                                                                    
come to  fruition, such as  the Outer Continental  Shelf. He                                                                    
reported  there   were  many  different  factors   that  had                                                                    
contributed to not reaching the goal.                                                                                           
Vice-Chair Ortiz  surmised the production was  not likely to                                                                    
get to that amount in the near future.                                                                                          
Mr. Stickel answered that as  Vice-Chair Ortiz had observed,                                                                    
the   production   forecast    anticipated   fairly   stable                                                                    
production over the next ten years.                                                                                             
Representative  Thompson recalled  that the  state had  been                                                                    
losing about 6  percent throughput per year.  He stated that                                                                    
when  SB 21  had  passed, there  had  been projections  that                                                                    
without the  passage of the  bill, production would  be down                                                                    
to 300,000  barrels per  day. He  remembered being  told the                                                                    
pipeline would  likely have  to be  shut down  if production                                                                    
declined  to  that level.  He  highlighted  that SB  21  had                                                                    
passed  [the  legislature].   Subsequently,  the  6  percent                                                                    
decline had  ceased, and production had  increased. He asked                                                                    
if he was remembering the situation accurately.                                                                                 
Mr. Stickel  answered that  his goal was  not to  rehash any                                                                    
past oil  tax debates during the  presentation. He confirmed                                                                    
there  was a  correlation,  and oil  production had  roughly                                                                    
stabilized over the past eight or so years.                                                                                     
2:55:18 PM                                                                                                                    
Representative Wool referenced a time  when the price of oil                                                                    
had dropped  into the negative  for a given amount  of time.                                                                    
He  remarked that  there  had been  a glut  of  oil and  the                                                                    
pipeline had  been throttled down  in response.  He reasoned                                                                    
that if the pipeline were  to stop functioning, it would not                                                                    
be for  mechanical or  physical reasons,  but due  to fiscal                                                                    
reasons. He asked what would happen  if the price of oil was                                                                    
$18  per barrel  for a  prolonged period  and transportation                                                                    
costs  were  $10 per  barrel.  He  considered whether  there                                                                    
would be any money  remaining after transportation costs. He                                                                    
surmised that if companies were  losing money, at some point                                                                    
the companies  would turn off  production regardless  of the                                                                    
mechanical capabilities  of the pipeline. He  thought an oil                                                                    
price of  $24 per barrel  was a  decent number in  the early                                                                    
days  of the  pipeline.  He wondered  if  the problem  could                                                                    
occur if,  for example, there  was a  glut of oil  or people                                                                    
started driving their electric cars.                                                                                            
Mr.  Stickel replied  that it  was  a risk.  He stated  that                                                                    
transportation  costs  came off  the  top  before a  company                                                                    
deducted any  cost of production.  He used the example  of a                                                                    
pie  for  illustrative  purposes   and  explained  that  the                                                                    
greater the  transportation cost, the less  pie remained. He                                                                    
highlighted  a situation  earlier  in the  spring where  the                                                                    
major  companies  had elected  to  curtail  production as  a                                                                    
result of the low price environment.                                                                                            
Representative   Wool  considered   the  numbers   and  data                                                                    
provided by  DOR. He contemplated  a scenario where  the oil                                                                    
price  was $28  per barrel  instead  of $48  per barrel.  He                                                                    
wondered what the breakeven number was for oil companies.                                                                       
Mr. Stickel answered that the  breakeven price would vary by                                                                    
company. He elaborated that in  the aggregate, DOR estimated                                                                    
the breakeven price to be  somewhere between $40 and $50 per                                                                    
barrel. The fall forecast was just above that point.                                                                            
Representative Wool  highlighted various factors  that could                                                                    
influence oil price including  a geopolitical event, General                                                                    
Motors'  announcement  to  go  to all  electric  cars  in  a                                                                    
certain timeframe, or if there was  a glut or low demand. He                                                                    
surmised  that depending  on the  circumstances, oil  prices                                                                    
could  be below  $40  for  a prolonged  period  in the  near                                                                    
future.  He  thought some  of  the  fiscal decisions  should                                                                    
factor  in   the  possibility.   He  wondered   whether  the                                                                    
department thought about the scenario.                                                                                          
Mr. Stickel answered there was  always a risk on oil prices.                                                                    
He brought attention to a  table in the Revenue Sources Book                                                                    
that included  a low and high  case. He thought it  was good                                                                    
advice to consider how to  address the low case scenario. He                                                                    
added that the state had  been fortunate that oil prices had                                                                    
increased. He concluded that oil  prices had been around the                                                                    
$60 per barrel range recently; however, there was no                                                                            
guarantee prices would remain at that level.                                                                                    
Co-Chair Foster thanked the presenters. He reviewed the                                                                         
schedule for the following day.                                                                                                 
3:00:46 PM                                                                                                                    
The meeting was adjourned at 3:00 p.m.                                                                                          

Document Name Date/Time Subjects
DOR Order of Operations HFIN_3.3.2021.pdf HFIN 3/3/2021 1:30:00 PM
DOR Response to HFIN Order of Operations 2021.03.22 w Attachment.pdf HFIN 3/3/2021 1:30:00 PM