Legislature(2015 - 2016)BARNES 124

03/02/2016 01:00 PM RESOURCES

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Audio Topic
01:02:08 PM Start
01:02:55 PM HB247
02:52:08 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> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:02:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
1:04:20 PM                                                                                                                    
                                                                                                                                
JARED GREEN,  President, ENSTAR Natural Gas  Company, assisted in                                                               
providing a  PowerPoint presentation  to the committee  about the                                                               
company's use  of Cook Inlet gas.   Turning to slide  2, "Natural                                                               
Gas Supply Needs," he said  ENSTAR Natural Gas Company ("ENSTAR")                                                               
is the largest purchaser of natural  gas in the Cook Inlet today.                                                               
Ultimately, he pointed out, ENSTAR's  customers are a beneficiary                                                               
of the  tax credit  program that  has been  in place  since 2012.                                                               
The  customers of  ENSTAR depend  on  natural gas  from the  Cook                                                               
Inlet to  heat their homes,  businesses, schools,  hospitals, and                                                               
industries.     Fundamentally,  ENSTAR's   interest  is   in  the                                                               
fostering of a  stable and appealing natural  gas environment for                                                               
the Cook  Inlet.  This environment  needs to exist in  the short,                                                               
medium, and  long term.   ENSTAR's number  one priority  is safe,                                                               
reliable natural gas  service to its customers.   The company was                                                               
founded in 1959, the same year as statehood.                                                                                    
                                                                                                                                
MR. GREEN  noted that ENSTAR's  customers use, on  average, about                                                               
33 billion  cubic feet  (Bcf) of gas  a year.   In a  really warm                                                               
year that can drop to as low as  30 Bcf and in a really cold year                                                               
it  can be  as high  35  Bcf.   He recalled  that enalytica,  the                                                               
legislature's consultant,  has said  that the total  in-state use                                                               
is about 80 Bcf.   So, on average, ENSTAR is about  33 of that 80                                                               
Bcf a year.   He explained that ENSTAR has  very high seasonality                                                               
to its gas  needs, varying from about  a 12 to 1  ratio of winter                                                               
to summer  gas needs.   There is  also the aspect  of substantial                                                               
daily  variability  in gas  demand  due  to  weather.   With  its                                                               
current customer base ENSTAR has  a potential daily gas demand of                                                               
287 million  cubic feet per  day (MMcf/d)  during a cold  snap in                                                               
January.   But,  during a  warm  snap on  that very  same day  in                                                               
January,  ENSTAR  has the  potential  of  burning less  than  100                                                               
MMcf/d; for example, the system is currently at 102.5 MMcf/d.                                                                   
                                                                                                                                
1:06:59 PM                                                                                                                    
                                                                                                                                
MR.  GREEN  explained that  when  ENSTAR  plans its  natural  gas                                                               
portfolio  it  looks  many  years in  advance.    Because  ENSTAR                                                               
operates in a small, closed  supply network, very long lead times                                                               
are required  when putting together  what the portfolio  will be.                                                               
The utility needs to know that it  will have firm gas set for its                                                               
customers at least  two years in advance; anything  less puts the                                                               
marketplace at risk to supply  shortages.  No matter what, ENSTAR                                                               
must have gas available for  its customers on those coldest days.                                                               
When  it is  20 degrees  below zero  in January  and dark,  every                                                               
single one  of ENSTAR's  140,935 customers  must have  their full                                                               
gas  needs met.   These  customers represent  over 50  percent of                                                               
Alaska's population.                                                                                                            
                                                                                                                                
MR. GREEN stated  it is challenging to be a  natural gas supplier                                                               
in the Cook  Inlet today.  The largest purchaser  of natural gas,                                                               
ENSTAR has very demanding needs.   Between the Cook Inlet Natural                                                               
Gas  Storage Alaska  (CINGSA)  facility  and producer  contracts,                                                               
ENSTAR needs to have that  287 MMcf/d available.  However, ENSTAR                                                               
does not  need this amount each  and every day.   This means that                                                               
the producers  and CINGSA need  to have the  significant capacity                                                               
well  beyond what  the average  production  rates are.   It  also                                                               
means  that  ENSTAR's  producers  need to  have  the  operational                                                               
capability to ramp up their  production but then also throttle it                                                               
back when  weather is getting warmer.   This is a  very different                                                               
world than in the Lower 48,  he stressed, which has an integrated                                                               
transmission and storage network.   Producers in the Lower 48 can                                                               
simply drill  a well,  open up  their taps  100 percent,  and the                                                               
very large market absorbs it.                                                                                                   
                                                                                                                                
MR. GREEN  added that from the  utility perspective it is  also a                                                               
nice  easy world  in the  Lower 48.   Utilities  have lineups  of                                                               
marketers trying to  sell them gas.  If a  utility has a contract                                                               
in place  that isn't  fulfilled for any  reason, the  utility can                                                               
simply go back to its trading  screen and source the gas from one                                                               
of the other thousands of suppliers.   But that luxury is not had                                                               
up  here.   [Southcentral Alaska]  is a  very small  and illiquid                                                               
market with  a handful of  buyers and  an even smaller  number of                                                               
suppliers.   Layered  onto that  is  that ConocoPhillips  Alaska,                                                               
Inc., is  selling its  assets in the  Cook Inlet,  taking another                                                               
supplier out  of the  market.   It also  shrinks the  buying side                                                               
because  it  effectively makes  Municipal  Light  & Power  (ML&P)                                                               
self-supplied; ML&P will no longer  be purchasing from the active                                                               
market, leaving ENSTAR with a very delicate marketplace.                                                                        
                                                                                                                                
1:09:43 PM                                                                                                                    
                                                                                                                                
MR. GREEN stressed he is not  saying the sky is falling as ENSTAR                                                               
is in a much  better place than it was in 2012.   The utility has                                                               
transitioned from a  time when it was looking  at shortages, both                                                               
from  a total  supply and  a deliverability  perspective.   A key                                                               
contract to  ENSTAR's gas supply  portfolio has been  signed with                                                               
Hilcorp Alaska, LLC ("Hilcorp").   This contract will take ENSTAR                                                               
out through 2023,  which is just beyond the  short-term window of                                                               
what ENSTAR looks at.  Right  now ENSTAR has very good visibility                                                               
out to 2021 as to where its gas  is going to come from and decent                                                               
visibility out to  2023.  With continued activity  by Hilcorp and                                                               
others,  and  hopefully  new players  entering  the  marketplace,                                                               
ENSTAR is optimistic that its  supply horizons will move out past                                                               
2025.   But, that statement  hinges on the continued  activity of                                                               
these and new producers in  Cook Inlet; an environment that keeps                                                               
the producers engaged must be encouraged and fostered.                                                                          
                                                                                                                                
MR. GREEN said  he strongly feels that the utilities  have a very                                                               
significant   role  and   responsibility   in  encouraging   this                                                               
marketplace.    He said  ENSTAR  has  designed its  portfolio  to                                                               
balance its  number one  priority of  safe, reliable  natural gas                                                               
service with  the need to  foster the long-term viability  of the                                                               
inlet.   The utility  has put its  support behind  development of                                                               
the  Kitchen  Lights Unit,  but  ENSTAR  has  also left  open  10                                                               
percent of  its supply portfolio  for other producers to  be able                                                               
to come  into.   Since 2012  the state has  also provided  a huge                                                               
support to the viability of the  market in the Cook Inlet.  While                                                               
cognizant of  the short-term  budget challenges  currently facing                                                               
the state,  ENSTAR would love to  see the state continue  to help                                                               
the  encouragement  of this  marketplace  in  whatever form  that                                                               
encouragement may  be to  keep this  as an  attractive investment                                                               
for producers.                                                                                                                  
                                                                                                                                
1:11:56 PM                                                                                                                    
                                                                                                                                
MR. GREEN  stated that things are  in a relatively good  place in                                                               
the Cook Inlet  right now.  However, he pointed  out, weather has                                                               
been very advantageous for ENSTAR over  the last two years and so                                                               
far in  2016 as well.   If [Southcentral Alaska]  had experienced                                                               
three  cold   winters  the  current  facilities   may  have  been                                                               
stretched.  He  reminded members that there is one  well into the                                                               
Kitchen  Lights  Unit,  no  gas-producing   wells  into  the  new                                                               
Cosmopolitan play, and  four very large fields that  are very old                                                               
and aging  more every single  year.   There is no  contingency of                                                               
significant backup  alternatives should there be  cold weather or                                                               
if one of  the existing platforms or fields has  an issue.  There                                                               
are no interties to  the Lower 48 or to Canada  and ENSTAR is 100                                                               
percent dependent on this small,  illiquid market to keep half of                                                               
the state's population warm.                                                                                                    
                                                                                                                                
1:13:05 PM                                                                                                                    
                                                                                                                                
MOIRA SMITH, Vice President, General  Counsel, ENSTAR Natural Gas                                                               
Company, drew  attention to  slide 3, "Supply  and Demand."   She                                                               
said the graph  illustrates why ENSTAR is  a challenging customer                                                               
for producers  of natural gas  in Cook  Inlet.  She  related that                                                               
any  producer will  say  it  would like  to  produce  wells at  a                                                               
consistent rate  - open up the  flow, sell into a  liquid market,                                                               
and let  the market  bear what  the price will  be.   But, ENSTAR                                                               
does not purchase  gas that way; the graph  shows the variability                                                               
in the  daily demand of  ENSTAR's customers, as well  as ENSTAR's                                                               
actual daily supply  in 2014 and 2015.  The  graph is actual data                                                               
as to  which companies supplied gas  on a day-to-day basis.   The                                                               
black line that tops off most  days on the graph depicts how much                                                               
gas was consumed on each day of the two years.                                                                                  
                                                                                                                                
MS.  SMITH pointed  out the  day-to-day variability  seen on  the                                                               
graph, noting that [demand] changes  every day as the temperature                                                               
changes.  She further pointed  out the seasonal variability - the                                                               
peaks and valleys on the  chart associated with winter and summer                                                               
demand.  In  winter, she explained, ENSTAR  customers can consume                                                               
as  much as  12 times  more gas  in  a day  than they  do in  the                                                               
summer.   She noted  the blue  color at the  bottom of  the graph                                                               
represents  CINGSA injections  and withdrawals,  injections being                                                               
seen below  the line and withdrawals  above the bottom line.   On                                                               
cold days ENSTAR withdrew significant  volumes of gas from CINGSA                                                               
to meet customer  demand.  For example, cold  weather occurred in                                                               
mid-November  2015 and  the peak  in the  graph represents  those                                                               
cold days.  Similarly, the winter  of 2015 was pretty warm, but a                                                               
cold snap in  mid-February is directly represented  on the graph.                                                               
On  warm days  ENSTAR injects  gas into  CINGSA.   The withdrawal                                                               
ability from  CINGSA is  91 MMcf/d, about  one-third of  that key                                                               
number  of 287  MMcf/d.   The rest  of ENSTAR's  daily withdrawal                                                               
ability has to be contracted  under firm contracts with producers                                                               
in the Cook Inlet.  Having  CINGSA available is critical in light                                                               
of  the  declining deliverability  available  out  of Cook  Inlet                                                               
wells, which  was detailed  by enalytica  at a  previous hearing.                                                               
Ms. Smith brought attention to the  orange line at the top of the                                                               
graph, noting it represents the  golden 287 MMcf/d that is needed                                                               
on the coldest  of cold days.   Such a day only  comes along once                                                               
every 10  years or so, with  four such days in  ENSTAR's history.                                                               
But, when that day comes, ENSTAR  must be there with reliable gas                                                               
to keep its pipelines pressurized and serving all its customers.                                                                
                                                                                                                                
1:16:17 PM                                                                                                                    
                                                                                                                                
MS.  SMITH said  the  bar  chart on  slide  4, "Seasonal  Average                                                               
Deliverability," further illustrates  the seasonality of ENSTAR's                                                               
demand,  showing ENSTAR's  average daily  deliverability in  each                                                               
month in 2019.  She reiterated  that ENSTAR's goal is to have 287                                                               
MMcf/d  under contract  or  available from  storage  on each  and                                                               
every day  of the  year.   The dark blue  in each  bar represents                                                               
firm deliveries under the Hilcorp  contract and the light blue is                                                               
the  optional volumes  that  can be  pulled  from that  contract.                                                               
Stacked on top  of that are the firm deliveries  [dark green] and                                                               
the optional  volumes (light green)  under the new  contract with                                                               
Furie Operating  Alaska, LLC ("Furie").   Looking  throughout the                                                               
year, it can  be seen that ENSTAR's demand from  producers in the                                                               
middle of  winter is  quite different from  its demand  in summer                                                               
and producers  must be prepared  to deliver that on  a day-to-day                                                               
basis.  In  addition are the withdrawals from CINGSA.   The chart                                                               
shows that in  January, typically the coldest  month, ENSTAR only                                                               
has 150  MMcf/d under contract  in 2019.   When the 91  MMcf/d of                                                               
contracted  withdrawal  capacity from  CINGSA  is  added to  that                                                               
ENSTAR is  still only at 241  MMcf/d, leaving a gap  of 46 MMcf/d                                                               
that ENSTAR will be looking to fill in the marketplace.                                                                         
                                                                                                                                
MS. SMITH turned  to the bar chart on slide  5, "Supply Contracts                                                               
2016-23," to  discuss ENSTAR's projected  gas supply.   The years                                                               
2016 and 2017  have a lot of different contracts,  she noted, all                                                               
of which will taper off in 2018.   She recalled that in late 2014                                                               
ENSTAR faced a  future wherein there was sort of  a cliff with no                                                               
gas under contract  as of 2018 and beyond.   The utility sent out                                                               
a request  for proposals (RFP)  and a  request for bids  from all                                                               
producers, potential and otherwise, in  Cook Inlet asking them to                                                               
provide ENSTAR  with a bid  to provide all  of that firm  gas for                                                               
ENSTAR's  customers.   The  utility  then  engaged in  intensive,                                                               
protracted  negotiations with  multiple  producers and  potential                                                               
producers  throughout 2015  on  up until  [2/26/16].   The  first                                                               
priority was  to secure an  anchor contract at  reasonable prices                                                               
which could form  the foundation for gas supply  in the post-2018                                                               
world.   These negotiations took  a year and resulted  in APL-14,                                                               
the contract with  Hilcorp that was just filed  on [2/29/16] with                                                               
the Regulatory Commission of Alaska (RCA) for its approval.                                                                     
                                                                                                                                
1:19:12 PM                                                                                                                    
                                                                                                                                
MS. SMITH addressed slide 6,  "(TA 280-4) APL-14 GSA," explaining                                                               
that  APL-14 is  the  new agreement  [with  Hilcorp] under  which                                                               
deliveries will  commence on 4/1/18.   The agreement  will supply                                                               
about 70 percent  of ENSTAR customers' needs from  2018-2023.  On                                                               
a firm  basis APL-14 will  supply about 22  Bcf per year  of gas.                                                               
The optional  volumes under  this agreement  will help  ENSTAR to                                                               
manage its weather-related variability.   Customers might consume                                                               
29 Bcf in a  year or they might consume 35 Bcf.   From a planning                                                               
perspective  this  is challenging,  so  this  contract will  help                                                               
ENSTAR adjust  its takes to  ensure it is not  over-purchasing or                                                               
under-purchasing as  the circumstances may provide.   Another key                                                               
element of  this contract is its  reasonable price.  In  2013 the                                                               
State of Alaska entered into  a consent decree with Hilcorp which                                                               
resolved an anti-trust  investigation and set price  caps for the                                                               
sale of  natural gas  to Cook  Inlet utilities.   The  price caps                                                               
escalate  at 4  percent annually.   The  weighted average  annual                                                               
price for the  last years under the APL-12  contract with Hilcorp                                                               
will  be $8.33/Mcf.   By  contrast, the  weighted average  annual                                                               
price for firm deliveries during  the first contract year of APL-                                                               
14 will be $7.56/Mcf, an almost 10 percent decrease.                                                                            
                                                                                                                                
MS. SMITH  noted that perhaps  the most important feature  of the                                                               
APL-14  contract is  that it  doesn't  meet all  of ENSTAR's  gas                                                               
supply  requirements.   Until  ENSTAR  signed  its contract  with                                                               
Furie last  week, 30  percent of  the utility's  supply portfolio                                                               
was available for  other producers to fill.  As  a public utility                                                               
ENSTAR values safety  and reliability above all  else.  Therefore                                                               
ENSTAR  understands  the  need   to  have  a  diversified  supply                                                               
portfolio.   This diversifies supplier  risk as well as  helps to                                                               
foster investment in  drilling, which is good news  for the long-                                                               
term stability of Cook Inlet supply.                                                                                            
                                                                                                                                
MS. SMITH stated that between  APL-14 and the new Furie contract,                                                               
ENSTAR now  has 90  percent of  its needs met  through 2021.   To                                                               
ensure  that  the market  has  a  second chance  to  participate,                                                               
ENSTAR sent  a second  RFP to  producers on  [2/26/16] to  try to                                                               
acquire  supply   for  the  remaining  10   percent  of  ENSTAR's                                                               
portfolio.  The utility believes  this contract represents a huge                                                               
measure of stability in the Cook  Inlet gas market.  If approved,                                                               
it  will be  the most  significant  gas contract  ENSTAR has  had                                                               
approved in 15 years.   Assuming commission approval, ENSTAR will                                                               
have laid  the foundation of  its gas  supply well into  the next                                                               
decade, which is very good news  given where the utility was just                                                               
three years ago.                                                                                                                
                                                                                                                                
1:22:07 PM                                                                                                                    
                                                                                                                                
MR. GREEN concluded the presentation  by stressing that ENSTAR is                                                               
working with  a very delicate market  - a small number  of buyers                                                               
and a  very small number  of producers.   Contracts are  had that                                                               
meet most  of ENSTAR's needs  through 2021-2023, but  the utility                                                               
will need  to negotiate  extensions on  those contracts  within a                                                               
few years.   It is very important for all  of Southcentral Alaska                                                               
that there is  a capable producer marketplace that  will be there                                                               
to  provide the  gas molecules  and the  deliverability that  the                                                               
region needs.                                                                                                                   
                                                                                                                                
1:22:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked about  the docket  calendaring on                                                               
the application to the RCA.                                                                                                     
                                                                                                                                
MS. SMITH replied that ENSTAR  filed the application on [2/29/16]                                                               
and public comment is due within 30 days.                                                                                       
                                                                                                                                
REPRESENTATIVE JOSEPHSON inquired as  to an expected timeline for                                                               
the ruling.                                                                                                                     
                                                                                                                                
MS. SMITH  responded that the  RCA could  approve it in  45 days'                                                               
time if the  commission chooses not to suspend it  into a docket,                                                               
which is  what ENSTAR has requested.   If the RCA  feels the need                                                               
to investigate, the  commission can suspend it into  a docket and                                                               
would then have  six months after that time to  approve or reject                                                               
the contract.                                                                                                                   
                                                                                                                                
1:23:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON asked  whether the 2023 date is  a result of                                                               
the RCA limiting  the length of the contracts or  is a reluctance                                                               
on  the part  of the  producers to  commit to  something in  2023                                                               
without knowing what the tax regime will be at that time.                                                                       
                                                                                                                                
MS. SMITH answered she is not  sure anything can be inferred from                                                               
the timeline  in the sense  that the producers were  very willing                                                               
to sit  down with ENSTAR  and have conversations  about extended-                                                               
term contracts.  There is a  fair amount of supply uncertainty as                                                               
to  what is  going  to happen  in the  mid-2020s.   If  anything,                                                               
ENSTAR  was the  one who  said to  get a  good chunk  of time  in                                                               
there.  But, who knows what is  going to happen in Cook Inlet and                                                               
who knows about the pipeline from the North Slope?                                                                              
                                                                                                                                
1:24:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON recalled  that the  legislature's analysts                                                               
have  advised  the  committee that  $5-$7/Mcf  is  sufficient  to                                                               
produce the most expensive gas  in other jurisdictions around the                                                               
world, such  as Egypt and  offshore Argentina.  He  also recalled                                                               
that under the 2009 consent decree  the price is averaging $6 and                                                               
over and  that ENSTAR has  negotiated a price of  [$7.56] through                                                               
2023.    He inquired  whether  ENSTAR  agrees that  $5-$7/Mcf  is                                                               
sufficient to produce the most  expensive gas and that the market                                                               
is ample for economic development of gas for ENSTAR.                                                                            
                                                                                                                                
MR. GREEN replied that enalytica put  out the cost to develop the                                                               
most  expensive gas  available,  the drilling  and lifting  cost.                                                               
But there  is the assumption that  a producer is able  to produce                                                               
at  full  capability  of its  productions,  can  crystallize  the                                                               
production  coming on,  can produce  the  gas and  sell it  right                                                               
away.  Directing  attention to the graph on slide  3, "Supply and                                                               
Demand,"  he  pointed out  that  within  the Southcentral  Alaska                                                               
marketplace there is a lot  of time, summer months in particular,                                                               
where  the producers  have  to  just sit  on  the  wells and  not                                                               
produce any gas  at all.  Three  or four years ago  there was the                                                               
ConocoPhillips liquefied  natural gas (LNG) export  facility, and                                                               
a year  ago that  facility was exporting  gas through  the summer                                                               
months.  That  created a much better balance  for producers being                                                               
able to produce  relatively evenly throughout the  year, but that                                                               
is  effectively  gone  right  now.   April  prices  for  LNG  are                                                               
currently at  about $4.65, not  a great market for  that facility                                                               
to be  selling off to.   Because ENSTAR  is the largest  buyer in                                                               
this area, producers are stuck  with ENSTAR's buying patterns and                                                               
this has  an impact  on the overall  price because  producers are                                                               
unable to  do as much volume  in this tight, illiquid  market.  A                                                               
couple decades ago  was a world where ENSTAR was  noise, which is                                                               
ideal.  A  utility wants to be just easy  noise because utilities                                                               
have  very  challenging demand  profiles.    When there  are  big                                                               
industrial loads a utility is just  a blip in the profile and can                                                               
be  easily taken  care of,  and  prices are  reflective of  that.                                                               
When a  utility with  very demanding  needs is  the main  load it                                                               
creates a very  challenging environment to be in.   That enhances                                                               
the need  for storage,  so the CINGSA  storage facility  that was                                                               
put in  place in 2012 is  an absolute key and  integral asset for                                                               
the Cook Inlet.  The  storage facility knocks off about one-third                                                               
of the deliverability needed by  ENSTAR, but ENSTAR still needs a                                                               
lot more  coming from  that marketplace.   There  is a  cost that                                                               
comes with building  assets and having them ready  to deliver but                                                               
then not being able to sell.                                                                                                    
                                                                                                                                
1:28:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON further  recalled that  enalytica provided                                                               
the committee  with three  scenarios.  The  first scenario  was a                                                               
constrained market where large projects  are drilled and then sit                                                               
idle.   No matter the  price in  this first scenario,  putting in                                                               
massive amounts  of credits  would be  a net  loss to  the state.                                                               
The second  scenario was export,  an unconstrained market  if the                                                               
export facility  can make a  profit.   He opined that  he doesn't                                                               
think the state  wants to be subsidizing an  export facility just                                                               
to ensure that the facility is  making price.  The third scenario                                                               
was infield  drilling, which  enalytica found  to be  economic in                                                               
all  cases.   So,  he  posited, the  economics  of those  balance                                                               
unless  [the legislature]  wants to  invest $200-$300  million of                                                               
the people's  money every year to  sit in the ground  and just be                                                               
available  for whenever.    Representative  Seaton asked  whether                                                               
ENSTAR  sees  the   policy  decision  being  looked   at  by  the                                                               
legislature as  being infield drilling,  which is economic,  or a                                                               
producer doing its own massive  project if there is unconstrained                                                               
supply,  or a  massive  project just  sitting  there waiting  for                                                               
someone to turn on the spigot.                                                                                                  
                                                                                                                                
MR. GREEN responded  that ENSTAR does need  excess redundancy for                                                               
backup needs  and for  those cold  peak days;  there needs  to be                                                               
natural gas  available for  the basic  needs of  the Southcentral                                                               
Alaska  population.   Under the  scenarios that  enalytica looked                                                               
at, whether  it is export  or a  large industrial, being  able to                                                               
average it  out reduces  the profile and  the slopes  of ENSTAR's                                                               
demand  needs  and  makes  the need  for  the  excesses  smaller.                                                               
Having  other industries  is very  good  for ENSTAR.   Having  no                                                               
other demanders  of natural gas  puts ENSTAR in a  position where                                                               
there will  need to be  significant excess gas that  is available                                                               
for the climate of Southcentral Alaska.                                                                                         
                                                                                                                                
1:31:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  understood the  current storage  capacity of                                                               
the CINGSA facility is 11  Bcf with a future expansion capability                                                               
to  17 Bcf.   She  inquired  whether members  should be  thinking                                                               
about opportunities  for more storage  if an anchor  tenant, such                                                               
as an export  facility or an Agrium plant, does  not come back on                                                               
line in addition to  ENSTAR, which is a major user  given it is a                                                               
utility.    She  further  asked whether  opportunities  for  more                                                               
storage would help the profile at all.                                                                                          
                                                                                                                                
MR.  GREEN  answered  yes.    If  a  very,  very  closed  network                                                               
continues,  he said,  all options  have to  be looked  at and  be                                                               
available.   Storage is a very  useful facility, but is  not free                                                               
and comes  with a cost.   He explained  that ENSTAR has  about 70                                                               
percent of CINGSA committed under  its firm contracts and most of                                                               
the  cost  of  using  CINGSA   is  under  a  20-year  take-or-pay                                                               
contract.  In warm years when  much of that deliverability is not                                                               
needed ENSTAR still  has to use the infrastructure  because it is                                                               
ENSTAR's backup  piece.   It is incredibly  important to  have it                                                               
there in case  a cold snap occurs.  Looking  at an enhancement or                                                               
expansion of that  facility going into the future  should be part                                                               
of what will be needed if ENSTAR  is in a place of not seeing the                                                               
producers being able to come to  the table.  The contracts, along                                                               
with  CINGSA  in its  current  state,  are working  for  ENSTAR's                                                               
existing needs.                                                                                                                 
                                                                                                                                
1:33:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR understood that  four utilities are currently                                                               
involved  in the  CINGSA facility.   She  asked whether  there is                                                               
additional interest  from other  utilities in the  nearby region,                                                               
such as Seward or Homer.                                                                                                        
                                                                                                                                
MR. GREEN replied that Homer  is connected into the ENSTAR system                                                               
and therefore  has access  to the CINGSA  facility.   Seward does                                                               
not currently  have natural gas,  so a distribution  system would                                                               
have to  be installed into Seward.   At this time,  he continued,                                                               
there have not  been requests for additional use  from the CINGSA                                                               
facility outside  of the four  utilities that have signed  up for                                                               
the firm service.  Of  those, Chugach Electric Association, Inc.,                                                               
has a significant amount of it,  as does ENSTAR.  The facility is                                                               
a key asset  for Homer Electric Association, Inc.  (HEA), but HEA                                                               
is a relatively  small subscriber, as is Municipal  Light & Power                                                               
(ML&P) of Anchorage.                                                                                                            
                                                                                                                                
1:34:33 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
1:35:49 PM                                                                                                                    
                                                                                                                                
BRIAN  CLEMENZ, Chair,  Government  Affairs  Committee, Board  of                                                               
Directors, Alaska  Support Industry Alliance  ("Alliance"), noted                                                               
he  is president-elect  of the  Alliance.   Turning  to slide  2,                                                               
"Today's  key messages,"  he stated  that the  Alliance is  about                                                               
responsible resource  development for  the benefit of  Alaska and                                                               
Alaskans.    The  Alliance  is  composed  of  nearly  600  Alaska                                                               
businesses   that  provide   goods  and   services  to   resource                                                               
developers  and that  employ  over 30,000  Alaskans.   Since  the                                                               
Alliance's  inception, exploration  and producing  companies have                                                               
not been allowed to be members of the organization.                                                                             
                                                                                                                                
MR.  CLEMENZ said  that in  recent weeks  there have  been people                                                               
taking positions and  making decisions based on  the premise that                                                               
Alaska is  done as an  oil and gas  economy.  But,  he countered,                                                               
great  potential still  exists  in  Alaska.   None  of the  other                                                               
revenue streams being discussed can  come close to generating the                                                               
revenue that resource  development does.  Instead  of putting the                                                               
last nail  in the coffin of  the oil and gas  industry, the state                                                               
should  be  doing  its best  to  incentivize  future  production.                                                               
During each of  the five previous times that oil  taxes have been                                                               
changed over the last ten years,  the message has always been the                                                               
same -  a stable investment  climate is  needed.  The  message is                                                               
still the  same as this sixth  change is considered.   Instead of                                                               
asking how much  more can the state take,  legislators should ask                                                               
themselves  what  the   state's  policy  is  to   ensure  that  a                                                               
partnership with  industry is maintained that  benefits Alaskans.                                                               
Recounting  Governor Walker's  statement that  his administration                                                               
will  continue  to  work  with the  legislature  to  make  Alaska                                                               
attractive to investors, Mr. Clemenz  argued that HB 247 does not                                                               
make Alaska attractive to investors.                                                                                            
                                                                                                                                
MR. CLEMENZ addressed slide 3,  "Thoughts on previous testimony,"                                                               
recalling that  during testimony questions have  been asked about                                                               
compromise on HB 247.  He  maintained there is no compromise, the                                                               
bill is just plain bad policy.   There is no compromise, he said,                                                               
that would  not result  in significant  job losses  for Alaskans.                                                               
Any   additional  tax   on  the   industry  would   have  serious                                                               
consequences on  the state's  economy.  Passage  of HB  247 would                                                               
result in continued  declining revenues to the  state that cannot                                                               
be  replaced.   He  further  said he  has  repeatedly heard  that                                                               
everybody needs  to give.   However,  he asserted,  this industry                                                               
has been  doing the majority  of the  giving to the  general fund                                                               
for years,  not to mention  the contributions to  the communities                                                               
and  nonprofits throughout  the state  by the  Alliance's Alaskan                                                               
companies and their employees.                                                                                                  
                                                                                                                                
1:40:55 PM                                                                                                                    
                                                                                                                                
DOUG SMITH,  President, CEO,  ASRC Construction  Holding Company;                                                               
President, CEO, Little Red Services;  Member, Board of Directors,                                                               
Alaska Support  Industry Alliance, brought attention  to slide 4,                                                               
"North Slope."   He said he will address  where service companies                                                               
are today by  using his company as an example.   He stressed that                                                               
service companies  are currently in  a state  of crisis.   He has                                                               
lived in  Alaska through three  oil price downturns -  the 1980s,                                                               
1998 when  oil was done to  $9 a barrel, and  now today's trough.                                                               
Having  gone through  those the  general  public recognizes  that                                                               
things are in crisis mode when  housing prices are low or crashed                                                               
and  homes  are sitting  empty,  and  when  there is  an  obvious                                                               
decrease in purchases of goods and services in communities.                                                                     
                                                                                                                                
MR. SMITH  related that what has  been learned over the  years is                                                               
not to knee-jerk  react to the price of oil  in the industry, but                                                               
that is what  has been done over  the last 18 months.   The first                                                               
thing  industry did  was  to take  it  off the  top  line of  its                                                               
profits.   Little  Red  Services  has not  had  a  layoff of  any                                                               
personnel  since the  peak  of  the recession  in  2009 when  his                                                               
company lost four people.  Over  the last few years the uptick in                                                               
prices and activity have benefitted  his company and it has built                                                               
some new  units and stimulated  the economy by building  those in                                                               
Anchorage.  Little Red Services  Company made a choice to protect                                                               
its market  share and its  jobs.  The company's  average employee                                                               
tenure  is over  six years,  which is  a very  valuable resource.                                                               
So, his company  took significant profit impacts  and reduced its                                                               
rates.   The hope  was for  recovery in price  of oil,  but since                                                               
January it  has plummeted and  now his  company is at  stage two.                                                               
Producers are in  a bind with negative cash flow.   Yesterday his                                                               
company underwent  its first layoffs  since 2009 and that  is not                                                               
the end  of it, he  said.  The  layoffs are  a loss of  almost $2                                                               
million  in payroll  to the  people the  company had  to release.                                                               
This is strictly  activity driven, he noted, it is  not to regain                                                               
profitability.   This is pod oil  units no longer working  in the                                                               
field  and transports  no  longer taking  fluid  to those  units.                                                               
What does  it mean to us  as Alaskans?  Little  Red Services does                                                               
well intervention  work - hot  oil jobs on wells,  clearing wells                                                               
of  paraffin,  and  support  acid  jobs -  things  that  have  an                                                               
immediate potential production  increase on wells.   This work is                                                               
one  of  the  last line  of  things  that  is  trimmed out  of  a                                                               
producer's  activity in  a  declining market  and  this is  where                                                               
things are at  now.  He informed the committee  that the state is                                                               
closely approaching  a 60 percent  decrease in rig  activity from                                                               
just  one year  ago, and  Little  Red Services  supports the  rig                                                               
activity through freeze protection  and other activities when the                                                               
wells come back on line.                                                                                                        
                                                                                                                                
MR. SMITH  pointed out that right  now his business is  not about                                                               
profit  but rather  about protecting  market  share and  customer                                                               
relationships.   As an  Alaskan he understands  that this  is the                                                               
same business  decision legislators are  in - whether  to protect                                                               
Alaska's  market share  of resource  development and  protect the                                                               
future potential revenue of that  market share or whether to take                                                               
from that market now and live  with the consequences.  He offered                                                               
his  appreciation for  having  to make  this  tough decision  but                                                               
cautioned  that there  are not  any more  levers to  pull in  the                                                               
industry.  Industry is now at  the crux where any additional cost                                                               
results in some  type of reaction.  The only  reaction left right                                                               
now is to  decrease activity or to take capital  projects off the                                                               
table.   His  company  will  have to  make  the  choices to  move                                                               
forward, but those will not  be without consequence if additional                                                               
tax revenue is pulled from the industry.                                                                                        
                                                                                                                                
1:45:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked whether  the 60  percent decrease                                                               
in rig activity  is for Mr. Smith's clients.   He posited that it                                                               
would self-correct -  that what could be more than  $1 billion in                                                               
credits would, theoretically, become $400 million in credits.                                                                   
                                                                                                                                
MR. SMITH replied  he cannot speak for oil companies,  but he can                                                               
say that this is a wide range  of activity.  These vary from coil                                                               
units doing  infield work and  side-tracking existing wells.   In                                                               
legacy fields these are rotary rigs  and development rigs.  It is                                                               
a wide  bandwidth of  activity that  is being  talked about  as a                                                               
slowdown.   Not all of that  is in the  line of credits.   So, as                                                               
far as  self-correcting and  the potential  threat of  the credit                                                               
volume, it is a little bit of apples and oranges.                                                                               
                                                                                                                                
1:46:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  HB 247  has  two policies.   One  is                                                               
taxes, 5 percent  instead of 4 percent and whether  a company can                                                               
write off  against that floor.   The second is credits,  which is                                                               
the main  aspect of  the bill.   He  asked whether,  when talking                                                               
about taxes, Mr. Smith was meaning  the total of anything that is                                                               
done or only taxes and not the credits.                                                                                         
                                                                                                                                
MR.  SMITH responded  it is  both for  his company.   Little  Red                                                               
Services is  the sole supplier  of this service across  the North                                                               
Slope, he said.   He has a unit working  for Caelus Energy Alaska                                                               
("Caelus") right now that will  be coming offline as Caelus wraps                                                               
up its exploration work.   His company works with independents, a                                                               
group that  is dependent  [on credits] as  new entrants.   During                                                               
the  consideration of  Senate  Bill  21 [passed  in  2013 by  the                                                               
Twenty-Eighth  Alaska State  Legislature], many  legislators were                                                               
adamant about the importance of  these new entrants and he agreed                                                               
with  that.    It  has  been   a  lot  of  his  company's  market                                                               
opportunity  and  he thinks  it  is  a  lot of  Alaska's  future.                                                               
Independents are  in a  different position  than are  the state's                                                               
legacy owners  and those credits  are very important.   Regarding                                                               
net  present  value spoken  about  by  Representative Seaton,  he                                                               
noted  he  has spent  millions  of  dollars purchasing  equipment                                                               
during the last  couple of years and that equipment  is now idle.                                                               
His original net  present value calculations are  no longer valid                                                               
because  [the  equipment]  has  a  10-year-plus  lifecycle.    In                                                               
looking at the  investment through credits the  question is total                                                               
return.   For  example,  a  study of  the  Alaska Marine  Highway                                                               
demonstrated  the value  of that  system  statewide.   Everything                                                               
must be looked  at when considering investments  - jobs, trickle-                                                               
down economy, and eventual return.   Oil will not be $30 forever,                                                               
it is going  to be better someday, so the  longer term versus the                                                               
nearer term must be looked at for these type investments.                                                                       
                                                                                                                                
1:48:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  noted the  net present value  being looked                                                               
at was a 30-year lifespan of the entire fields.                                                                                 
                                                                                                                                
MR. SMITH answered yes.                                                                                                         
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  instead  of looking  at                                                               
prices of $60-$80  a barrel, that higher prices in  the future be                                                               
looked at and considered a  good investment.  He further inquired                                                               
as to  the kind of  projection looked at by  Mr. Smith as  far as                                                               
price per barrel and the activity that the price will generate.                                                                 
                                                                                                                                
MR. SMITH replied he understands  the problem is the inability to                                                               
forecast prices, and said this  extends to himself.  Industry and                                                               
businesses have  built a level  of activity around a  price range                                                               
of $100,  he said.  So,  everyone is readjusting to  survive in a                                                               
lower price  environment.   Regarding the  future of  credits and                                                               
investment,  it is  going  to be  a  leaner, lower-cost  industry                                                               
going forward  because of  this exercise.   The  recalibration of                                                               
cost to develop and recalibration of  what it is going to cost to                                                               
operate is  still finding  its way  to the  top.   Businesses are                                                               
looking in  every corner for  efficiency.  Any model  picked from                                                               
recent history  to forecast what it  will cost to produce  oil is                                                               
probably not very sound right now.   He said he thinks businesses                                                               
will be  able to demonstrate  the ability to be  pretty effective                                                               
in the  $70-$90 range given  how much companies have  trimmed and                                                               
will continue to trim.                                                                                                          
                                                                                                                                
1:50:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR recalled that 15  years ago during the era of                                                               
the Economic  Limit Factor (ELF)  there was not  much early-stage                                                               
exploration activity.   She asked where Mr.  Smith's company fits                                                               
in that  profile and  whether his company  was active  during the                                                               
time period of ELF.  In regard  to how Mr. Smith thinks about his                                                               
investment  decisions,  she  further asked  whether  the  current                                                               
ability  to  borrow  cheaply  would  make  the  purchase  of  big                                                               
equipment a desirable activity.                                                                                                 
                                                                                                                                
MR. SMITH responded  that his company pays as it  goes in that it                                                               
pays cash  for its equipment  and so  does not pay  any interest.                                                               
Regarding his  company's longevity,  he said Little  Red Services                                                               
has been around  since 1983.  The company was  active through the                                                               
2000s  doing infield  support work,  providing freeze  protection                                                               
and production  stops, and basically  being the  fire department.                                                               
If  the Trans-Alaska  Pipeline System  (TAPS) is  shut down,  his                                                               
company  goes  out and  freeze  protects  2,000  wells.   As  new                                                               
entrants  came  into  the market  in  Alaska,  as  ConocoPhillips                                                               
Alaska, Inc., has gone west,  and as Point Thomson was developed,                                                               
his company has  had the opportunity to extend  its services into                                                               
those areas.   Leading up to  and after Senate Bill  21 there was                                                               
quite a  bit of new spin  infield and his company  added about 30                                                               
employees in that range of time  and that is when his company had                                                               
its  last big  equipment  push.   His  company  was committed  to                                                               
building  those in  Anchorage  and  they were  built  in a  small                                                               
fabrication shop that  he went by the day before  yesterday.  The                                                               
shop had  60 employees when  he built  those units, but  today it                                                               
has 7 working on  the floor along with 3 staff  and the doors are                                                               
just barely  being kept  open.  This  current condition  has been                                                               
felt pretty  deeply in the  industry at  all service levels.   He                                                               
said 2016  is going  to demonstrate some  very visible  things in                                                               
the way of housing; this industry is in a recession already.                                                                    
                                                                                                                                
1:53:47 PM                                                                                                                    
                                                                                                                                
TOM   WALSH,  Geophysicist,   Managing  Partner,   Petrotechnical                                                               
Resources  of Alaska  (PRA); Board  of Directors,  Alaska Support                                                               
Industry Alliance,  noted that PRA  is an integrated oil  and gas                                                               
consulting firm.   Turning  to slide 5,  "Middle Earth,"  he said                                                               
PRA  has   worked  extensively  with   Doyon,  Limited,   in  the                                                               
corporation's exploration  of the  Nenana Basin and  Yukon Flats.                                                               
Currently, PRA is  working on Doyon's drilling  program that will                                                               
commence this  summer in  Nenana with another  well.   The policy                                                               
that  generated Senate  Bill 21  was  very sound  and is  clearly                                                               
meeting  its objectives,  in  his  view, all  over  the state  of                                                               
Alaska.   There has been  a very significant uptick  in activity,                                                               
both exploration  and development.   Doyon,  Ahtna, Incorporated,                                                               
and  NANA  Regional Corporation  are  all  in various  stages  of                                                               
exploration in Middle  Earth.  Another exploration  well is being                                                               
drilled this year  by Doyon with the support of  Middle Earth tax                                                               
credits and  Ahtna is getting  ready to  drill its first  well in                                                               
the  Copper Center.   Regarding  potential, the  Nenana Basin  is                                                               
estimated to  contain up to 234  million barrels of oil,  as well                                                               
as 5.6  trillion cubic  feet (Tcf)  of gas.   Although  there has                                                               
been no  commercial discovery in  Nenana at this point,  there is                                                               
significant potential.   A well that finds oil and  gas in Nenana                                                               
Basin would be  a huge homerun for Doyon and  the State of Alaska                                                               
in terms of jobs and fuel stability for these rural areas.                                                                      
                                                                                                                                
1:56:39 PM                                                                                                                    
                                                                                                                                
MR. WALSH  said that in regard  to ongoing projects Doyon  is the                                                               
poster  child for  successful Middle  Earth investment  driven by                                                               
tax credits.   Doyon has invested every penny it  has received in                                                               
tax credits  in exploration.   When Doyon  gets the  credit money                                                               
back  it reinvests  and has  now gone  through several  cycles of                                                               
exploration in  Nenana Basin.   Doyon  is an  ideal case  for the                                                               
function  of these  tax  credits  and the  tax  credits are  very                                                               
critical going  forward for Doyon.   The proposed sunset  of some                                                               
of the tax  credits currently in effect would occur  right in the                                                               
middle of  Doyon's drilling  season, and  has caused  great alarm                                                               
for Doyon's  ongoing projects.   Ahtna is in a  similar situation                                                               
as Doyon.   With its first well planned for  this summer Ahtna is                                                               
at the beginning of its exploration  cycle.  The discovery of gas                                                               
or oil in Copper Center would be hugely impacting for Alaskans.                                                                 
                                                                                                                                
MR.  WALSH stressed  that the  aforementioned  projects are  huge                                                               
potential benefit  in terms  of jobs for  Alaskans and  local and                                                               
rural fuel supply.   The instability and proposed  changes to the                                                               
tax structure are  very damaging to those types of  projects.  He                                                               
appealed  to the  committee to  not kill  these projects  through                                                               
either intentional  or collateral  impacts of HB  247.   Doyon is                                                               
very focused on local hire  and workforce development.  Also, the                                                               
work  of  PRA  and  others   would  be  significantly  negatively                                                               
impacted by the changes that would be imposed by HB 247.                                                                        
                                                                                                                                
1:59:22 PM                                                                                                                    
                                                                                                                                
MR. WALSH  drew attention  to slide 6,  "Cook Inlet,"  and stated                                                               
that  the incentives  are working  and have  successfully brought                                                               
Southcentral Alaska  to a  point of  stability in  energy supply.                                                               
He said  PRA produced  a report  in 2009 and  updated it  in 2012                                                               
that Cook Inlet  Basin was running out of gas  and it was thought                                                               
that LNG would  have to be imported.   But that is  no longer the                                                               
case,  he continued,  because of  the incentives  that have  been                                                               
offered and the  activity that has occurred.   Oil production has                                                               
risen  form 7.5  million  barrels  a day  in  2009  to almost  18                                                               
million barrels a day today.   Gas production has stabilized, but                                                               
there is  still a perceived  shortage in the market  beyond 2023.                                                               
In regard to  the new contract just announced  between ENSTAR and                                                               
Hilcorp,  he  noted  that  that  gas  is  still  in  the  ground.                                                               
Projects need  to take place to  produce that gas and  funding is                                                               
required  to  carry  out  those   projects.    A  change  in  tax                                                               
structure,  particularly in  terms  of credits,  will impact  the                                                               
development of those gas molecules.                                                                                             
                                                                                                                                
MR. WALSH  pointed out that  unemployment in Kenai  declined from                                                               
11  percent to  7 percent  over this  recent period  of activity.                                                               
The Alliance's membership in the Kenai  area has grown from 40 to                                                               
102.   There  is lots  of activity  and lots  of potential:   600                                                               
billion barrels  of oil  potential in Cook  Inlet Basin  and 1.18                                                               
Tcf  of gas  estimated to  yet be  developed.   The benefit  from                                                               
jobs, energy stability, and royalty  is critical to the future of                                                               
the Middle Earth and Cook Inlet basins.                                                                                         
                                                                                                                                
2:02:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR inquired  about the envisioned infrastructure                                                               
and delivery system  for the Middle Earth area should  there be a                                                               
discovery.                                                                                                                      
                                                                                                                                
MR.  WALSH answered  that the  plans right  now are  dependent on                                                               
whether it is  oil or gas that  is discovered and how  much.  The                                                               
Nenana Basin  is very close  to TAPS and the  idea for oil  is to                                                               
bring it to TAPS.   For gas, supply to the  local market would be                                                               
very beneficial, although it would not  be a big enough market to                                                               
make it  a tremendous  commercial success for  Doyon.   But tying                                                               
into export facilities  or the grid would be the  plan for either                                                               
a large or small gas find in the Nenana Basin.                                                                                  
                                                                                                                                
2:03:34 PM                                                                                                                    
                                                                                                                                
MR. CLEMENZ  addressed slide 7,  "A bit more about  jobs," saying                                                               
that  West Virginia  has it  right in  considering a  legislative                                                               
measure that  would reduce the  state's coal and natural  gas tax                                                               
rates.   The belief is  that this  measure would create  jobs and                                                               
would put  West Virginia  at a more  competitive advantage.   The                                                               
proposals  under HB  247 would  do exactly  the opposite  for the                                                               
state of Alaska.  Jobs are  the future, but right now the support                                                               
industry  is hemorrhaging  jobs.   According to  a Department  of                                                               
Labor  & Workforce  Development study,  the industry  lost around                                                               
1,000  jobs between  December 2014  and  December 2015.   From  a                                                               
survey of  its members the  Alliance believes the number  is much                                                               
greater than  1,000.   The survey also  asked about  the members'                                                               
expectations for  the future  and from  the answers  the Alliance                                                               
believes the job loss will significantly exceed 1,000 in 2016.                                                                  
                                                                                                                                
MR. CLEMENZ drew attention to  slide 8, "Rig Personnel," pointing                                                               
out that it represents only  one dimension regarding what is done                                                               
in the  oil and gas  industry.  He  explained that rigs  are used                                                               
primarily for  workovers to make  existing wells flow  better and                                                               
for explorations.   The 44 positions  shown on the slide  for rig                                                               
personnel  is  a  conservative   number  of  positions  that  are                                                               
required  to  support  a  drilling  operation  for  the  drilling                                                               
contractor  only.    The  total  economic  benefit  through  that                                                               
drilling company  would be close to  $2 million a month.   The 44                                                               
positions are on the North Slope,  but there is rotation so it is                                                               
88 jobs.  Further, there is  the drilling support that goes along                                                               
with  that,  such  as  hot  oil, rig  up,  rig  down,  fluid  and                                                               
equipment  hauling at  the well/drill  site itself,  which almost                                                               
doubles  the number  of folks  that are  impacted.   Additionally                                                               
there  is   the  in-near   infrastructure  and   supporting  jobs                                                               
associated    with    housing,   billeting,    feeding,    camps,                                                               
transportation,  security, housekeeping,  and travel  folks, plus                                                               
the multiplicative effect of all of that.                                                                                       
                                                                                                                                
2:07:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  requested Mr. Walsh to  explain the $2,000                                                               
per month per position.                                                                                                         
                                                                                                                                
MR. CLEMENZ  replied that that is  the cost of labor  at the very                                                               
round billing rate.   The specific numbers on slide  8 are either                                                               
rounded up or  down to the nearest $100-$200  for that particular                                                               
position for one day.                                                                                                           
                                                                                                                                
2:07:50 PM                                                                                                                    
                                                                                                                                
MR. CLEMENZ returned  to his presentation, pointing  out that the                                                               
multiplicative effect  even goes further.   Many local  folks are                                                               
supporting all of  that infrastructure, he explained,  as well as                                                               
those people  who are deployed on  the North Slope.   Those folks                                                               
in turn are  going to restaurants and merchants all  the way down                                                               
to  the coffee  shop on  the corner.   Laying  down a  single rig                                                               
might reach 1,000 folks pretty quick  for just the people who are                                                               
involved throughout the entire supply chain.                                                                                    
                                                                                                                                
MR. CLEMENZ reported  that there has been a  60 percent reduction                                                               
in rig activity  due to low oil prices and  a negative cash flow.                                                               
There seems to  be an unsympathetic ear toward  the oil companies                                                               
when they discuss their negative  cash flow, he said. However, in                                                               
this environment  of low prices  the Alliance's  member companies                                                               
are  experiencing  the  same  pressures.    Companies  have  gone                                                               
through  many  rounds of  looking  at  and reducing  costs,  then                                                               
looking at markups.  Many  of the Alliance's member companies are                                                               
already at  break-even markups or are  experiencing negative cash                                                               
flows.   Companies  must then  look at  wages and  many companies                                                               
have either  already reduced wages,  are thinking  about reducing                                                               
wages,  or will  be reducing  wages in  the near  future.   After                                                               
that, jobs  are lost.   So this  is just the  tip of  the iceberg                                                               
right now  with this low  oil price environment and  this impacts                                                               
working Alaskans from every district represented in Juneau.                                                                     
                                                                                                                                
2:10:08 PM                                                                                                                    
                                                                                                                                
MR. CLEMENZ  ended his presentation with  slide 9, "Conclusions."                                                               
He  said it  can be  asked  whether HB  247 could  impact an  LNG                                                               
project.  Any LNG project of  any size or scope faces challenges,                                                               
including low  commodity prices  and lack  of capital.   However,                                                               
one factor  that legislators can  influence as policymakers  is a                                                               
stable tax structure  and HB 247 negatively impacts  a future LNG                                                               
project for Alaska.   Future oil production is the  bridge to any                                                               
LNG project  because the  revenue stream  generated is  needed to                                                               
develop   that  pipeline;   moving  forward   that  healthy   oil                                                               
production  is needed  in Alaska.    The state  and the  industry                                                               
cannot control oil prices, but  industry has weathered this storm                                                               
before and knows how to batten  down the hatches until oil prices                                                               
recover.  The  state can sink the ship by  over-taxing.  He urged                                                               
that  a policy  not be  invoked that  further decreases  jobs and                                                               
erodes  the  needed competencies  required  to  respond when  oil                                                               
prices and investment increase, which  they will.  Job losses are                                                               
already  being  experienced  and  HB  247  would  create  a  high                                                               
likelihood  that the  last of  the core  competencies needed  for                                                               
responding  to  future development  will  suddenly  erode and  be                                                               
gone.   The question for  legislators as policymakers  is whether                                                               
slow progress is wanted or no progress.                                                                                         
                                                                                                                                
2:12:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR observed from  slide 8, "Rig Personnel," that                                                               
the two company  representatives per rig are  accounted at $2,000                                                               
[per  position] per  day for  30 days  for a  total of  $60,000 a                                                               
month.   She asked  whether each  of those  representatives makes                                                               
$720,000 a year.                                                                                                                
                                                                                                                                
MR.  CLEMENZ responded  that the  rotation is  included in  that.                                                               
This is  the total economic  benefit coming through  the drilling                                                               
company into the economy.   And, yes, higher-end rig personnel do                                                               
make very good money.                                                                                                           
                                                                                                                                
2:12:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON offered his  appreciation for the situation                                                               
the various companies are  in and that the state is  in.  But, he                                                               
continued, it  sounds like the  recommendation is  that companies                                                               
are going  to cut  costs while  the state  should not,  the state                                                               
should continue to give.  Last  year the amount of refundable tax                                                               
credits to the oil industry  was $628 million, two-thirds in Cook                                                               
Inlet and  half on  the North  Slope.  That  was limited  to $500                                                               
million.   This last  year it  will be $623  million.   Next year                                                               
when  the   state  is  running   a  $3.8  billion   deficit  [the                                                               
recommendation appears to  be] that the state  should raise other                                                               
taxes or  go to some  other source  of money while  continuing to                                                               
spend  that   money  in  refundable   tax  credits   without  any                                                               
limitations.  He  remarked that that is not  giving the committee                                                               
much help  in making a policy  of no change in  anything that the                                                               
state has been doing.  He  requested the Alliance to come forward                                                               
with  some positive  feedback on  what kind  of changes  would be                                                               
least impactful but  that would reduce the state's  deficit.  The                                                               
state cannot go  forward and go bankrupt by paying  out money for                                                               
something that may or may not be there in the future.                                                                           
                                                                                                                                
MR. CLEMENZ answered that from  the Alliance's position it is all                                                               
about policy.   He said he is  not a tax expert  either, but when                                                               
other states are hurting in this  regard they are not taking away                                                               
from the incentives that will ensure  that they are in a position                                                               
in  the  future   to  take  advantage  of  future   oil  and  gas                                                               
production.   Instead, other states  are either making  it stable                                                               
or trying to create more incentives  for the oil and gas industry                                                               
to stick around and continue their endeavors.                                                                                   
                                                                                                                                
2:15:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK commented  that the  cost of  doing business  is                                                               
much lower  in the  Lower 48 than  in Alaska.   The Lower  48 has                                                               
roads  and  infrastructure  that  make  it  much  cheaper  to  do                                                               
business.  So, he continued,  when "decrying about that stuff ...                                                               
you're talking  about apples  and oranges,  because it's  a whole                                                               
lot cheaper down there and a whole lot more expensive up here."                                                                 
                                                                                                                                
2:16:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  said he  hopes the comment  about being                                                               
unsympathetic was  not about  him, because he  could not  be more                                                               
sympathetic.   If the Exxon  Valdez oil  spill on Good  Friday of                                                               
March 1989  is excluded, he continued,  it is all roses.   He was                                                               
born  in  Alaska in  1964  and  has  seen  how the  industry  has                                                               
transformed  the state  for  the  better and  he  wants to  help.                                                               
However, since  sitting down  this afternoon  the state  has bled                                                               
$500 million in  red ink.  Regarding that there  is no compromise                                                               
and  following up  on what  Representative Seaton  said, he  said                                                               
there  has to  be a  pathway forward.   Fantastic  arguments were                                                               
heard  today  and  yesterday  from  Furie  and  Hilcorp  and  the                                                               
committee is  trying to  meld all that  and achieve  some win-win                                                               
result.   The  West  Virginia model  does not  work  for him,  he                                                               
added, because that state has  devastated its natural environment                                                               
and that is not somewhere he wants to go.                                                                                       
                                                                                                                                
MR.  WALSH recalled  Representative  Josephson's earlier  inquiry                                                               
about whether this will be  somewhat self-correcting.  He pointed                                                               
out that reductions in activity  have occurred because of the low                                                               
oil price and  advised that those reductions in  activity will be                                                               
compounded  with changes  in  the tax  structure.   Projects  are                                                               
ongoing  right  now  that  had  their  economics  and  commercial                                                               
analysis done based on the tax  structure being stable.  When PRA                                                               
does  a commercial  analysis  or due  diligence  for someone  and                                                               
projects  forward  the commercial  viability  of  a project,  PRA                                                               
assumes  the tax  structure is  going  to be  stable because  PRA                                                               
cannot guess.   Also, PRA assumes some type of  model for the oil                                                               
price because it  cannot guess at that either.   He said he would                                                               
like to  think that PRA could  assume that this tax  structure is                                                               
going to  be stable.   Producers  are in  the middle  of projects                                                               
that they  have funded  and sanctioned based  on the  current tax                                                               
structure.   Changing that  structure right  now would  blow them                                                               
out  of  the water  and  would  give  the  State of  Alaska  poor                                                               
credibility.   It  really is  the  wrong thing  to do  as far  as                                                               
policy.  He said he  thinks there will be self-correction because                                                               
of  that   lowering  of   activity  and   he  expects   that  the                                                               
applications  for credits  will be  lower in  future years  until                                                               
things turn around.                                                                                                             
                                                                                                                                
REPRESENTATIVE JOSEPHSON said the  argument about pulling the rug                                                               
out is an  outstanding argument and one he  takes very seriously.                                                               
Relative to the tax scheme changes,  he allowed there have been a                                                               
lot of  changes although he was  not a member of  the legislature                                                               
for those.  He offered his  hope that those changes slow and said                                                               
he hears Mr. Walsh in that regard.                                                                                              
                                                                                                                                
2:20:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON  offered   his  appreciation   for  those                                                               
comments.  He inquired whether  all projects, those that have and                                                               
those that have not reached  final investment decision, should be                                                               
treated the same.  For example,  in Cook Inlet it was stated that                                                               
at  some point  success is  declared and  another tact  is taken.                                                               
However,  all that  is being  heard by  the committee  is to  not                                                               
change anything, the  state should stay in the  same position and                                                               
spend  itself into  bankruptcy  if  it needs  to.    He said  the                                                               
committee needs input from industry  as to what policy parameters                                                               
should  be put  forth to  lower the  state's expenditure  and yet                                                               
support the [industry] decisions that have been made.                                                                           
                                                                                                                                
MR. WALSH responded he understands,  but explained that PRA works                                                               
throughout the basins  in Alaska and these  impacts are affecting                                                               
companies across  the board, including  his.  The bottom  line is                                                               
that   stability  creates   investment   and  instability   ruins                                                               
investment.  The State of  Alaska increases taxes when things are                                                               
good and the  price of oil is  high, and now when  prices are low                                                               
and  the state  and industry  are in  dire straits  the state  is                                                               
trying to  increase taxes again  or reduce its investment  in the                                                               
industry.  The  state cannot have it both ways  - increase on the                                                               
high end and increase on the low  end.  The tax credit system for                                                               
oil and  gas in Alaska is  trying to be  used as a hedge  fund by                                                               
charging  the oil  industry  more to  cover  the state's  revenue                                                               
needs.   But it  is not  a hedge  fund.   A national  oil company                                                               
(NOC) like  Saudi Arabia  doesn't have anyone  to be  a scapegoat                                                               
for paying  more taxes.   Saudi Arabia  owns the industry  and is                                                               
dipping into its savings funds.   People who want to believe that                                                               
Alaska is an owner state and  that the state should have a bigger                                                               
share of the  pie ought to look  at those NOC's to  see what they                                                               
are  doing, and  what they  are doing  is using  their rainy  day                                                               
funds.  Saudi Arabia  needs $85 a barrel to be  healthy and it is                                                               
at $36.   In his view, Alaska should be  dipping into its savings                                                               
funds, not charging taxes at a higher rate.                                                                                     
                                                                                                                                
2:24:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TALERICO stated his  appreciation for the Alliance                                                               
coming  forward and  telling the  committee what  it thinks.   He                                                               
said it  is not his responsibility  to tell the Alliance  what to                                                               
think, rather  he is here to  listen to what the  Alliance has to                                                               
tell the  committee.  He said  he thinks there will  be some type                                                               
of  activity and  something  will have  to be  figured  out.   He                                                               
offered  his understanding  that it  isn't easy  for everyone  to                                                               
come  forward  and give  a  point-blank  honest evaluation.    He                                                               
requested confirmation that the  Alaska Support Industry Alliance                                                               
represents about 30,000 employees.                                                                                              
                                                                                                                                
MR.  CLEMENZ answered  yes, nearly  600 companies  and more  than                                                               
30,000 employees.                                                                                                               
                                                                                                                                
2:25:11 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 2:25 p.m. to 2:29 p.m.                                                                       
                                                                                                                                
2:29:08 PM                                                                                                                    
                                                                                                                                
PHIL   STEYER,  Director,   Government   Relations  &   Corporate                                                               
Communications,  Chugach  Electric  Association,  Inc.,  began  a                                                               
PowerPoint presentation,  "Chugach Electric Association's  use of                                                               
natural  gas for  electric generation."   He  explained that  his                                                               
role  today  is to  provide  a  perspective on  Chugach  Electric                                                               
Association's ("Chugach") historic use of  gas out of Cook Inlet,                                                               
while his  colleague, Mark  Fouts, will  discuss today's  use and                                                               
where the Association is headed in  the future.  Turning to slide                                                               
2, "The  Railbelt, electrically," he said  six different electric                                                               
utilities in  the Railbelt  provide retail  service, and  each of                                                               
those owns  generation.   Natural gas  is the  primary generation                                                               
fuel for  five of the six  utilities.  The sixth  utility, Golden                                                               
Valley Electric  Association (GVEA),  considers natural  gas part                                                               
of  its  generation  portfolio  as  well  because  it  buys  gas-                                                               
generated power from Southcentral utilities.   So, natural gas is                                                               
vitally important to  electric generation in the  Railbelt.  This                                                               
has  been the  case for  decades and  is foreseen  as continuing.                                                               
All of  Chugach Electric  Association's gas  supply comes  out of                                                               
the Cook  Inlet Basin.  Mr.  Steyer drew attention to  the map on                                                               
slide 3 depicting  the individual service territories  of the six                                                               
electric utilities  in the Railbelt.   He said that while  he and                                                               
Mr. Fouts  will be commenting  specifically for  Chugach Electric                                                               
Association, by  extension there is  a great deal  of commonality                                                               
between  the five  different electric  utilities in  the Railbelt                                                               
that use natural gas as their primary generation.                                                                               
                                                                                                                                
2:31:33 PM                                                                                                                    
                                                                                                                                
MR. STEYER moved to slide  4, "Chugach's changing gas situation,"                                                               
and said  Chugach's gas  situation has changed  quite a  bit over                                                               
time.  From the 1960s to  the 1980s Chugach's contracts were very                                                               
large  volumes,  long-term,  and  with inexpensive  gas.    Three                                                               
separate  producers were  involved and  provided full  service in                                                               
that they did everything and  were responsible for getting gas to                                                               
wherever Chugach needed it.  The  gas that Chugach bought met the                                                               
needs  of  multiple  utilities   because  Chugach  had  long-term                                                               
contracts  where it  generated power  and  sold it  to the  other                                                               
utilities.   From the 1980s  to the  2010s things changed  a bit.                                                               
Chugach was able  to secure large volume,  long-term contracts at                                                               
a  reasonable price  versus inexpensive.    Another producer  was                                                               
added,  so during  this time  period Chugach  had four  producers                                                               
providing  full  service  and  the  gas  that  Chugach  purchased                                                               
continued to  meet the needs  of multiple utilities.   Currently,                                                               
the 2010s  to the 2020s,  the contracts are for  smaller volumes,                                                               
of shorter duration,  and of limited service.   Chugach does much                                                               
more of what  is necessary to ensure it has  gas delivered to the                                                               
point where  it is  burned.  There  are still  multiple producers                                                               
and  today the  gas that  Chugach  purchases meets  the needs  of                                                               
Chugach retail customers  as well as the  Seward electric system.                                                               
Addressing Representative  Tarr's earlier question  about CINGSA,                                                               
Mr.  Steyer  explained  that  CINGSA   gains  a  benefit  through                                                               
Chugach's contractual share  of CINGSA.  So,  the Seward electric                                                               
system  benefits  in  CINGSA  through  Chugach's  contract  since                                                               
Chugach is Seward's wholesale power provider.                                                                                   
                                                                                                                                
2:33:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON requested  an example  of full  service                                                               
versus limited service.                                                                                                         
                                                                                                                                
MR. STEYER  replied that in  the old  days Chugach would  say the                                                               
amount  of gas  that it  needed per  day and  had multiple  power                                                               
plants  where it  might burn  that gas.   The  producers provided                                                               
that  amount  and delivered  the  gas  where Chugach  needed  it.                                                               
These days,  although perhaps  over-simplified, Chugach  now says                                                               
the amount  of gas it needs  per day and the  producers say where                                                               
they can provide  it and if Chugach wants to  use it elsewhere it                                                               
is   the  utility's   responsibility   to   have  a   contractual                                                               
arrangement with  somebody who owns  a pipeline along the  way to                                                               
where Chugach wants  to use the gas.   There has been  a shift to                                                               
the utility  in better defining its  daily requirements, actually                                                               
hour-by-hour requirements,  and in  arranging for  a transmission                                                               
path that was formerly provided.                                                                                                
                                                                                                                                
2:35:08 PM                                                                                                                    
                                                                                                                                
MR. STEYER  brought attention  to the photographs  on slide  5 to                                                               
point out  that Chugach Electric  Association is not  solely, but                                                               
is mostly, dependent  on natural gas.  To some  degree, he added,                                                               
this is  true for  the other  utilities as well.   Chugach  has a                                                               
renewable  energy  portion  of   its  generation  portfolio  that                                                               
accounts for  15-20 percent of  the utility's generation  need in                                                               
an average year.   That is because  that is all it  is capable of                                                               
meeting.  To  some degree, Chugach needs less  gas currently than                                                               
it used to  because the utility makes more efficient  use of gas.                                                               
For example,  along with  ML&P, Chugach built  a new  power plant                                                               
that uses only  about three-fourths of the amount of  gas to make                                                               
a  kilowatt hour  as  the generation  it replaced.    In part  in                                                               
recognition of the situation about  the Cook Inlet Basin, Chugach                                                               
has tried  to take steps  to be as  responsible a customer  as it                                                               
can  be.   That  said,  natural gas  is  critically important  to                                                               
electric generation in Southcentral Alaska.                                                                                     
                                                                                                                                
MR.  STEYER  displayed slide  6,  "Natural  gas as  a  generation                                                               
fuel,"  stating that  natural  gas is  the  generation fuel  that                                                               
provides about 85  percent of the needs of  multiple utilities in                                                               
Southcentral and  to some lesser  degree in the  Interior through                                                               
purchases of  Southcentral generated gas.   Uncertainty about the                                                               
supply or the deliverability of that gas creates concern.                                                                       
                                                                                                                                
MR. STEYER  drew attention to  slide 7, "What  does [uncertainty]                                                               
look like?"   He related that in 2009,  Chugach, other utilities,                                                               
the Municipality of  Anchorage, and the boroughs  north and south                                                               
of Anchorage  collaborated in putting  together the  Energy Watch                                                               
Program.  A  poster was put together with a  chart [outlining the                                                               
actions for  customers to take]  because there was  concern about                                                               
what happens  if at any time,  but especially during a  cold dark                                                               
night, there is not enough  gas deliverability to meet everyone's                                                               
needs.   Preparation was  made for an  energy emergency,  a place                                                               
that Chugach does not want to go back to.                                                                                       
                                                                                                                                
2:37:52 PM                                                                                                                    
                                                                                                                                
MARK  FOUTS, Director,  Corporate  Planning  & Analysis,  Chugach                                                               
Electric Association,  Inc., began his portion  of the PowerPoint                                                               
presentation.   He said that  when he started with  Chugach about                                                               
25 years  ago, the  utility signed  a gas  contract with  a major                                                               
producer  for  250 billion  cubic  feet  (Bcf)  to be  used  when                                                               
Chugach would  like to.   After  that had been  used up  20 years                                                               
later Chugach asked the producer for  more gas and was told about                                                               
2 years with an option for 2  more at the producer's option.  The                                                               
producer had found another place in  the world to make more money                                                               
and was  done with  the gas  business in Cook  Inlet.   Given the                                                               
price of  oil in 2009 and  2010 that's where that  producer went.                                                               
ConocoPhillips Alaska, Inc., ("ConocoPhillips")  was also a major                                                               
producer at the time and  offered Chugach three years but without                                                               
any swing, just flat gas.   There was no storage facility in Cook                                                               
Inlet  at  the time  that  Chugach  had  to make  that  decision.                                                               
Addressing Representative Josephson's  question about service, he                                                               
said  Chugach had  the full  service.   The dispatch  centers for                                                               
electric didn't  even schedule  gas, they just  showed up  at the                                                               
power plants whenever  Chugach needed it.  By the  time the major                                                               
producers  had left,  Chugach was  doing the  transport, storage,                                                               
swing, everything.                                                                                                              
                                                                                                                                
MR. FOUTS  showed slide 8, "2  key terms," and said  that what he                                                               
wants to share  is not so much  the story of what it  was like in                                                               
2009 and  2010 when Chugach was  looking for more gas  supply for                                                               
another  20 years,  but  rather that  it comes  down  to two  key                                                               
terms:  volume and deliverability.                                                                                              
                                                                                                                                
MR.  FOUTS noted  that  the chart  on slide  9,  "Cook Inlet  Gas                                                               
Supply," was put  out by the state in 2011  to explain that these                                                               
four major gas  fields in Cook Inlet are declining.   The decline                                                               
curve on the graph goes down to  the right.  In 2010 and 2011, in                                                               
recognition  that  Chevron and  Marathon  were  leaving the  Cook                                                               
Inlet, the state  went to Houston [Texas] and  looked for another                                                               
producer.  That producer became Hilcorp.   Not seen on this chart                                                               
for the  last five  years is  what Hilcorp did  - it  stopped the                                                               
decline.   "Five years ago,"  he said, "we had  1.2 Cs of  P2 gas                                                               
and today  we have 1.2 Ts."   That was very  valuable for Chugach                                                               
in terms of supply and volume.                                                                                                  
                                                                                                                                
2:41:05 PM                                                                                                                    
                                                                                                                                
MR.  FOUTS drew  attention to  the  chart on  slide 10,  "Chugach                                                               
Electric's Gas Supply, Gas Supply  by Contract and Ownership," to                                                               
show how  much gas Chugach uses  and where it gets  its gas from.                                                               
This  year,  he  said,  part  of Chugach's  gas  will  come  from                                                               
ConocoPhillips, the  last year of  a six-year contract.   For the                                                               
next  seven  years Hilcorp  will  largely  provide Chugach's  gas                                                               
supply.  Chugach is also part of  a 10 percent interest in one of                                                               
the largest fields in Cook Inlet  [Beluga Gas Field] to provide a                                                               
small portion of its  gas supply.  Of this 10  percent of the gas                                                               
being produced in  Cook Inlet, Chugach uses that 10  percent.  By                                                               
2023, that  is it, that is  seven years of supply.   In 2010/2011                                                               
Chugach was four  to five years away from running  out of gas, so                                                               
to say.  Actually, the problem  was running out of people willing                                                               
to  invest in  Cook Inlet.   The  state solved  that by  bringing                                                               
Hilcorp to Alaska  and Hilcorp made that  investment of $200-$300                                                               
million every year and things are now where they are today.                                                                     
                                                                                                                                
MR. FOUTS  said his concern  from having been at  the negotiating                                                               
table five  years ago with Marathon,  Chevron, and ConocoPhillips                                                               
is that  when producers get  ready to  pack their bags  and leave                                                               
for  someplace  else,  the  first   thing  they  do  is  to  stop                                                               
investing.  When  the well waters up they don't  do any more with                                                               
it, and that is exactly what happened.   If in two to three years                                                               
Hilcorp, Furie, BlueCrest Energy,  Inc., AIX Energy Inc., Aurora,                                                               
Cook Inlet  Energy, or NordAq  Energy Inc. all decide  that there                                                               
is a better  place to invest their money, in  two years [Chugach]                                                               
will be  right back where  it was in 2010,  which is five  to six                                                               
years away from nobody willing to  invest in Cook Inlet.  Chugach                                                               
has made  a $356 million  investment with  ML&P on a  power plant                                                               
that is  designed to last until  2048, and there is  a seven-year                                                               
supply that  is certain.   Chugach  would really  like to  have a                                                               
longer-term  lead time  than  being  lead time  away  to find  an                                                               
alternative supply.  In 2010  the electric utilities were meeting                                                               
weekly to  try to  figure out  where they were  going to  get gas                                                               
from.  The utilities talked to  parties who could build ships and                                                               
to parties with  sources of LNG and compressed  natural gas (CNG)                                                               
from around  the world.   The story  on supply is  very important                                                               
and that story depends on investment.                                                                                           
                                                                                                                                
2:43:34 PM                                                                                                                    
                                                                                                                                
MR. FOUTS  turned to the  chart on slide 11,  "Chugach Electric's                                                               
Gas Supply, Hourly  Gas Demand for the Year," and  said the other                                                               
aspect of  Chugach's business is  deliverability.  He  noted that                                                               
ENSTAR has  expressed that it  has almost all  the deliverability                                                               
it needs.   In the  electric business, he explained,  Chugach has                                                               
30  percent extra  capacity  in  its generation  so  that when  a                                                               
generator trips or  equipment fails the utility  still has enough                                                               
electricity  to meet  the  need.   Chugach  subscribed to  enough                                                               
deliverability  from CINGSA  to  again  provide that  redundancy.                                                               
Chugach can meet the instantaneous  peak seen on the chart, which                                                               
is  an hourly  projection of  Chugach's gas  needs with  the base                                                               
depicted in blue  and the peak in red.   What ENSTAR was speaking                                                               
about was  in terms  of the  daily rate, but  on an  hourly basis                                                               
even  more  swing is  required.    Chugach has  purchased  enough                                                               
deliverability from CINGSA  to not only meet  the need throughout                                                               
the winter  but even  weather and equipment  failure when  one or                                                               
two peaking units have to be turned on.                                                                                         
                                                                                                                                
MR. FOUTS showed  slide 12, "Gas Storage Meets  Peak Gas Demand,"                                                               
to discuss how Chugach looks at each  day when using its gas.  He                                                               
explained that the gas is received  on a continuous basis all day                                                               
long.  During  evening hours the electric load  goes down because                                                               
the lights are out while people  are asleep, but Chugach is still                                                               
getting  that 22  Mcf a  day so  it is  put into  storage.   When                                                               
everyone wakes up  the load increases, but the  supplier does not                                                               
provide  enough gas  and so  that gas  is pulled  out of  CINGSA.                                                               
Unlike ENSTAR  that mainly uses  CINGSA to meet the  winter peak,                                                               
Chugach uses CINGSA  every day.  The CINGSA  facility is critical                                                               
for  meeting  Chugach's load  and  provides  the least-cost  fuel                                                               
supply for Chugach  because the utility is buying all  its gas at                                                               
flat rates.   Chugach has invested in CINGSA with  a $100 million                                                               
commitment for 20  years.  It would  have been nice to  have a 30                                                               
or 40 year commitment, but 20 was available.                                                                                    
                                                                                                                                
2:46:08 PM                                                                                                                    
                                                                                                                                
MR. FOUTS moved to slide 13,  "Conclusion," and said his point is                                                               
that Chugach Electric Association has  its gas needs met in terms                                                               
of volume for  seven years, has its storage  facility for another                                                               
16 years under contract, and has  a generation asset that is good                                                               
until 2048.   If Chugach finds  itself in the situation  of being                                                               
five years  away from  a fuel supply  that is  uncertain, Chugach                                                               
will be right  back where it was  in 2010.  When  the question is                                                               
asked   about  whether   there  is   enough  supply   and  enough                                                               
deliverability in  Cook Inlet,  he would say  that when  there is                                                               
enough  supply to  go  out  15-20 years  the  problem is  solved.                                                               
There are agreements  to accommodate ENSTAR when it  calls him to                                                               
say it  is "10 short"  and asks to  borrow some of  Chugach's gas                                                               
for the  next eight hours.   But, he said, his  opinion in regard                                                               
to the state is that ENSTAR  should be able to commercially go to                                                               
the marketplace  in Cook  Inlet and  buy an  extra 10  percent of                                                               
deliverability so that when a  compressor goes down on a platform                                                               
ENSTAR can just  call up the other platform owner  and ask for an                                                               
extra 10 million a day.   If there were metrics going forward, he                                                               
advised, there would be two new  gas platforms, at least, in Cook                                                               
Inlet  that could  do  50 million  a day,  plus  what Hilcorp  is                                                               
doing, plus what CINGSA is  doing, and then [the utilities] would                                                               
be covered.                                                                                                                     
                                                                                                                                
MR. FOUTS  recapped that in  2009-2011 the Department  of Natural                                                               
Resources  (DNR) came  out with  its  study of  the [Cook  Inlet]                                                               
decline.   Hilcorp came  in and said  it would  cover [Chugach's]                                                               
volume  and   would  almost  cover   [Chugach's]  deliverability.                                                               
Deliverability is  extremely expensive,  he said.   Spending $100                                                               
million and trying  to get it back  in 10 days on  selling gas at                                                               
$7-$8 doesn't pay  for itself.  In 2015 the  state said there was                                                               
1.2 Tcf of proved plus probable  (2P) reserves, as was related by                                                               
enalytica last week.  That is  0.7 Tcf of proven (the infill) and                                                               
0.5  of  probable  (what  is   hoped  is  there),  a  50  percent                                                               
probability.   So, there  is five  to ten years  of gas  that the                                                               
state believes  is had.  Hilcorp  will do seven years.   However,                                                               
Hilcorp will  have to  drill over  the next  five to  seven years                                                               
because it  doesn't have all this  gas behind the pipe,  and will                                                               
be drilling in  the probable areas.  As the  committee heard from                                                               
Hilcorp yesterday,  $12 million  was spent  drilling a  well that                                                               
was unsuccessful.   Hilcorp will be doing a lot  more drilling as                                                               
these fields decline.   There are lots of stories  of looking for                                                               
gas that  is being counted  on, only to  find zero.   Security is                                                               
needed  in  Chugach's  fuel  supply  and he  is  looking  at  the                                                               
committee  as   an  opportunity   to  express   Chugach  Electric                                                               
Association's  perspective  that  long-term security  is  needed.                                                               
Chugach should  not have  to have  the uncertainty  of how  it is                                                               
going to meet its electric load.                                                                                                
                                                                                                                                
2:49:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR commented  that  a part  of this  discussion                                                               
needs to  be the work to  integrate the Railbelt utilities.   She                                                               
said  she is  aware of  legislation that  would build  efficiency                                                               
into the  system.  She requested  Mr. Fouts to provide  an update                                                               
on the progress in this regard.                                                                                                 
                                                                                                                                
MR.  FOUTS  replied there  are  multiple  efforts to  reduce  the                                                               
amount of gas  being burned by the electric utilities.   The most                                                               
certain effort  is what all  the utilities  already did -  put in                                                               
brand  new, highly  efficient generation.   Five  years ago  [the                                                               
utilities] burned  33 Bcf [a year].   By the start  of 2017, [the                                                               
utilities] will be burning 28 Bcf  [a year], cutting off 5 Bcf of                                                               
gas.   The utilities  are currently  studying the  dispatching of                                                               
all the  generation together, which  would save  another marginal                                                               
level  of  gas, not  near  as  significant as  the  5  Bcf.   The                                                               
utilities have minimized the gas  usage through almost $1 billion                                                               
in  investment in  new generation.   By  economically dispatching                                                               
together, a  marginal amount more will  be saved but most  of the                                                               
savings have probably already been accrued.                                                                                     
                                                                                                                                
REPRESENTATIVE TARR  inquired about  the terms  that are  used in                                                               
regard to the aforementioned.                                                                                                   
                                                                                                                                
MR. FOUTS responded that there  are several terms, but in general                                                               
there  is Independent  System Operator  (ISO) and  Unified System                                                               
Operator (USO).  The idea is  that all the utilities dispatch all                                                               
their generation optimally so no gas  or no fuel is wasted.  That                                                               
is the ISO.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  TARR understood  that that  is the  ongoing piece                                                               
that will only be a marginal reduction.                                                                                         
                                                                                                                                
MR. FOUTS  answered that the  amount of  gas being used  for next                                                               
year when all the new power plants  are on should be on the order                                                               
of 28  Bcf [a year].   If  the utilities optimize  their dispatch                                                               
there could be  another 0.5 Bcf or  1 Bcf of gas  that also could                                                               
be  saved.   Saving 0.5  Bcf  is $8  million and  $8 million  for                                                               
forever is a lot of money.                                                                                                      
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 3.2.16 HB 247 ENSTAR Natural Gas Company.pdf HRES 3/2/2016 1:00:00 PM
HB 247
HSE RES 3.2.16 HB 247 Chugach Electric Presentation.pdf HRES 3/2/2016 1:00:00 PM
HB 247
HSE RES 3.2.16 HB 247 - Alaska Support Industry Alliance.pdf HRES 3/2/2016 1:00:00 PM
HB 247