Legislature(2015 - 2016)BARNES 124

02/24/2016 01:00 PM RESOURCES


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01:02:53 PM Start
01:04:31 PM HB247
03:02:15 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Alaska Oil & Gas Overview & Activity Update by
Corri Feige, Director, Division of Oil & Gas,
Dept. of Natural Resources
- HB 247 Overview by Ken Alper, Director, Tax
Division, Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:04:31 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
1:05:06 PM                                                                                                                    
                                                                                                                                
CORRI FEIGE,  Director, Central  Office, Division  of Oil  & Gas,                                                               
Department  of   Natural  Resources  (DNR),  on   behalf  of  the                                                               
governor,  began a  PowerPoint  presentation entitled,  "Alaska's                                                               
Oil &  Gas Industry Overview &  Activity Update."  She  turned to                                                               
slide 2,  "Overview," and  advised that  due to  time constraints                                                               
the presentation  has been broken  into North Slope,  Cook Inlet,                                                               
and Frontier Basins.                                                                                                            
                                                                                                                                
1:05:15 PM                                                                                                                    
                                                                                                                                
PAUL  DECKER, Petroleum  Geologist, Central  Office, Division  of                                                               
Oil & Gas, Department of  Natural Resources (DNR), drew attention                                                               
to slide 3, "North Slope  Resources Overview," and explained that                                                               
it  shows the  land management  areas on  the North  Slope.   The                                                               
National Park Service administers  the Noatak National [Preserve]                                                               
and Gates of the Arctic National  Park & Preserve.  The U.S. Fish                                                               
&  Wildlife  Service  administers the  Arctic  National  Wildlife                                                               
Refuge (ANWR).   The coastal plain  [1002 area] of the  refuge is                                                               
shown  in a  different  color because  it's  not yet  permanently                                                               
protected and permanently  off limits to oil and  gas; he offered                                                               
his hope that it  will not come to that.   The other federal land                                                               
making  up  a big  chunk  of  the  North  Slope is  the  National                                                               
Petroleum Reserve-Alaska  (NPR-A), which  is about the  same size                                                               
as the State of Indiana.  He  then pointed out the state lands on                                                               
the North Slope:                                                                                                                
                                                                                                                                
     So, the  state lands are  those encompassed by  the red                                                                    
     lines where  we have  our annual areawide  lease sales.                                                                    
     So  starting along  the shoreline  from  zero to  three                                                                    
     miles  off  shore we  have  the  Beaufort Sea  areawide                                                                    
     sale, in  the Central North  Slope onshore we  have the                                                                    
     North Slope  areawide sale, and  then to the  south the                                                                    
     Foothills  sale.    And you'll  also  notice  important                                                                    
     acreage  within  the Foothills  sale  and  also on  the                                                                    
     extreme  western  North  Slope that  is  [Arctic  Slope                                                                    
     Regional  Corporation  (ASRC)] surface  and  subsurface                                                                    
     estate, so yet another owner  there.  The coastal plain                                                                    
     areas that  are in north  of the dashed blue  line, and                                                                    
     you  can  see  that  the  black  dots  show  a  greater                                                                    
     exploration well  density north  of that blue  line, so                                                                    
     that  the  coastal  plain   has  been  somewhat  better                                                                    
     explored.   The Foothills  area to the  south is  a lot                                                                    
     lower  exploration   well  density,   less  exploration                                                                    
     there, and  what you'll  also notice  is two  trends of                                                                    
     oil and  gas accumulations,  the oil  in green  and the                                                                    
     gas accumulations  in red.   The main  producing trend,                                                                    
     of course,  is near the  shoreline within say 30  or 40                                                                    
     kilometers  of  the  shoreline.    And  that's  because                                                                    
     that's underlain by a huge  feature known as the Barrow                                                                    
     Arch, which  is really, really good  petroleum habitat,                                                                    
     in essence.   There is  also a Foothills  trend, mostly                                                                    
     gas accumulations  discovered to date, Umiak  being the                                                                    
     contrarian  there, the  exception.   So, these  are the                                                                    
     areas  and  most  of these  areas  have  been  assessed                                                                    
     independently  by the  U.S. Geological  Survey [(USGS)]                                                                    
     for their resource potential.                                                                                              
                                                                                                                                
1:09:10 PM                                                                                                                    
                                                                                                                                
MR.  DECKER explained  that slide  4,  "Arctic Alaska  Oil &  Gas                                                               
Resources,"  rolls up  all of  those  federal resource  estimates                                                               
from  USGS onshore  and  the Bureau  of  Ocean Energy  Management                                                               
(BOEM) offshore  for Arctic  Alaska.  The  numbers on  the bottom                                                               
line of the chart are correct:   the 40 billion barrels of oil is                                                               
the mean  estimate when combining  the onshore and  offshore oil,                                                               
and 207 or so trillion cubic  feet (TCF) of undiscovered gas.  He                                                               
reiterated  that  these  numbers  are the  mean  estimates  of  a                                                               
probabilistic  distribution  accounting  for a  large  degree  of                                                               
uncertainty  about how  much exactly  remains  in this  category,                                                               
which  is  undiscovered,  technically recoverable.    These  mean                                                               
estimates  are   not  reserves  and  they   are  not  necessarily                                                               
economically recoverable.   He pointed out  a typographical error                                                               
within the blue block entitled,  "Mean Oil Estimate," and said it                                                               
should read  millions of barrels,  not billions, thus  the number                                                               
is read as 15,908 million or 15.9  billion barrels of oil.  It is                                                               
relatively evenly  split between  onshore and  offshore.   On the                                                               
oil  side, the  Chukchi and  Beaufort  seas appear  to have  more                                                               
undiscovered oil than the onshore  acreage.  Onshore is dominated                                                               
by about  10 billion barrels  in ANWR, about 4.5  billion barrels                                                               
undiscovered in  the central  North Slope  state lands,  and less                                                               
than 1 billion in NPR-A.                                                                                                        
                                                                                                                                
REPRESENTATIVE HERRON  asked whether  the offshore  estimates are                                                               
within 200 miles.                                                                                                               
                                                                                                                                
MR. DECKER replied yes.                                                                                                         
                                                                                                                                
1:11:20 PM                                                                                                                    
                                                                                                                                
MR.  DECKER  stated  that  slide  5, "Arctic  Alaska  Oil  &  Gas                                                               
Resources," drills  down to more  along the lines of  reserves as                                                               
opposed to  just undiscovered resource.   There are approximately                                                               
30 trillion cubic feet of associated  gas that is estimated to be                                                               
recoverable  in  the  existing producing  fields,  and  primarily                                                               
that's Prudhoe Bay  with Pt. Thomson lumped in, which  is about a                                                               
3:1 ratio.   Since there is  not yet an Alaska  Liquefied Natural                                                               
Gas (AK  LNG) line, a gas  transportation system is not  in place                                                               
and it is best to  consider those numbers as contingent resource,                                                               
he advised, and not as reserves per se.                                                                                         
                                                                                                                                
CO-CHAIR NAGEAK requested an explanation of contingent resource.                                                                
                                                                                                                                
MR.  DECKER explained  that contingent  resource is  the resource                                                               
that  has been  discovered but  not yet  approved for  commercial                                                               
development,   not  yet   sanctioned,   not   yet  brought   into                                                               
development.  So,  it's discovered and it may  become reserves in                                                               
the future with  a demonstration that those  volumes are economic                                                               
to produce.                                                                                                                     
                                                                                                                                
CO-CHAIR NAGEAK asked what has to be done to make it so.                                                                        
                                                                                                                                
MR. DECKER said that typically  the threshold would be a sanction                                                               
decision, a  final investment  decision (FID) in  the case  of AK                                                               
LNG.                                                                                                                            
                                                                                                                                
1:12:50 PM                                                                                                                    
                                                                                                                                
MR. DECKER referred to the second  bullet on slide 5, and said it                                                               
drills down within the actual  currently producing fields and how                                                               
much  is in  the  proved  gas reserve  category.    He said  that                                                               
according to  the Energy  Information Administration  (EIA) there                                                               
is  about  6.4  trillion  cubic feet  of  proved  associated  gas                                                               
reserves,  of which  a little  bit  [about 0.5  percent] is  Cook                                                               
Inlet gas  and the  bulk of  which is North  Slope gas  in places                                                               
like Prudhoe  Bay.  He advised  that the 6.4 trillion  cubic feet                                                               
of  reserves would  be the  portion of  the gas  in the  existing                                                               
fields  that actually  has  some  sort of  a  market, and  that's                                                               
really  mostly  a local  market  used  on  lease or  in  adjacent                                                               
fields.  With  regard to the oil reserves, he  explained that the                                                               
EIA's latest  report as  of year-end 2013  gives the  North Slope                                                               
approximately 2.8 billion  barrels of oil reserves  in the proved                                                               
category, which  is not too  different from what the  Division of                                                               
Oil  and Gas  estimated in  recent history  from its  own decline                                                               
analysis.                                                                                                                       
                                                                                                                                
1:14:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER asked whether  the division's definition of                                                               
"proved" resource  requires being economically recoverable  or is                                                               
simply the known proved existent resources.                                                                                     
                                                                                                                                
MR.  DECKER responded  that proved  reserves are  specifically in                                                               
that economically recoverable, expected  to be recovered, tranche                                                               
of volumes.  When the  division says proved reserves, it connotes                                                               
a  90 percent  certainty  that at  least that  much  gas will  be                                                               
produced.                                                                                                                       
                                                                                                                                
REPRESENTATIVE HAWKER inquired about  the division's standard for                                                               
economically viable recoverable resources.                                                                                      
                                                                                                                                
MR. DECKER replied  that the economic hurdle is  considered to be                                                               
met  when,  for  example,  a  project  is  sanctioned,  the  gold                                                               
standard is when a project is sanctioned to go into development.                                                                
                                                                                                                                
1:15:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER   concluded  then  that  the   entire  6.4                                                               
trillion cubic  feet of associated  gas reserves is  a sanctioned                                                               
project that is behind pipe.                                                                                                    
                                                                                                                                
MR. DECKER replied no,  that is a bit of an  exception and is one                                                               
of the  things about the  North Slope that's  a little odd.   The                                                               
North Slope has  its own local market where gas  is sold back and                                                               
forth  between the  producers  and  used on  site  - things  like                                                               
miscible gas injectant or fuel use.   He said he will have to ask                                                               
the EIA  why it describes  that as  proved gas reserves,  but his                                                               
understanding is that  it's because it is part of  a local market                                                               
that is functioning on the North Slope.                                                                                         
                                                                                                                                
REPRESENTATIVE HAWKER  surmised that  the 2.8 billion  barrels of                                                               
oil  reserves are  currently in  the process  of being  recovered                                                               
through a sanctioned project.                                                                                                   
                                                                                                                                
MR. DECKER replied "through all  the sanctioned fields ... that's                                                               
correct."                                                                                                                       
                                                                                                                                
1:16:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON understood that  the definition of a proven                                                               
reserve is 90 percent confidence in it.                                                                                         
                                                                                                                                
MR. DECKER responded correct, 90  percent certainty that at least                                                               
that volume will be produced.                                                                                                   
                                                                                                                                
1:16:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  surmised  that  the  oil  reserves  in  the                                                               
sanctioned projects are  over the life of that field.   She asked                                                               
for specifics that break down  [the number of 2.8 billion barrels                                                               
of oil (BBO)].                                                                                                                  
                                                                                                                                
MR. DECKER answered he does not  have that number today, but said                                                               
the division  could work it  out in  an approximate fashion.   He                                                               
noted that  the largest part  of that  will be Prudhoe  Bay, then                                                               
Kuparuk and Colville River Unit, and so forth.                                                                                  
                                                                                                                                
REPRESENTATIVE TARR  said she would appreciate  understanding the                                                               
breakdown better.                                                                                                               
                                                                                                                                
1:17:44 PM                                                                                                                    
                                                                                                                                
MS. FEIGE turned  to slides 6-9, "North Slope  Current Activity &                                                               
New Developments," to  outline the current and  new activities of                                                               
various companies.  She explained  that Accumulate Energy Alaska,                                                               
Inc. (AEA), is  a newcomer to the state and  is partnered with 88                                                               
Energy and  Burgundy Xploration.   They came into the  state with                                                               
Burgundy Xploration  acquiring a  sizable lease position  in 2014                                                               
in the  central North Slope  area, and are  predominantly looking                                                               
at  shale potential.   They  drilled the  Icewine #1  exploration                                                               
well on the Franklin Bluff's  pad, which is a pre-existing gravel                                                               
pad  located along  the Dalton  Highway about  65 miles  south of                                                               
Deadhorse.  Based upon the  results of the Icewine #1, Accumulate                                                               
is  now getting  ready to  commence a  seismic survey  across its                                                               
leasehold in  central North  Slope, and  it also  participated in                                                               
the November 2015  lease sale and the partnership  took about 130                                                               
additional tracts in that sale.                                                                                                 
                                                                                                                                
MS. FEIGE noted that ASRC  Exploration, LLC (AEX), a wholly owned                                                               
subsidiary of  the Arctic Slope  Regional Corporation  (ASRC), is                                                               
currently drilling an  exploration well in the Placer  Unit.  The                                                               
Placer Unit  is located  immediately south  of the  Oooguruk Unit                                                               
which is held by Caelus Natural Resources.                                                                                      
                                                                                                                                
MS. FEIGE said [BP Exploration (Alaska)  Inc.] is one of the long                                                               
time foundation producers on the  North Slope and continues to be                                                               
very  aggressive at  expanding  and  maintaining development  and                                                               
production out of the Prudhoe Bay  Unit.  She pointed out that BP                                                               
has  completed 8  wells, 46  new  sidetracks, and  well over  420                                                               
workovers just in  the Initial Participating Area  (IPA) in 2015.                                                               
The   company  completed   additional  wells   in  the   Lisburne                                                               
Participating Areas  (PA) and  also some  in-unit seismic  in the                                                               
North Prudhoe Bay in 2015.                                                                                                      
                                                                                                                                
1:20:24 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  reported that Caelus Natural  Resources [Caelus Energy                                                               
Alaska,  LLC] (slide  7)  entered the  state  in 2013,  acquiring                                                               
Pioneer Natural Resources position in  the Oooguruk Unit.  Caelus                                                               
continues  with ongoing  development and  production at  Oooguruk                                                               
with four  to five  long-reach wells drilled  each year  that are                                                               
stimulated  through   large  multi-stage  fracks.     Caelus  has                                                               
performed  work recently  optimizing that  frack to  optimize and                                                               
increase  recovery  in those  wells.    She said  Caelus  Natural                                                               
Resources  is  also  undertaking  the  Nuna  Development,  a  new                                                               
project  development.   The  surface  facilities  sit within  the                                                               
Kuparuk Unit  immediately outside of the  Oooguruk Unit, although                                                               
the  accumulation  is within  the  Oooguruk  Unit itself  on  the                                                               
southeastern flank  of that unit.   Caelus's first  production is                                                               
on track for  late 2017.  Caelus installed a  gravel road and pad                                                               
last winter but is not  performing construction work at Nuna this                                                               
winter.   Instead, Caelus, with  its partner NordAq  Energy Inc.,                                                               
is in  Smith Bay  drilling the second  of two  exploration wells.                                                               
Those wells are being drilled from  a grounded ice pad in shallow                                                               
water  just off  shore.   Smith Bay  is located  approximately 80                                                               
miles southeast of Barrow.                                                                                                      
                                                                                                                                
1:22:11 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  stated that ConocoPhillips  Alaska, Inc. (slide  7), a                                                               
very  active  company on  the  North  Slope,  is working  in  the                                                               
Colville River  Unit and initiated  production at CD5  in October                                                               
2015, with  that production  rapidly exceeding  its expectations.                                                               
Conoco  plans  to drill  eight  new  wells  in  2016 on  the  CD5                                                               
development.  In late 2015,  Conoco sanctioned the Greater Mooses                                                               
Tooth  Unit  (GMT1), which  will  be  a new  development  located                                                               
inside  the NPR-A.   Conoco  also continues  work at  the Kuparuk                                                               
River Unit  with the first wells  at drill site 2S  coming online                                                               
in  late 2015  and  with significant  drilling  planned for  2016                                                               
throughout the unit.                                                                                                            
                                                                                                                                
MS. FEIGE reported the exciting  news that ExxonMobil Corporation                                                               
will commence  production of  natural gas  liquids (NGLs)  in the                                                               
Pt. Thomson  unit by mid-May  2016.  Construction of  the Initial                                                               
Production System  (IPS) has been completed,  as has construction                                                               
of the pipeline that connects  Pt. Thomson into the Badami Field.                                                               
The Badami  pipeline then connects  to the  Trans-Alaska Pipeline                                                               
System (TAPS) and the sail line.                                                                                                
                                                                                                                                
MS.  FEIGE  advised  that  Great   Bear  Petroleum  is  currently                                                               
acquiring  a very  large three  dimensional (3D)  seismic survey.                                                               
Great  Bear is  another  shale  player located  to  the north  of                                                               
Accumulate in the  central North Slope region.   Great Bear plans                                                               
to  re-enter  its  Alkaid  #1,   drilled  in  2014,  and  perform                                                               
additional well  work after  the completion  of its  seismic this                                                               
year and the Alkaid will come next year.                                                                                        
                                                                                                                                
1:24:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  recalled that Great Bear  was moving ahead                                                               
rapidly  with  this  development   with  the  support  of  Alaska                                                               
Industrial  Development  Authority  funds,  but  its  third-party                                                               
financing withdrew after  the veto of the state  tax credits last                                                               
year.  He asked whether that  has compromised the project, or the                                                               
division's assessment of its future viability.                                                                                  
                                                                                                                                
MS. FEIGE replied  she can't speak to whether  it has compromised                                                               
the future viability,  but that Great Bear did  tell the division                                                               
that  it has  impacted  the  schedule under  which  it is  taking                                                               
future work.   The  Alkaid #1 work  was originally  scheduled for                                                               
2016, and  now has  been pushed  back to 2017.   The  division is                                                               
aware  that  Great Bear  is  in  the  process of  bringing  other                                                               
partners into its program on the North Slope.                                                                                   
                                                                                                                                
1:25:03 PM                                                                                                                    
                                                                                                                                
MS. FEIGE noted that Hilcorp Alaska  LLC (slide 9), a large actor                                                               
in  Cook  Inlet,  has  moved   onto  the  North  Slope  with  the                                                               
acquisition of  the North  Star Unit  where it  promptly returned                                                               
two  wells to  production.   Hilcorp  acquired a  portion of  the                                                               
Milne  Point Unit  where it  is now  operator and  in partnership                                                               
with BP has drilled three  wells and undertaken some new facility                                                               
construction there.  Hilcorp has plans  to drill 10 new wells and                                                               
complete a slew of workovers in 2016.                                                                                           
                                                                                                                                
MS.  FEIGE said  Repsol and  Armstrong Oil  & Gas  (slide 9)  are                                                               
working on  the Nanushuk Project development,  which the division                                                               
refers to  as the Pikka  Unit.   Repsol and Armstrong  formed the                                                               
Pikka Unit in  June 2015 and to date, from  2012 to current, they                                                               
have drilled  a total of  12 exploration wells and  sidetracks on                                                               
that acreage, which  led to the unit application.   They have now                                                               
commenced  the  environmental  impact   study  and  the  National                                                               
Environmental Policy  Act of 1969  (NEPA) review for  the overall                                                               
project development.   The division expects that if  there are no                                                               
hiccups,  production will  come online  in five  to seven  years,                                                               
although they may try to fast-track that.                                                                                       
                                                                                                                                
1:26:33 PM                                                                                                                    
                                                                                                                                
MS.  FEIGE turned  to  slide  10, "North  Slope  Wells Drilled  &                                                               
Seismic Acquired,"  to provide  a 10-year  summary for  the years                                                               
from 2004 to  2014.  During this time period  on the North Slope,                                                               
110 exploratory wells and well  branches were drilled, along with                                                               
[1,646] development  and service  wells and  well branches.   She                                                               
noted that two  dimensional (2D) and three  dimensional (3D) data                                                               
is acquired  through tax credit data  under the rules of  the tax                                                               
credit programs.   During 2004 and 2014, about 870  line miles of                                                               
2D data  was acquired and just  shy of 10,000 square  miles of 3D                                                               
data acquired.   This is both  onshore and near shore  ground and                                                               
ice acquisition.                                                                                                                
                                                                                                                                
REPRESENTATIVE HAWKER recalled that  in prior years the committee                                                               
would receive  a colorful bar  graph depicting, by year,  the rig                                                               
count for exploration and development  wells drilled.  He further                                                               
recalled that  there was  one winter  where no  exploratory wells                                                               
were drilled.   He asked whether  Ms. Feige could obtain  the rig                                                               
and well count  data from the division's archives  and prepare an                                                               
updated graph for the committee.                                                                                                
                                                                                                                                
MS. FEIGE agreed  to provide a by-year breakdown.   She explained                                                               
that for purposes  of summary and time  for today's presentation,                                                               
the division rolled the numbers up into totals.                                                                                 
                                                                                                                                
REPRESENTATIVE HAWKER  recalled it may  have been the  Alaska Oil                                                               
and Gas Conservation Commission  (AOGCC) that prepared the graphs                                                               
he is  thinking of, but surmised  Ms. Feige knows what  graphs he                                                               
is requesting.                                                                                                                  
                                                                                                                                
MS. FEIGE confirmed she knows which graphs are being requested.                                                                 
                                                                                                                                
1:28:54 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  drew attention to  slides 11-12, "Who's  Working North                                                               
Slope?" to  review which companies  are investing and  working in                                                               
the North  Slope and what this  shows about the evolution  of the                                                               
basin or region.   She described Alaska as having  a very healthy                                                               
and  robust  cross-section  of companies  working  on  the  North                                                               
Slope, and fundamentally  that says the industry  still views the                                                               
resource endowment and the environment  of investing in Alaska as                                                               
being a  good place to  be.  In  terms of large  companies, these                                                               
are predominantly  the state's  foundation producers,  big legacy                                                               
producers, and  for the  purposes of  breakout here  the division                                                               
has  classified  these  as  companies with  greater  than  a  $40                                                               
billion  market capitalization.   These  large companies  include                                                               
BP, Chevron,  Conoco, Eni, Exxon,  and Shell.  Behind  the majors                                                               
are  the  large independents  and  mid-sized  companies, such  as                                                               
Armstrong and its  subsidiary 70 & 148,  Anadarko, Caelus, Repsol                                                               
[and  BG Alaska,  Halliburton, Hilcorp].   She  advised that  the                                                               
listing of Apache  is an error and should be  taken off this list                                                               
because it only operates in Cook Inlet.                                                                                         
                                                                                                                                
REPRESENTATIVE  HERRON  inquired whether  ExxonMobil  Corporation                                                               
wouldn't  now be  called an  "ultra-major" rather  than a  large-                                                               
major.                                                                                                                          
                                                                                                                                
MS. FEIGE agreed  that ExxonMobil Corporation and  Shell with the                                                               
acquisition of BG Group could  be called ultra-majors as they are                                                               
clearly greater than $40 billion market capitalization.                                                                         
                                                                                                                                
1:30:47 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  continued her review  of who  is working on  the North                                                               
Slope  (slide  12).    She   explained  that  a  cadre  of  small                                                               
independents  have moved  into Alaska  as the  exploration cycles                                                               
and  production  have  begun  to  mature in  the  regions.    She                                                               
explained  that that  many of  the companies  listed on  slide 12                                                               
will partner  together in developments.   For example, Accumulate                                                               
Energy  Alaska is  a partnership  of Burgundy  Xploration and  88                                                               
Energy.   She noted  that Burgundy  Xploration also  holds leases                                                               
independently  of  the  partnership.   Brooks  Range  Development                                                               
Corporation  is  undertaking  the  Mustang  Development  and  its                                                               
partners  are  Caracol  Petroleum, Ramshorn  Investments,  and  a                                                               
number of others.   She explained that the nature  of the smaller                                                               
companies is that they will be  very fluid and their numbers will                                                               
grow  when  commodity prices  are  high  and their  numbers  will                                                               
shrink a  bit as  commodity prices fall  because they  partner up                                                               
and sell their assets between  themselves.  For some companies it                                                               
becomes  too high  a cost  environment, so  they sell  or partner                                                               
with others  to manage  those economic  realities.   Overall, the                                                               
state  has a  broad and  healthy cross-section  of players  still                                                               
working on the North Slope.                                                                                                     
                                                                                                                                
1:32:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER referred  to slide 12, and  said that there                                                               
are issues  in Cook Inlet  where people  come in, incented  to be                                                               
there, but  really were  not able  to perform,  were not  able to                                                               
provide the  state the proper  assurance for their  financial and                                                               
environmental responsibility.  He  requested assurance as to what                                                               
the state  is doing to  be certain the  folks on the  North Slope                                                               
are  economically  capable  and  certainly have  the  ability  to                                                               
provide  the  due diligence  the  state  would  want to  have  of                                                               
someone undertaking these sort of activities.                                                                                   
                                                                                                                                
MS. FEIGE replied that the Division  of Oil & Gas administers the                                                               
dismantlement, removal, and restoration  (DR&R) program, which is                                                               
the end  of economic life closure  period for fields that  are in                                                               
production.   She said DR&R  includes removal and  remediation of                                                               
facilities,  infrastructure, roads,  pads, and  so forth.   Under                                                               
the leases, the lessees, and in  this case the unit operators and                                                               
their partners,  are required to work  with the state at  the end                                                               
of  life  in  DR&R  planning.   The  state  works  with  them  to                                                               
determine which assets the state  deems valuable that it may want                                                               
to  keep and  carry forward,  or which  of the  assets should  be                                                               
removed  and  the  area  remediated.   That  final  plan  is  put                                                               
together with a  DR&R estimate that is  maintained throughout the                                                               
life of  the field.   As leases  are transferred and  new parties                                                               
come in,  or there is  a shuffling  of the interest,  the parties                                                               
work  with  the  division  to establish  a  Financial  Assurances                                                               
Agreement,  a  DR&R agreement  that  looks  to  the end  of  that                                                               
field's life.   The parties either  provide a bond or  pay into a                                                               
Sinking Fund as production develops, so  there is a pool of money                                                               
available  to undertake  that DR&R  activity  at the  end of  the                                                               
field  life and  the state  does not  find itself  in a  position                                                               
where a  company may  falter or  fail and end  up going  under or                                                               
going away before the DR&R's work  is finished.  Thus, there is a                                                               
kitty or  fund available  for undertaking  that work  should that                                                               
circumstance occur.                                                                                                             
                                                                                                                                
1:34:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER asked  about the  current activities  with                                                               
regard to the  smaller entities where safety  practices have been                                                               
compromised and  the challenges that  can come from  an inability                                                               
to  financially  complete  their  work up  front  let  alone  the                                                               
backside  of life.   He  further  asked whether  the division  is                                                               
focused on the front end of field life.                                                                                         
                                                                                                                                
MS. FEIGE  confirmed that the division  is doing this.   She said                                                               
that in  unit activities  as well as  lease hold  activities, the                                                               
division  has authority  to request  performance bonds  to ensure                                                               
that not  only is the  activity undertaken but that  the activity                                                               
is  then remediated  on the  backside.   The Alaska  Oil and  Gas                                                               
Conservation  Commission  (AOGCC)  for anything  downhole  has  a                                                               
bonding requirement  as well  that would  cover the  plugging and                                                               
abandonment  of  wells if  the  company  can't perform,  and  the                                                               
division has  and utilizes  that same  authority for  the ongoing                                                               
early stage activities.                                                                                                         
                                                                                                                                
1:36:15 PM                                                                                                                    
                                                                                                                                
MS.  FEIGE turned  to  slide 13,  "North  Slope Leasing  Activity                                                               
Trends, North  Slope Foothills Areawide  Lease Sale  Results," to                                                               
show  the  generalized activity  levels  and  interest in  taking                                                               
leases since the beginning of  the areawide leasing program.  She                                                               
explained that the North Slope  Foothills region is predominantly                                                               
a gas  prone area just north  of the Brooks Range.   Its areawide                                                               
leasing  began in  2001  with  a flurry  of  activity with  lease                                                               
taking in  that area in the  first couple years.   She said these                                                               
would have  been leases with  the primary  term of 10  years, but                                                               
over the life  of leasing within the North  Slope Foothills there                                                               
has not  been much activity.   She offered the  division's belief                                                               
that this is  due to the remoteness, no  infrastructure, and very                                                               
high cost  operating.  She opined  that until there is  an AK LNG                                                               
or some sort  of means to get  that gas resource to  a market the                                                               
state will see subdued activity.                                                                                                
                                                                                                                                
1:37:25 PM                                                                                                                    
                                                                                                                                
MS.  FEIGE  moved to  slide  14,  "North Slope  Leasing  Activity                                                               
Trends, Beaufort  Sea Areawide Lease  Sale Results,"  and advised                                                               
that this  area is  zero to  three miles out.   The  Beaufort Sea                                                               
areawide  leasing  began  in  2000   with  a  fairly  robust  and                                                               
consistent level  of leasing.   These were 10-year  primary terms                                                               
on the  leases.  So,  for example, if it  was leased in  2000 and                                                               
wasn't  developed and  was allowed  to come  back into  the lease                                                               
sale,  it would  not have  been available  again until  2011, and                                                               
that spike  is seen on  the graph.   She opined that  leasing for                                                               
the Beaufort  Sea is  somewhat hampered by  the fact  that beyond                                                               
three  miles the  federal  government is  not  consistent in  how                                                               
frequently  it is  willing  to lease  that  acreage.   Therefore,                                                               
there is a bit  of an artificial boundary at three  miles.  So, a                                                               
discovery near that margin that  extends past the three-mile mark                                                               
would be into federal territory,  and without a lease to continue                                                               
it is  too risky because  the explorer doesn't own  the resource.                                                               
Clearly, that has an impact on leasing in the Beaufort Sea.                                                                     
                                                                                                                                
MS.  FEIGE  discussed slide  15,  "North  Slope Leasing  Activity                                                               
Trends, North Slope Areawide Lease  Sale Results."  She said that                                                               
this  areawide leasing  program  commenced in  1998 with  10-year                                                               
primary  terms on  the leases.    These track  oil prices  pretty                                                               
consistently  knowing that  companies  are  making those  leasing                                                               
decisions  and setting  those finances  aside, designating  those                                                               
funds, at  least one  to two  years in  advance.   She reiterated                                                               
that  there is  a robust  ready sort  of crew  that is  coming to                                                               
participate in the North Slope,  and the graph indicates that the                                                               
interest and belief in the endowment of the resource remains.                                                                   
                                                                                                                                
1:39:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  referenced Ms. Feige's statement  that the                                                               
trend lines were  largely tracking oil prices,  and asked whether                                                               
that  is  really what  explains  this  very significant  profound                                                               
growth  from  2007-2011, the  fall-off  in  2012, but  then  that                                                               
incredible spike  in 2014.   He  said that  the 2014  spike seems                                                               
contrary to a  claim of that kind of a  proportionate increase in                                                               
oil prices.                                                                                                                     
                                                                                                                                
MR. DECKER pointed  out that beginning in 2010 the  state had its                                                               
first   shale   play   bidding   wherein   the   state   received                                                               
approximately 100  bids of that 117.   That was a  wakeup call to                                                               
the division and to the industry  globally that Alaska may have a                                                               
shale play.  Due to that flurry  of activity in 2010, by 2011 the                                                               
division adopted a strategy whereby  the division took its former                                                               
nine-square-mile   tracts  in   the   area  deemed   geologically                                                               
appropriate to the shale play,  and cut its existing lease tracts                                                               
into four smaller  tracts.  He described it as  a very deliberate                                                               
decision  to protect  the state's  interest in  order that  large                                                               
areas  would not  be  held without  actually  producing or  being                                                               
penetrated by successful wells.  In  other words, he said, a well                                                               
would be  needed on each lease  to hold it forever  and by making                                                               
smaller tracts  they would have to  drill more wells to  hold the                                                               
same  acreage,  which  is  appropriate  to  the  shale  reservoir                                                               
behavior  because one  well  does not  drain  nine square  miles.                                                               
From  that point  on,  the  division has  had  the smaller  tract                                                               
scheme in  place and in  2011, 140 tracts  were sold and  part of                                                               
that is because  to lease the same number of  acreage they had to                                                               
bid four tracts and not just one.   He said that in 2014, the 212                                                               
tracts  offered  were  to parties  like  AD8  Energy,  Accumulate                                                               
Energy, and Repsol bidding in  some other areas.  So partitioning                                                               
of  lease tracts  into  smaller  blocks means  the  selling of  a                                                               
larger number of tracts.                                                                                                        
                                                                                                                                
1:42:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON asked  whether  the aforementioned  was                                                               
done administratively,  and further  asked for background  on the                                                               
policy to create four units out of what had been one.                                                                           
                                                                                                                                
MR.  DECKER clarified  it was  not  four units,  but rather  four                                                               
lease tracts out of a single tract.   The reason for that is that                                                               
with shale  wells a horizontal  well is drilled and  fracked, but                                                               
one well  can only  drain a  very limited  area in  the immediate                                                               
vicinity of that  well.  There is  no way in shale  play that one                                                               
well could  adequately drain a  nine-square-mile lease  tract, so                                                               
the  division carefully  thought  through the  decision with  the                                                               
commissioner's  blessing that  for  the sales  beginning in  2011                                                               
that would be part of the terms and conditions.                                                                                 
                                                                                                                                
REPRESENTATIVE  JOSEPHSON said  it  begs the  question then  that                                                               
that would have been true 50  years ago, so why the policy change                                                               
now.  He asked whether someone was being dilatory.                                                                              
                                                                                                                                
MR. DECKER  answered that the reason  for the change is  that now                                                               
the  division   was  looking  at   shale  plays  as   opposed  to                                                               
conventional plays.   Great Bear  came in and then  Royale Energy                                                               
and AD8  Energy came  in and have  forthrightly stated  that they                                                               
are there to develop the shale  plays, so that by itself requires                                                               
a  different  way of  looking  at  the reservoirs  and  potential                                                               
reservoirs.                                                                                                                     
                                                                                                                                
1:44:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  commended  the division's  foresight  and                                                               
said  the change  was a  "really wise  decision" given  the great                                                               
difference between  shale development and  the rest of  the North                                                               
Slope.    Since  the  restructuring was  done  in  2010-2011,  he                                                               
continued, it  cannot account for  the incredible spike  in 2014.                                                               
He asked  what accounts for the  spike in 201, and  whether there                                                               
is a graph for 2015.                                                                                                            
                                                                                                                                
MS. FEIGE replied that once  the division finishes issuing all of                                                               
those leases  and has fully  adjudicated numbers, it  will update                                                               
the graph for  2015 for the committee.  Speaking  to the spike in                                                               
2014,  she  said it  is  a  complex  relationship and  a  complex                                                               
thought process that goes into  making the investment decision to                                                               
take lease  assets.  Looking  toward the future and  planning for                                                               
that exploration  work and more  importantly the funding  of that                                                               
exploration work.   She asked the committee to bear  in mind that                                                               
decisions would have  been made a year or better  in advance with                                                               
regard  to  taking  a  significant   acreage  position,  and  the                                                               
division  believes  that prior  to  that  precipitous crash  that                                                               
started in  late 2014  with oil prices,  the planning  would have                                                               
been done and  they would have pulled the trigger.   Clearly, she                                                               
pointed out, there was a tax  change within that time period, the                                                               
implementation of Senate Bill 21,  the More Alaska Production Act                                                               
(MAPA), that became effective January  2014.  She opined that the                                                               
conversation leading  up to  MAPA would  have been  factored into                                                               
decisions by companies as well,  and she encouraged the committee                                                               
members  to speak  to the  companies and  lessees directly  about                                                               
some of those decisions that are made.                                                                                          
                                                                                                                                
1:46:40 PM                                                                                                                    
                                                                                                                                
MR. DECKER  moved to  slide 16, "Cook  Inlet Resource  & Reserves                                                               
Overview," noting that  the map comes out of  the U.S. Geological                                                               
Survey's 2011  resource assessment for  undiscovered, technically                                                               
recoverable  oil  and gas,  which  is  not  reserves and  is  not                                                               
necessarily  commercial   but  just  what  is   the  undiscovered                                                               
resource  out   there  that  could  be   extracted  with  today's                                                               
technology.  The USGS came back  with a fairly robust estimate on                                                               
Cook Inlet in  both oil and gas, he reported.   The USGS believes                                                               
the  basin has  approximately 600  million barrels  of oil  to be                                                               
discovered and approximately 19 trillion  cubic feet of gas to be                                                               
discovered.   That  is broken  out by  between about  14 trillion                                                               
cubic feet  of conventional  gas split  between the  Tertiary and                                                               
Mesozoic  reservoirs,   and  about  5  trillion   cubic  feet  of                                                               
unconventional  gas split  between  Mesozoic  sandstones and  the                                                               
coalbed methane play  that has never quite gotten  off the ground                                                               
in Cook Inlet, but is still there with resource potential.                                                                      
                                                                                                                                
MR. DECKER then  pointed to information released  by the division                                                               
in  late  September  2015  regarding   the  current  natural  gas                                                               
reserves in  the basin,  which is  gas in  the legacy  fields for                                                               
which there  is a 50  percent or better likelihood  of producing.                                                               
He explained that these are  called "2P" or "proven and probable"                                                               
reserves  and that  estimate is  1.18  trillion cubic  feet.   So                                                               
that's not too  different than the number that  the division came                                                               
up with  about five years ago,  and is even a  little bit higher.                                                               
While  there's some  plus or  minus in  the estimates,  that says                                                               
that "we're holding  relatively steady on our  reserve space with                                                               
the investment  that's going on  in the basin; in  fact, probably                                                               
increasing  our  reserve base  slightly  even  though we've  been                                                               
producing gas  at the  same time."   So it's a  good trend.   The                                                               
division doesn't know  how long exactly the  reserve's growth can                                                               
continue to  be the case, but  it's certainly a good  trend.  Mr.                                                               
Decker drew attention  to the southern portion of  the map beyond                                                               
the limits  of the  areawide sale  or the  state lands  where the                                                               
words "Cook  Inlet" are written.   He advised that that  is outer                                                               
continental  shelf and  is assessed  by the  BOEM and  BOEM gives                                                               
that area  a mean  undiscovered resource  potential of  about 1.2                                                               
trillion cubic feet, as well as some oil but mostly gas.                                                                        
                                                                                                                                
1:49:33 PM                                                                                                                    
                                                                                                                                
MS.  FEIGE  drew  attention  to slide  17,  "Cook  Inlet  Current                                                               
Activity  & New  Developments,"  and advised  that Apache  Alaska                                                               
Corporation came into  Cook Inlet in 2011 with  a very aggressive                                                               
acreage taking  in the Cook  Inlet lease sale.   Apache continues                                                               
its  extensive  seismic  acquisition program,  both  onshore  and                                                               
offshore, and  is in  the process  of permitting  for a  new well                                                               
which could  be drilled  in late  2016.   ConocoPhillips recently                                                               
announced the  sale of its interest  in the Beluga River  Unit to                                                               
the  Municipality of  Anchorage,  Anchorage  Municipal Light  and                                                               
Power (ML&P), and Chugach Electric  Association.  Furie Operating                                                               
Alaska  is the  newest  producer  in Cook  Inlet  at the  Kitchen                                                               
Lights  Unit.   In summer  2015, Furie  set the  offshore monopod                                                               
platform, completed all of its  onshore facilities and pipelines,                                                               
and commenced  first gas production  from the Kitchen  Light Unit                                                               
in December  2015.  A second  larger jack-up rig is  scheduled to                                                               
reach Cook  Inlet in  mid-May [2016].   Furie needed  that larger                                                               
piece of equipment for drilling  of the development wells off the                                                               
monopod in  that it is  necessary for  it to cantilever  over the                                                               
top and anchor very securely.   The smaller Spartan 151 rig would                                                               
be floating  somewhat on  the tide and  anchored only  by barges,                                                               
which would leave them with only  1 or 1.5 feet of clearance over                                                               
the  monopod, which  is a  very  dangerous situation.   So  Furie                                                               
decided  to contract  the second  larger jack-up  rig, and  Furie                                                               
will utilize that rig over the  next couple of years to drill out                                                               
the  full   field  development  and  undertake   some  additional                                                               
exploration within the unit area.                                                                                               
                                                                                                                                
MS. FEIGE pointed out that  BlueCrest Energy has the Cosmopolitan                                                               
(Cosmo) Unit and will be  bringing a large ground-based drill rig                                                               
for extended-reach wells into Cook  Inlet in April 2015, and will                                                               
produce oil  from the Cosmo  Unit from onshore  facilities rather                                                               
than   offshore.     BlueCrest  would   like  to   undertake  gas                                                               
development  and  if  BlueCrest  does  choose  to  undertake  the                                                               
investment for  development of the  gas cap it  could potentially                                                               
use the smaller Spartan 151  jack-up rig from offshore.  However,                                                               
should BlueCrest choose not to proceed  in the near term with the                                                               
gas development the Spartan 151 will leave Cook Inlet.                                                                          
                                                                                                                                
1:52:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  where  the  jack-up rig  originated                                                               
from and whether it had been  active or inactive before coming to                                                               
Alaska.                                                                                                                         
                                                                                                                                
MS. FEIGE  replied that  Furie Operating  Alaska reported  to the                                                               
division that  the rig is  coming out  of Singapore and  has been                                                               
actively  drilling on  deep water  prospects there.   It  had not                                                               
been torn  down and stacked  out in  storage as the  Endeavor had                                                               
been.  It is currently on a vessel coming from Singapore.                                                                       
                                                                                                                                
REPRESENTATIVE  SEATON related  that  when the  Endeavor came  to                                                               
Alaska it had been out of the water  for a month or so, but there                                                               
were encrusted mollusks and other  things on the jack-up rig when                                                               
it  arrived in  Kachemak  Bay.   He asked  whether  the rig  from                                                               
Singapore has been inspected for invasive species.                                                                              
                                                                                                                                
MS. FEIGE  responded that  she does  not know  the answer  to the                                                               
question of  inspection for  invasive species  but she  does know                                                               
that  AOGCC has  a robust  rig inspection  and rig  certification                                                               
program  for  new  ground-based and  offshore  rigs  coming  into                                                               
Alaska, and AOGCC will be  responsible for performing the initial                                                               
sign-off  prior  to  operations.   She  said  the  division  will                                                               
inquire about whether  invasive species will now be  part of that                                                               
inspection process, given the history with the Endeavor.                                                                        
                                                                                                                                
REPRESENTATIVE SEATON  offered his appreciation because  there is                                                               
nothing  worse  than  getting  held  up  by  court  filings,  and                                                               
currently Alaska does not have a statutory requirement.                                                                         
                                                                                                                                
1:54:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  noted that  slide 18, "Cook  Inlet Current                                                               
Activity  & New  Developments," shows  the significant  amount of                                                               
work that Hilcorp is doing in  Cook Inlet.  He inquired about the                                                               
current and  anticipated proportion  of production coming  out of                                                               
Cook Inlet today  that is allocable to each  of the participants,                                                               
and requested  a guideline as to  how much of that  proportion is                                                               
oil and how much is gas.                                                                                                        
                                                                                                                                
MS. FEIGE  responded that the  division will drill down  on that,                                                               
but said notionally from today's  activity update:  Apache Alaska                                                               
is not  producing, Conoco  is producing gas,  Furie is  gas only,                                                               
BlueCrest  Energy   will  be  oil   but  nothing   on  production                                                               
currently,  and Hilcorp  Alaska  is clearly  in  production.   At                                                               
present, Cook Inlet oil is nearly  18,000 barrels a day, which is                                                               
the  highest level  it  has  been at  since  2005  with a  steady                                                               
increase since  2009.  She  said that the increase  in production                                                               
can be attributed to Hilcorp's activities.                                                                                      
                                                                                                                                
1:55:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked whether West Eagle  plans to perform                                                               
seismic  workovers with  regard to  Buccaneer's previous  attempt                                                               
out there.                                                                                                                      
                                                                                                                                
MS. FEIGE offered her belief that  West Eagle was acquired by AIX                                                               
Energy, which is  on the division's list  of operating companies.                                                               
Although, the division has no  active applications at the present                                                               
time so  if AIX  is planning work  it has not  brought it  to the                                                               
division's attention at this point in time.                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON inquired whether AIX  would have to come to                                                               
the division before it does seismic work.                                                                                       
                                                                                                                                
MS. FEIGE  answered yes,  the company would  be required  to have                                                               
either a miscellaneous land  use permit or, if it is  on an oil &                                                               
gas  lease,  the  requirement  is  a  lease  plan  of  operations                                                               
approval from the division.                                                                                                     
                                                                                                                                
1:57:03 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  returned to slide  18, "Cook Inlet Current  Activity &                                                               
New Developments,"  and said Hilcorp has  been working diligently                                                               
throughout  the basin  bringing both  gas and  oil production  on                                                               
line.  Notably  in late 2015, Hilcorp acquired  the middle ground                                                               
shoal assets from XTO Energy,  which is offshore in southern Cook                                                               
Inlet and included onshore facilities  and one platform.  Hilcorp                                                               
reports  it  has  a projection  of  spending  approximately  $120                                                               
million in the Cook Inlet region in 2016.                                                                                       
                                                                                                                                
MS. FEIGE moved to slide 19,  "Cook Inlet Wells Drilled & Seismic                                                               
Acquired," to summarize the exploration  and development wells in                                                               
the 2010-2014 period.   She noted that 2010 would  have been just                                                               
before the  Cook Inlet Recovery Act  came into play.   During the                                                               
period  of 2010-2014,  24 exploration  wells  and 65  development                                                               
service wells  and well  branches were  drilled.   She reiterated                                                               
that  the seismic  data acquired  in  Cook Inlet  comes into  the                                                               
division via the tax credit  programs, and 2004-2014 takes in the                                                               
entire time period  where the division would  have been receiving                                                               
credit-related data.   Approximately  725 line  miles of  2D data                                                               
and roughly  660 square miles  of 3D  data was acquired  for both                                                               
onshore and offshore.                                                                                                           
                                                                                                                                
1:58:46 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  reviewed slide  20, "Who's Working  Cook Inlet?"   She                                                               
advised that ConocoPhillips  is the one large major  left in Cook                                                               
Inlet.  Conoco  has announced the sale of the  Beluga River Unit,                                                               
and its  North Cook Inlet Unit  assets are still for  sale.  Mid-                                                               
sized independents  that are still operating  include Hilcorp and                                                               
Apache  Alaska.   Hilcorp  has done  a fine  job  of driving  its                                                               
operating costs in  the inlet down.  Because Hilcorp  owns such a                                                               
suite of properties  it is able to aggregate  its activities into                                                               
areas around the basin or into  type of activity - so rather than                                                               
drilling one or two wells, which  is the highest cost program, it                                                               
aggregates those and drills 10  wells, or does 15-20 workovers at                                                               
a time.   This enables Hilcorp to obtain volume  pricing from the                                                               
local  service sector  and if  Hilcorp  is not  pleased with  the                                                               
local pricing, it has been  able to successfully bring additional                                                               
service companies into Cook Inlet  thereby growing competition in                                                               
that service sector  in the inlet.   She said it has  been a very                                                               
successful model  for Hilcorp and the  division fully anticipates                                                               
Hilcorp employing  the same  practices on the  North Slope.   Ms.                                                               
Feige noted  that the small  independents and LLCs in  Cook Inlet                                                               
are partnered in  developments around the inlet,  and include AIX                                                               
Energy  from West  Eagle, NordAq  Energy, Furie  Operating Alaska                                                               
and  BlueCrest.   She pointed  out that  Furie's partners  in the                                                               
inlet are Corsair Oil & Gas  Company LLC and Cornucopia Oil & Gas                                                               
Company LLC.                                                                                                                    
                                                                                                                                
2:00:45 PM                                                                                                                    
                                                                                                                                
MS. FEIGE  discussed the graph  on slide 22, "Cook  Inlet Leasing                                                               
Activity Trends," depicting the  trends since the commencement of                                                               
areawide leasing in  Cook Inlet between 1999 and  2015.  Notably,                                                               
the big spike  in the graph indicates when Apache  came into Cook                                                               
Inlet in 2011.   It can be seen that a  robust presence and level                                                               
of activity  continues across Cook Inlet.   Interestingly, leases                                                               
in Cook  Inlet have a primary  term of seven years  as opposed to                                                               
ten  years because  the exploration  to development  cycle within                                                               
Cook Inlet is  shorter than on the North Slope  because the inlet                                                               
is  closer to  infrastructure and  there  is less  of a  seasonal                                                               
control on access in the Cook Inlet than on the North Slope.                                                                    
                                                                                                                                
2:01:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER observed  that the graph on  slide 22 shows                                                               
a precipitous decline of activity  between 2004 and 2009 and then                                                               
the jump  in 2010-2011 with  Apache coming  in and then  a fairly                                                               
robust activity  continuing in the  inlet.  He asked  whether DNR                                                               
has a sense  of how efficacious the  financial incentives awarded                                                               
under  the Cook  Inlet Recovery  Act were  in turning  around the                                                               
2004-2009  decline   and  sustaining  the  level   of  investment                                                               
currently  and whether  DNR believes  those incentives  are still                                                               
needed and  still working.   Given that DNR does  the forecasting                                                               
and the  Department of  Revenue (DOR)  is no  longer part  of the                                                               
forecasting, he  further asked  how the passage  of HB  247 would                                                               
affect DNR's forecasting for Cook Inlet.                                                                                        
                                                                                                                                
MS. FEIGE responded:                                                                                                            
                                                                                                                                
     I think  first of all,  we can  see in Cook  Inlet when                                                                    
     Cook  Inlet actually  stopped  being over-supplied  and                                                                    
     started  actually behaving  like  a  supply and  demand                                                                    
     driven market.   And you see that really  start to take                                                                    
     hold in about 2002, and  there was a ... fairly massive                                                                    
     ...  robust  entrance  of  companies  into  Cook  Inlet                                                                    
     because now you could actually  sell your gas and there                                                                    
     was a  market for the gas.   Clearly, over time  and in                                                                    
     Cook  Inlet  and it  is  a  unique  market, it  is  not                                                                    
     attached to the  Lower 48....  Henry Hub  today I think                                                                    
     is  $1.87,  or something  like  that,  and we're  about                                                                    
     $6.56 or  something ... in  Cook Inlet.  So  we're very                                                                    
     separate, but  our market  tends to  become constrained                                                                    
     fairly  rapidly  because  the majority  of  our  demand                                                                    
     comes from  those utilities.   And we have,  over time,                                                                    
     had large  industrial anchors  like Agrium  and looking                                                                    
     forward  we could  again see  Agrium ...  and in  a few                                                                    
     years we could  hopefully see a Donlin  Creek Mine also                                                                    
     needing  to  source   gas  out  of  the   Inlet.    So,                                                                    
     absolutely  I think  that  those  market dynamics  have                                                                    
     played a  role over time  in Cook  Inlet.  And  we were                                                                    
     clearly,  as was  part of  the discussion  in the  Cook                                                                    
     Inlet Recovery Act,  we were behind the  power curve in                                                                    
     terms of investment  and drilling to make  sure that we                                                                    
     had  enough  ready  supply  of gas  to  meet  our  base                                                                    
     utility  needs  and  that then  precipitated  the  Cook                                                                    
     Inlet recovery.   And  we saw, I  think, an  upswing in                                                                    
     activity associated with that.   I think we're seeing a                                                                    
     couple  of things  leading into  the downturn  in 2015.                                                                    
     Again  a  little bit  of  market  constraint going  on,                                                                    
     we're beginning  to see our  utilities out to  ... some                                                                    
     five  year contracts.   Utilities  really like,  as you                                                                    
     all  know, to  have  contracts  out at  10  years as  a                                                                    
     minimum and ... in the  last few years the best they've                                                                    
     been able to  do is 18 months, maybe 2  years, and then                                                                    
     very  recently  we've  seen  a  few  5  year  contracts                                                                    
     trickle out.  So I think  we're seeing the effects of a                                                                    
     bit of market constraint here....                                                                                          
                                                                                                                                
2:05:39 PM                                                                                                                    
                                                                                                                                
MR. DECKER  also responded to Representative  Hawker's questions.                                                               
Regarding the first  question he said there is no  doubt that the                                                               
credits  were  efficacious  and  helped  stimulate  some  of  the                                                               
drilling activity  and reserve replacement  activity.   Also, the                                                               
price  has been  a leveraging  factor.   The Hilcorp  takeover is                                                               
another pretty obvious point in that  it is a single company that                                                               
can manage  the basin as almost  a portfolio.  Another  factor is                                                               
gas storage.  Expansion of gas  storage at the Cook Inlet Natural                                                               
Gas Storage Alaska (CINGSA) facility  helps provide a little more                                                               
incentive for  companies to drill a  well - they may  not be able                                                               
to sell  the gas  directly to the  utilities year-round  but they                                                               
can  sell  it into  storage.    Regarding the  forecasting  going                                                               
forward, Mr.  Decker said his  section of  the Division of  Oil &                                                               
Gas,  the   reservoir  engineers,   will  be  working   with  the                                                               
commercial section, as  well as with some of the  people in DOR's                                                               
Tax Division.   He said DOR's contribution is  still important in                                                               
that it has the rapport and  history of going to the companies to                                                               
speak off the record about  confidential issues for projects that                                                               
are  under development  or  under  evaluation.   The  goal is  to                                                               
prepare  a  more  probabilistic   forecast  that  recognizes  the                                                               
uncertainty at every level, whether  the currently producing, the                                                               
underdevelopment, or the undervaluation.                                                                                        
                                                                                                                                
2:07:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  offered his  appreciation for  DNR working                                                               
with probabilistic  models.   He asked  when something  like that                                                               
might be  available to assist  the committee in judging  the true                                                               
impacts  and  consequences  on  production  volumes  of  the  tax                                                               
proposal that is currently before the committee.                                                                                
                                                                                                                                
MR. DECKER  estimated that the  change is intended to  take place                                                               
in time for the fall revenue forecast.                                                                                          
                                                                                                                                
REPRESENTATIVE  HAWKER understood  Mr. Decker  to be  saying that                                                               
DNR is  the forecasting entity  for the  State of Alaska,  with a                                                               
tiny amount of forecasting done  by DOR, and that the legislature                                                               
will not have forecast information  on the consequences of HB 247                                                               
until the fall revenue forecast.                                                                                                
                                                                                                                                
MR. DECKER replied  that this is his understanding,  unless it is                                                               
contained in the spring DOR Source Book update.                                                                                 
                                                                                                                                
MS. FEIGE added correct.                                                                                                        
                                                                                                                                
2:08:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON, regarding  Ms. Feige's  mention of  market                                                               
constraints,   inquired  whether   she  was   referring  to   the                                                               
Regulatory Commission of Alaska (RCA)  cutting back on the length                                                               
of the gas sales to Japan.                                                                                                      
                                                                                                                                
MS. FEIGE  responded she thinks  that certainly had an  impact at                                                               
the time; it was clear that  when the RCA lifted that restriction                                                               
more fluidity  and flow in  the development of the  local utility                                                               
contracts was  seen.  After confirming  that Representative Olson                                                               
was specifically  referring to  the export  to Japan  through the                                                               
Nikiski facility, she  said she does not have an  answer and will                                                               
have to  look into that.   However, she continued, once  the RCA,                                                               
in  general, lifted  some of  the constraints  that were  broadly                                                               
seen across  Cook Inlet, there was  more activity in that  it was                                                               
one less barrier to development and sale of the product.                                                                        
                                                                                                                                
REPRESENTATIVE OLSON noted there was less demand as well.                                                                       
                                                                                                                                
MS. FEIGE agreed.                                                                                                               
                                                                                                                                
2:10:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted he is  trying to figure out the five-                                                               
year contract period.  He surmised as follows:                                                                                  
                                                                                                                                
     Means  that people  bringing gas  on  right now  unless                                                                    
     they have some  other sales are sitting  there with gas                                                                    
     not ready  to sell  if there's a  five year  filling of                                                                    
     the  market,  unless  Donlin Creek  or  something  else                                                                    
     comes on  line.  So,  first of  all, is that  a correct                                                                    
     analysis  of   that  with  if   the  market   is  fully                                                                    
     subscribed and  with a five-year contract,  people that                                                                    
     bring gas on right now,  unless it would go ... through                                                                    
     ConocoPhillips'  Nikiski plant,  there's  really not  a                                                                    
     sale for that gas.                                                                                                         
                                                                                                                                
MS. FEIGE answered  that the five-year contract  she referred to,                                                               
that DNR has seen, was for  one of the Southcentral utilities and                                                               
it doesn't actually  start until 2018, so it  was forward looking                                                               
past the  expiration of  another contract.   She said  she thinks                                                               
Representative  Seaton's assessment  is correct  in that  DNR has                                                               
heard from Furie that it will need  to scale the pace at which it                                                               
does its  development based  upon the  company's ability  to sell                                                               
its gas,  which makes  perfect financial sense  that that  is the                                                               
driver.   In the event  Furie can't sell  the gas and  recoup its                                                               
cost on  drilling the wells  and doing the  development activity,                                                               
it  does become  a hindrance  to  that development  work and  the                                                               
timely fashion in which that development gets done.                                                                             
                                                                                                                                
2:11:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked about  the impact of  credits versus                                                               
no  credits and  HB  247  on that  modeling.    He further  asked                                                               
whether modeling by the Division  of Oil & Gas incorporates those                                                               
elements and how that would influence actual wells drilled.                                                                     
                                                                                                                                
MR. DECKER  replied that the question  of how HB 247  will impact                                                               
the  forecast  has  not  come  up  in  the  division's  technical                                                               
discussions with  DOR about  how the  division intends  to pursue                                                               
forecasting.                                                                                                                    
                                                                                                                                
MS. FEIGE  added that in the  modeling the Division of  Oil & Gas                                                               
undertakes, the assessment of the  impacts of the tax credits and                                                               
the  costing  is  outside  the   scope  of  what  the  division's                                                               
commercial section  normally does.   She explained that  DNR does                                                               
not  have  access to  the  cost  data  that  DOR has  access  to.                                                               
However, DNR  notionally keeps  a working  inventory or  sense of                                                               
how healthy production is at  the various units around the state.                                                               
Therefore, DNR knows that in  a low price stress environment like                                                               
today, some production might be taken  off line or there might be                                                               
a shortening of the economic life of  a field.  She said the kind                                                               
of analysis  the committee has  asked for is what  Director Alper                                                               
and his  team at  DOR have  been working on  and are  planning to                                                               
present over the  next couple of days.  This  type of analysis on                                                               
bill impacts  would not be  something DNR would normally  take up                                                               
in the scope  of its activities because DNR does  not have access                                                               
to that costing information.                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  he wants  to be  sure the  committee                                                               
does not  have expectations  that the report  it will  receive is                                                               
"on something other than their modeling."                                                                                       
                                                                                                                                
2:14:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER pointed  out that Ms. Feige  and Mr. Decker                                                               
are  the experts  tasked with  doing the  production projections.                                                               
He  asked whether  there is  concern that  these projections  are                                                               
being done  in a vacuum by  not having access to  the information                                                               
"that  would seem  really relevant  to these  production levels."                                                               
For  example,  DNR's  charts  depict  very  distinct  changes  in                                                               
leasing  and resultant  production as  a result  of policy  calls                                                               
made  in major  tax increases  and  decreases in  the state  over                                                               
recent years.   He asked  whether Ms.  Feige and Mr.  Decker have                                                               
comfort  in their  ability to  prepare accurate  modeling without                                                               
better  information  as  to  the  consequences  of  these  policy                                                               
decisions.                                                                                                                      
                                                                                                                                
MS. FEIGE  stated that Representative Hawker  makes an absolutely                                                               
valid point in  that access to good information is  needed and to                                                               
work  with  DOR  in  making  those projections.    She  said  the                                                               
division  tries to  drive its  information  and its  look at  how                                                               
industry is doing  by talking directly with industry.   She noted                                                               
that industry  is forthcoming  on its  perceived impacts  to what                                                               
industry  has planned.   She  said, "We  are in  a bit  of a  box                                                               
because of the information and ...  I think that's where I'd have                                                               
to leave it."                                                                                                                   
                                                                                                                                
2:16:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  asked whether  DNR  has  any position  or                                                               
counsel for committee members on HB 247.                                                                                        
                                                                                                                                
MS. FEIGE responded:                                                                                                            
                                                                                                                                
     From DNR's standpoint and  the division's standpoint, I                                                                    
     would just stress that balance is  the key.  We have to                                                                    
     keep a  balance moving forward between  exploration and                                                                    
     ongoing  production.   The exploration  wells of  today                                                                    
     and the exploration successes of  today, and the next 5                                                                    
     years  or so  become the  production 10,  15, 20  years                                                                    
     down the  road.  So, where  we really want to  focus in                                                                    
     and  be  very,  you  know, on  the  spot  and  somewhat                                                                    
     myopic,  I think  we have  to be  cautious not  to take                                                                    
     that tact  because we  have to keep  our eye  on what's                                                                    
     going to be  our production 5, 10, 15,...  20 years ...                                                                    
     down  the road.   I  think that  we can  absolutely say                                                                    
     that incentive  credit programs work.   We saw  it work                                                                    
     in  Cook Inlet,  but again  it comes  back to  balance.                                                                    
     It's a balance of what  can the state afford to sustain                                                                    
     going forward and I think  that we have to keep talking                                                                    
     to  our companies,  hearing  from  them because  that's                                                                    
     going to be  the response to us all as  we work through                                                                    
     this  and try  to make  that decision  of what  can the                                                                    
     state afford to  do going forward.  Trying  to keep our                                                                    
     eye on  what is our  production source going to  be ...                                                                    
     10, 15, 20 years down the road.                                                                                            
                                                                                                                                
REPRESENTATIVE HAWKER noted he heard  Ms. Feige say to "keep your                                                               
eye on the ball."                                                                                                               
                                                                                                                                
MS. FEIGE replied absolutely.                                                                                                   
                                                                                                                                
2:18:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR addressed  the statement  about making  sure                                                               
the state is holding lease sales  so there is always that ongoing                                                               
activity.   Regarding maintaining  a balance  in the  current low                                                               
price environment,  she asked  how the  department plans  to keep                                                               
things moving forward from the lease sale side of things.                                                                       
                                                                                                                                
MS. FEIGE answered  that the division undertakes a  review of its                                                               
terms and conditions within about  six months prior to each lease                                                               
sale, be it  North Slope or Cook  Inlet.  The team  looks at Cook                                                               
Inlet,  for example,  from  the standpoint  of  the resource  and                                                               
reserve and what the division understands  about it.  It looks at                                                               
the commercial  side of things  and what's the  price projection,                                                               
how supplied  is the Cook Inlet  basin, and all of  those complex                                                               
factors that  can come to bear  on the behavior of  companies and                                                               
their participation in  the lease sales.  The  division then sets                                                               
the  terms   and  conditions   for  each   lease  sale   and  the                                                               
commissioner has  the authority to  raise or lower  minimum entry                                                               
bids to reflect  what the division believes may  be stress points                                                               
on the  industry.  For  example, she  said, there shouldn't  be a                                                               
minimum entry  bid that is  too high  in a price  stressed market                                                               
when companies do not have a  lot of surplus cash sitting around.                                                               
It is in the state's interest  for companies to take that acreage                                                               
and  be  able to  hang  onto  it  and perform  their  exploration                                                               
planning through  the period of  downturn and then  be positioned                                                               
to really  ride the wave as  prices begin to come  back up again.                                                               
Those are  all factors the  division considers and  works through                                                               
in making its recommendation to  the commissioner to engender and                                                               
establish a  robust level of  leasing activity across  the state.                                                               
She  pointed out  that it  is important  that conversations  like                                                               
this  certainly come  into  play in  those  assessments of  those                                                               
terms and conditions.                                                                                                           
                                                                                                                                
2:20:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON inquired  whether Ms.  Feige believes  her                                                               
division   was  able   to   get  its   opinion   across  to   the                                                               
administration about  how HB  247 will impact  the industry.   He                                                               
further  inquired  whether  Ms.  Feige could  share  any  of  the                                                               
concerns that industry has expressed to DNR about the bill.                                                                     
                                                                                                                                
MS.  FEIGE replied  that  she and  Director  Alper spoke  several                                                               
times during  the development of  the legislation; he  would call                                                               
and ask questions  about existing credits on the  books, how long                                                               
they've been  used, and did DNR  perceive that there would  be an                                                               
impact to industry  if certain older credits were  repealed.  The                                                               
Department of Revenue would ask  DNR's opinion as to how industry                                                               
may react  if a credit program  went away.  She  advised that she                                                               
and her division were not  intimately involved in the development                                                               
of the bill  that is before the committee, but  DNR did add input                                                               
as it was asked  of it from DOR and Director  Alper's team.  With                                                               
respect to the  second question, she said the  division has heard                                                               
from industry that taxes generally  are lumped into the bucket of                                                               
cost  for  the  overall  project  development  or  working  in  a                                                               
specific area.   In the  event costs go  up companies need  to be                                                               
able to compensate,  and at a time when prices  are very low that                                                               
sets off  some alarm bells  and the division has  certainly heard                                                               
that from  industry.  The concern  is over making big  changes to                                                               
tax policy  at a  time that prices  are very low,  and at  a time                                                               
when prices  are not expected  to come  back into the  $100 realm                                                               
anytime soon.   Ms. Feige said  the division has also  heard from                                                               
companies  that are  halfway way  through a  development drilling                                                               
program in which they have  factored the tax credit programs into                                                               
their  expenditure equation,  and if  the credits  go away  their                                                               
world changes  at that point.   She said it's coming  back to the                                                               
constant  theme  of stability,  what  can  the companies  expect?                                                               
They need to be able to plan  more than six months out, they need                                                               
to plan one  or two years out  in order to line  up their funding                                                               
and  ensure  that they  can  undertake  those activities  without                                                               
interruption.                                                                                                                   
                                                                                                                                
REPRESENTATIVE HERRON  commented that  there has  been discussion                                                               
about if there  is a change "where  do we stop it  but not impact                                                               
the  ones that  are  in play?"    That is  an  important part  of                                                               
factoring in amendments to the proposed legislation.                                                                            
                                                                                                                                
2:24:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  remarked  that there  are  two  different                                                               
conversations, one on gas and  especially Cook Inlet gas, and the                                                               
rest on  oil.  He  noted there is gas  at about $1.87  Henry Hub,                                                               
and worldwide LNG  long-term contracts less than $5.00  spot.  He                                                               
asked  whether  there  is  any  place in  the  United  States  or                                                               
worldwide that has a better  profit margin for producing gas than                                                               
Cook Inlet, which is selling  at $6.85, with winter prices higher                                                               
than that.                                                                                                                      
                                                                                                                                
MS. FEIGE  responded that  the answer  clearly is  no.   The Cook                                                               
Inlet is at $6.50, the Lower  48 is $1.87, and currently Japan is                                                               
less  than one-half  of what  it was  two or  three years  ago in                                                               
terms of LNG import.  Cook Inlet  is a good place to be for being                                                               
in  the  gas business.    "Our  problem  is  that we  lack  those                                                               
industrial anchors," she said.   Those large consumers, just like                                                               
in  the power  sector, shoulder  the development  of a  big power                                                               
plant.  An industrial anchor  allows power generation at a steady                                                               
rate and  then others  can come  into the  power stream  once the                                                               
plant is up  and going.  That  same model applies to  gas in Cook                                                               
Inlet.  Cook Inlet has great  resource and has a lot of companies                                                               
doing a lot of good work, but at  the present time it runs out of                                                               
offtakes.                                                                                                                       
                                                                                                                                
REPRESENTATIVE   SEATON  surmised   that  "the   market  is   the                                                               
determiner  of what  is happening  in  Cook Inlet,  but that  ...                                                               
people  drill, and  if they  have a  market for  it, is  probably                                                               
about the best in the world."                                                                                                   
                                                                                                                                
MS. FEIGE agreed.                                                                                                               
                                                                                                                                
2:26:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  surmised  that if  the  Agrium  [fertilizer                                                               
facility]  came back  on  line it  would be  large  enough to  be                                                               
considered an anchor.                                                                                                           
                                                                                                                                
MS. FEIGE replied  yes.  She noted that Agrium  has two trains at                                                               
its facility  and each train  takes 24-25 billion cubic  feet per                                                               
year, so  if the full facility  came on that would  be 50 billion                                                               
cubic feet  [per year].  Right  now, the utility, field  gas, and                                                               
refinery-based demand in Southcentral is  80 billion cubic feet a                                                               
year.  Donlin Creek Mine would  add another 12 billion cubic feet                                                               
a year.  So, those large anchor potentials are out there.                                                                       
                                                                                                                                
2:27:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  referred  to   Ms.  Feige's  response  to                                                               
Representative  Seaton  that  the   gross  sales  price  for  the                                                               
extracted  resource  in  Cook  Inlet is  higher  than  Henry  Hub                                                               
prices.   He  asked  whether Ms.  Feige would  come  to the  same                                                               
conclusion  when  looking   at  the  net  income   of  a  company                                                               
performing  in  Cook  Inlet  and when  the  cost  structures  are                                                               
considered.   If a company develops  gas in Cook Inlet  and wants                                                               
to sell  it to  Japan, there  is a  large ocean  in between.   He                                                               
asked whether Ms.  Feige was addressing the  net profitability of                                                               
a company  coming into Cook Inlet  and operating, or was  it more                                                               
in the context  of a high gross  price and at the end  of the day                                                               
the company's gross doesn't matter, the net matters.                                                                            
                                                                                                                                
MS.  FEIGE confirmed  Representative Hawker  is correct  and said                                                               
costs have to  be a consideration in any  business decisions, and                                                               
both Cook  Inlet and  the North Slope  are higher  cost operating                                                               
environments in  that labor costs  more, services cost  more, and                                                               
transportation  costs from  an export  standpoint will  certainly                                                               
come into  play.  If  companies look for  an area where  they can                                                               
make a  good return on  the gas,  their internal rates  of return                                                               
will drive  that.  She said  she still thinks that  with a robust                                                               
market,  Cook Inlet  and  Alaska  are good  places  to  be.   She                                                               
stressed that  Representative Hawker's  point is very  well taken                                                               
in that the net and the  end-of-the-day margin matter and that is                                                               
driven by cost.                                                                                                                 
                                                                                                                                
REPRESENTATIVE HAWKER  identified himself  as the sponsor  of the                                                               
Cook Inlet Recovery Act and said  it truly was the intent to make                                                               
the  basin  competitive, attractive,  and  attract  the level  of                                                               
production that has been seen.                                                                                                  
                                                                                                                                
The committee took an at-ease from 2:30 p.m. to 2:33 p.m.                                                                       
                                                                                                                                
2:33:10 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
on behalf of the governor,  continued his PowerPoint presentation                                                               
entitled,  "Oil  and Gas  Tax  Credit  Reform- HB247,  Additional                                                               
Modeling and Scenario Analysis -  Part 1a."  Before beginning his                                                               
presentation, he  advised that  Commissioner Randall  Hoffbeck is                                                               
in  transit  from  New  York, and  DOR's  senior  economists  are                                                               
currently putting  the finishing  touches on a  presentation that                                                               
will be  given to the  committee tomorrow  morning.  He  spoke to                                                               
the evolution of DOR's forecasting process as follows:                                                                          
                                                                                                                                
     The Department  of Revenue is charged  with forecasting                                                                    
     oil   production   primarily   for   the   purpose   of                                                                    
     forecasting  revenue.   That's our  job, is  to produce                                                                    
     the  Revenue  Sources  Book   and  determine  how  much                                                                  
     revenue the  State of Alaska  can expect.  Most  of the                                                                    
     source data for  that is tied to our  own outreach from                                                                    
     industry.   We don't  make this up,  we talk  to people                                                                    
     from  industry, multiple  companies every  year.   They                                                                    
     tell us  their drilling plans, their  expectations, and                                                                    
     then we  build that into  a drilling forecast  and then                                                                    
     we  have,  for many  years,  used  the services  of  an                                                                    
     outside consulting  engineer, a petroleum  engineer who                                                                    
     would  help us  convert that  data into  decline curves                                                                    
     and  expected  volumes.   And  then  to that,  in  more                                                                    
     recent years, we  would layer on some  risk factors and                                                                    
     delay  principles, expectations  for the  new oil,  the                                                                    
     under development and under evaluation.   What we faced                                                                    
     in the last  year or so, frankly, is  because of budget                                                                    
     short  falls, we  re-looked at  how we  paid for  these                                                                    
     services.    That  we  thought  rather  than  going  to                                                                    
     outside  consulting   services  that  cost   the  state                                                                    
     substantial  amounts  of  money,   that  much  of  that                                                                    
     expertise  and  professional   knowledge  in  petroleum                                                                    
     engineering existed  within the  state's own  system in                                                                    
     the Department of Natural Resources.   So, we looked to                                                                    
     them to  help us  through it beginning  this year.   We                                                                    
     are  the  client  and  they  are,  in  many  ways,  our                                                                    
     consultant.  And  they are going to be  taking the same                                                                    
     data set,  the information on  what wells are  going to                                                                    
     be drilled and helping us  to turn it into the forecast                                                                    
     that we brought  before this committee ...  in the fall                                                                    
     Revenue  Sources  Book.    If   there  are  changes  in                                                                  
     behavior, whether tied to market  forces or any changes                                                                    
     in  legislation, those  will be  reflected in  the fall                                                                    
       forecast; we begin that outreach generally in the                                                                        
     months of August and September.                                                                                            
                                                                                                                                
2:36:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  understood that Commissioner  Hoffbeck was                                                               
back  East discussing  state fiscal  prospects  with the  state's                                                               
rating agencies and securities analysts.   He inquired as to what                                                               
the  rating   agency's  responses   were  to  the   Alaska  State                                                               
Legislature considering HB 247 and  imposing a major tax increase                                                               
on its only  sustaining industry at a time when  that industry is                                                               
facing severe economic losses.                                                                                                  
                                                                                                                                
MR. ALPER replied  he has not spoken to  Commissioner Hoffbeck on                                                               
his experiences in  New York, although he returns  tonight and he                                                               
will speak with him tomorrow.   He said that the rating agency is                                                               
concerned  about  the  state's  budget  shortfall,  and  Alaska's                                                               
ability to prove that it can  continue to balance its budget.  He                                                               
said the  Department of Revenue  presents to them as  it presents                                                               
to the  legislature this bill  as part  of a package  of reducing                                                               
that budget deficit.                                                                                                            
                                                                                                                                
2:37:16 PM                                                                                                                    
                                                                                                                                
MR. ALPER drew attention to  slide 2, "What We'll Be Discussing,"                                                               
to explain  that the slide is  from the Table of  Contents of the                                                               
presentation he  began on 2/22/16.   He reminded members  that he                                                               
had  ended that  presentation about  half-way through  the fourth                                                               
bullet  which deals  with the  details  of how  the pieces  work:                                                               
some of  the historic cost  information, overview of the  oil and                                                               
gas  economy, DOR's  thoughts  as  to what  has  worked and  what                                                               
hasn't,  what  is  scheduled  for sunset,  what  is  expected  to                                                               
continue, what  is being repealed  in this bill,  and summarizing                                                               
the  suite of  credits  in  Alaska's portfolio.    He noted  that                                                               
appended  at  the  end  of this  presentation  are  DNR's  slides                                                               
addressing  issues of  gas supply  in  Cook Inlet,  and that  the                                                               
bullet  shown  in grey  on  slide  2  will  be presented  to  the                                                               
committee tomorrow.                                                                                                             
                                                                                                                                
MR. ALPER  noted that the last  subject he discussed was  what is                                                               
involved in  strengthening the minimum tax  by preventing certain                                                               
credits from being  able to be used to reduce  payments below the                                                               
so-called  floor,  the  4  percent  minimum  tax.    He  said  he                                                               
previously  reviewed the  Gross  Value  Reduction (GVR)  eligible                                                               
fields and the issues there and  how DOR proposes to make the so-                                                               
called  new oil  pay at  the 4  percent minimum,  as well  as the                                                               
issue of major producers who may  have a Net Operating Loss (NOL)                                                               
Credit due to  losing money in one calendar year  from being able                                                               
to use  that Net Operating  Loss Credit  in the next  calendar to                                                               
offset  their minimum  productions taxes  and pay  something like                                                               
zero.   He noted that  slides 35-36, "Section 17(b):   Strengthen                                                               
the Minimum Tax, How net  operating loss (NOL) credits are earned                                                               
and used,"  are very complex  but are  more or less  monthly cash                                                               
flow slides  to show that  with a second  year of low  taxes what                                                               
could  happen  by  offsetting  the   minimum  tax  with  the  Net                                                               
Operating  Loss Credit,  and  then yet  more  Net Operating  Loss                                                               
Credits stack up into the future.                                                                                               
                                                                                                                                
2:39:31 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to  slide 38, "Section  17(c):   Strengthen the                                                               
Minimum  Tax, Preventing  per-taxable barrel  credits from  being                                                               
used in  another month  other than  the month  earned."   He said                                                               
current  law  allows  those  monthly  earned  taxes  to  be  used                                                               
anywhere  in the  year.   This  is only  relevant with  a lot  of                                                               
volatility specifically with certain  months of the year impacted                                                               
by the  minimum tax and certain  months of the year  not impacted                                                               
by  the  minimum tax.    In  the  months  with the  minimum  tax,                                                               
typically the entire $8 cannot  be used, the companies will start                                                               
to use  that $8 per  barrel credit,  bump up against  the minimum                                                               
tax, and then lose the rest of it.   In the event there are other                                                               
months  of the  year, those  lost credits  have been  able to  be                                                               
applied to reduce  earlier months' taxes down  toward the minimum                                                               
tax level.  He advised that  he will provide graphs later in this                                                               
presentation that will  show more clearly what  he is discussing.                                                               
He  said Alaska's  Clear and  Equitable Share  (ACES) bill  was a                                                               
true  monthly tax,  the progressivity,  the entirety  of the  tax                                                               
rate, was  monthly.  That  regime was eliminated three  years ago                                                               
and the  bill before the committee  is more of a  true annual tax                                                               
where one  small component of  the tax  would be locked  into the                                                               
month in  which it was earned  so as to prevent  some upside risk                                                               
to the  state.   [The administration's]  contention is  that when                                                               
there are several months of high  oil prices, the state should be                                                               
able to  earn all of  the taxes earned  in those high  months and                                                               
not have  those high month  revenues eroded by a  possible credit                                                               
earned in low months later on in the year.                                                                                      
                                                                                                                                
2:41:22 PM                                                                                                                    
                                                                                                                                
MR. ALPER  addressed slide  39, "Section  17(c):   Strengthen the                                                               
Minimum  Tax, Credits  'lost' to  the minimum  tax before  annual                                                               
true-up," and explained  that the graph is a model  of the actual                                                               
conditions of what happened in calendar year 2014.  He said:                                                                    
                                                                                                                                
     The  top of  the  yellow  bar is  the  entirety of  the                                                                    
     production tax  based on 35  percent of  production tax                                                                    
     value, the statutory calculation  of what the tax would                                                                    
     be  given the  information  provided  by our  producing                                                                    
     taxpayers.    The  top  of the  green  line,  or  after                                                                    
     subtracting the  yellow, is the  actual tax  paid after                                                                    
     application of the Per-Taxable Barrel  Credit.  So, you                                                                    
     could  see ...  in the  early months  of the  year when                                                                    
     prices were  higher, the grey  line across the  top ...                                                                    
     looks  like it  just might  be  a stray  line.   That's                                                                    
     actually  a line  tied to  the axis  on the  right-hand                                                                    
     side, which is  the price of oil.  And  you could see a                                                                    
     price of oil that was  over $100, dipped under $100 for                                                                    
     the  last time  in the  month  of August  and was  down                                                                    
     around $50 by December.   So in those earlier months of                                                                    
     the year  the Per-Taxable  Barrel Credit was  either $5                                                                    
     or  $6 per  month.   That number  ... increases  as the                                                                    
     price decreases  to hit a peak  of $8 at below  a price                                                                    
     of  oil of  between  $80 or  $90.   So  that's why  the                                                                    
     yellow bar  got thicker  in September and  October, and                                                                    
     then into November and December  what happened is there                                                                    
     is  no more  green bar.    What the  red bar  is, is  4                                                                    
     percent of  gross tax.  The  4 percent of the  gross is                                                                    
     what  must   be  paid  based   upon  the   minimum  tax                                                                    
     calculation and  the dotted lines  in the  November and                                                                    
     December, those  show those Per-Taxable  Barrel Credits                                                                    
     that were effectively lost to  the producers; they were                                                                    
     not able to use them  because there wasn't enough delta                                                                    
     between the  top of the yellow  bar and the top  of the                                                                    
     red bar.                                                                                                                   
                                                                                                                                
2:43:14 PM                                                                                                                    
                                                                                                                                
MR. ALPER moved to the graph on slide 40, "Section 17(c):                                                                       
Strengthen the Minimum Tax, 'Lost' credits recovered at annual                                                                  
true-up."  He continued:                                                                                                        
                                                                                                                                
     You could see what happened  here ... you could see the                                                                    
     same dotted lines  in November and December.   What the                                                                    
     companies were able  to do is migrate  those credits to                                                                    
     effectively   offset  the   great  bulk   of  January's                                                                    
     production tax above the level  of the floor.  And what                                                                    
     that meant  was at  the time of  our annual  true-up in                                                                    
     April  of 2015,  we  refunded  companies $112  million.                                                                    
     That was the  amount of lost credits that  we were able                                                                    
     to migrate in  to ... prior months' tax  liability.  So                                                                    
     that's the  phenomenon that actually did  occur.  We've                                                                    
     created  a  second  scenario that  would  show  a  more                                                                    
     extreme  example of  what I've  just presented.   In  a                                                                    
     year of  greater price volatility the  credit recovery,                                                                    
     or the  ability to  migrate credits,  could take  up an                                                                    
     even greater  share and could  push a large  portion of                                                                    
     the  state's  production tax  even  in  high cost  high                                                                    
     price months down  to the minimum tax level.   And this                                                                    
     occurs because  ... the minimum  tax calculation  is an                                                                    
     annual tax  so the credits  that cannot be  used within                                                                    
     the year ... could be recovered at the year's end.                                                                         
                                                                                                                                
2:44:27 PM                                                                                                                    
                                                                                                                                
MR. ALPER explained  that the graph on slide  43, "Section 17(c):                                                               
Strengthen the  Minimum Tax, 'Lost'  credits recovered  at annual                                                               
true-up," is  a more hypothetical  and dramatic drop  that occurs                                                               
earlier in the year.  He said:                                                                                                  
                                                                                                                                
     So here we have a scenario  where in January of year X,                                                                    
     the  price of  price of  oil is  $90, by  December it's                                                                    
     down to  $50.   And you'll  recognize the  structure of                                                                    
     this chart, the yellow bar  is the production tax based                                                                    
     on  the statutory  35 percent  calculation.   The green                                                                    
     bar is  that tax after  the application of  the sliding                                                                    
     scale credit, which  for most of these  months would be                                                                    
     $8 per barrel.  And  then beginning in June and getting                                                                    
     larger in  the later months,  you see a  growing dotted                                                                    
     line  which  is  Per-Taxable Barrel  Credits  that  are                                                                    
     lost,  that are  foregone because  of the  inability to                                                                    
     use them because of the  minimum tax; the companies are                                                                    
     forced  to pay  at  the red  minimum  tax level  during                                                                    
     those months.   [Returning to slide 42],  you could see                                                                    
     the  relative thickness  of the  green bars  in January                                                                    
     and February  in slide 42.   [On slide 43],  those bars                                                                    
     are completely  wiped out  by the  migration of  all of                                                                    
     those  unused credits  from June  through December  and                                                                    
     offset  against  February.    And  the  total  in  this                                                                    
     calculation, which was something  of a snapshot created                                                                    
     by our  staff, leads to  $233 million in  lost credits,                                                                    
     or about  a third of  the total production  tax revenue                                                                    
     for  this theoretical  year is  lost at  true-up.   So,                                                                    
     what the bill before you  is doing ... and the language                                                                    
     in it is  somewhat complicated, but what it  does is it                                                                    
     locks in the Per-Taxable Barrel  Credit to the month in                                                                    
     which it  was earned  and doesn't  allow it  to migrate                                                                    
     from month-to-month within the calendar year.                                                                              
                                                                                                                                
2:46:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked whether there was  any discussion                                                               
in either  body or in  any committee  about this phenomenon.   He                                                               
noted that it is the law  and arguably it doesn't matter if there                                                               
was a discussion, but he would  like to know whether this came up                                                               
in any presentation that Mr. Alper is aware of.                                                                                 
                                                                                                                                
MR.  ALPER replied  that he  specifically reviewed  the committee                                                               
record on this  issue for the House  Resources Standing Committee                                                               
at the  time.   The gentleman  who did the  bulk of  carrying the                                                               
bill  on behalf  of the  previous administration  was DOR  Deputy                                                               
Commissioner [Michael]  Pawlowski.   Mr. Alper related  that when                                                               
asked  a similar  line of  questioning by  Representative Seaton,                                                               
Mr.  Pawlowski's  understanding  was  that  this  was  a  monthly                                                               
credit, a  monthly calculation,  and that it  was intended  to be                                                               
taken within the month it was earned.  Mr. Alper continued:                                                                     
                                                                                                                                
     To be fair,  the committee record, nor  the thinking at                                                                    
     the time,  did not  contemplate the  minimum tax.   Did                                                                    
     not contemplate that  there would be years  in which we                                                                    
     would be  at the floor.   That this phenomena  which is                                                                    
     before you would  be relevant.  And I  don't believe it                                                                    
     was  addressed.   In the  context of  a normal  year in                                                                    
     which  there  is  no minimum  tax,  Mr.  Pawlowski  was                                                                    
     absolutely  correct -  this is  a monthly  calculation.                                                                    
     The credit rate itself  does change from month-to-month                                                                    
     as the  price of oil might  change from month-to-month,                                                                    
     but  the ability  to recapture  it at  true-up did  not                                                                    
     become relevant  until roughly 18  months ago  ... when                                                                    
     the  price of  oil dropped  to  a level  where for  the                                                                    
     first time in our history  of having a net profits tax,                                                                    
     we fell  into the  realm of minimum  tax, of  paying at                                                                    
     the floor.                                                                                                                 
                                                                                                                                
2:47:48 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to  slide 44, "Section  17(c):   Strengthen the                                                               
Minimum Tax," to  summarize his previous comments.   He said that                                                               
this particular  issue of strengthening  the minimum tax  is only                                                               
an issue in  years of relatively high oil  price volatility where                                                               
some, but  not all, of  the months trigger  the minimum tax.   He                                                               
pointed out that the examples  on the previous two slides showing                                                               
moderate to high  oil volatility reduce the  state's tax payments                                                               
by close to 30 percent, and  an effective tax rate on net profits                                                               
would reduce that  from about 14.5 percent to 10.5  percent as an                                                               
effective tax rate.   This phenomenon causes the  state to forego                                                               
some  fraction of  the  upside  in years  where  the monthly  oil                                                               
prices  might be  very high,  and otherwise  would generate  high                                                               
revenues; the state loses some of  that revenue due to the offset                                                               
from the months  in which prices are low.   "Another phenomenon,"                                                               
he continued, "in  the future as tariff rates  begin to increase,                                                               
you'll  start seeing  wellhead values  decreasing and  that might                                                               
mean,  for example,  the Per-Taxable  Barrel  Credit itself  will                                                               
start to trend toward the  larger numbers, the $7-$8 range rather                                                               
than  the $5  and $6  range that  was envisioned  in some  of the                                                               
committee discussions during the last major fiscal change."                                                                     
                                                                                                                                
2:49:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON,  regarding when  Mr. Alper  talks about                                                               
an increase in  tariff rates, asked whether  that anticipation is                                                               
due to moving to more unconventional oil or some other reason.                                                                  
                                                                                                                                
MR. ALPER responded that the  most prominent factor in increasing                                                               
tariff  rates   are  declining  production,  when   the  cost  of                                                               
operating the  transportation system  is relatively fixed  and as                                                               
fewer barrels go  through, each one has to pay  a higher share of                                                               
the freight.                                                                                                                    
                                                                                                                                
2:49:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  understood that everything in  Section 17 is                                                               
retroactive to January 1.  She  surmised this is because at true-                                                               
up at  the end  of calendar  year 2016, DOR  wants to  avoid this                                                               
problem for 2016.   She inquired as to how  difficult it would be                                                               
for the companies  at true-up if, for example, it  was started on                                                               
the fiscal year.                                                                                                                
                                                                                                                                
MR. ALPER  answered that  the intent of  the retroactivity  is to                                                               
have  this  phenomenon be  eliminated  for  the current  calendar                                                               
year.  If the bill doesn't  pass until the end of the legislative                                                               
session there would have to be  some sort of make-up payment or a                                                               
way to account for that come  the first monthly payment after the                                                               
passage of the bill.  He offered the following:                                                                                 
                                                                                                                                
     The  concept  of  a  split   year  for  many  of  these                                                                    
     provisions that  affect the calendar year  tax are very                                                                    
     problematic;  they   have  caused   complex  situations                                                                    
     inside the  audit staff  in the past.   The  ACES bill,                                                                    
     for example, took  effect on July 1, 2007  ... but it's                                                                    
     a calendar  year tax, it  lead to a situation  where in                                                                    
     many ways they had to  split 2007 into two separate tax                                                                    
     returns and do a full  analysis of the first six months                                                                    
     separate  and  distinct from  a  full  analysis of  the                                                                    
     second six  months.   So, to  the extent  features that                                                                    
     impact  the underlying  tax  calculation  for the  tax-                                                                    
     paying producers,  changes in  the middle of  the year,                                                                    
     it  will lead  to some  inevitable complexities  in the                                                                    
     administering of that tax.                                                                                                 
                                                                                                                                
2:51:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR asked which of the two fiscal notes shows                                                                   
this element.                                                                                                                   
                                                                                                                                
MR. ALPER replied:                                                                                                              
                                                                                                                                
     The one fiscal note  that shows the fund capitalization                                                                    
     element also  shows the  negative numbers  in spending,                                                                    
     and  all of  the  provisions of  the  bill that  reduce                                                                    
     credit  payments  or   eliminate  certain  credits  are                                                                    
     encompassed  in  that  negative number.    All  of  the                                                                    
     minimum  tax  changing  provisions  are  in  the  other                                                                    
     fiscal note  that shows  the positive  revenue numbers.                                                                    
     So, what you  see in the early couple of  years is $100                                                                    
     million  revenue estimate  declining to  a $50  million                                                                    
     revenue estimate  in the out  years.  The  $50 million,                                                                    
     in every  year, is  the rough  estimate for  the annual                                                                    
     additional revenue from an increase  in the minimum tax                                                                    
     from 4 percent to 5  percent.  Now, previous slides and                                                                    
     this  slide  deck  before  you  that  we  went  through                                                                    
     Monday,  show that  there is  some variability  in that                                                                    
     and  depending on  the price  of  oil that  could be  a                                                                    
     number between roughly  $30 and $70 million.   And with                                                                    
     the  next  generation  of this  fiscal  note,  we  will                                                                    
     incorporate some of that more  nuanced modeling to that                                                                    
     element  of the  calculation.   The second  $50 million                                                                    
     that's in  the early  years is the  impact specifically                                                                    
     of  not being  able to  use Operating  Loss Credits  to                                                                    
     offset minimum  tax payments from the  major producers.                                                                    
     But based on our forecast,  this is a phenomenon that's                                                                    
     only in  place for  the current and  next year  so it's                                                                    
     about a two-year  problem, then it will go  away of its                                                                    
     own  accord if  our forecasted  prices hold  because at                                                                    
     that point we  don't expect any of our  producers to be                                                                    
     losing money;  therefore won't be earning  an operating                                                                    
     loss  credit.   This specific  provision in  17(c) that                                                                    
     I've been discussing thus far  today, is not forecasted                                                                    
     at any value simply because  our price forecasts do not                                                                    
     consider volatility.   That we have a  fixed number for                                                                    
     the year and  this is a phenomena  that's only relevant                                                                    
     in a year where there's a  lot of up and down and we're                                                                    
     looking at  annual average numbers and  therefore can't                                                                    
     project the value of up and down.                                                                                          
                                                                                                                                
2:54:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER stated  that for the last  two meetings Mr.                                                               
Alper has dialogued  using one circumstance - the year  2014 - to                                                               
discuss and illustrate  the inner play of  truly major components                                                               
of the  overall tax  construct.  This  tax construct  has evolved                                                               
since  the end  of the  Economic Limit  Factor (ELF).   He  asked                                                               
whether Mr. Alper  has any support or evidence  from his research                                                               
of  past legislative  sessions that  would  show the  legislature                                                               
intended the  state's major tax  constructs to be  anything other                                                               
than an  annualized tax cycle  to annualize activity that  can be                                                               
volatile  on  both  the  taxpayer   and  the  state  as  the  tax                                                               
administrator.   Representative Hawker said Mr.  Alper is clearly                                                               
looking to  have this parsed  into a  more granular tax  cycle of                                                               
literally an isolated monthly cycle.                                                                                            
                                                                                                                                
MR.  ALPER responded  that the  specific  provision addressed  in                                                               
Section 17(c) of HB 247 relates to the application of the Per-                                                                  
Taxable Barrel  Credit.  That is  a new credit that  did not take                                                               
effect until  January 2014  with the passage  of Senate  Bill 21.                                                               
Senate Bill  21 describes that credit  as a monthly credit  and a                                                               
monthly calculation  that very  explicitly varies  from month-to-                                                               
month depending  upon the average  price of oil in  that calendar                                                               
month.  If it's  below $90 gross value it is  $8, between $90 and                                                               
$100 it is $7, and so on.   So, the value of the credit was quite                                                               
explicitly monthly.  As for the ability to use it from month-to-                                                                
month it was neither addressed nor  not addressed.  To the extent                                                               
it was  discussed, Deputy  Commissioner [Pawlowski]  described it                                                               
as a monthly calculation.  He continued:                                                                                        
                                                                                                                                
     That one specific provision of  the new law was said to                                                                    
     be a monthly calculation.   All other provisions of the                                                                    
     calculation are absolutely an  annual calculation.  And                                                                    
     by  the elimination  of  progressivity,  which was  the                                                                    
     most  extreme  monthly  calculation in  the  prior  tax                                                                    
     regime, in many, many ways  Alaska's oil and gas system                                                                    
     was  converted  from  a  monthly  to  an  annual  based                                                                    
     system.  But, the remnant  of a monthly system that was                                                                    
     retained with  the passage of  Senate Bill 21  was this                                                                    
     specific calculation of the Per-Taxable Barrel Credit.                                                                     
                                                                                                                                
REPRESENTATIVE  HAWKER respectfully  disagreed  with Mr.  Alper's                                                               
characterization that  the changes  made moved  the state  from a                                                               
monthly  to  an  annual  calculation  as  the  progressivity  was                                                               
eliminated, and  added that he and  Mr. Alper are never  going to                                                               
agree on this.                                                                                                                  
                                                                                                                                
2:57:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  whether this  hypothetical scenario                                                               
on slide  43 only  goes back  and calculates  what the  tax would                                                               
have been by applying it to  past months, or also moves the other                                                               
way and  has a carry  forward that would diminish  forward months                                                               
as well.                                                                                                                        
                                                                                                                                
MR. ALPER replied yes, this model  was built with a declining oil                                                               
price much  as the earlier  set of  2014 actuals was  a declining                                                               
price, but  the phenomenon works  the same exact way  in reverse.                                                               
For example,  if there are  unused credits in January,  but there                                                               
is adequate  credit value  in November  and December  because the                                                               
price  of oil  recovered,  they  could just  as  well be  carried                                                               
forward.    The  one  essential  limitation is  that  this  is  a                                                               
calendar  year tax  and  any such  adjustment  or migration  must                                                               
occur within a calendar year.                                                                                                   
                                                                                                                                
2:58:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  whether,  in  this  situation  and                                                               
making  it retroactive  to January  1, there  would be  any green                                                               
bars to take  advantage of, or to  apply it to, at  this point in                                                               
time.  He  further asked whether the state would  have to go back                                                               
and capture any payments because  going forward there wouldn't be                                                               
any to apply.                                                                                                                   
                                                                                                                                
MR.  ALPER  responded   that  to  the  best   of  the  division's                                                               
knowledge, and it won't know for sure until the annual tax true-                                                                
ups are seen at the end  of March, every single month of calendar                                                               
year  2015 was  a minimum  tax month.   Therefore,  whatever Per-                                                               
Taxable  Barrel  Credits  were foregone,  are  foregone  and  not                                                               
recoverable.   In calendar  year 2016 and  being only  two months                                                               
in,  everyone is  hoping  for a  substantial  price recovery,  in                                                               
which case  this will come  into play at the  end of the  year in                                                               
April 2017 when those taxes are trued-up.                                                                                       
                                                                                                                                
2:59:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  questioned  whether there  would  be  any                                                               
going back and having a  tax calculation that was paid previously                                                               
in January or  February or March.  He surmised  that because they                                                               
were all at minimum tax an adjustment would not be made.                                                                        
                                                                                                                                
MR.  ALPER answered  correct.   Pointing to  the graph  [on slide                                                               
43],  he said  that October  and  November look  like what  every                                                               
month  in 2015  looked like.   There  is a  minimum tax  payment,                                                               
there's a  certain amount of  Per-Taxable Barrel Credit  that was                                                               
used, it  varied, it got smaller  and smaller as the  prices went                                                               
down later  in the year, and  then there was a  certain amount of                                                               
those Per-Taxable  Barrel Credits that  was foregone.   So, there                                                               
would literally be  no green bar against which  to apply anything                                                               
in all of calendar year 2015.                                                                                                   
                                                                                                                                
3:00:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked why Mr.  Alper continues to  use the                                                               
word  "phenomenon," and  whether  it is  being  used because  Mr.                                                               
Alper questions the fact or the situation.                                                                                      
                                                                                                                                
MR. ALPER  apologized if the  word seems inappropriate.   He said                                                               
it  was  an  unexpected  occurrence  based  upon  the  division's                                                               
intuitive understanding of  how the tax was supposed  to work and                                                               
then in  practice it was different.   He offered that  he doesn't                                                               
know what the appropriate word is  to describe that, and it is by                                                               
no means magical.  Everything the  division has seen is a literal                                                               
interpretation of the statutes as they are written.                                                                             
                                                                                                                                
REPRESENTATIVE  HERRON said  he is  trying to  understand because                                                               
normally  it means  that  it's  a fact  or  a  situation that  is                                                               
happening  or  occurring, "but  you're  also  at the  same  time,                                                               
you're questioning it, and I just  want to make sure I understand                                                               
why you use the word so much."                                                                                                  
                                                                                                                                
[HB 247 was held over.]