Legislature(2015 - 2016)BARNES 124

03/01/2016 01:00 PM RESOURCES

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Audio Topic
01:00:00 PM Start
01:00:11 PM HB247
03:28:17 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> --
- Blue Crest Energy
- Hilcorp
- Furie
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:00:11 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."                                                                                           
                                                                                                                                
CO-CHAIR NAGEAK  noted that the  committee will  continue hearing                                                               
invited testimony  from the  oil and  gas industry  regarding the                                                               
potential impacts of HB 247.                                                                                                    
                                                                                                                                
1:01:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  requested that Mr. Seckers  of ExxonMobil                                                               
Corporation provide his qualifications as a tax expert.                                                                         
                                                                                                                                
DANIEL   SECKERS,  Tax   Counsel,  Upstream   Business  Services,                                                               
ExxonMobil  Corporation,  stated  that  was  previously  a  chief                                                               
appeals officer  for the Internal  Revenue Service (IRS),  has an                                                               
undergraduate  degree in  accounting, a  minor in  economics, two                                                               
masters degrees, and  two law degrees of which one  is Masters in                                                               
Law  on  Taxation.   He  has  worked for  ExxonMobil  Corporation                                                               
("ExxonMobil") for  nearly 30  years and  has done  Alaska taxes,                                                               
international taxes, and transactional taxes.                                                                                   
                                                                                                                                
REPRESENTATIVE JOHNSON  commented that he wants  the committee to                                                               
know it is dealing with people who are qualified.                                                                               
                                                                                                                                
CO-CHAIR NAGEAK  requested that all witnesses  provide comment on                                                               
the impacts  that the changes  proposed in  HB 247 would  have on                                                               
their respective companies.                                                                                                     
                                                                                                                                
1:02:56 PM                                                                                                                    
                                                                                                                                
MR. SECKERS  thanked the committee for  listening to ExxonMobil's                                                               
views on this  troubling legislation.  He stated  that in today's                                                               
economic  environment,  ExxonMobil  is committed  to  Alaska  and                                                               
continues   to   actively   pursue  all   attractive   investment                                                               
activities  in the  state.    ExxonMobil has  had  a presence  in                                                               
Alaska  for over  nine years,  has invested  over $20  billion to                                                               
date, and  Alaska remains a  very important part  of ExxonMobil's                                                               
worldwide investment portfolio.   He recognized that legislators,                                                               
as  policy makers,  have the  very  difficult task  of trying  to                                                               
resolve the  state's budget problems, trying  to maintain current                                                               
revenue  streams,  and  yet  trying   to  maintain  Alaska  as  a                                                               
competitive and attractive place for companies to invest.                                                                       
                                                                                                                                
MR. SECKERS  said tax policy  decisions fundamentally  impact the                                                               
economic  health  of Alaska  and  the  companies that  are  doing                                                               
business  in the  state.   ExxonMobil  believes  that tax  policy                                                               
decisions  need to  move the  state forward,  not away  from, its                                                               
vision  of  oil  and  gas   development.    It  is  critical  for                                                               
legislators to  maintain every stable and  competitive investment                                                               
environment.   ExxonMobil  believes the  question that  really is                                                               
before the committee is whether or  not to raise taxes on the oil                                                               
and  gas  industry  at  the  very time  when  the  companies  are                                                               
reporting significant losses  on the very activities  that HB 247                                                               
is trying to tax.   Is it sound tax policy  for legislators to do                                                               
that?   Do  legislators believe  that such  action will  actually                                                               
help the state weather these hard times or make matters worse?                                                                  
                                                                                                                                
1:05:01 PM                                                                                                                    
                                                                                                                                
MR.  SECKERS said  he will  break  down his  comments into  three                                                               
areas:   substantive  law changes,  procedural  changes, and  tax                                                               
policy  changes.   He  said  ExxonMobil  agrees with  yesterday's                                                               
testimony from  the Alaska  Oil and  Gas Association  (AOGA), and                                                               
from each  of the  other companies,  that HB  247:   represents a                                                               
significant tax  increase on the  oil and gas industry;  will not                                                               
improve  Alaska's overall  investment climate;  will not  lead to                                                               
more  jobs or  opportunities in  the  state; and  will not  help,                                                               
maintain, or increase oil and  gas production levels.  ExxonMobil                                                               
believes that  HB 247 will  do the  exact opposite and  for these                                                               
reasons ExxonMobil opposes HB 247.                                                                                              
                                                                                                                                
MR.  SECKERS first  addressed the  substantive provisions  of the                                                               
bill.   He  said raising  the  minimum tax  from 4  percent to  5                                                               
percent is a tax increase of  at least 25 percent on companies on                                                               
the  North Slope  on  their  gross revenues.    Raising taxes  on                                                               
companies that  are reporting record  losses, losses on  the very                                                               
activity that HB  247 is trying to tax, is  not sound tax policy.                                                               
The hardening  of the minimum  tax floor is also  very troubling.                                                               
Section 17  of the  bill would  prevent companies  from realizing                                                               
the true  economics of their  investments by  preventing critical                                                               
tax  credits  from   being  used  to  offset   the  minimum  tax.                                                               
Disallowing companies from using  earned or available tax credits                                                               
to  reduce  the minimum  tax  would  represent an  immediate  and                                                               
significant tax increase.  It  would penalize companies that have                                                               
made prior  year investments  even when  they were  losing money.                                                               
It would  penalize companies  today that  are continuing  to make                                                               
investments  even  though they  are  losing  money and  that  are                                                               
continuing   to   make   investments  despite   the   low   price                                                               
environment.  The impacts of Section  17 were summed up well when                                                               
yesterday AOGA  stated that both  large and small  companies that                                                               
may  have  new oil  tax  credits,  exploration credits,  drilling                                                               
credits,  tax  loss  credits,  sliding  scale  credits,  new  oil                                                               
credits, and  that may be  in a loss due  to low prices,  are all                                                               
going  to be  at  risk  to having  such  valuable credits  either                                                               
denied or  deferred.  In  either case, it  is a current  year tax                                                               
increase.                                                                                                                       
                                                                                                                                
1:07:31 PM                                                                                                                    
                                                                                                                                
MR.  SECKERS  offered  ExxonMobil's   belief  that  in  order  to                                                               
maximize  investment   in  Alaska  it  is   critical  to  provide                                                               
investors the opportunity to capture  the economic benefit of the                                                               
investments they've made, especially  given the inherent downside                                                               
long-term  risks  of  capital investments  on  the  North  Slope.                                                               
Section  17 will  significantly  and  negatively impact  Alaska's                                                               
investment  climate and  the  perception  of Alaska's  investment                                                               
climate to any  future investors by announcing to  the world that                                                               
Alaska is  willing to  adversely affect  the economics  of prior,                                                               
current,  and  future  year  investments  simply  for  short-term                                                               
revenue needs.                                                                                                                  
                                                                                                                                
MR. SECKERS  said Section 17  is also troubling because  it would                                                               
further  increase  taxes  by  preventing  a  company  from  fully                                                               
utilizing all available earned or  available tax credits from any                                                               
month to  offset the tax for  the entire calendar year.   This is                                                               
nothing more  than a disguised  tax increase, he continued.   The                                                               
production  tax  is  an  annual  tax  that  is  paid  in  monthly                                                               
installments and  it has been  that way since this  provision was                                                               
put on the books back with  the production profits tax (PPT).  It                                                               
is not  and has  never been a  monthly tax.   But this  change in                                                               
Section 17 would,  in effect, convert, or at  least migrate, this                                                               
tax to more  of a monthly tax.   This is a  significant change in                                                               
substantive  law.    Despite  what   the  administration  may  be                                                               
alluding to by  focusing only on sliding scale  tax credits, this                                                               
provision  is  much broader  than  that.   This  provision  would                                                               
impact  every single  tax credit  available under  the production                                                               
tax  law.   That means  companies with  all the  credits -  small                                                               
producer  credits, Middle  Earth credits,  and tax  loss credits,                                                               
all of  them - would be  at risk to having  tax credits deferred,                                                               
or worse, lost forever.  That is a tax increase.                                                                                
                                                                                                                                
1:09:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON  asked  whether  ExxonMobil  has  done  any                                                               
models  on Section  17  that are  not  proprietary and  therefore                                                               
available to the committee.                                                                                                     
                                                                                                                                
MR.  SECKERS responded  that any  modeling  done on  the bill  by                                                               
ExxonMobil  would have  confidential  data.   However, he  noted,                                                               
ExxonMobil  agrees with  the presentation  provided by  enalytica                                                               
and  he therefore  Representative  Olson could  run his  question                                                               
through  enalytica for  modeling  purposes.   He reiterated  that                                                               
Section 17 is troubling and is without question a tax increase.                                                                 
                                                                                                                                
REPRESENTATIVE OLSON  inquired whether  Mr. Seckers knows  of any                                                               
other  political subdivisions,  provinces, states,  countries, or                                                               
emirates that have a tax mechanism  that has changed six times in                                                               
ten or eleven years.                                                                                                            
                                                                                                                                
MR. SECKERS replied, "Not to my knowledge."                                                                                     
                                                                                                                                
1:10:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON referred to  Mr. Seckers' statement that it                                                               
has not  been monthly  since PPT.   He  said his  recollection is                                                               
that  the progressivity  element  in the  taxes was  specifically                                                               
monthly, so  it would  seem like this  element is  comparative to                                                               
that more than to PPT.                                                                                                          
                                                                                                                                
MR. SECKERS  answered that Representative Seaton  is correct that                                                               
the progressivity piece  that was present under  PPT and Alaska's                                                               
Clear and Equitable  Share (ACES) was a  monthly determination of                                                               
the rate  for that particular  month, but  tax itself was  a year                                                               
tax.  He said  the tax itself is calculated on  a yearly basis as                                                               
provided  in statute  and is  the way  the Department  of Revenue                                                               
(DOR) has administered the tax since its inception.                                                                             
                                                                                                                                
1:11:24 PM                                                                                                                    
                                                                                                                                
MR. SECKERS continued his testimony  regarding Section 17, saying                                                               
that the  monthly payments made  by ExxonMobil are estimates.   A                                                               
lot  of variables  go into  it -  for example,  estimates of  the                                                               
company's expenses  as well  as estimates  of one-twelfth  of the                                                               
company's credits.   There is then a final true-up  at the end of                                                               
the year so  the taxpayer can determine and pay  the tax based on                                                               
the entire calendar year of operations.                                                                                         
                                                                                                                                
1:11:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON  offered   his  understanding   that  the                                                               
progressivity was a monthly calculation  that was not trued up at                                                               
year end  or annualized later.   To his knowledge,  he continued,                                                               
the  sliding  scale was  put  in  there  specifically to  be  the                                                               
progressivity  piece and  reverse going  at low  prices, but  was                                                               
specifically put in  there to emulate the  progressivity that was                                                               
had in the previous tax bill.   It was pretty clear that that was                                                               
providing progressivity.  He requested  Mr. Seckers to comment in                                                               
this regard.                                                                                                                    
                                                                                                                                
MR. SECKERS  responded that, in  regard to the sliding  scale tax                                                               
credits,  he cannot  address the  intent behind  the thoughts  of                                                               
each legislative  member.  He agreed  it was put on  the books as                                                               
an offset to the elimination of  progressivity.  He said that the                                                               
regulations in law  today, as well as the way  the statutes work,                                                               
clearly allow that  credits that could be used  in one particular                                                               
month  are still  available for  the entire  calendar year.   So,                                                               
while  the sliding  scale credits  were determined  on a  monthly                                                               
basis,  should  the  economics  of that  month  change,  and  the                                                               
economics  for the  entire year  change, the  credits that  would                                                               
otherwise  have been  used  that  couldn't have  been  used in  a                                                               
particular  month are  still available  for  the entire  calendar                                                               
year.   He  said Representative  Seaton is  correct in  the sense                                                               
that the determination  of the sliding scale credits  is based on                                                               
monthly  production, but  it is  an annual  tax in  terms of  its                                                               
actual determination for the year.                                                                                              
                                                                                                                                
1:13:39 PM                                                                                                                    
                                                                                                                                
MR. SECKERS returned to his testimony.   He said Section 31 would                                                               
prevent the  gross value  at the point  of production  from going                                                               
below  zero, thereby  increasing the  production tax  by changing                                                               
the way the gross value at  the point of production is determined                                                               
and applied.   He allowed that this change may  sound harmless at                                                               
times, and  that intuitively  it may  seem to  make sense  that a                                                               
gross tax  at the point of  production should not go  below zero,                                                               
that there should not be a  negative tax.  However, he continued,                                                               
this  provision  represents  another  tax  increase.    It  would                                                               
adversely impact the economics of  investments and penalize those                                                               
producers  that  made  prior-year investments  and  would  create                                                               
uncertainty as to  how a company is to calculate  its tax return.                                                               
Currently, if the price of  oil fluctuates, or a company's marine                                                               
transportation or pipeline  tariff costs are such  that it forces                                                               
the gross  value at the point  of production to go  negative at a                                                               
particular field  or unit, the  economics of that  investment are                                                               
not lost.   Why?   Because  when a company  files its  tax return                                                               
under current law,  it is not filed on a  field-by-field or unit-                                                               
by-unit basis; rather, it is filed  by segments.  In Alaska there                                                               
are four  segments that  were created  under PPT:   two  for Cook                                                               
Inlet oil  and gas, the North  Slope, and Middle Earth.   For the                                                               
North  Slope,  ExxonMobil files  a  consolidated  return for  the                                                               
entire segment.   So, if there  is a negative gross  value at the                                                               
point  of production  because of  an expensive  investment or  an                                                               
investment with  troubled economics, the negative  gross value at                                                               
the  point  of  production  gets  offset  or  combined  with  the                                                               
company's gross  value of  the entire  segment and  therefore the                                                               
economics  of  that investment  are  not  lost.   That's  a  very                                                               
valuable thing when  companies look at making  investments.  This                                                               
provision would instead  say that those costs are  now lost, that                                                               
the gross  value at the  point of  production from that  field or                                                               
unit will now be limited to that  field or unit.  The law doesn't                                                               
say  that, this  provision just  says  it cannot  go below  zero.                                                               
There  is no  indication of  how [DOR]  is going  to apply  that.                                                               
Does  that mean  by  segment or  by  field?   Based  on what  was                                                               
testified by the  Department of Revenue, a company  would have to                                                               
interpret  it by  field.    If that's  the  case,  then that's  a                                                               
substantive change  in the  law because it  is not  determined by                                                               
field - it is consolidated and  a company files one return of all                                                               
the company's  gross value at  the point of production  minus the                                                               
expenses.  This would be nothing more than a tax increase.                                                                      
                                                                                                                                
1:15:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR understood that the  concern is whether it is                                                               
applied  per field  or per  segment since  it is  currently being                                                               
done  by  segment.   She  asked  whether ExxonMobil  would  still                                                               
oppose the provision if it was  instead more specific to say that                                                               
it would be applied per segment.                                                                                                
                                                                                                                                
MR. SECKERS  replied certainly, because  it would still be  a tax                                                               
increase.  The  only difference there is if the  whole segment is                                                               
going negative for  any big company, then everyone is  in a world                                                               
of hurt.   The point  is that what  will happen by  applying this                                                               
section  is that  the  investments  a company  has  made for  its                                                               
pipeline, its tankers, and so forth  - if it forces the economics                                                               
of that particular  investment to go negative -  then the company                                                               
would  lose recovery  of that  part of  its economic  investment,                                                               
which  would be  a change  in  the tax  law and  therefore a  tax                                                               
increase.                                                                                                                       
                                                                                                                                
1:16:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON maintained that  it is a transparent tax                                                               
increase, not a  disguised tax increase as stated  earlier by Mr.                                                               
Seckers.   The administration has  a number of measures  to raise                                                               
revenue given  the state's fiscal  situation, he said,  and these                                                               
were not  hidden to Mr. Seckers  and these are understood  by Mr.                                                               
Seckers.                                                                                                                        
                                                                                                                                
MR.  SECKERS allowed  Representative  Josephson is  right in  the                                                               
sense that it would be apparent  to someone who knows what he/she                                                               
is  looking at.   However,  the reason  he chose  those words  is                                                               
because HB  247 is  being couched  as a  tax credit  reform bill.                                                               
[Section 31] has  nothing to do with tax credits,  it goes to the                                                               
gross value at the point  of production and substantively changes                                                               
the way a  tax is calculated.  When the  bill was first testified                                                               
to, this was  just glossed over as  basically conforming language                                                               
and it  was an  alarming provision  for that  reason.   It wasn't                                                               
flushed  out until  very later  on, causing  him concern  that "a                                                               
fast one" was being pulled.                                                                                                     
                                                                                                                                
1:18:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  addressed the  issue of  monthly versus                                                               
annual calculation  raised by Representative  Seaton.   He argued                                                               
that if kept  in its current form, and price  variability is such                                                               
that companies cannot use all the  credits in a month and so some                                                               
are carried over,  then the state would bear  that variability in                                                               
just about every instance.                                                                                                      
                                                                                                                                
MR.  SECKERS  responded, "Not  with  the  provision as  drafted."                                                               
There are  more variables that  could cause that event,  he said.                                                               
For  example, a  company's  expenses  can go  up  and down,  some                                                               
expenses are  unknown until the  end of  the year and  that's why                                                               
they are  estimates.  But, the  law says that if,  for example, a                                                               
company claims 12  credits in a given month but  should have only                                                               
claimed  11, then  the  company  must refund  that  back, it  has                                                               
underpaid its tax at  that point.  This law says,  "oh by the way                                                               
you claimed  11, you could have  claimed 12, you had  12, you can                                                               
only claim  12, sorry,  you don't  get to keep  them."   He noted                                                               
that consultant  Janak Mayer of  enalytica stated that this  is a                                                               
one directional tax increase, it doesn't go back and forth.                                                                     
                                                                                                                                
1:19:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON referred to  Mr. Seckers' statement that if                                                               
this was applied by segment [the  costs] would be lost.  He asked                                                               
whether Mr.  Seckers was meaning they  were lost in that  year or                                                               
would roll over as net operating loss credit.                                                                                   
                                                                                                                                
MR. SECKERS answered he is not  certain this has ever been tested                                                               
because he's unaware of a tax  credit that's had a negative gross                                                               
value at the point of production,  but he is not saying it hasn't                                                               
happened.   He explained  that the  calculation would  start with                                                               
the gross  value at the point  of production to the  extent there                                                               
is  negative to  it, and  then  the lease  expenditures would  be                                                               
subtracted to determine  the net operating loss.   He offered his                                                               
belief that  the net operating  loss would be increased  by those                                                               
additional deductions  and suggested that Mr.  Alper [Director of                                                               
the DOR Tax Division] be asked this question.                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  stated, "We  would be doing  basically the                                                               
same  thing as  the net  loss carry  forward as  we have  now, it                                                               
would just  be that  the tax  wouldn't go below  zero in  any one                                                               
year."                                                                                                                          
                                                                                                                                
MR.  SECKERS replied  the law  is  very specific  that a  company                                                               
cannot have a negative tax, the worst it can go is to zero.                                                                     
                                                                                                                                
1:21:00 PM                                                                                                                    
                                                                                                                                
MR.  SECKERS continued  his testimony  and offered  his agreement                                                               
with the  comments made yesterday  by Mr. Foley of  Caelus Energy                                                               
Alaska about the removal of  the gross revenue exclusion from the                                                               
determination of  a net operating loss.   He said he  agrees with                                                               
Mr. Foley  that it  is in  the law  and is  an incentive  to help                                                               
develop smaller  fields and those  with troubled economics.   Mr.                                                               
Seckers said  it is a  provision that  is clearly a  tax increase                                                               
and one that will make those fields more difficult to produce.                                                                  
                                                                                                                                
MR. SECKERS stated that Section  8 of the bill raises significant                                                               
concerns in regard to the disclosure of tax credit information.                                                                 
                                                                                                                                
1:21:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  noted that the  committee is trying  to come                                                               
up with  a reasonable  resolution that  potentially meets  in the                                                               
middle.   In regard to  the proposed  $25 million cap,  she asked                                                               
whether  there  is an  amount  that  Mr. Seckers  would  consider                                                               
reasonable.   She recounted that  yesterday no one  who testified                                                               
would give her a number.                                                                                                        
                                                                                                                                
MR. SECKERS qualified he isn't  sure he understands the question,                                                               
but said  the proposed "$25  million annual limit applies  to the                                                               
ability of  refundable credits for a  company to say this  is the                                                               
most you can  have the state refund in any  given year subject to                                                               
other limitations  - the local  hire and things of  that nature."                                                               
ExxonMobil has never qualified for  that, he continued, has never                                                               
had  a refundable  credit and  will  not ever  have a  refundable                                                               
credit as  long as it can  keep its production high  enough.  So,                                                               
it may be unfair for ExxonMobil to comment on this provision.                                                                   
                                                                                                                                
REPRESENTATIVE TARR noted  that ExxonMobil would have  to use the                                                               
proposed change against  its future tax liability.   She inquired                                                               
whether this is what ExxonMobil  is considering a substantive tax                                                               
increase.                                                                                                                       
                                                                                                                                
MR. SECKERS answered absolutely.   From a general policy point of                                                               
view when companies make investments  and prices tank, they're in                                                               
a loss  position through no fault  of their own and  they want to                                                               
recover some of  that economic investment.   Yesterday the Alaska                                                               
Oil  and Gas  Association (AOGA)  said that  this is  critical to                                                               
some of the  companies to continue to  make necessary investments                                                               
in the state - those companies  need the recovery today.  To deny                                                               
that recovery  by forcing them  to be  unable to use  it against,                                                               
say, the  minimum tax is  a pretty big  tax increase and,  in his                                                               
opinion, is a major substantive change.                                                                                         
                                                                                                                                
1:24:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON recalled  Mr.  Seckers' statement  that                                                               
under Senate Bill 21 there can never  be a negative tax.  But, he                                                               
said,  it's the  credits that  can drive  it underneath  the zero                                                               
floor and there have been  some instances where the net operating                                                               
loss put the state in a  position of paying more than 100 percent                                                               
of the costs of development.                                                                                                    
                                                                                                                                
MR.  SECKERS  replied  that  the  aforementioned  is  a  two-part                                                               
question.   What he is meaning  by a negative production  tax, he                                                               
explained, is  that a company  cannot go  to the state  saying it                                                               
has  a negative  production  tax of  $100 and  is  owed a  check.                                                               
Under the law, a company goes to  zero and that's it; if there is                                                               
a loss it is carried  forward to use against future opportunities                                                               
or against future production tax  or is possibly certificated and                                                               
transferred.   So, a company  cannot get a negative  current year                                                               
production tax.   As for  the ability  of the Net  Operating Loss                                                               
(NOL)  to  go above  the  cost  of  development,  he said  he  is                                                               
uncertain  how that  gets  there.   That  is not  to  say that  a                                                               
company couldn't, for example, have  a gross revenue exclusion or                                                               
stackable  credits, of  which  the number  can  get pretty  high.                                                               
But, in order to have an NOL, a  company spends the $1 and gets a                                                               
35 percent  recovery, so the company  is still out 65  cents.  To                                                               
the extent that that number can get  over 100, he said he has not                                                               
seen it.  He suggested asking a smaller company this question.                                                                  
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked whether  Mr. Seckers  would agree                                                               
that it  is egregious  if it  was shown that  it could  [get over                                                               
100].                                                                                                                           
                                                                                                                                
MR. SECKERS responded  it would depend on what the  policy of the                                                               
state  is in  terms of  trying to  encourage whatever  is causing                                                               
that investment  to go that  low - it would  have to be  a pretty                                                               
risky investment with a lot of  costs.  From a tax practitioner's                                                               
point of few,  he said he is  not certain he has  ever seen that,                                                               
so his knee-jerk reaction is that  it's pretty rare.  However, if                                                               
the  state says  it's  happening to  certain  taxpayers, then  he                                                               
believes the state but he has not seen it.                                                                                      
                                                                                                                                
1:26:31 PM                                                                                                                    
                                                                                                                                
MR. SECKERS  resumed his testimony  about Section 8 of  the bill,                                                               
which would allow the Department  of Revenue (DOR) to make public                                                               
information concerning a  taxpayer's uses of tax  credits as well                                                               
as information  concerning the activities  of that  taxpayer that                                                               
gave rise  to those tax  credits.  This information  is currently                                                               
confidential and for  good reasons.  ExxonMobil  is partners with                                                               
BP,  Conoco, and  others at  Prudhoe Bay  and other  fields.   As                                                               
partners, certain information is  shared in the co-development of                                                               
the field.  But, on a  global scale the companies are competitors                                                               
and, as  such, are bound by  certain laws to keep  certain things                                                               
confidential;  for   instance,  prices  and   taxpayer  sensitive                                                               
information.   To now  allow DOR the  liberty of  publishing this                                                               
kind  of  data,  with  who  knows what  limit  or  no  limit,  is                                                               
troubling.  He  said he agrees with yesterday's  testimony by BP,                                                               
AOGA,  Conoco,  and others  that  this  is a  troubling  section.                                                               
Going down this path opens it up  to a risk of full disclosure of                                                               
taxpayer sensitive, as well as confidential, information.                                                                       
                                                                                                                                
1:27:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  imagined  that  if  this  legislation  went                                                               
forward as  written, the regulations implementing  this provision                                                               
would  be  more   specific  and  the  companies   would  have  an                                                               
opportunity to  participate in  that process to  define it.   She                                                               
asked whether  this gives Mr.  Seckers any level of  comfort that                                                               
ExxonMobil would  be able to  participate or whether  Mr. Seckers                                                               
thinks it needs to be more clearly defined in the statute.                                                                      
                                                                                                                                
MR.  SECKERS answered  that  the administration  of  the tax  law                                                               
belongs to the Department of  Revenue, but the regulatory process                                                               
is not always a give and  take.  Many times industry will present                                                               
comments  that don't  go anywhere.   His  personal preference  is                                                               
that there  always be language  in the statute that  is extremely                                                               
clear, extremely point, so that  the regulations cannot vary from                                                               
it.  If  open-ended language is given to allow  the department to                                                               
interpret  it and  issue regulations,  those regulations  can get                                                               
changed  without legislators  knowing it  and therefore  there is                                                               
not  as much  check and  balance as  going through  the statutory                                                               
process.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  TARR  requested  Mr.   Seckers  to  suggest  some                                                               
changes that would make this grey area more clear.                                                                              
                                                                                                                                
MR. SECKERS agreed to  look at it and said he will  try to run it                                                               
through AOGA  so that it  would be  a consolidated view  from the                                                               
industry.                                                                                                                       
                                                                                                                                
1:29:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled conversation from  yesterday that                                                               
divulging  Net  Operating  Loss   Credits  would  yield  taxpayer                                                               
information.  He  asked whether excluding those  from the process                                                               
would have that same consequence  to ExxonMobil where it wouldn't                                                               
relate to  taxpayer information,  it would  simply be  the amount                                                               
that the  state is paying  to individual companies  and projects.                                                               
He pointed  out that  legislators are at  a loss  without knowing                                                               
where hundreds of millions of  dollars are being spent; the money                                                               
is just gone and legislators cannot find out to make policy.                                                                    
                                                                                                                                
MR. SECKERS  allowed it is a  good point and said  he understands                                                               
the  concerns.   Clearly, he  continued, the  Net Operating  Loss                                                               
Credit is one  of the most concerning because in  order to get to                                                               
that number  there could theoretically be  a lot of data  as well                                                               
as sensitive  data relating to how  that credit was earned.   The                                                               
general notion  of publishing  information by  specific taxpayers                                                               
raises red flags  in that it may allow one  company to gain favor                                                               
over another  in public  press and  things of  this nature.   The                                                               
devil is in the details, it depends  on how it is written and how                                                               
it  is  administered  and  what  it  actually  relates  to.    He                                                               
suggested that  it could  possibly be  done by  field or  unit as                                                               
opposed to  individual companies because companies  are investing                                                               
jointly in that  well.  That may be a  way to provide information                                                               
that  is  not  so  concerning   but  yet  gives  legislators  the                                                               
information  they need  regarding  credits.   It  is really  more                                                               
field or  unit specific in this  case, he reiterated, than  it is                                                               
the individual taxpayer.                                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON said he would  appreciate it if Mr. Seckers                                                               
could suggest a reasonable compromise in this regard.                                                                           
                                                                                                                                
MR. SECKERS  replied he will go  back to AOGA to  see if language                                                               
can be found  that everyone agrees with - something  that is good                                                               
for one should be good for all.   He said he isn't trying to hide                                                               
behind AOGA,  but an advantage of  AOGA is that it  is looking at                                                               
it  from a  global  industry perspective,  and  the stronger  the                                                               
industry is in the state, the stronger is everyone.                                                                             
                                                                                                                                
1:32:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   OLSON    asked   whether,    from   ExxonMobil's                                                               
perspective, there is anything in HB 247 that is salvageable.                                                                   
                                                                                                                                
MR. SECKERS  responded that ExxonMobil  believes that as  a whole                                                               
HB  247 is  a  bad bill.    He said  he is  not  certain he  sees                                                               
anything in the bill that  would make Alaska's investment climate                                                               
better or that would lead to  more jobs or more production.  From                                                               
the perspective of ExxonMobil it is troubling legislation.                                                                      
                                                                                                                                
1:33:32 PM                                                                                                                    
                                                                                                                                
MR. SECKERS returned  to his testimony to  discuss the procedural                                                               
matters of  HB 247.   As if the bill  isn't bad enough,  he said,                                                               
two of  the provisions are  made retroactive  to January 1.   Any                                                               
time there is  a retroactive tax provision there  is concern from                                                               
a tax  practitioner perspective.   He pointed out that,  not only                                                               
from  a  business  perspective and  a  policy  perspective  about                                                               
investments  and judging  the regime,  by the  time the  bill was                                                               
passed  taxpayers  would  have   already  filed  several  monthly                                                               
installments  under the  current  law.   This retroactive  change                                                               
would put  all the taxpayers  at risk of having  filing incorrect                                                               
monthly installments and  put all taxpayers at  potential risk of                                                               
penalties and interest  through no fault of their own.   It would                                                               
also  jeopardize  investment  decisions that  the  companies  are                                                               
making, commitments  on expenditures, and  so forth.   Making any                                                               
law retroactive is troubling and is bad tax policy.                                                                             
                                                                                                                                
MR. SECKERS  reiterated ExxonMobil's belief that  enacting HB 247                                                               
would   impact   Alaska's   global  overall   effectiveness   and                                                               
competitiveness.     Raising  taxes   when  many   companies  are                                                               
reporting record  losses, losses on  the very activities  that HB                                                               
247 is trying to  raise taxes on, is poor tax  policy.  This bill                                                               
will  force  companies  to re-examine  short-term  and  long-term                                                               
investment behavior  and is inconsistent  with the  state's long-                                                               
term  vision of  promoting oil  and gas  development.   The state                                                               
enacted  the PPT  and  ACES  in recent  years  with  the goal  of                                                               
increasing taxes as prices rose.   Enacting HB 247 will signal to                                                               
the global  investment community that  Alaska's tax policy  is to                                                               
raise  taxes  when  industry  makes money  and  then  again  when                                                               
industry  loses  money.   ExxonMobil  believes  Alaska  needs  to                                                               
remain  globally competitive  for  critical capital  investments.                                                               
Increasing taxes  on companies that  are losing money  today will                                                               
not lead  to more jobs,  will not  lead to more  investment, will                                                               
not lead to more production, and  will not lead to more long-term                                                               
sustainable state revenues.                                                                                                     
                                                                                                                                
1:36:12 PM                                                                                                                    
                                                                                                                                
MR. SECKERS again said Alaska  remains a very important component                                                               
of ExxonMobil's  worldwide portfolio;  that the company  has been                                                               
in Alaska  a long time  and looks forward  to being in  the state                                                               
for a lot longer.   ExxonMobil will continue to pursue attractive                                                               
investment opportunities  in the state,  but if HB 247  is passed                                                               
and the  state raises taxes when  the company is losing  money on                                                               
the North Slope, then all those opportunities are diminished.                                                                   
                                                                                                                                
MR.  SECKERS concluded  by stating  that the  need for  Alaska to                                                               
maintain  a  competitive  and   stable  fiscal  environment  that                                                               
attracts   and   encourages   critical   long-term   investments,                                                               
especially in today's low price  environment, is one of the most,                                                               
if not  the most, important issues  facing the state.   As policy                                                               
makers, legislators  need to decide  whether increasing  taxes on                                                               
companies that are losing money,  losing money making investments                                                               
that every  Alaskan needs  the companies  to make,  including his                                                               
own company,  is sound  long-term policy and  will lead  to jobs,                                                               
investments, and sustainable  revenues.  Is it  sound tax policy?                                                               
ExxonMobil believes the answer to that question is no.                                                                          
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
1:38:47 PM                                                                                                                    
                                                                                                                                
J.  Benjamin  Johnson,  President, CEO,  BlueCrest  Energy  Inc.,                                                               
began his PowerPoint presentation on  HB 247 by noting that while                                                               
BlueCrest  Energy Inc.  ("BlueCrest")  is  a Texas-based  company                                                               
now,  it  has Alaskan  roots.    He said  he  grew  up in  Kenai,                                                               
graduated from school  there, and worked his  way through college                                                               
on the  Cook Inlet platforms and  on Prudhoe Bay.   After college                                                               
he worked  for ARCO and worked  on some of the  early engineering                                                               
studies for  Prudhoe Bay and  Kuparuk.  BlueCrest  management has                                                               
over  40  collective  years  of  experience  in  Alaska.    Since                                                               
BlueCrest only operates in the Cook  Inlet, he said he will limit                                                               
his testimony to those issues that  apply to BlueCrest.  He noted                                                               
that BlueCrest concurs with the  Alaska Oil and Gas Association's                                                               
(AOGA's) presentation to the committee yesterday.  He continued:                                                                
                                                                                                                                
     First, I  want to  emphasize that  with regard  to what                                                                    
     BlueCrest is doing  in the Cook Inlet,  the tax program                                                                    
     has been a very, very  good investment for the State of                                                                    
     Alaska.  The credits have  been a tremendous success in                                                                    
     attracting  outside  investment  in the  industry,  and                                                                    
     most  importantly, generating  significant royalty  and                                                                    
     tax income for the state throughout the future.                                                                            
                                                                                                                                
     As  I'll explain  today, BlueCrest  is in  Alaska as  a                                                                    
     direct result  of the state's incentive  programs.  And                                                                    
     it  is the  state's investment  - in  the forms  of the                                                                    
     credits  - that  have  facilitated our  success in  the                                                                    
     Cosmopolitan  Unit.   I'm going  to show  you that  the                                                                    
     state's  investments in  Cosmopolitan tax  credits will                                                                    
     provide  high returns  to  the state  even  at low  oil                                                                    
     prices.  In fact, the  tax credit investments under the                                                                    
     current  laws  can  actually provide  higher  rates  of                                                                    
     return  to the  state than  the average  investments of                                                                    
     the permanent fund.                                                                                                        
                                                                                                                                
     Secondly,  I'd like  to just  give you  a really  quick                                                                    
     overview of  Cosmo, [the  Cosmopolitan Unit],  and I'll                                                                    
     explain the difference between our  onshore oil and our                                                                    
     offshore gas developments.  And  I'll show you ... both                                                                    
     BlueCrest's calculations  and our summary of  the DOR's                                                                    
     calculations on the value of  the tax credits.  Lastly,                                                                    
     I'll  wrap up  with just  our specific  factors in  the                                                                    
     existing draft of HB 247  and their impact to BlueCrest                                                                    
     in particular.                                                                                                             
                                                                                                                                
1:41:30 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON  turned to slide  2, "Cosmopolitan Project  Area," to                                                               
describe this  project that  is located  in the  Cook Inlet.   He                                                               
said the  field is three miles  offshore and is just  a few miles                                                               
north of Anchor Point.  All  of these are state leases, he noted.                                                               
BlueCrest also has  an onshore surface-use lease  where the drill                                                               
site and production  facilities are located.  Moving  to slide 3,                                                               
"1967: Pennzoil Found the First  Oil - Drilled from Offshore," he                                                               
outlined the  history of the  Cosmopolitan Unit.   Pennzoil first                                                               
discovered  the Cosmopolitan  oil  accumulation in  1967 when  it                                                               
drilled an  offshore well  at Anchor Point.   However,  that well                                                               
just barely  clipped the edge  of the accumulation and  there was                                                               
no way  Pennzoil could know what  was there.  And  since 1967 was                                                               
about the time that Prudhoe  Bay was discovered, everyone's focus                                                               
subsequently turned to the North Slope.                                                                                         
                                                                                                                                
1:42:24 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON drew attention to  slide 4, "2007: ConocoPhillips and                                                               
Pioneer had drilled  3 wells and 3D," to continue  the history of                                                               
the Cosmopolitan Unit.  He said:                                                                                                
                                                                                                                                
     In the late  1990's, ARCO/ConocoPhillips got interested                                                                    
     in the area again, and  they called it the "missed-pay"                                                                    
     prospect thinking  that Pennzoil  may have  just missed                                                                    
     it.   Well,  in 2001  and 2003,  ConocoPhillips drilled                                                                    
     two  new wells,  and Pioneer  purchased ConocoPhillips'                                                                    
     interest and  drilled another new  well.   Pioneer also                                                                    
     acquired  3-D  seismic  over the  area  and  what  that                                                                    
     showed was  that it  looked like there  was a  big dome                                                                    
     down  there,  but they  couldn't  see  anything in  the                                                                    
     middle  of the  dome on  the  top because  it had  what                                                                    
     looked like it could be a  gas cloud.  There was no way                                                                    
     Pioneer could really tell what  the shape of the top of                                                                    
     it  looked  like.    They  knew  there  was  definitely                                                                    
     producible  oil  down at  the  bottom  but they  didn't                                                                    
     know, couldn't know what was  up top.  By 2010, Pioneer                                                                    
     had already developed a plan  to develop the field they                                                                    
     were ready to  go when in 201 their  board of directors                                                                    
     decided  to invest  in West  Texas  shale plays  rather                                                                    
     than in the Cook Inlet.                                                                                                    
                                                                                                                                
     Well, about that  time, BlueCrest had just  formed by a                                                                    
     group of  former major oil company  executives, each of                                                                    
     whom have extensive experience  in developing large oil                                                                    
     and gas assets.  So, our  plan was to look for, to find                                                                    
     some oil  and gas properties that  could potentially be                                                                    
     improved  using   our  backgrounds  and   knowledge  of                                                                    
     industry  technology.    Now, we  evaluated  dozens  of                                                                    
     acquisition  opportunities  around   the  US  (offshore                                                                    
     California, Gulf  of Mexico, Wyoming,  Colorado, Texas,                                                                    
     Louisiana  and Alaska).   Alaska's  huge handicap  was,                                                                    
     and  it   continues  to   be,  that   the  exploration,                                                                    
     development  and operating  costs in  the state  are at                                                                    
     least 300 percent of any  other major hydrocarbon basin                                                                    
     in  the US.   But  we ultimately  decided to  invest in                                                                    
     Alaska because, through the  credit programs, the state                                                                    
     was  investing in  itself, and  that  investment -  the                                                                    
     state's credits  - offset the  higher cost  of drilling                                                                    
     and development.  So we  acquired our interest in Cosmo                                                                    
     in 2012,  and our team  came up with  a new idea.   Our                                                                    
     concept was to drill a vertical well offshore.                                                                             
                                                                                                                                
1:44:45 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON moved to slide 5, "2013: BlueCrest Drilled a                                                                        
Vertical Well from Offshore," and continued:                                                                                    
                                                                                                                                
     In  2013, we  drilled the  Cosmopolitan State  Number 1                                                                    
     well.  It  passed through every geologic  zone from the                                                                    
     sea floor down to about a mile  and a half deep.  As it                                                                    
     turns  out, almost  every sand  we penetrated  down for                                                                    
     the mile deep was full  of producible natural gas.  And                                                                    
     then  all the  sands below  that to  the bottom  of the                                                                    
     well  were  full of  oil.    So,  we also  completed  a                                                                    
     vertical seismic profile  in the well and  then we were                                                                    
     able  to  clear up  some  of  the questions  about  the                                                                    
     previous seismic  data.  We flow-tested  several of the                                                                    
     larger  new  gas  sands  and  a  couple  of  the  newly                                                                    
     discovered oil  zones.  We  took samples of  the rocks,                                                                    
     gas, and oil.  In summary,  not only did we confirm the                                                                    
     existence of  the two previously  known oil  sands that                                                                    
     Pennzoil, ConocoPhillips, and  Pioneer had encountered,                                                                    
     we also  discovered at  least six  new large  gas zones                                                                    
     and four more oil zones.                                                                                                   
                                                                                                                                
1:45:40 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON turned to slide 6, "Cosmopolitan Unit Development                                                                   
Concept," and explained:                                                                                                        
                                                                                                                                
     The   Cosmopolitan   Unit   is  really   two   separate                                                                    
     development  projects, just  one on  top of  the other,                                                                    
     they're not connected.   The oil zones  are deep enough                                                                    
     that  we can  reach  them from  an  onshore drill  site                                                                    
     about three  miles away using a  very powerful drilling                                                                    
     rig.   The  gas zones  are just  simply too  shallow to                                                                    
     make  drilling from  [onshore] a  possibility.   So the                                                                    
     gas zones  will need  to be  developed by  drilling gas                                                                    
     wells offshore  with a jack-up  rig and  then producing                                                                    
     that  through platforms  and back  to  our onshore  oil                                                                    
     production facility.                                                                                                       
                                                                                                                                
     ...  Given the  success  of our  2013 drilling  program                                                                    
     with  the  Cosmo well,  we  then  were faced  with  the                                                                    
     challenge of  how to  pay for  the development  of this                                                                    
     new  field.   I mean  right now,  BlueCrest is  a small                                                                    
     private company  with a single focus  of developing the                                                                    
     Cosmopolitan Unit.  The members  of our management team                                                                    
     now   all  have   extensive   technical  and   business                                                                    
     experience in  developing projects  like this,  but the                                                                    
     potential  costs of  Cosmo  far  exceeded our  personal                                                                    
     financial capabilities.   So we teamed with  a group of                                                                    
     oil industry  investors and then we  ... very carefully                                                                    
     created  our  plan  for financing  the  development  of                                                                    
     Cosmopolitan.                                                                                                              
                                                                                                                                
1:46:58 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON outlined the life-cycle cash flow of a typical                                                                      
project.  Displaying slide 7, "Typical Project Life-Cycle Cash                                                                  
Flow," he stated:                                                                                                               
                                                                                                                                
     This  next chart  shows the  cumulative cash  flow over                                                                    
     time for  a typical life  cycle of a successful  oil or                                                                    
     gas  development.    The very  beginning  here  is  the                                                                    
     exploration phase.   And when  you see this  [curve] go                                                                    
     down below the horizontal axis  that means that ... the                                                                    
     company  at  this point  is  spending  more money  than                                                                    
     they're bringing  in.  So,  if it's pointed  down we're                                                                    
     losing money.   If  it's pointed  up we're  starting to                                                                    
     increase.   What's important to  understand is  that we                                                                    
     never get to the point  where we break even until we're                                                                    
     all the  way back up  over that horizontal axis.   Only                                                                    
     at that  point can  we make the  very first  profits on                                                                    
     this deal.                                                                                                                 
                                                                                                                                
     We  need  to understand  that  the  first part  of  any                                                                    
     project is  exploration and it  is spending  money that                                                                    
     we may or  may not get back.  At  this stage there's no                                                                    
     assurance, in  exploration there  is no  assurance that                                                                    
     anything is  going to be found.   The only way  to know                                                                    
     that an  area will be  productive is to spend  money to                                                                    
     drill expensive wells,  and then test them  if it looks                                                                    
     like  there's something  there.   The vast  majority of                                                                    
     exploration  prospects are,  in fact,  dry holes  - the                                                                    
     money spent will never be  recovered.  Just because you                                                                    
     drill  a lot  of  wells doesn't  mean  you're going  to                                                                    
     discover  anything.   I mean  if  there's nothing  down                                                                    
     there, drilling  wells won't  make it  appear.   On the                                                                    
     other hand,  and very  important to  understand, you'll                                                                    
     never  be able  to get  to the  development phase  of a                                                                    
     successful project  if you  haven't made  the discovery                                                                    
     and haven't drilled those exploration  wells.  So, both                                                                    
     pieces are very important.                                                                                                 
                                                                                                                                
1:48:45 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON continued his explanation of slide 7:                                                                               
                                                                                                                                
     But in the  minority situation, like we're  in now with                                                                    
     Cosmo,  where the  exploration process  was successful,                                                                    
     the  really huge  cost of  developing  the field  comes                                                                    
     into  play.   In  other  basins  of the  world,  people                                                                    
     aren't so  concerned about the environment  and the way                                                                    
     things are  done, and that's  not the way it's  done in                                                                    
     Alaska.    We   take  a  very  strong   stance  on  the                                                                    
     environment and safety and it  costs money to that, but                                                                    
     we do  it right.  ...  Before we sell the  first barrel                                                                    
     of oil  from a well, we  have to be ready  to make that                                                                    
     work and that's what we're  doing with Cosmo right now.                                                                    
     We've got  a well  that would  produce, but  we've been                                                                    
     working two years on the  facilities to be able to turn                                                                    
     it  on  and  produce  it  -  the  gas  pipeline  that's                                                                    
     connected, all  of that has to  be done up front.   So,                                                                    
     it's  important to  understand that  no profits  can be                                                                    
     generated on  an oil and gas  development project until                                                                    
     that curve has crossed back up and become positive.                                                                        
                                                                                                                                
     ... Remember  this represents a  successful exploratory                                                                    
     project that  has been developed.   The  vast majority,                                                                    
     industry statistics now at two-thirds  to 90 percent of                                                                    
     all exploration  projects do not  find economic  oil or                                                                    
     gas.   So, for the industry  to survive, we have  to be                                                                    
     at least able to  generate enough profits on successful                                                                    
     developments to  pay for the losses  on the exploration                                                                    
     phase.                                                                                                                     
                                                                                                                                
1:50:11 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON addressed slide 8, "Cosmopolitan Progress as of                                                                     
03/01/2016," to talk specifically about Cosmopolitan.  He said:                                                                 
                                                                                                                                
     Right  now, we're  just a  couple of  months away  from                                                                    
     starting  up.   We'll have  production from  that first                                                                    
     old well  that was drilled.   In  order to do  that, we                                                                    
     have   spent  two   years  building   these  production                                                                    
     facilities and  the drill  site. Then  we bring  in our                                                                    
     new  drilling  rig  (in fact  it's  the  most  powerful                                                                    
     drilling  rig in  Alaska) and  start spending  over $40                                                                    
     million a  well to bring on  this new oil and  gas.  So                                                                    
     here we are  in March.  After years of  working on this                                                                    
     project  and investing  all the  money  we have,  we're                                                                    
     just about ready  to start the new drilling.   And that                                                                    
     new drilling  is going  to occur  mostly in  the second                                                                    
     half of  this year.   And HB247  is proposing  that tax                                                                    
     credits end  on July 1  of this year, even  though that                                                                    
     is just  the culmination of  what we have  been working                                                                    
     on.                                                                                                                        
                                                                                                                                
     These pictures show  you the progress we've  made.  ...                                                                    
     We're 38  acres on the site  ... we've got room  for 20                                                                    
     wells.   The first  phase of this  is 10,000  barrels a                                                                    
     day of capacity.  We have  a 50-person man camp.  We're                                                                    
     also designed to  allow for a lot of  expansion of this                                                                    
     facility  as needed.   ...  We are  on schedule  and on                                                                    
     budget for  starting the first oil  production in April                                                                    
     of this year.                                                                                                              
                                                                                                                                
1:51:37 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON continued his discussion of slide 8:                                                                                
                                                                                                                                
     With regard to  the offshore gas, we're at  a point now                                                                    
     where we  could begin the  drilling the gas  wells this                                                                    
     year and set  one or two platforms next  year.  Without                                                                    
     the benefit of the tax  credits, the gas is just simply                                                                    
     too  expensive  to  do  right  now.    We  could  begin                                                                    
     production  of the  Cosmo  gas in  2018  if we  started                                                                    
     right now.   The issue  is if  we're not able  to start                                                                    
     this  year,  we  risk   losing  the  existing  offshore                                                                    
     drilling  rig  that's  been ...  in  Seward  right  now                                                                    
     waiting for us.  If the  rig owners take the rig out of                                                                    
     Alaska,  we're afraid  that  it could  be  a long  time                                                                    
     before we're able  to get another one back  in the Cook                                                                    
     Inlet  that  would  be  available for  us  to  use;  we                                                                    
     understand there  could be others  in, but one  that we                                                                    
     could use.                                                                                                                 
                                                                                                                                
     ... Thanks  to the  work that Hilcorp  has done  in the                                                                    
     Cook  Inlet, there  are sufficient  supplies of  gas in                                                                    
     the  Cook Inlet  that  have already  been developed  to                                                                    
     meet   the   requirements   for   several   years   for                                                                    
     Southcentral users.  There is  not enough gas developed                                                                    
     to  allow re-opening  of the  Agrium facility  or allow                                                                    
     for  significant   new  uses  such  as   mines  or  LNG                                                                    
     distribution  throughout   the  rural   communities  of                                                                    
     Alaska.    As  this  Committee has  heard  in  previous                                                                    
     presentations, there  is a lot  of Cook Inlet  gas that                                                                    
     has recently been discovered,  including Cosmo in those                                                                    
     numbers.   But  discovery is  just the  first phase  of                                                                    
     actually bringing  new gas  to market.   It  takes many                                                                    
     years to  bring a new  gas field on production,  and if                                                                    
     we  don't get  started  soon, we're  risking a  serious                                                                    
     shortage years down the road.                                                                                              
                                                                                                                                
1:53:16 PM                                                                                                                    
                                                                                                                                
MR.  JOHNSON  drew  attention  to   slide  9,  "Tax  credits  for                                                               
development  of  previously  discovered  proven  reserves  are  a                                                               
solid, low-risk  investment for Alaska."   He discussed  what the                                                               
tax credits mean to Alaska  from a successful development project                                                               
like Cosmopolitan.   He  said that when  used for  development of                                                               
new proven  reserves in  the state, the  tax credits  are without                                                               
question  a valuable  low-risk investment.    He maintained  that                                                               
speaking  of the  credits as  costs  or a  give-away ignores  the                                                               
value  that is  received  by the  state.   The  tax credits  make                                                               
projects work  and they bring  new sources of  long-term revenues                                                               
to the state for decades to come.                                                                                               
                                                                                                                                
MR. JOHNSON  turned to  slide 10, "Summary  of DOR  Analysis Cook                                                               
Inlet Oil Development  2/19/2016, Net Cash Benefit  to State With                                                               
Continued Tax Credits at Various Oil Prices," and continued:                                                                    
                                                                                                                                
     At Cosmo, we're  sitting on a large  proven resource of                                                                    
     future oil and gas  that now simply requires additional                                                                    
     investments  to  bring it  to  full  production.   Last                                                                    
     December,   Representative   Seaton  here   asked   the                                                                    
     Department of  Revenue for its  analysis on  the impact                                                                    
     to the  state on  development of a  new Cook  Inlet oil                                                                    
     field.  On  February 19, DOR produced  its analysis and                                                                    
     DOR's  analysis modeled  an  example  Cook Inlet  field                                                                    
     that   is  basically   equivalent  to   a  conservative                                                                    
     forecast  for  Cosmopolitan.   It  assumed  50  million                                                                    
     barrels  of ultimate  oil recovery  and  a maximum  oil                                                                    
     producing  rate of  about 17,000  barrels a  day, which                                                                    
     would  represent  the  low side  of  our  future  Cosmo                                                                    
     expectations.  The total capital  costs it assumed were                                                                    
     about $600  million, and it  assumed that the  full tax                                                                    
     credits under existing  law would continue indefinitely                                                                    
     into the future.  So, it  assumed no changes to the tax                                                                    
     law.                                                                                                                       
                                                                                                                                
     This chart  is a  summary of  the calculations  the DOR                                                                    
     provided in their letter to  Representative Seaton.  It                                                                    
     includes a  summary of the  total net  benefit received                                                                    
     by the  state and  municipalities, including  taxes and                                                                    
     royalties.    We contend  that  you  certainly need  to                                                                    
     consider the  entire benefit  of the  state to  look at                                                                    
     the  return  on the  investment  from  the tax  credits                                                                    
     here.   You can't  reasonably exclude  the bulk  of the                                                                    
     value -  that is the  royalties that are received  as a                                                                    
     benefit of  these credits.   So  this chart  shows that                                                                    
     the  tax  credits for  this  example  Cook Inlet  field                                                                    
     break  even at  about $35  a barrel.   At  about $60  a                                                                    
     barrel, the  state would net  double the amount  of the                                                                    
     tax  credits  paid.    Basically  that  would  be  $900                                                                    
     million received  for the $300 million  in tax credits,                                                                    
     or a net of $600 million on that chart.                                                                                    
                                                                                                                                
1:55:50 PM                                                                                                                    
                                                                                                                                
MR.  JOHNSON moved  to slide  11, "Summary  of DOR  Analysis Cook                                                               
Inlet  Oil Development  2/19/2016, Comparison  to Permanent  Fund                                                               
NPV Return  (6.15%) to State  at Various Oil Prices  Assuming All                                                               
Tax Credits are Continued In Full."  He stated:                                                                                 
                                                                                                                                
     DOR  also provided  the  calculations  that showed  the                                                                    
     impact of the tax credits  as a pure investment, with a                                                                    
     head-to-head  discounted-cash-flow  comparison  to  the                                                                    
     investments by  the permanent fund.   According to DOR,                                                                    
     the permanent  fund's September  2015 earnings  were at                                                                    
     6.15 percent.   So  if an alternative  investment earns                                                                    
     less  than   6.15  percent,  it  would   have  a  worse                                                                    
     performance  than   the  average  investments   in  the                                                                    
     permanent fund.   On the other hand, if  it earned more                                                                    
     than  6.15 percent,  it would  be  a better  investment                                                                    
     than the average of the permanent fund.                                                                                    
                                                                                                                                
     So,  this chart  shows  that, even  in  the case  where                                                                    
     there are  never any changes  to the tax system  in the                                                                    
     Cook Inlet (that is, all  credits stay in place forever                                                                    
     and there's  no oil  production taxes until  2022), the                                                                    
     state's  investment in  those credits  for the  example                                                                    
     field is  still better  than the average  investment in                                                                    
     the permanent fund as long  as oil prices over the next                                                                    
     30 years  average about $44 a  barrel.  And it  makes a                                                                    
     profit for  the state at  any price greater  than about                                                                    
     $35 a barrel.                                                                                                              
                                                                                                                                
                                                                                                                                
1:56:54 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON drew attention to  slide 12, "Specific Comments on HB                                                               
247 - Section  21," to provide comments on  the specific portions                                                               
of the  bill that apply  to BlueCrest and the  Cosmopolitan Unit.                                                               
He said:                                                                                                                        
                                                                                                                                
     First of  all, the  termination of  the 023(a)  and (l)                                                                    
     credits will  result in a significant  reduction of our                                                                    
     ability  to  continue  making the  investments  in  the                                                                    
     Cosmo  wells   in  particular  in   a  low   oil  price                                                                    
     environment.   It's been said  that the NOL  credits in                                                                    
     the  Cook Inlet  are somehow  duplicative with  the (a)                                                                    
     and (l) credits,  but ... it's not really  the case for                                                                    
     BlueCrest.   From the  beginning of  2017, we'll  be on                                                                    
     production with our two new wells  and we may not be in                                                                    
     an NOL situation at that  point depending on oil price.                                                                    
     To make matters  even any worse, in the  event that the                                                                    
     023(a) and (l)  credits were terminated and  we were to                                                                    
     be able to  claim an NOL credit in the  future, the NOL                                                                    
     credit  would only  be  25 percent  instead  of the  35                                                                    
     percent that ... would apply to the North Slope.                                                                           
                                                                                                                                
     We've done  some interesting analyses  of the  value to                                                                    
     the  state in  keeping the  023(a) and  (l) credits  as                                                                    
     they  apply   to  Cosmopolitan.    We   looked  at  the                                                                    
     effective   return   using   just  a   simple   and   a                                                                    
     conservative   calculation   looking    at   only   the                                                                    
     incremental royalty  for each  new Cosmo  well drilled.                                                                    
     And this  calculation doesn't include  production taxes                                                                    
     that would be  paid after 2022 under  the existing law,                                                                    
     nor does it include property taxes.                                                                                        
                                                                                                                                
     Of course, we've also looked  at the impact the loss of                                                                    
     the (a) and (l) credits would  have on us.  We could be                                                                    
     drilling Cosmo wells for the  next five to seven years,                                                                    
     we have  a lot  of locations to  be drilling  to there.                                                                    
     For each  new well we have  to decide if the  return to                                                                    
     BlueCrest  is  worth  spending  the  investment.    The                                                                    
     bottom  line is  that, particularly  in periods  of low                                                                    
     oil  prices, these  (a)  and (l)  credits  allow us  to                                                                    
     continue  drilling   the  Cosmopolitan  oil   wells  at                                                                    
     approximately $10 a barrel lower  oil prices.  So, that                                                                    
     would encourage us, it would  allow us then, to be able                                                                    
     to drill  at lower  oil prices and  get these  wells on                                                                    
     production.    And that's  likely  to  be an  important                                                                    
     factor in our 2017 drilling program next year.                                                                             
                                                                                                                                
1:59:03 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON  addressed slide 13, "State's  Investment Return From                                                               
Individual New Cosmopolitan  Well Royalties."  He  said the chart                                                               
depicted  on the  slide is  an undiscounted  cash flow  including                                                               
only the royalties from the .023(a) and (l) credits.  He                                                                        
reviewed the chart as follows:                                                                                                  
                                                                                                                                
     A  100  percent  on  investment  here  means  that  100                                                                    
     percent  of  the tax  credit  would  be repaid  out  of                                                                    
     increased  royalties over  the  life of  the new  well.                                                                    
     And what this  shows is that these (a)  and (l) credits                                                                    
     break  even at  about an  average  oil price  of $24  a                                                                    
     barrel.  At $40 a barrel  the total return would be 170                                                                    
     percent, and  at $60 a  barrel the return is  about 250                                                                    
     percent.  Now this  is BlueCrest's analysis, not DOR's,                                                                    
     but it's  actually pretty similar to  DOR's calculation                                                                    
     that they had done for  their entire example Cook Inlet                                                                    
     field.   They showed  about 300  percent return  at $60                                                                    
     oil. So you can see  that continuation of these credits                                                                    
     for Cosmo, at least for Cosmo,  are likely to be a good                                                                    
     investment for the state.                                                                                                  
                                                                                                                                
                                                                                                                                
2:00:07 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON  turned to slide 14,  "Specific Comments on HB  247 -                                                               
Section  26," to  comment on  the proposed  $25 million  per year                                                               
limitation.    He  said this  limitation  doesn't  recognize  the                                                               
differences in  qualified investment  made by  different parties.                                                               
He continued:                                                                                                                   
                                                                                                                                
     This [$25 million  limitation] is particularly damaging                                                                    
     to small companies like BlueCrest  who have invested in                                                                    
     good faith  based on the  tax policy in  existence when                                                                    
     we  entered into  the commitments  on our  investments.                                                                    
     We came to Alaska based  on these credits.  We invested                                                                    
     our cash, we  borrowed a lot of money  and committed to                                                                    
     spending a lot  more - all based on  these tax credits.                                                                    
     The timing  of the  receipt of  those payments  for the                                                                    
     credits  is  paramount  in  our  ability  to  make  the                                                                    
     payments   on   the   loan  used   for   making   those                                                                    
     investments.                                                                                                               
                                                                                                                                
MR. JOHNSON moved to slides 15-16, "Specific Comments on HB 247                                                                 
- Section 27," and said:                                                                                                        
                                                                                                                                
     BlueCrest,  along  with  the ...  entire  rest  of  the                                                                    
     industry,  tries really  hard to  hire as  many Alaskan                                                                    
     workers as  is practical.   ...  Adding in  the further                                                                    
     restriction of  reducing the  credit payment  by amount                                                                    
     of  the  percentage  of  non-Alaskan  workers  is  just                                                                    
     simply impractical.   In our  case, for  example, we've                                                                    
     hired 100  percent Alaskans for our  full-time operator                                                                    
     positions  at Cosmopolitan.   And,  to my  knowledge, I                                                                    
     think  our  drilling  staff  is  the  same  percentage.                                                                    
     We've always offered  Alaskan companies the opportunity                                                                    
     to bid  on new  contract jobs  and we've  have employed                                                                    
     over   100   different   Alaskan   companies   in   the                                                                    
     construction  of  our  Cosmo facilities.    But  Alaska                                                                    
     companies have  got to be competitive,  of course, both                                                                    
     from a  cost and  quality standpoint.   Sometimes there                                                                    
     are specialized fields that  are needed in construction                                                                    
     and drilling  that [is] just simply  not available from                                                                    
     Alaskan companies.   So, we've  tried to  do everything                                                                    
     we  can to  ... let  Alaskan crafts  people work.   For                                                                    
     example,  we've  given  Alaskan welders  several  extra                                                                    
     tries to  pass the required  welding quality test.   We                                                                    
     didn't  do  that  to  other people,  but  we  have  for                                                                    
     Alaskans.   Now,  of course,  we're  zero tolerance  on                                                                    
     drug testing, no matter where  the worker is from.  ...                                                                    
     Bottom  line, we  support Alaska  hire, but  it doesn't                                                                    
     make  sense to  penalize  companies after-the-fact  for                                                                    
     their business decisions ....                                                                                              
                                                                                                                                
2:02:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  remarked that  Mr. Johnson made  a good                                                               
case relative to BlueCrest's oil fields  on the net return to the                                                               
state, essentially  arguing it's a win-win,  which is compelling.                                                               
He asked  whether Mr. Johnson  has any arguments relative  to the                                                               
gas credits.                                                                                                                    
                                                                                                                                
MR.  JOHNSON replied  that BlueCrest  has those  calculations and                                                               
they look  similar to  the oil calculations.   However,  he said,                                                               
the gas is  a function of when  it's going to be  sold, what will                                                               
the price  be in  the future, and  right now there  are a  lot of                                                               
uncertainties about  that.  BlueCrest  has not commenced  the gas                                                               
development at this phase.                                                                                                      
                                                                                                                                
2:03:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  requested Mr.  Johnson  to  talk about  the                                                               
relative importance of Well Lease  Expenditure Credits, given she                                                               
thinks those and the other Capital  Credits are what will go away                                                               
for BlueCrest's  Cook Inlet operations  and then  BlueCrest would                                                               
have to  rely on the  net operating loss  (NOL).  She  noted that                                                               
the committee  has tried  to talk about  the different  phases of                                                               
development  and making  sure the  state has  enough activity  in                                                               
each phase for providing supply going forward.                                                                                  
                                                                                                                                
MR. JOHNSON responded  that AS 43.55.023(a) and (l)  are the Well                                                               
Lease Expenditure  Credits:   20 percent  is rebated  on tangible                                                               
type equipment, which  is pipeline facilities, and  40 percent is                                                               
paid on  the intangibles,  which is the  majority of  drilling of                                                               
the wells.   BlueCrest  will be finished  with the  facilities by                                                               
July  1 or  certainly by  the  end of  this year.   However,  the                                                               
really big costs  begin with drilling.  Each well  is roughly $40                                                               
million and  the credits  received, even without  the NOL  if the                                                               
company is  in a cash  positive position, are  really significant                                                               
for BlueCrest determining the economics  of whether it can afford                                                               
to drill the  wells.  In high oil prices  the economics are great                                                               
whether  or not  the credits  are there.   In  low oil  prices it                                                               
really makes  a difference and  BlueCrest's discounted  cash flow                                                               
analysis showed that these credits  effectively make a difference                                                               
of anywhere from  $10 to $14 a barrel price  difference, so it is                                                               
important to BlueCrest.                                                                                                         
                                                                                                                                
2:05:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR posed  a scenario  in  which the  20 and  40                                                               
percent credits  were scaled  back rather  than eliminated.   She                                                               
asked whether  there is a  way to  assess the relative  impact of                                                               
the credits becoming  less generous; for example,  the 40 percent                                                               
credit being scaled back to 20 percent.                                                                                         
                                                                                                                                
MR. JOHNSON  answered that BlueCrest  would have to look  at each                                                               
one of those.   He said 20 percent is  certainly better than zero                                                               
because maybe  it makes a  difference of $4  a barrel in  the oil                                                               
price versus the $10 that was  calculated for the 40 percent.  He                                                               
advised  that BlueCrest  will have  to base  its spending  in the                                                               
future on whatever changes, if any, are made to these credits.                                                                  
                                                                                                                                
2:06:37 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON  reviewed slide  17, "Specific Comments  on HB  247 -                                                               
Section  46."   Of all  of the  bill's provisions,  he said,  the                                                               
single most  important point  to BlueCrest is  the timing  of the                                                               
implementation  of the  changes, whatever  those changes  may be.                                                               
He explained:                                                                                                                   
                                                                                                                                
     It's now  March, and the proposed  changes are supposed                                                                    
     to take place  on July 1.  BlueCrest being  small as we                                                                    
     are has had  to be very, very careful  in our financial                                                                    
     planning  process.   Before  we  ever  started the  oil                                                                    
     development  project,  we  made  sure  that  we'd  have                                                                    
     enough funds  to allow us  to complete  construction of                                                                    
     everything -  the onshore drill site  facilities, bring                                                                    
     in  the most  powerful drilling  rig, and  to drill  at                                                                    
     least  the   first  two  new   oil  wells.     So,  our                                                                    
     calculation  showed that  we  would need  approximately                                                                    
     $525 million  to get to that  point of self-sufficiency                                                                    
     where we wouldn't  have to be going  and borrowing more                                                                    
     money  or  asking  our investors  for  more,  and  that                                                                    
     should occur  in early  2017 for  us, depending  on oil                                                                    
     price.     In  order  to   make  ...  that   work,  our                                                                    
     shareholders  invested  approximately $200  million  in                                                                    
     cash.     We've  borrowed  $30  million   from  [Alaska                                                                    
     Industrial  Development and  Export Authority  (AIDEA)]                                                                    
     for a loan on the drilling  rig....  We obtained a $150                                                                    
     million high-interest  development loan.   ...  To date                                                                    
     we have received  $24 million in tax  credits, and that                                                                    
     goes  into  that  formula,  and  the  balance  is  $121                                                                    
     million  to get  us up  to $525  [million].   That $121                                                                    
     million  is what  ... we  would  receive, hopefully  we                                                                    
     will receive,  from the tax credits  on the investments                                                                    
     that we've  made basically for  2015 and  2016 spending                                                                    
     under  the current  tax laws.    We've spent  a lot  of                                                                    
     money  to get  to  the  point where  we  can now  start                                                                    
     drilling,  but  an  abrupt  termination  of  these  tax                                                                    
     credits  on  which  we've based  our  entire  financial                                                                    
     planning would be devastating.                                                                                             
                                                                                                                                
2:08:35 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON continued:                                                                                                          
                                                                                                                                
     We've  finally reached  the  point,  by completing  all                                                                    
     this work and  spending all this money,  to where we'll                                                                    
     finally have our drill site  and rig ready to drill the                                                                    
     second half of this year.   We need the production from                                                                    
     the first new wells to pay  for the costs we have spent                                                                    
     so far.   Those drilling costs, at  least through early                                                                    
     2017, are all  based on the assumption that  we will be                                                                    
     able  to  obtain the  credits  under  existing law  for                                                                    
     those investments  and be fully paid  for those credits                                                                    
     on time.  We've done all  this work and we've spent all                                                                    
     this money  to date, and  it only seems  reasonable for                                                                    
     us to ask to be able  to claim the existing credits for                                                                    
     the  spending that  is the  result  of our  investments                                                                    
     made in  good faith based  on the expectation  that the                                                                    
     state would honor its share of the investments.                                                                            
                                                                                                                                
     We need  to be  able to  be able to  get to  the finish                                                                    
     line here.  Not paying  the credits that were the basis                                                                    
     for the investments we've made  over the last couple of                                                                    
     years,  as close  as we  are,  is kind  of like  saying                                                                    
     "well, you  can spend  the money for  a new  house, but                                                                    
     you can never  move into it."  We've got  to get to the                                                                    
     finish line.                                                                                                               
                                                                                                                                
2:09:39 PM                                                                                                                    
                                                                                                                                
MR. JOHNSON  concluded with slide  18 which states, "When  we are                                                               
driving on  slippery icy roads,  the most dangerous thing  we can                                                               
do is suddenly slam on the brakes!"  He said:                                                                                   
                                                                                                                                
     In conclusion,  I'd like to reemphasize  the importance                                                                    
     of  phasing into  any changes  over  a reasonable  time                                                                    
     period.   Everyone in this room  today understands that                                                                    
     when  we  are faced  with  driving  on dangerous,  icy,                                                                    
     slippery roads - like the  State of Alaska and Alaska's                                                                    
     oil  and gas  industry is  faced with  right now  - the                                                                    
     most dangerous thing we can  do is suddenly slam on the                                                                    
     brakes.                                                                                                                    
                                                                                                                                
2:10:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  Mr.  Johnson is  asking                                                               
that the  credits earned  through the  credit expiration  date be                                                               
paid  on time  or asking  that those  credits be  extended beyond                                                               
their statutory expiration date.                                                                                                
                                                                                                                                
MR. JOHNSON  replied yes, BlueCrest is  definitely expecting that                                                               
it will receive the credits in  a timely manner as they have been                                                               
earned under  current law.   A  change in current  law on  July 1                                                               
will result in a huge impact  to BlueCrest in terms of the amount                                                               
of  credits  because the  last  half  of  2016 is  the  company's                                                               
largest, most  expensive drilling expenditure  time.  By  the end                                                               
of  2016, early  2017, BlueCrest  will have  to make  an economic                                                               
decision about  what to do  drilling-wise.  But, he  pointed out,                                                               
BlueCrest has already  committed that money for all  of 2016, the                                                               
company has  already signed contracts  for the money to  be spent                                                               
the last half of 2016.                                                                                                          
                                                                                                                                
2:11:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR recalled Mr.  Johnson mentioning that the Net                                                               
Operating Loss  Credit should be  35 percent  like it is  for the                                                               
North Slope  producers.  She  noted that BlueCrest  has different                                                               
levers it  can pull  here.   The state  is trying  to incentivize                                                               
certain behaviors.  Say, for  example, the Well Lease Expenditure                                                               
Credit and  the .023(a) and  (l) credits  go away, and  then that                                                               
other  change happens  simultaneously.   That  is different  once                                                               
BlueCrest is  producing net positive.   She asked how  that makes                                                               
things look favorability-wise.                                                                                                  
                                                                                                                                
MR.  JOHNSON responded  that the  NOL Credit  is important  for a                                                               
company  just   getting  started  and  has   been  important  for                                                               
BlueCrest.    The  .023(a)  and  (l)  credits  are  important  as                                                               
BlueCrest goes  down the road  drilling and continuing  to drill.                                                               
BlueCrest has  five to seven years  of drilling that it  could do                                                               
at Cosmo.   The .023(a) and (l) credits facilitate  drilling at a                                                               
lower oil price,  these credits make the  economics more feasible                                                               
to drill those wells.                                                                                                           
                                                                                                                                
2:12:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  surmised  Mr.  Johnson  is  anticipating  a                                                               
situation  where  BlueCrest is  net  positive  but continuing  to                                                               
drill, and so the company is  ineligible for a Net Operating Loss                                                               
Credit but  wants to  have a credit  that would  help incentivize                                                               
the continued drilling activities.                                                                                              
                                                                                                                                
MR. JOHNSON  answered yes, and that  is what the .023(a)  and (l)                                                               
credits  do.   For  example,  if  BlueCrest  had $10  million  of                                                               
positive cash  flow, what would  the company  do with that?   The                                                               
company's plan  is to reinvest  everything it  gets.  If  that is                                                               
applied  against an  NOL  Credit in  a new  well  that costs  $40                                                               
million, then  instead of being able  to claim the credit  on all                                                               
$40 million  BlueCrest would  get credit on  only $30  million of                                                               
it.  But if  the company is in a positive cash  flow of, say, $40                                                               
million and it  drills one well, that just brings  the company to                                                               
$0 and the  company never gets a  credit at all.   That's why the                                                               
.023(a) and  (l) credits are important  for continued development                                                               
after  a company  has  started  up and  finally  made  it to  the                                                               
positive point.                                                                                                                 
                                                                                                                                
2:14:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  remarked that she  is trying to  think about                                                               
what  other  opportunities there  are  for  how to  address  this                                                               
without  unintended consequences  that are  more costly  than the                                                               
state can afford.  She posed  a scenario in which a company could                                                               
claim credits for  its drilling activity for a  certain number of                                                               
years, and asked  whether Mr. Johnson would see that  as being an                                                               
appropriate application.                                                                                                        
                                                                                                                                
MR. JOHNSON replied that that's  a tough decision legislators are                                                               
faced with.   He said  industry will  take whatever is  done into                                                               
account  and   will  make   actions  based   upon  that.     Most                                                               
importantly, he cautioned,  is that the action taken  not be done                                                               
immediately -  that industry be  given some  time so it  can plan                                                               
accordingly.  For  example, a few months to July  1 is impossible                                                               
to plan for, but  one to three years can be planned  for.  If the                                                               
credits  go down,  the result  will be  less development;  if the                                                               
credits  apply  to exploration,  then  the  result will  be  less                                                               
exploration  also.   That's  a choice  that  legislators have  to                                                               
make.                                                                                                                           
                                                                                                                                
The committee took an at-ease from 2:16 p.m. to 2:20 p.m.                                                                       
                                                                                                                                
2:20:19 PM                                                                                                                    
                                                                                                                                
DAVID WILKINS, Senior Vice President,  Hilcorp Alaska, LLC, noted                                                               
that he is fairly new to  Alaska and is a petroleum engineer with                                                               
30 years of  industry experience all over the world  and U.S.  He                                                               
said he  moved his family  to Anchorage  last summer to  lead the                                                               
Hilcorp  Alaska,  LLC,  ("Hilcorp")  team and  looks  forward  to                                                               
continuing  the legacy  of  responsible  development of  Alaska's                                                               
resources so  that his children  might also have  the opportunity                                                               
to live  and work  here.   He noted that  Hilcorp is  the largest                                                               
privately held oil and gas  company in the U.S., is headquartered                                                               
in Houston,  Texas, and operates in  the Gulf Coast of  Texas and                                                               
Louisiana as  well as  the Northeast U.S.   Hilcorp  entered into                                                               
the  Cook  Inlet in  2012  and  into  the  North Slope  in  2014.                                                               
Founded  in 1989,  Hilcorp has  over  1,350 full-time  employees.                                                               
Just over  500 employees support Hilcorp's  operations in Alaska,                                                               
of which 90 percent are Alaska residents.                                                                                       
                                                                                                                                
2:23:06 PM                                                                                                                    
                                                                                                                                
MR.  WILKINS  said  that Hilcorp  operates  approximately  53,000                                                               
gross barrels of  oil a day in Alaska and  150 million cubic feet                                                               
of gross gas per day  from approximately 500 producing wells, for                                                               
a  total  net  production  to  Hilcorp  of  approximately  57,000                                                               
barrels of oil equivalent (BOE) per day.  He continued:                                                                         
                                                                                                                                
     Hilcorp's   assets   are    primarily,   although   not                                                                    
     exclusively,  older  fields with  extensive  production                                                                    
     histories,  steady  and  predictable  performance  that                                                                    
     carry an  incredible opportunity  for getting  more oil                                                                    
     and gas out of the  ground safely and responsibly while                                                                    
     extending  production   life  through   efficiency  and                                                                    
     thousands  of  smaller scale  projects.    We hope  the                                                                    
     state  sees  a  need  to attract  more  companies  like                                                                    
     Hilcorp as  fields and infrastructures continue  to age                                                                    
     here in Alaska.                                                                                                            
                                                                                                                                
     That  brings me  to why  I sit  before you  here today.                                                                    
     Hilcorp's     production    in     Alaska    represents                                                                    
     approximately 40  percent of  what we  produce company-                                                                    
     wide,  so our  success here  in Alaska  is critical  to                                                                    
     Hilcorp's  overall success.   I  absolutely agree  with                                                                    
     all  of  what  the   Alaska  Oil  and  Gas  Association                                                                    
     [(AOGA)] presented yesterday on HB  247.  It's our view                                                                    
     that  the credits  in question  have  resulted in  more                                                                    
     investments  here  in  Alaska   and  we  stand  by  our                                                                    
     commitment to serve Alaska's energy needs first.                                                                           
                                                                                                                                
     It's  no secret  that Hilcorp  has been  a big  part of                                                                    
     reviving  the energy  security in  Southcentral Alaska.                                                                    
     Over the past four years  we've invested over a billion                                                                    
     dollars in projects  and have drilled over  50 wells in                                                                    
     the Cook  Inlet Area.   As a result of  this investment                                                                    
     and the positive results, we're  sending more oil to be                                                                    
     refined  and used  here in  Alaska and  we're currently                                                                    
     making gas  supply commitments into the  year 2023 with                                                                    
     local  utilities  and  continue  to work  to  ensure  a                                                                    
     reliable  and  affordable  energy source  for  Alaska's                                                                    
     largest population hub.   As you are  well aware, prior                                                                    
     to Hilcorp's  entry into  Alaska, there  was widespread                                                                    
     concern  that utilities  would need  to import  natural                                                                    
     gas  to  meet demand.    I've  heard numbers  like  LNG                                                                    
     [liquefied natural  gas] imports  being on  the $10-$20                                                                    
     per MCF  [thousand cubic feet] basis,  which would have                                                                    
     been   a  very   bad   impact  on   the  economies   in                                                                    
     Southcentral Alaska.                                                                                                       
                                                                                                                                
2:26:01 PM                                                                                                                    
                                                                                                                                
MR. WILKINS continued:                                                                                                          
                                                                                                                                
     These   commitments   certainly  don't   come   without                                                                    
     challenges.  Developing  oil and gas in  the Cook Inlet                                                                    
     basin carries  a very high  cost of  production coupled                                                                    
     with  decline  rates  that   vary  from  15-50  percent                                                                    
     annually depending on the field.   Let me restate that.                                                                    
     We  have wells  in areas  in the  Cook Inlet  that lose                                                                    
     half of their production in  one year.  The simple fact                                                                    
     is that if  we are not spending money  on projects that                                                                    
     bring on  new production we cannot  curb these declines                                                                    
     and we  will very quickly  get back into  the situation                                                                    
     we  were in  prior to  2012 to  where supplies  were in                                                                    
     question.  So  we believe it is in  both Hilcorp's best                                                                    
     interest  and   the  state's  best  interest   that  we                                                                    
     continue  to spend  dollars on  trying to  produce more                                                                    
     oil and gas  in the Cook Inlet as well  as on the North                                                                    
     Slope.                                                                                                                     
                                                                                                                                
     It's  also no  secret that  Alaska's tax  credit system                                                                    
     and the  Cook Inlet  Recovery Act  were key  drivers in                                                                    
     bringing Hilcorp  to Alaska and  in our  investments to                                                                    
     date.    Since 2012,  Hilcorp  has  spent $3.2  billion                                                                    
     dollars  in  capital  and  acquisition  costs  here  in                                                                    
     Alaska.   Those investments  were aimed at  one primary                                                                    
     goal - increasing  oil and gas production.   Since 2012                                                                    
     we   have   increased   our   organic,   meaning   non-                                                                    
     acquisition, production by  approximately 40 percent in                                                                    
     the Cook Inlet.  A lot of  people ask how we do it, and                                                                    
     the  answer is  simple.   First, we  have talented  and                                                                    
     dedicated people  here in Alaska  and, second,  we have                                                                    
     and   continue   to   make   significant   investments;                                                                    
     investments  that were  encouraged by  the state's  tax                                                                    
     credit  program  and  investments  did  just  what  the                                                                    
     credits meant to do -  increase energy supply needs for                                                                    
     Alaska.                                                                                                                    
                                                                                                                                
2:28:14 PM                                                                                                                    
                                                                                                                                
MR. WILKINS continued:                                                                                                          
                                                                                                                                
     I would argue  that our success has  been meaningful to                                                                    
     many,  including  the   state.    Increased  production                                                                    
     levels of oil  and natural gas in the  Cook Inlet basin                                                                    
     has  resulted  in  increased royalty,  property  taxes,                                                                    
     jobs, and more.  One example  of this is looking at our                                                                    
     Monopod  offshore platform.    In  January 2012,  right                                                                    
     after Hilcorp  took over  operations, the  realized oil                                                                    
     price was approximately $95 a  barrel.  Production from                                                                    
     the  platform was  approximately 600  barrels of  oil a                                                                    
     day, a marginal  rate for an offshore  platform in high                                                                    
     operating  costs.   As the  royalty owner,  the state's                                                                    
     take from  the Monopod  at that time  was approximately                                                                    
     $90,000 per  month -  again, that  was when  oil prices                                                                    
     were $95 a  barrel.  Because of this  marginal rate and                                                                    
     low  profitability, the  Monopod qualified  for royalty                                                                    
     relief  under House  Bill 185  that was  passed in  the                                                                    
     year 2003.   The royalty rate was  restructured to help                                                                    
     maintain  profitability for  the  platform  so that  it                                                                    
     would  not  be  shut-in and/or  permanently  abandoned.                                                                    
     Over the  past four  years, Hilcorp  has done  over 150                                                                    
     projects  on  the Monopod  alone,  most  of which  were                                                                    
     smaller in  scope, and we have  increased production to                                                                    
     a current rate of approximately  3,000 barrels of oil a                                                                    
     day.   Because  of  this increase  the state's  royalty                                                                    
     share is back up to  the standard 12.5 percent take and                                                                    
     even  with oil  prices  at $35  a  barrel, the  state's                                                                    
     royalty  take  from  the  Monopod  has  increased  from                                                                    
     $90,000  a month  to over  a half  a million  dollars a                                                                    
     month.   That's  over a  ten time  increase in  royalty                                                                    
     barrels and  a five time  increase in dollars  going to                                                                    
     the  state despite  oil  prices  declining 60  percent.                                                                    
     Furthermore ...  the Monopod platform was  probably one                                                                    
     to two to  three years from being plugged.   Because of                                                                    
     the  increase,  we  have  increased  and  extended  the                                                                    
     Monopod 15-20  years and added  on the reserves  on the                                                                    
     books 8 million barrels of oil.                                                                                            
                                                                                                                                
2:31:01 PM                                                                                                                    
                                                                                                                                
MR. WILKINS continued:                                                                                                          
                                                                                                                                
     I would offer we need more  results like this.  I would                                                                    
     also offer  that the industry  needs a system  in place                                                                    
     that    incentivizes,   not    jeopardizes,   continued                                                                    
     investment of  this type  of activity.   It's  a really                                                                    
     good of  example of  the state  putting good  policy in                                                                    
     place aimed at  and achieving a positive  result and we                                                                    
     delivering the result.                                                                                                     
                                                                                                                                
     I can  tell you today  that the credits  Hilcorp earned                                                                    
     were  absolutely reinvested  in  Alaska.   Our  current                                                                    
     production rates  prove it.   We  have managed  to work                                                                    
     our  way above  the  50,000 BOE  per  day mark  through                                                                    
     acquisition  and a  lot  of hard  work.   Breaking  the                                                                    
     50,000 mark means we can  no longer cash in the credits                                                                    
     that HB 247  proposes to take away.   But other budding                                                                    
     companies,  like you  heard  from  BlueCrest and  Furie                                                                    
     you're  going to  hear form,  can.   And  Hilcorp is  a                                                                    
     company  that   always  welcomes  competition   in  the                                                                    
     market.   We want  to help  promote a  healthy industry                                                                    
     throughout the state.   As others have  said, an active                                                                    
     industry  means additional  service  companies will  be                                                                    
     attracted  to  Alaska,  which creates  competition  and                                                                    
     will help drive down costs.                                                                                                
                                                                                                                                
     A lot of the discussion  around HB 247 has involved the                                                                    
     Cook  Inlet basin,  primarily  because  of the  notable                                                                    
     increase in  production and activity that  the existing                                                                    
     tax  structure  intended  to generate  and  was  wildly                                                                    
     successful.   Our  success in  the Cook  Inlet is  what                                                                    
     fueled  Hilcorp's interest  in expanding  to the  North                                                                    
     Slope.  And  we did just that in November  2014 when we                                                                    
     purchased 20 percent of BP's assets on the Slope.                                                                          
                                                                                                                                
2:33:04 PM                                                                                                                    
                                                                                                                                
MR. WILKINS continued:                                                                                                          
                                                                                                                                
     It's  been over  just a  year since  we arrived  on the                                                                    
     North Slope and  I am very excited about  the amount of                                                                    
     opportunity  we   see  on  the   Slope.    We   have  a                                                                    
     comprehensive list of projects that  we can invest in -                                                                    
     small and big -  facility recompletes, drilling, we see                                                                    
     lots of opportunity.   Projects that will  put more oil                                                                    
     in the pipeline and  support literally hundreds, if not                                                                    
     thousands, of jobs in the state of Alaska.                                                                                 
                                                                                                                                
     But, in  today's price environment  and in the  face of                                                                    
     an uncertain state fiscal  structure, it's difficult to                                                                    
     determine  what projects  will move  forward and  when.                                                                    
     We have been very, very  thoughtful with every penny we                                                                    
     spent.   We  have to  continue  to work  hard to  build                                                                    
     efficiencies  and cut  costs while  ensuring  we do  it                                                                    
     safely and protecting the  environment.  Cutting costs,                                                                    
     not  corners,  is the  only  way  we will  survive  the                                                                    
     current downturn.                                                                                                          
                                                                                                                                
     I know  we aren't  the only  ones faced  with difficult                                                                    
     decisions and  realities during this  challenging time.                                                                    
     I also recognize the members  of this committee and the                                                                    
     legislature  have much  to consider  about what's  best                                                                    
     for the  state and  our future.   In closing,  I'd just                                                                    
     like  to  remind  you  that   the  uncertainty  we  are                                                                    
     currently  facing threatens  our  ability  to plan  our                                                                    
     investments and that the decisions  you make today will                                                                    
     impact the economics and  the opportunities to increase                                                                    
     tomorrow's production  both in  the Cook Inlet  and the                                                                    
     North Slope.                                                                                                               
                                                                                                                                
2:34:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON  inquired  whether the  platforms  in  Cook                                                               
Inlet are all being worked on.                                                                                                  
                                                                                                                                
MR.  WILKINS replied  that Spark,  Spur, Dillon,  and Baker  have                                                               
opportunity to  them but are  not producing  right now.   He said                                                               
Hilcorp is  doing everything it can  to lower the costs  and save                                                               
them  for another  day.    Currently, Hilcorp  is  looking as  to                                                               
whether it can make investments to turn those platforms back on.                                                                
                                                                                                                                
REPRESENTATIVE OLSON  asked whether platforms  A and C  belong to                                                               
Hilcorp.                                                                                                                        
                                                                                                                                
MR. WILKINS responded yes, Hilcorp  recently acquired platforms A                                                               
and C  from XTO Energy  Inc., but  right now those  platforms are                                                               
not making money.                                                                                                               
                                                                                                                                
2:35:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON commented  that it is heard  from both big                                                               
and  small  producers  that  they   want  stability,  and  he  is                                                               
interested in stability  for his constituents.   He asked whether                                                               
HB  247 would  enhance stability  for his  constituents so  there                                                               
would be no need for rolling blackouts.                                                                                         
                                                                                                                                
MR. WILKINS  answered that over  the last four years  Hilcorp has                                                               
invested  a lot  of  money,  especially in  oil  production.   In                                                               
regard  to natural  gas production,  the issue  in 2012  was that                                                               
there  wasn't availability,  especially over  a longer  period of                                                               
time,  to give  confidence  in the  market.   He  said he  thinks                                                               
Hilcorp has  demonstrated through significant investment  that it                                                               
has brought stability  and extra capacity to the  market, as well                                                               
as  deliverability in  the places  it needs  to be.   Hilcorp  is                                                               
convincing the local utilities that,  yes, that capacity is there                                                               
and  at  the same  time  Hilcorp  is  providing  that gas  at  an                                                               
affordable rate for the customers.   If Hilcorp doesn't spend the                                                               
continued  investments the  wells  are going  to  decline and  it                                                               
could  very quickly  return to  the situation  where there  isn't                                                               
enough gas  to meet the  market demands.   He, too,  is concerned                                                               
going forward about  the stability, but as long  as Hilcorp keeps                                                               
doing what it is doing and bringing on new gas....                                                                              
                                                                                                                                
2:37:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON understood  that  Hilcorp  is working  on                                                               
contracts to  the year 2023.   He inquired as to  what effect, if                                                               
any,  HB 247  would have  on Hilcorp's  ability to  fulfill those                                                               
contracts.                                                                                                                      
                                                                                                                                
MR. WILKINS  replied that  Hilcorp is very  confident it  has the                                                               
projects to bring on to meet  the demands in the future.  Hilcorp                                                               
doesn't execute on  those projects today because  it doesn't need                                                               
to deliver  the gas today.   But  Hilcorp is very  confident that                                                               
when it  needs to deliver  that, it  will do the  projects, spend                                                               
the money, and  bring the gas on.  All  that said, Hilcorp hasn't                                                               
stopped looking  for new  gas.   Hilcorp is  drilling exploration                                                               
wells and will  continue to look for  new gas and new  oil in the                                                               
Cook Inlet  basin.  Hilcorp  will be drilling  a new well  on the                                                               
Monopod  in  the next  two  weeks  and  Hilcorp  plans to  do  an                                                               
exploration  well  or  two  in  the Kenai  area.    Hilcorp  just                                                               
finished  drilling an  exploration well  in the  Kenai area  that                                                               
unfortunately wasn't successful.   Hilcorp spent over $12 million                                                               
on that well,  but the geology there is very  complex and Hilcorp                                                               
is trying  to employ new  technology to find  new oil and  gas in                                                               
that area.                                                                                                                      
                                                                                                                                
2:39:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON remarked  that the  testimonies of  Mr.                                                               
Wilkins  and  Mr.  Johnson  have   been  very  interesting.    He                                                               
recounted  that  the  legislature's consultant,  Janak  Mayer  of                                                               
enalytica, told  the committee  that the  Cook Inlet  credits are                                                               
exceptionally   generous   and   Mr.   Mayer   questioned   their                                                               
sustainability.  Representative  Josephson further recounted that                                                               
Mr. Mayer  seemed to be  speaking as  the secondary source  as if                                                               
he'd  spoken to  someone who  is a  primary source  of the  data.                                                               
Representative  Josephson further  recounted  that yesterday  Mr.                                                               
Armstrong noted  that this  is the most  generous tax  regimen in                                                               
the  world.   He  asked  whether  Mr.  Wilkins thinks  these  are                                                               
sustainable.                                                                                                                    
                                                                                                                                
MR. WILKINS responded  that all he knows from  his perspective is                                                               
that  they've worked,  they've  done what  they  intended to  do.                                                               
Hilcorp  is in  a little  different situation.   It  has invested                                                               
billions of dollars and is not  looking to get that money back in                                                               
a year or two; Hilcorp is  making long-term decisions.  Right now                                                               
Hilcorp is looking to get its money  back over a five to ten year                                                               
period.    Hilcorp  is  all the  time  projecting  its  long-term                                                               
investment  and  what  Hilcorp   desires  is  predictability  and                                                               
sustainability in  the fiscal  regime so  it can  make decisions.                                                               
From  the  tax  credit  standpoint, he  would  still  argue  that                                                               
Hilcorp has done  exactly what the state wanted it  to do and the                                                               
state benefitted from the work that Hilcorp has done.                                                                           
                                                                                                                                
REPRESENTATIVE JOSEPHSON thanked Mr. Wilkins for that work.                                                                     
                                                                                                                                
2:41:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON understood that Hilcorp  now has some of the                                                               
longer gas  contracts in the  inlet, primarily to  ENSTAR Natural                                                               
Gas  Company  ("ENSTAR").    He  inquired  whether,  if  the  tax                                                               
structure changes during that period,  Hilcorp is allowed to pass                                                               
that  on to  ENSTAR  or Hilcorp  is stuck  with  whatever was  in                                                               
effect when it signed the contracts.                                                                                            
                                                                                                                                
MR. WILKINS answered that Hilcorp  has multiple contracts and all                                                               
the time Hilcorp  is renewing and giving contracts.   He said the                                                               
price of  gas is  actually coming down  because Hilcorp  has been                                                               
successful.   Hilcorp looks to  be successful and  provide energy                                                               
needs to Southcentral Alaskans that's affordable and reliable.                                                                  
                                                                                                                                
REPRESENTATIVE OLSON  posed a scenario  in which the tax  goes up                                                               
significantly and  Hilcorp is in  the middle  of a contract.   He                                                               
asked whether that is an allowable  item that Hilcorp can pass on                                                               
to ENSTAR.                                                                                                                      
                                                                                                                                
MR.  WILKINS replied  that he  would see  it that  way.   He said                                                               
Hilcorp incorporates  the tax credits into  its overall long-term                                                               
decisions  and  investment  decisions.     Hilcorp  is  a  little                                                               
different than  some of  the other companies  that are  using the                                                               
tax  credits because  Hilcorp incorporates  that in  its decision                                                               
making.    Hilcorp  is  going  to spend  money  in  Alaska  doing                                                               
projects  and doing  them economically  as Hilcorp  sees it  can.                                                               
So, the tax  credits going away will have an  impact on Hilcorp's                                                               
investments, on the level of  Hilcorp's investments, but he still                                                               
sees Hilcorp meeting the energy  needs and meeting the market for                                                               
the foreseeable future for the life of its contracts.                                                                           
                                                                                                                                
2:43:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON recalled that  enalytica told the committee                                                               
that $5-$7 per  thousand cubic feet (MCF) is  sufficient price to                                                               
produce the most  expensive gas in the world.   He noted that the                                                               
[November 2012  consent decree  between the  State of  Alaska and                                                               
Hilcorp  Alaska, LLC,]  will go  [until  sometime in  2017].   He                                                               
further noted  that Hilcorp is  working on contracts  through the                                                               
year 2023.  He stated that  [legislators] are in a dilemma with a                                                               
$3.8 billion  deficit and yet  these refundable tax  credits were                                                               
$500 million this last year and  are estimated to be $623 million                                                               
next year.   Taking $1,000  from every resident's  dividend would                                                               
just about  equate to the $623  million that will be  provided in                                                               
reimbursable tax credits.  Therefore,  he is trying to figure out                                                               
where,  as a  policy,  [the legislature]  breaks  this where  the                                                               
credits are  needed.  He  said it seems  to him that  the credits                                                               
for gas  in Cook Inlet are  liked, but given the  price structure                                                               
of Cook Inlet  gas, they're really not needed.   He requested Mr.                                                               
Wilkins to comment on this statement.                                                                                           
                                                                                                                                
MR. WILKINS  responded that  Hilcorp is an  example of  where the                                                               
tax credits worked  and both benefitted.  He  said he appreciates                                                               
that the  state needs to make  difficult choices, but all  of the                                                               
companies are faced  with the same dilemma.  There  isn't a magic                                                               
elixir  decision here.    Will removing  the  tax credits  impact                                                               
investment in  Alaska?  Yes.   How much?   It will depend  on the                                                               
levels that are being talked about.                                                                                             
                                                                                                                                
2:46:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON related  that he  has been  thinking about                                                               
how  to parse  which credits  to pay  and which  credits must  be                                                               
withdrawn.   He asked whether Mr.  Wilkins would see it  as being                                                               
reasonable  if   those  people  who   have  committed   to  final                                                               
investment  decision  (FID)  and  have  a  DNR-approved  plan  of                                                               
development were grandfathered for some period of time.                                                                         
                                                                                                                                
MR. WILKINS  answered that  it is  tough for  him to  say without                                                               
knowing all  the specifics.   He said  Hilcorp would  welcome the                                                               
opportunity to  evaluate and provide  comment.  He added  that he                                                               
agrees with ExxonMobil's comment that  a response can be provided                                                               
from an  industry perspective  through AOGA  because he  does not                                                               
want  to  make  a  comment  that  is  favorable  to  Hilcorp  but                                                               
detrimental to another company.                                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON clarified  that he is not  asking a "gotcha                                                               
question" but is trying to figure  out how to move forward in the                                                               
current  economic environment,  what is  the state's  net present                                                               
value on investments,  and how to give  companies enough latitude                                                               
to  amortize their  investment and  decision making.   The  state                                                               
cannot invest in  everything.  He urged Mr. Wilkins  to talk with                                                               
others  and provide  the committee  with  ideas on  how to  parse                                                               
things.                                                                                                                         
                                                                                                                                
2:49:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  offered  her understanding  that  Hilcorp's                                                               
development for  the Cook  Inlet is  separate from  the company's                                                               
development for  the North  Slope.   She said  she thinks  she is                                                               
seeing very different  scenarios for these two areas  in terms of                                                               
the generosity of the credits.   She inquired as to which credits                                                               
have been used by Hilcorp.                                                                                                      
                                                                                                                                
MR. WILKINS replied he is not  a tax person and therefore doesn't                                                               
have specific line-by-line answers.   But, he said, Hilcorp takes                                                               
the tax credits  very seriously and the  credits get incorporated                                                               
into all  of Hilcorp's  investment decisions.   Within  a company                                                               
like Hilcorp,  dollars can  go several places  and he  would love                                                               
for capital  dollars, investment  dollars, to  come to  Alaska to                                                               
where Alaska  benefits and  to where  Hilcorp benefits.   Hilcorp                                                               
takes  everything  into  account  when  making  those  investment                                                               
decisions because they can go to Texas, Louisiana, or elsewhere.                                                                
                                                                                                                                
2:50:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  stated that  the very generous  bonuses that                                                               
went  to Hilcorp  employees is  something  her constituents  have                                                               
reacted to.  This is a  consideration here, she said, because she                                                               
represents an  area where 39  percent of  the families in  one of                                                               
the neighborhoods make  less than $25,000 per year.   So, for her                                                               
constituents it  seems there is  opportunity to  make adjustments                                                               
in the system that seem fair.                                                                                                   
                                                                                                                                
MR. WILKINS  responded that  if the  implication is  that Hilcorp                                                               
took money from the state to  pay the bonuses, the answer to that                                                               
is categorically no.  He explained  that Hilcorp uses any kind of                                                               
tax credit  to promote  the projects  within Alaska  and increase                                                               
production, which Hilcorp has demonstrated.   He said he has been                                                               
with Hilcorp  for 10 years  and the aforementioned  bonus program                                                               
was the latest of two bonus programs.                                                                                           
                                                                                                                                
REPRESENTATIVE  TARR understood  the  other bonus  program was  a                                                               
car.                                                                                                                            
                                                                                                                                
MR.  WILKINS continued  his response  and said  that Hilcorp  met                                                               
both of its  bonus programs.  This last program  was started five                                                               
years ago in 2010 before Hilcorp  was in Alaska.  Hilcorp went to                                                               
its employees and told them  it wanted a long-term incentive goal                                                               
to incentivize  the behaviors that  the company wants.   For five                                                               
years  Hilcorp planned  on paying  those by  having a  systematic                                                               
measure  to  reward  the employees  when  they  were  successful.                                                               
Hilcorp  also views  that  as a  compensation;  it's a  long-term                                                               
compensation incentive within Hilcorp  and the company benchmarks                                                               
those against  other companies.   Lots of  companies in  the U.S.                                                               
have long-term incentive programs.   Some give stock options, but                                                               
Hilcorp gives what  it calls "a BHAG bonus -  Big Hairy Audicious                                                               
Goal"  and it's  a  five-year goal.   The  actual  program is  to                                                               
double  the  size of  the  company:   double  production,  double                                                               
reserves, double  equity value of  the company.  When  looking at                                                               
the structure  of the program  on a  per-year basis, the  goal is                                                               
actually  less  per  employee  than   what  Hilcorp  provides  in                                                               
healthcare and  so is  not out  of line  at all.   What  does the                                                               
company get when its employees do  that?  It gets 1,350 employees                                                               
pulling every day  for a common goal.  When  the goal was started                                                               
in 2010,  did Hilcorp anticipate oil  prices crashing?  No.   The                                                               
company had to decide whether  to honor its commitment because it                                                               
impacted the  bottom line and  it hurt.   Over half  of Hilcorp's                                                               
employees  are   field  workers,  hard-working  folks   that  got                                                               
energized about  this goal.   When he  talked to  employees about                                                               
what they did  with their bonus, some people said  they paid down                                                               
debt, some  sent kids  to college  that otherwise  wouldn't have,                                                               
and one person bought a house.   He said he knows Hilcorp did the                                                               
right thing - a deal is a deal - and he is proud of doing that.                                                                 
                                                                                                                                
REPRESENTATIVE  TARR appreciated  Mr. Wilkins  response and  said                                                               
members feel similarly  in terms of the  expectations of Alaskans                                                               
of having a deal on receiving  a permanent fund dividend or other                                                               
programs.  It is a challenge  to balance those things, she added,                                                               
and it will be difficult to work through.                                                                                       
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
2:56:59 PM                                                                                                                    
                                                                                                                                
BRUCE WEBB,  Senior Vice President,  Furie Operating  Alaska LLC,                                                               
explained that  Furie Operating Alaska LLC  ("Furie") started out                                                               
as  Escopeda Oil  Company buying  the  first leases  in the  Cook                                                               
Inlet between  2002 and  2006.   The president  at the  time, Mr.                                                               
Danny Davis,  formed a unit  and tried to get  investors involved                                                               
in what  would be  a very expensive  endeavor bringing  a jack-up                                                               
rig  to explore  the  offshore Cook  Inlet  resources.   Escopeda                                                               
found  such  an  individual,  a  German  citizen  with  a  German                                                               
investment  company, and  in October  2010 Escopeda  became Furie                                                               
Operating Alaska LLC.   The company's main  investments came from                                                               
Germany and  those investments were  raised by touting  the State                                                               
of Alaska  as its business partner.   The state, through  the tax                                                               
credit  program,  basically  subsidized Furie's  exploration  and                                                               
development.  It  was widely praised in Europe that  the State of                                                               
Alaska  was a  partner  in  trying to  get  more exploration  and                                                               
development in  the Cook Inlet.   Furie was able to  bring up the                                                               
Spartan 151  jack-up rig  in August  2011, the  first time  in 20                                                               
years that a jack-up  rig had been in the Cook  Inlet.  Furie has                                                               
been on the  leading edge of everything  throughout this project,                                                               
there has been  one hurdle after another.  Furie  is proud to say                                                               
that it  has drilled five different  wells in five years  and put                                                               
in the first platform in the Cook Inlet in about twelve years.                                                                  
                                                                                                                                
MR. WEBB played a video showing  the magnitude of the project and                                                               
the number of  employees and contractors involved  in the jack-up                                                               
rig.   The video starts  in Corpus Christi, Texas,  he explained,                                                               
with  the  monopile  structure  being   made  and  then  all  the                                                               
facilities being  constructed.   The rig moves  from the  Gulf of                                                               
Mexico through the  Panama Canal up to Seattle and  then into the                                                               
Cook Inlet.                                                                                                                     
                                                                                                                                
3:03:16 PM                                                                                                                    
                                                                                                                                
MR. WEBB  stated that,  without a doubt,  this project  would not                                                               
have happened without  the tax credit program.   While other Cook                                                               
Inlet  explorers  have  talked  about  wells  that  cost  $12-$40                                                               
million,  he continued,  drilling  a well  in  the offshore  Cook                                                               
Inlet is  $60-$80 million - a  huge investment.  When  Furie went                                                               
into this  with the tax credit  program it had a  10-year goal in                                                               
mind and certain  financial commitments to make  along that goal.                                                               
If the  tax credit  program goes  away, he said,  it will  have a                                                               
significant impact on  the company.  Furie just  set the platform                                                               
and first  production was in  November [2015]; to date  about 700                                                               
million cubic  feet (MMCF)  has already  been produced.   Furie's                                                               
first  real contract  starts  in April,  but  even that  contract                                                               
doesn't meet just  the debt commitment.   Furie's debt commitment                                                               
doesn't fully  get met  until the contract  that was  just signed                                                               
last week that  starts April [2018].  So, between  2016 and 2018,                                                               
Furie has  this period of being  at the bottom of  the curve (the                                                               
curve as was discussed by Mr.  Johnson of BlueCrest) and will not                                                               
start moving  up until 2018,  and that  is with the  tax credits.                                                               
If the  tax credits go  away, Furie's  ability to explore  and do                                                               
further developments will really be hindered.                                                                                   
                                                                                                                                
3:04:44 PM                                                                                                                    
                                                                                                                                
MR. WEBB,  regarding the unintentional consequences  mentioned by                                                               
Representative  Tarr,  noted  that  the Kitchen  Lights  Unit  is                                                               
83,000 acres; Furie  just developed a 300 acre  area that's going                                                               
to have  significant gas reserves and  the gas price in  the Cook                                                               
Inlet has already  gone down.  But, if Furie  doesn't continue to                                                               
meet  exploration  and  development targets,  the  Department  of                                                               
Natural Resources  will systematically reduce those  83,000 acres                                                               
down to  just what is the  producible area.  What  does that mean                                                               
to the state?   That means that those leases go  back up for bid.                                                               
How many companies are going to bid  on a lease with the price of                                                               
oil at  $30?  Then, when  they do start getting  the leases there                                                               
is going  to be  a non-contiguous ownership  so it  will probably                                                               
take decades  before a  contiguous unit is  formed and  a company                                                               
has the  ability to bring  up another jack-up  rig.  Furie  has a                                                               
new  jack-up  rig that  will  be  arriving  in Homer  next  week.                                                               
Without the tax  credit program, Furie probably won't  be able to                                                               
keep that rig here.  That's  just the economics.  The exploration                                                               
and development window  in the Cook Inlet is only  six months, so                                                               
Furie must pay for that rig during  the six months that it is not                                                               
using it.   It is too costly  [to keep the rig]  unless a company                                                               
has a goal and a financial  structure in place that can be relied                                                               
upon.  The  bottom line is that  Furie came into this  with a tax                                                               
structure that it  thought was reliable and could  be counted on,                                                               
and now it's  being changed in the middle of  Furie's game.  This                                                               
is not going to be good for the  company.  In just the last year,                                                               
two Cook  Inlet producers have  already filed bankruptcy  and one                                                               
has  left the  state.    This is  a  very expensive  environment,                                                               
especially the  offshore, and the  offshore is where  the biggest                                                               
resources  are.    Furie  has  huge  wells,  but  they  are  very                                                               
expensive to get to  the market and it is going  to take Furie 10                                                               
years before it starts seeing a profit.                                                                                         
                                                                                                                                
3:07:05 PM                                                                                                                    
                                                                                                                                
DAVID  ELDER, Chief  Financial  Officer,  Furie Operating  Alaska                                                               
LLC,  began the  PowerPoint  presentation  regarding the  impacts                                                               
that HB  247 would have on  Furie Operating Alaska LLC.   Turning                                                               
to slide 1,  "Overview:  Tax Credits = Jobs,"  he said the bottom                                                               
line  is that  Furie never  would  have undertaken  a project  as                                                               
large as  this without the tax  credits.  Furie did  exactly what                                                               
the  tax  credits were  intended  to  do:   a  small  independent                                                               
exploration and  production company  that could move  quickly and                                                               
was willing  to make  these commitments came  to the  Cook Inlet,                                                               
and  over a  five-year period  it developed  and began  producing                                                               
significant new  natural gas reserves.   The tax  credits support                                                               
investment in  the state, they  create jobs, they  bring revenue,                                                               
and Furie  is just at  the phase now  where it will  begin making                                                               
its  repayment  back  to  the  state  for  the  benefits  it  has                                                               
received.   Furie has  invested $700 million  in Alaska  over the                                                               
last  five years,  and  over the  next two  to  three years  will                                                               
invest another  planned additional  amount of  approximately $300                                                               
million, depending on what happens with the credits.                                                                            
                                                                                                                                
MR. ELDER noted  that Furie's investment horizon has  to be long.                                                               
The unique  nature of  the Cook Inlet  gas markets,  the contract                                                               
structures that  are in  place, mean  that it  takes a  while for                                                               
Furie's cash flows to build up  to the point where it breaks even                                                               
and  meets all  of its  obligations to  the state  as well  as to                                                               
lenders and investors.   Furie is looking at probably  a seven to                                                               
ten year  horizon before it  has recovered its investment  in the                                                               
Cook Inlet.  Furie estimates that  it employed over 300 people in                                                               
Alaska at  the peak of its  construction phase last year.   Furie                                                               
likes to  compete, it's a little  guy that has come  on the scene                                                               
to help  compete and lower prices.   The declining prices  in the                                                               
natural gas market in Southcentral  Alaska reflect, in part, what                                                               
Furie has done, as well as  other people's investments.  If Furie                                                               
doesn't have  these tax credits  going forward, the  company will                                                               
be  forced to  significantly reduce  its investment,  probably to                                                               
absolute minimum levels.  The  ability to continue to explore and                                                               
develop the 84,000 acres could be significantly lost to Furie.                                                                  
                                                                                                                                
3:09:55 PM                                                                                                                    
                                                                                                                                
MR.  ELDER  addressed slide  3,  "Tax  Credits Help  Alaskans  by                                                               
Supporting  Development," and  said the  lower energy  prices are                                                               
going to benefit the people of  Southcentral Alaska.  It is going                                                               
to help  produce new jobs and  every month it will  save families                                                               
when they  pay their utility  bills.   Furie uses over  100 local                                                               
companies as vendors.   Furie is lowering the  risk of shortfalls                                                               
in natural  gas in the future.   While Furie respects  what other                                                               
people  have  said  on  their ability  to  continue  to  increase                                                               
reserves,  the company's  studies show  that  it is  going to  be                                                               
critical  to  the  Southcentral region  that  Furie  continue  to                                                               
develop these resources offshore.                                                                                               
                                                                                                                                
MR. ELDER  stressed that all  of the tax credits  have benefitted                                                               
Furie.   The company  needed the 20  percent credit  for tangible                                                               
spending, he  said, and  the 40 percent  on intangibles  has been                                                               
critical because of the high cost  of drilling a well in the Cook                                                               
Inlet.  Offshore is automatically  more expensive.  Furie totally                                                               
agrees with  the figure  of at least  300 percent  more expensive                                                               
that was presented  earlier.  Regarding keeping  rigs on contract                                                               
365 days  a year, he noted  that Furie brought some  of the first                                                               
new supply  vessels back up  to the Cook Inlet.   A lot  of these                                                               
resources materials, as well as  some specialized skills, must be                                                               
brought up  from the  Lower 48.   The 25  percent loss  credit is                                                               
critical in the  early phases of development.   Provided that the                                                               
other  credits are  retained, Furie  will be  very happy  when it                                                               
gets to  a point where  it no  longer qualifies for  loss credits                                                               
and becomes a positive taxpayer.                                                                                                
                                                                                                                                
3:12:07 PM                                                                                                                    
                                                                                                                                
MR.  ELDER  moved   to  slide  4,  "Benefits   for  Alaska,"  and                                                               
reiterated that Furie helped create  300 jobs this [past] summer.                                                               
He provided  some examples of  the results of  Furie's investment                                                               
and the payback  that Furie will begin giving to  the state.  For                                                               
the first  five years,  Furie paid $3  million in  local property                                                               
taxes, an average  of $350-$600 a year.  Furie  estimates that in                                                               
2016  it will  be  paying  close to  $5  million annually,  which                                                               
reflects the  investment in property,  plant, and  equipment that                                                               
the company has done.  Furie  has paid lease rentals to the state                                                               
of  about $1.6  million,  and is  very conservatively  predicting                                                               
that it  will be paying  royalties of  $300 million to  the state                                                               
[over the life of the reserves].                                                                                                
                                                                                                                                
3:13:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON recalled  that enalytica, the legislature's                                                               
consultant,  provided  committee  members  with  three  different                                                               
scenarios, of which one was a  constrained market for gas in Cook                                                               
Inlet.   In that  scenario, he  related, the state  was in  a net                                                               
present  value loss  over  the entire  life  of the  development,                                                               
regardless of  the gas price;  it was only with  an unconstrained                                                               
market that it  turned around the other way.   He asked whether a                                                               
constrained  market will  be maintained  such that  it will  be a                                                               
huge investment  up front that  will not  be recovered.   He said                                                               
committee members  are trying to  balance the  scenarios provided                                                               
by the  consultants to putting  massive amounts of credits  for a                                                               
large project if  it isn't going to pay the  state back over time                                                               
unless it is an unconstrained market.                                                                                           
                                                                                                                                
MR.  ELDER  replied that  Furie  recognizes  and appreciates  the                                                               
constraints had  by the state.   Industry is  now going to  see a                                                               
lot  of hurt  and loss  of jobs  and Furie  appreciates that  the                                                               
state has  residents who  struggle and  work hard.   He  said his                                                               
answer to the  question is that in the  early phases Southcentral                                                               
was  having  brownouts,  prices   were  rising,  and  there  were                                                               
shortages that justified generous  incentives at the time because                                                               
of having  to mobilize.   Furie  sees significant  resources that                                                               
will enable it to justify  the investment and deliver the supply.                                                               
However,  he pointed  out, to  the  largest companies  it is  not                                                               
large enough.  Companies like  Furie that are capital constrained                                                               
must pay more for those investment  dollars.  So, at least in the                                                               
beginning  of these  developments,  the  credits were  absolutely                                                               
critical.  Part of  the challenge of this market is  that it is a                                                               
unique, localized  market.   But, because  of the  contracting of                                                               
the utilities  and the need to  lock in supply, a  cycle is being                                                               
seen of where there  is now gas supply but it  will take a couple                                                               
of  years to  get that  supply  into the  market.   So, there  is                                                               
continued need  of these credits to  do that.  Over  the long run                                                               
Furie could  see the credits  being phased reduced at  some point                                                               
in time, but  his message today is that Furie  needs certainty in                                                               
the next few years to complete what it has already started.                                                                     
                                                                                                                                
3:16:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  inquired whether plans of  development and                                                               
final  investment decisions  is  the correct  point for  decision                                                               
making of where  a timeframe is given to continue,  but the state                                                               
would  no  longer  be  able to  financially  do  speculation  and                                                               
leasing  of new  areas  without there  being  a final  investment                                                               
decision.                                                                                                                       
                                                                                                                                
MR. WEBB  responded that that is  very hard to answer  because if                                                               
the state gives certainty to  Furie for this current development,                                                               
it gets  the company over  the hurdle and  allows it to  meet its                                                               
commitments for its  future gas contracts and  do some additional                                                               
development  drilling to  maybe  get more  gas  contracts in  the                                                               
future.   However,  the problem  is that  future exploration  and                                                               
development is  so expensive.  Until  Furie gets to where  it has                                                               
profit, it is  unable to commit to the type  of investment needed                                                               
to find another  field and set another platform;  Furie cannot do                                                               
that out of its pocket.                                                                                                         
                                                                                                                                
3:18:23 PM                                                                                                                    
                                                                                                                                
MR. ELDER  resumed his  presentation.  He  drew attention  to the                                                               
list of about  100 local businesses on slide  5, "Alaska Partners                                                               
Supporting  Exploration and  Development,"  and  said that  these                                                               
businesses provided both  services and goods to Furie.   He noted                                                               
that  the list  includes local  operations of  multi-national oil                                                               
and gas  service companies as  well as local hardware  stores and                                                               
vendors that  rely upon  income from  Furie's operations  to help                                                               
employ people and support their businesses.                                                                                     
                                                                                                                                
MR.  ELDER turned  to slide  6, "Tax  Credits Helped  Furie Bring                                                               
Cheaper Gas  to Southcentral  Alaska," and  said the  tax credits                                                               
have  done  what  [the  legislature] told  Furie  it  wanted  the                                                               
company to do.  Furie  developed more natural gas which increased                                                               
supply.     Under   its  first   contract  with   Homer  Electric                                                               
Association  Furie  is  selling   significantly  lower  than  the                                                               
consent decree  pricing.  The  other day  Furie signed a  new gas                                                               
contract that  will provide a  large amount of  gas significantly                                                               
below the  Hilcorp pricing and  below the pricing in  the renewed                                                               
Hilcorp  and Chugach  Electric Association  contracts.   The  tax                                                               
credits have done  that.  Furie estimates that that  is worth $75                                                               
million a year  to the residents of Southcentral  Alaska and that                                                               
does not  take into consideration  the jobs that can  be retained                                                               
through lower cost energy sources.                                                                                              
                                                                                                                                
3:20:13 PM                                                                                                                    
                                                                                                                                
MR. ELDER moved to slide 7,  "General Comments about HB 247," and                                                               
specified that these  comments are from a  Cook Inlet perspective                                                               
only.   He  said that  repeal of  the 40  percent and  20 percent                                                               
credits  [AS  43.55.023(a)  Qualified Capital  Expenditure  (QCE)                                                               
Credits  and   AS  43.55.023(l)  Well  Lease   Expenditure  (WLE)                                                               
Credits]  will  definitely  have  a  negative  impact  on  future                                                               
investment,  at least  for Furie.   Retention  of the  25 percent                                                               
loss credit [AS 43.55.023(b)] is  helpful, but it is not adequate                                                               
with the  repeal of  the other credits,  especially with  the $25                                                               
million limitation  on purchase of the  cash credit certificates.                                                               
The proposed changes have really  hit and hurt Furie's ability to                                                               
finance its  operations.   Small companies  have to  borrow money                                                               
and get  competitive money,  he explained, and  Furie has  to pay                                                               
back that money this year.  If  changes are not made [to HB 247's                                                               
proposals], Furie will have a  hard time paying back its lenders.                                                               
He also noted  that the proposed change of July  1, rather than a                                                               
phase-out  over a  reasonable time  period, will  cause confusion                                                               
and loss because Furie put its plans in place two years ago.                                                                    
                                                                                                                                
3:21:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  asked whether HB  247 will have  any impact                                                               
on Furie's  long-term contracts  that are  already in  place; for                                                               
example, whether  Furie will  be able  to pass  that on  to Homer                                                               
Electric Association and others that it has sold gas to.                                                                        
                                                                                                                                
MR. WEBB  answered no.   The contracts  are based on  firm prices                                                               
and firm  commitments, so there is  no way for Furie  to re-enter                                                               
the negotiation and  say it now wants a higher  gas price because                                                               
the tax credits changed and now Furie  is at a loss.  Furie would                                                               
be stuck, it negotiated a gas price and has to stick with it.                                                                   
                                                                                                                                
3:22:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  postulated that  depending upon  the length                                                               
of the  contract, Furie could  have new  gas coming into  it that                                                               
was done  under a  different structure.   He asked  whether Furie                                                               
would still have to sell that gas at the original price.                                                                        
                                                                                                                                
MR.  WEBB replied  that  if Furie  had a  new  contract it  could                                                               
negotiate  a different  price and  that price  would be  based on                                                               
what Furie's  investments and  capital costs  are.   However, for                                                               
the contracts that Furie has right now, the price is set.                                                                       
                                                                                                                                
REPRESENTATIVE  OLSON  presumed  that   Furie  doesn't  have  100                                                               
percent of  the gas for  the contracts,  so Furie would  have gas                                                               
coming  in that  was under  a different  well, but  he understood                                                               
that Furie would have to sell that gas at the same price.                                                                       
                                                                                                                                
MR. WEBB  responded correct, under  Furie's last contract  it has                                                               
to drill three more wells.                                                                                                      
                                                                                                                                
REPRESENTATIVE  OLSON   concluded  that   Furie  could   then  be                                                               
competing on that.                                                                                                              
                                                                                                                                
MR. WEBB answered  right, Furie has to drill the  wells no matter                                                               
what.                                                                                                                           
                                                                                                                                
3:23:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON inquired whether  the contracts with the                                                               
Homer Electric Association are confidential or public.                                                                          
                                                                                                                                
MR.  WEBB replied  that they  are public  through the  Regulatory                                                               
Commission of Alaska (RCA).                                                                                                     
                                                                                                                                
3:23:27 PM                                                                                                                    
                                                                                                                                
MR. ELDER  returned to his  presentation.  He displayed  slide 8,                                                               
"Tax  Credits Enable  Development  Companies to  Access Low  Cost                                                               
Capital,"  and  noted  the  importance  of  the  tax  credits  to                                                               
financing.   Regarding  unintended consequences,  he stated  that                                                               
the actions  last year  on the line-item  veto and  the confusion                                                               
that  that generated  throughout  the  financial community  froze                                                               
Furie's borrowings at that time.   Furie is thankful that members                                                               
of the legislature, the governor's  office, and the Department of                                                               
Revenue took  time to meet  with potential lenders,  because only                                                               
through  that was  Furie  able  to access  that  funding.   Those                                                               
actions  instantly cost  Furie  $30 million  in  funding and  hit                                                               
Furie right  in the largest  development phase it had  ever done.                                                               
Furie  was eventually  able to  get a  lot of  that back  through                                                               
discussions with the  state.  The problem Furie has  right now is                                                               
that  lenders are  unsure whether  Furie will  get paid  the 2015                                                               
credits it has earned and lenders have stopped lending in 2016.                                                                 
                                                                                                                                
3:24:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  allowed the  veto was  very significant                                                               
in terms of its  impact, but said that if he  were counsel to the                                                               
oil companies  he would have  advised each  time he met  with his                                                               
client  that the  statute  says  the state  only  has  to pay  10                                                               
percent.  He inquired whether Furie was aware of this.                                                                          
                                                                                                                                
MR. ELDER  responded that Furie  was aware.   But, he  added, the                                                               
state had  a history  of not  doing that and  there was  faith in                                                               
that.    When  Furie  started  the  applications  were  submitted                                                               
quarterly and were  processed and paid within about  six or seven                                                               
months.    Furie  recognized  that  changes  were  occurring  and                                                               
restructured its programs.  All Furie  is trying to do is use the                                                               
existing program to finalize and  fund a program that started two                                                               
years ago.  Furie is asking  for certainty.  A question was asked                                                               
earlier about what is most important  - the absolute level of the                                                               
credits or this  current system and dependability?   He would say                                                               
that a company  like Furie has to have that  certainty because it                                                               
has to meet its financial  obligations.  Furie needs the credits,                                                               
but certainty is needed too.                                                                                                    
                                                                                                                                
3:25:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  observed the bullet  on slide 8  about being                                                               
able to access low cost capital  and pointed out the provision in                                                               
HB 247  for a  fund under the  Alaska Industrial  Development and                                                               
Export Authority (AIDEA) from which  companies could borrow.  She                                                               
asked whether that  fund could be similarly used  to leverage low                                                               
cost capital for the investments.                                                                                               
                                                                                                                                
MR.  ELDER answered  that the  $25 million  limit is  not enough.                                                               
The cost of capital for  a development stage company is extremely                                                               
high, he explained,  and such a company also  has the constraints                                                               
of how  to fit  in a  different lender  with the  company's other                                                               
lenders that  don't want to  get any collateral  or consideration                                                               
of anybody else.   Just $25 million won't do  it, especially when                                                               
combined  with the  $25  million  cap on  these  credits.   While                                                               
helpful,  it isn't  enough.   Furie has  talked to  AIDEA in  the                                                               
past,  but  it  was  explained  that the  risk  of  oil  and  gas                                                               
investment  doesn't  necessarily   fit  what  AIDEA's  investment                                                               
profile is.                                                                                                                     
                                                                                                                                
3:27:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   TARR  pointed   out   that   another  piece   of                                                               
legislation  [HB 246]  would capitalize  the aforementioned  fund                                                               
and  would provide  another opportunity  to revisit  the cap,  at                                                               
which time Furie  could provide comment as to what  would be more                                                               
favorable to advancing its projects.                                                                                            
                                                                                                                                
MR. ELDER replied  that he does have some good  ideas on that but                                                               
didn't have  a chance to  talk about  them during his  last visit                                                               
with [DOR  Commissioner] Hoffbeck.   He suggested that a  fund be                                                               
structured  that financed  these  credits; this  would allow  the                                                               
state some flexibility and give industry certainty.                                                                             
                                                                                                                                
MR. ELDER  thanked the committee  for the opportunity  to comment                                                               
on HB 247.                                                                                                                      
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 3.1.16 BlueCrest Testimony Slides.pdf HRES 3/1/2016 1:00:00 PM
HB 247
HSE RES 3.1.16 Furie Alaska.pdf HRES 3/1/2016 1:00:00 PM
HB 247
HSE RES 3.1.16 HB 247 - Hilcorp written testimony.pdf HRES 3/1/2016 1:00:00 PM
HB 247