Legislature(2015 - 2016)BARNES 124

03/07/2016 06:00 PM RESOURCES


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06:02:11 PM Start
06:03:13 PM HB247
06:51:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Dept. of Revenue Oil & Gas Tax Credit Overview
by Ken Alper, Director, Tax Division
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
6:03:13 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."                                                                                           
                                                                                                                                
6:04:36 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
continued his  PowerPoint presentation on behalf  of the governor                                                               
entitled,  "Oil  and Gas  Tax  Credit  Reform- HB247,  Additional                                                               
Modeling and Scenario Analysis - Part  2a," which he had begun at                                                               
the committee's  1:00 p.m. meeting  today.  He noted  that slides                                                               
47-50  in many  ways parallel  slides  40-46, all  of them  being                                                               
modeling of  the status quo looking  at the assumptions of  a new                                                               
oil field [of  50 million barrels of oil  (MMbo)] being developed                                                               
in  Cook Inlet.   The  only difference  between the  two sets  of                                                               
slides is  what happens  in the  year 2022  when the  current tax                                                               
caps are  scheduled to sunset  under existing law.   The modeling                                                               
on slides  40-46 show  the answers  for the  taxes that  would be                                                               
paid under  the underlying tax  regime of 35 percent  net profits                                                               
tax.   The modeling  on slides  47-50 show  the answers  for what                                                               
would happen if the Cook Inlet caps were extended indefinitely.                                                                 
                                                                                                                                
MR. ALPER  turned to slide  48, "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo Status Quo, Tax Caps  extended, $60/bbl."  He pointed out                                                               
that  at an  oil price  of $60  per barrel  (bbl), the  amount of                                                               
production tax paid  would be zero because  the current statutory                                                               
production tax on oil in Cook Inlet  is zero.  This is based upon                                                               
the conditions  that were  in place in  2006 when  the production                                                               
profits  tax   (PPT)  was  passed  [Twenty-Fourth   Alaska  State                                                               
Legislature, House  Bill 488]; those  are the old  Economic Limit                                                               
Factor (ELF) multipliers.   In a zero tax scenario  at a price of                                                               
$60, this field  would be quite robust for the  producer, but the                                                               
state's net  present value (NPV)  would be negative  $37 million.                                                               
The state would  receive money from royalty  and eventually would                                                               
have  a positive  cash flow,  but  not enough  to compensate  the                                                               
state for  credit cost up  front, especially without  any backend                                                               
production tax revenue.                                                                                                         
                                                                                                                                
6:06:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON understood that a  minimum of 25 percent of                                                               
the  royalty is  required  to go  to the  permanent  fund and  so                                                               
unavailable for  the general fund,  and that the property  tax is                                                               
split about 50:50  in Cook Inlet.  Referring to  the bottom right                                                               
chart  on  slide 48,  he  requested  an  explanation of  what  is                                                               
included in the figures on lines 6-9.                                                                                           
                                                                                                                                
MR. ALPER offered his belief  that these numbers include the non-                                                               
permanent fund  share of  the royalty,  meaning the  general fund                                                               
portion  of the  royalty which  is  75 percent.   He  said he  is                                                               
fairly certain that the numbers  include only the state's portion                                                               
of  property  taxes, meaning  the  portion  that is  shared  with                                                               
municipalities is  not included  in this analysis.   So,  this is                                                               
the state's  unrestricted general fund  cash flow as  an isolated                                                               
dataset.  He requested Ms.  Cherie Nienhuis to confirm whether he                                                               
is correct in his answer.                                                                                                       
                                                                                                                                
CHERIE NIENHUIS, Commercial Analyst,  Tax Division, Department of                                                               
Revenue (DOR), offered her belief  that the state revenue in this                                                               
case  does include  the amount  that  would go  to the  permanent                                                               
fund.   If only  the revenue  that goes to  the general  fund was                                                               
represented it would be called  general fund unrestricted revenue                                                               
(GFUR).   She  further  offered her  understanding  that this  is                                                               
state revenues  only and does  not include the amount  that would                                                               
go  to the  municipalities  for  the property  tax,  but it  does                                                               
include the amount that would go to the permanent fund.                                                                         
                                                                                                                                
REPRESENTATIVE SEATON  requested that the department  get back to                                                               
the  committee with  a verification  of the  answer so  committee                                                               
members can understand exactly what is included.                                                                                
                                                                                                                                
MR. ALPER thanked  Ms. Nienhuis for correcting  him and explained                                                               
that part  of the  confusion is  that DOR  did the  analysis both                                                               
ways for Representative Seaton's request.   The request had asked                                                               
for a  broader set of analysis  with different cash flows  and he                                                               
was  not sure  which  one survived  to the  version  that is  now                                                               
before the committee.                                                                                                           
                                                                                                                                
6:09:00 PM                                                                                                                    
                                                                                                                                
MR. ALPER  addressed slide 49,  "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo  Status Quo, Tax  Caps extended, $80/bbl."   He specified                                                               
that once again  no production tax is paid, but  when the royalty                                                               
is  included  the  state  has  a positive  NPV  of  $63  million.                                                               
However, he qualified,  if this is looking at  general fund only,                                                               
then that  might go back to  being a negative number  and so that                                                               
needs to  be found out.   The producer's discounted cash  flow is                                                               
relatively robust at $612 million.   Generally speaking, there is                                                               
not a  lot of difference  in the shapes  of the curves  on slides                                                               
47-49, it is just  a matter of the magnitude that  is tied to the                                                               
different prices of oil.                                                                                                        
                                                                                                                                
REPRESENTATIVE JOSEPHSON  said that when looking  at these slides                                                               
his  eyes continually  focus on  the comparison  with opportunity                                                               
lost.  He asked whether this is  what DOR is trying to reflect in                                                               
the state NPV 6.15 percent.                                                                                                     
                                                                                                                                
MR.  ALPER  responded  that  when  it is  said  "state  NPV  6.15                                                               
[percent]," yes.  It is the  value of what is called a discounted                                                               
cash flow.   A  dollar received  next year  is 6.15  percent less                                                               
valuable than  a dollar  received this year.   A  dollar received                                                               
two years from now would be  6.15 percent times 6.15 percent less                                                               
valuable.  So,  the deeper into the future the  less the money is                                                               
worth to the state.                                                                                                             
                                                                                                                                
REPRESENTATIVE  JOSEPHSON, regarding  slide 49,  inquired whether                                                               
the state's  $337 million is  the comparison to  [the producer's]                                                               
$1.385 billion.                                                                                                                 
                                                                                                                                
MR. ALPER answered  that the [net] cash flow,  the money in/money                                                               
out, without worrying  about time, is $337 million  for the state                                                               
as compared to the producer's  [net] cash flow of $1.385 billion.                                                               
In terms  of the  time value  of money,  the state's  $36 million                                                               
compares to the producer's $612 million.                                                                                        
                                                                                                                                
6:11:15 PM                                                                                                                    
                                                                                                                                
MR. ALPER moved to slide 50,  "Cook Inlet Life Cycle Modeling, 50                                                               
mmbo  Status Quo,  Tax Caps  extended, Fall  2015 FC  Price," and                                                               
specified that  in all of  these models the forecast  price falls                                                               
somewhere in between $60 and $80.   In this scenario, the state's                                                               
NPV number of  $14 million is almost exactly zero  because with a                                                               
dataset this large  $14 million is essentially  a rounding error.                                                               
The  producer's cash  NPV  is  $481 million.    This  slide is  a                                                               
relatively  unlikely  scenario  of  the status  quo  in  that  it                                                               
presumes that the legislature chooses  to indefinitely extend the                                                               
existing  caps  on Cook  Inlet  taxes  without making  any  other                                                               
changes to the tax and credit regime in Cook Inlet.                                                                             
                                                                                                                                
REPRESENTATIVE JOSEPHSON  recalled that when asked  about this at                                                               
the  committee's 1:00  p.m. meeting  today,  Mr. Alper  responded                                                               
that  it  was unlikely  the  legislature  would extend  the  caps                                                               
beyond  2022.     Representative   Josephson  posited   that  the                                                               
arguments heard  before would  be the  same arguments  [in 2022],                                                               
short of  having a  gasline coming  from the  North Slope  to the                                                               
city gate and  in which case the legislature  might logically ask                                                               
what it  is doing with  Cook Inlet at that  point.  He  asked Mr.                                                               
Alper to address why the arguments would be any different.                                                                      
                                                                                                                                
MR.  ALPER replied  that  to  his knowledge  no  one is  actively                                                               
asking for  extension of the Cook  Inlet tax caps right  now.  As                                                               
heard in last  week's invited testimony before  the committee, he                                                               
continued,  there are  certainly many  proponents to  keeping the                                                               
tax credit  regime in place  the way that it  is.  The  caps were                                                               
left in place for  15 years, a very long time.   A production tax                                                               
of zero  is hard to justify  over the long term  unless the state                                                               
simply did  not have a  production tax and  that would be  a very                                                               
different thing.   The state  does have  a production tax  on the                                                               
books that pays out  a lot of credits.  As shown  by the red bars                                                               
[in the upper  left graph], at the forecasted price  the state is                                                               
spending  $347 million  on tax  credits of  various sorts  to the                                                               
owners of that  field without any production tax.   As a diligent                                                               
sovereign, as an  entity desiring to balance a budget  and do all                                                               
the many things that the Alaska  state government needs to do, it                                                               
is hard to  imagine a justification for that  over the indefinite                                                               
long term.                                                                                                                      
                                                                                                                                
6:13:53 PM                                                                                                                    
                                                                                                                                
MR. ALPER looked at the first  of several slides dealing with the                                                               
impact of  HB 247.  Turning  to slide 51, "Cook  Inlet Life Cycle                                                               
Modeling,  50 mmbo  HB247,  2022 Tax  Caps  expire, $40/bbl,"  he                                                               
explained  that  the  bill's  proposed cap  of  $25  million  per                                                               
company is  clearly apparent in  the red  bars on the  upper left                                                               
graph.   He  noted  the  reimbursements are  at  $25 million  for                                                               
several  years before  they reduce  and the  state gets  positive                                                               
cash flow  from the production tax.   Even with that,  at a price                                                               
of $40 it is  not really making a lot of money  for anybody.  But                                                               
the production  tax is  enough to provide  positive cash  flow to                                                               
the  state  of $159  million,  with  a  discounted cash  flow  of                                                               
negative $19  million.   The state's  total cash  flow, including                                                               
apparently  permanent  fund  royalties, creates  a  positive  net                                                               
present value of  $108 million.  Although he  argued earlier that                                                               
a scenario of  maintaining the tax caps forever is  too low, this                                                               
tax regime for Cook Inlet is  almost certainly too high.  This is                                                               
a  35 percent  net profits  tax  without any  sort of  comparable                                                               
benefit  like the  Per-Barrel  Credit that  exists  on the  North                                                               
Slope  and  without  any  sort of  Gross  Value  Reduction  (GVR)                                                               
benefit for new oil that exists on  the North Slope.  At just the                                                               
35 percent  net tax the state  has a positive net  present value,                                                               
and once the royalty is included  the producer is losing money at                                                               
an oil price of $40.                                                                                                            
                                                                                                                                
6:15:33 PM                                                                                                                    
                                                                                                                                
MR. ALPER  discussed slide 52,  "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo  HB247, 2022 Tax Caps  expire, $60/bbl."  He  pointed out                                                               
that  at a  price of  $60  this is  a money-making  field to  the                                                               
producer at a positive net  present value of $80 million, despite                                                               
the  onerous production  tax regime  and the  cutting off  of the                                                               
credits at  $25 million.  The  state would have a  discounted net                                                               
present  value  of $121  million  on  the  production tax.    The                                                               
state's total revenue  would provide a net present  value of $331                                                               
million.   In this scenario  the tax credits themselves  would be                                                               
cut off at $25 million per  year.  Mr. Alper outlined the state's                                                               
numbers shown in the bottom  right chart:  state's production tax                                                               
NPV - $121  million; state's NPV - $331  million; producer's cash                                                               
NPV  - $80  million.    He then  brought  attention  to slide  44                                                               
[depicting  the status  quo at  $60 a  barrel with  the tax  caps                                                               
expiring:   state's production  tax NPV  - negative  $50 million;                                                               
state's NPV - $167 million;  producer's cash NPV - $202 million].                                                               
Comparing the numbers  for both scenarios, he said  that under HB                                                               
247 the  state would  gain about $170  million on  the production                                                               
tax  NPV  and the  producer's  cash  NPV  would lose  about  $120                                                               
million.  This gain for the  state would primarily be from moving                                                               
the  cash flow  around of  the $25  million per  year cap  on the                                                               
refunded tax credits.                                                                                                           
                                                                                                                                
MR. ALPER moved to slide 53,  "Cook Inlet Life Cycle Modeling, 50                                                               
mmbo HB  247, 2022 Tax Caps  expire, $80/bbl."  He  noted that in                                                               
this scenario  the state would  get a  robust cash flow  from the                                                               
production tax [$263 million], an  excellent cash flow from total                                                               
state  take [$557  million], and  the producer  would see  a cash                                                               
NPV/discounted  value of  $278  million.   He  clarified that  in                                                               
these  various   scenarios  the  cost  profiles   and  all  other                                                               
assumptions have  stayed the same as  the price of oil  was moved                                                               
around, thus the changes are purely  the impact of the changes in                                                               
the price of oil.                                                                                                               
                                                                                                                                
6:18:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON inquired  whether Mr.  Alper is  saying                                                               
that a future  legislature would need to revisit  this tax before                                                               
2022 or in  2022.  He further inquired whether  the passage of HB                                                               
247 along with  the expiration of the tax caps  would result in a                                                               
scenario that is too favorable to the state.                                                                                    
                                                                                                                                
MR. ALPER responded that the expiration  of tax caps in 2022 is a                                                               
pending issue before the legislature  with or without the passage                                                               
of tax credit reform this year.   In his opinion, that production                                                               
tax is likely too generous  and, frankly, unstable for Cook Inlet                                                               
given the  inlet's constraints.   That tax  system would  also be                                                               
the same tax  system for gas - 35 percent  of net profits without                                                               
any offsets or Per-Barrel Credits.   He explained that it was not                                                               
so  much left  there to  be the  tax system,  but was  left there                                                               
because  a previous  legislature,  when looking  to reform  North                                                               
Slope  taxes, did  not need  to worry  about the  Cook Inlet  yet                                                               
since it  was enough years  off in the future.   It is  a problem                                                               
that  might not  need  to be  addressed  until the  Thirty-Second                                                               
Alaska State Legislature in the  2021 session.  He recounted that                                                               
the legislature's  consultant, Mr. Janak Meyer  of enalytica, and                                                               
whose  testimony he  is inclined  to agree  with, testified  that                                                               
industry  finds instability  in Alaska's  system in  a couple  of                                                               
different places.  First, the  State of Alaska has giant deficits                                                               
and therefore industry does not  know what the state's government                                                               
is  going to  look like  in  a year  or  two.   Second, and  more                                                               
importantly  in  the  context here,  industry  sees  the  state's                                                               
extensive negative  cash flow  from the tax  credit system.   The                                                               
state is spending  hundreds of millions of dollars  that are more                                                               
than the amount of production  tax revenue coming in and industry                                                               
is presuming,  on a  certain level  at least,  that some  sort of                                                               
reform  is  going  to  be  made and  industry  is  building  that                                                               
instability into  its assumptions.   Third is  the sunset  of the                                                               
tax  caps.   Industry does  not know  what the  fiscal system  is                                                               
going to  be for the majority  of the life cycle  of any decision                                                               
that industry might  make now.  Any investment  decision made now                                                               
or soon is a multi-year decision  and industry does not know what                                                               
the tax is going to be for the  tail end of it.  He said he would                                                               
be happy  to work with  the committee, if  it is so  inclined, to                                                               
create a new Cook Inlet oil and gas tax system.                                                                                 
                                                                                                                                
6:21:56 PM                                                                                                                    
                                                                                                                                
MR. ALPER resumed his presentation  and addressed slide 54, "Cook                                                               
Inlet Life Cycle  Modeling, 50 mmbo HB247, 2022  Tax Caps expire,                                                               
Fall 2015  FC Price."   In this  scenario, he said,  the forecast                                                               
price is going  up from $50 now to $56  next year and stabilizing                                                               
into  the $70s.    Without considering  inflation,  DOR sees  the                                                               
state  with  positives  on the  production  tax  [$197  million],                                                               
higher  positives on  the overall  take [$451  million], and  the                                                               
producer with a  positive value of $183 million.   He pointed out                                                               
that the cash flow on such  a field drops off quite rapidly after                                                               
peak  production, which  is the  nature of  any large  oil field.                                                               
Fields of 50 MMbo, he continued,  peak at 17,000 barrels a day of                                                               
production, but production declines rapidly after that peak.                                                                    
                                                                                                                                
6:22:36 PM                                                                                                                    
                                                                                                                                
MR. ALPER brought  attention to slide 55, "Cook  Inlet Life Cycle                                                               
Modeling, 50 mmbo HB247, Tax  Caps extended, $40 bbl," explaining                                                               
that this  scenario is the tax  caps extended with the  impact of                                                               
HB 247 [at a  price of $40 a barrel].  The  credits are capped at                                                               
$25 million  per year with a  sum total payout in  tax credits of                                                               
negative $142  million.  Passage of  HB 247 would also  result in                                                               
the repeal of the Cook  Inlet Well Lease Expenditure (WLE) Credit                                                               
and  the Qualified  Capital Expenditure  (QCE) Credit.   In  this                                                               
scenario  the state  would only  be  paying 25  percent of  costs                                                               
through the development phase via  the Net Operating Loss Credit,                                                               
as  opposed to  the 50-60  percent  that the  state is  currently                                                               
paying.  The  state's cash obligations would be cut  by more than                                                               
half, which  tremendously helps  the state's  bottom line.   Even                                                               
with that, at a  price of $40 a barrel the  state would be losing                                                               
money on  production tax because  there is no production  tax and                                                               
would  barely  be making  money  on  the  total state  take  [$29                                                               
million in state  NPV].  The producer would  lose money [negative                                                               
$76 million in cash NPV], as is  also the case in the status quo.                                                               
The difference in these numbers is  about the same between the no                                                               
tax system  and the  underlying tax system,  as there  is between                                                               
the before and the  after with the passage of HB  247.  The order                                                               
of magnitude is about the same.                                                                                                 
                                                                                                                                
MR. ALPER  discussed slide 56,  "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo HB247,  Tax Caps extended, $60/bbl," noting  that a price                                                               
of $60  is closer  to a  breakeven price for  everyone.   At this                                                               
price  the  state would  pay  $134  million  in credits,  with  a                                                               
discounted value of  negative $97 million.  The  total state take                                                               
would be  decent at $126  million.   The producer does  better at                                                               
this price [with a cash NPV] of $214 million.                                                                                   
                                                                                                                                
6:24:52 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to slide  57, "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo  HB247, Tax Caps  extended, $80/bbl."   Drawing attention                                                               
to the  top right graph he  pointed out that while  it looks like                                                               
the numbers  are smaller,  it is  only because  the scale  of the                                                               
graph is at  $100 million while the scale for  this same graph on                                                               
slide  56  is at  $50  million.   Total  state  take  in the  $80                                                               
scenario is close to $80 million a  year in the peak years of the                                                               
project,  with  a  total  state take  discounted  value  of  $225                                                               
million.  [The  production tax NPV is negative $92  million.]  If                                                               
the tax caps  are extended, the production tax is  never going to                                                               
be a  positive number, he noted.   If the state  spends any money                                                               
on credits  in any one year  it becomes a negative  money for the                                                               
entirety of  the calculation  because there  is never  a positive                                                               
number to  offset against.  The  producer would be at  a cash NPV                                                               
of $[494] million.                                                                                                              
                                                                                                                                
MR. ALPER displayed slide 58,  Cook Inlet Life Cycle Modeling, 50                                                               
mmbo HB247, Tax Caps extended, Fall  2015 FC Price," and said the                                                               
state does pretty  well at an oil price of  $80 and the producers                                                               
do better.   A regime of  the tax caps extended,  he added, would                                                               
be a very generous regime to industry.                                                                                          
                                                                                                                                
6:26:15 PM                                                                                                                    
                                                                                                                                
MR. ALPER drew  attention to the summary tables on  slides 60 and                                                               
61.   He explained that  slide 60, "Summary Table-  North Slope,"                                                               
includes  on  one  page  all  20  of  the  North  Slope  modeling                                                               
scenarios  that he  presented.   The first  eight scenarios  were                                                               
based  on a  smaller  field of  50 MMbo,  four  of the  scenarios                                                               
depicting the  status quo  at four different  prices and  four of                                                               
the scenarios depicting what would  happen under the proposals of                                                               
HB  247 at  four  different  prices.   Each  scenario includes  a                                                               
summary  column for  the total  credits  paid by  the state,  the                                                               
state's net  of production tax  credits minus  eventual taxation,                                                               
the state's discounted  value of that cash flow,  net state gain,                                                               
state net present value (NPV),  the producer's cash flow, and the                                                               
producer's NPV/discounted  value.  Across  the board, all  of the                                                               
$40  scenarios are  losers  for the  producer.   All  of the  $60                                                               
scenarios  for the  smaller field  are winners  for the  producer                                                               
under both  the status quo  and the  proposed changes of  HB 247.                                                               
The changes made by  HB 247 do turn the large  field from a small                                                               
gain to a  loss, with the main  reason for that being  the cap of                                                               
$25 million a  year on how much credits the  state is prepared to                                                               
purchase; this  is a much  bigger deal  for a much  bigger field.                                                               
The 12  scenarios for  the 750 MMbo  field include  two different                                                               
"after" scenarios - one where a  company gets the $25 million and                                                               
one  where a  very  large company  of more  than  $10 billion  in                                                               
revenue is completely excluded from  being able to get state cash                                                               
rebates.  He  drew attention to the last column  for producer NPV                                                               
at a price of $80 for a 750  MMbo field at the status quo, noting                                                               
it would be $2.216 million.   This amount drops to $1.415 billion                                                               
if the producer gets $25 million  a year from the state, and when                                                               
the company  gets no credits the  producer NPV drops by  only $60                                                               
million [to $1.355  billion].  So, there is far  more impact done                                                               
from the  reduction in  credits to $25  million than  the further                                                               
reduction to zero in credits.                                                                                                   
                                                                                                                                
6:29:40 PM                                                                                                                    
                                                                                                                                
MR. ALPER reviewed  slide 61, "Summary Table-  Cook Inlet," which                                                               
includes on one  page all 16 scenarios that he  presented for the                                                               
Cook Inlet.   He reminded committee members that  DOR only looked                                                               
at the smaller  field of 50 MMbo because the  department does not                                                               
anticipate elephant fields  in Cook Inlet.  Two  tax regimes were                                                               
looked at [for the status quo  and proposed changes under HB 247]                                                               
with  the question  being asked  of whether  the tax  caps sunset                                                               
(third column).  At  an oil price of $80 in the  status quo and a                                                               
sunset  of the  tax  caps,  the producer's  NPV  drops from  $396                                                               
million to  $278 million,  a loss  of about  $118 million  in net                                                               
present value.  If the tax  caps are extended, the producer loses                                                               
about  $120  million.   So,  similar  numbers but  the  increment                                                               
between  a sunset  of the  tax cap  and not  a sunset  within the                                                               
status quo  is actually bigger;  it is over $200  million benefit                                                               
to the  company of extending the  tax caps within the  status quo                                                               
and over  $200 million  benefit from  the company  from extending                                                               
the tax  caps within the HB  247 scenario.  He  said the argument                                                               
he  is making  is that  the credit  changes, while  material, are                                                               
smaller  in magnitude  than  any other  decisions  that a  future                                                               
legislature would make  about the tax regime  itself that impacts                                                               
production in Cook Inlet.                                                                                                       
                                                                                                                                
MR. ALPER further  mentioned that DOR would like  to put together                                                               
some gas  field life cycle modeling  and that this could  be done                                                               
in fairly short order.  Slides  will be provided to the committee                                                               
so DOR does not need to  be scheduled again before the committee.                                                               
He noted that Representative Olson  after today's earlier hearing                                                               
asked whether  DOR had other  scenarios.  Something DOR  has done                                                               
on the  North Slope side is  to look at  a field of 750  MMbo and                                                               
what the impact  would be if it were in  a high royalty location,                                                               
a part  of the state where  the producer is paying  the one-sixth                                                               
rather than  the one-eighth  royalty.   Although the  state gains                                                               
money on  the royalty  side with that  higher royalty,  the state                                                               
loses money on the production tax  side because of the way Senate                                                               
Bill 21 [passed in 2013,  Twenty-Eighth Alaska State Legislature]                                                               
is constructed  so that the  Gross Value Reduction (GVR)  for new                                                               
oil increases from  a 20 percent benefit to a  30 percent benefit                                                               
if the  entirety of a  field is at the  high royalty level.   The                                                               
bottom line numbers are about the  same and DOR will be providing                                                               
these slides  to the committee, but  it is more royalty  and less                                                               
production tax.                                                                                                                 
                                                                                                                                
6:32:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON asked  whether  this same  type of  summary                                                               
table  could  be  done  for   the  Interior,  Middle  Earth,  and                                                               
everything that is going on in Fairbanks.                                                                                       
                                                                                                                                
MR. ALPER answered he  is pretty sure it can be  done but he will                                                               
check with  his staff.  He  offered his belief that  Middle Earth                                                               
has its own  statutory tax caps of 4 percent  of gross value that                                                               
are good until 2027, thus providing  a bit more certainty for the                                                               
short and  medium term as  to what  the tax is  going to be.   He                                                               
noted that  something could be done  along the lines of  the kind                                                               
of  development that  Doyon, Limited,  is talking  about for  the                                                               
Nenana area.                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  inquired whether there are  tax credits for                                                               
the Fairbanks  liquefied natural  gas (LNG) storage  facility and                                                               
suggested  that  those  be  included.   He  also  inquired  about                                                               
including the in-state refinery up north.                                                                                       
                                                                                                                                
MR.  ALPER replied  that these  are  hard credits  to build  into                                                               
project-level  modeling.   The Fairbanks  utility, the  Fairbanks                                                               
regional  project, is  going  to benefit  from  the storage  tank                                                               
credit, which is a comparable credit  to what was received by the                                                               
Cook  Inlet Natural  Gas Storage  Alaska (CINGSA)  facility.   He                                                               
said he  does not know  where the  refinery credits can  be built                                                               
into that  as he does not  know enough about the  local utilities                                                               
and needs  as to where that  might play into the  project itself.                                                               
He  offered for  Representative Olson  to talk  to him  after the                                                               
hearing for directions on how to run this modeling request.                                                                     
                                                                                                                                
REPRESENTATIVE OLSON said  he thinks he and Mr. Alper  are on the                                                               
same page, which  is why he asked the question.   He acknowledged                                                               
that his request will be a lot of  work but said it will help the                                                               
committee.                                                                                                                      
                                                                                                                                
MR.  ALPER noted  that DOR  provided three  presentations to  the                                                               
Senate Working  Group last  fall - one  dedicated to  Cook Inlet,                                                               
one to North Slope, and one to  Middle Earth credits.  He said he                                                               
will  provide the  committee co-chairs  with the  links to  those                                                               
presentations so  committee members can read  those presentations                                                               
which provide a  good overview of how the  credits are structured                                                               
and used, what  the benefits are, and what the  sunsets are.  The                                                               
presentations will  serve as a  good background document  and DOR                                                               
will do some modeling on a theoretical future project.                                                                          
                                                                                                                                
6:35:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked  whether DOR can also  make sure that                                                               
the committee  receives some modeling on  private royalty/private                                                               
land and  what the state is  providing in that type  of scenario.                                                               
He said  it would be helpful  to know what the  state's cash flow                                                               
is for projects where the state does not receive any royalty.                                                                   
                                                                                                                                
MR. ALPER responded that DOR  earlier provided the committee with                                                               
an analysis that was done for  a member of the other body showing                                                               
the royalty  breakdowns for  federal lands  such as  the National                                                               
Petroleum Reserve-Alaska and Arctic  National Wildlife Refuge, as                                                               
well  as  for  private  royalty  that will  be  shared  with  the                                                               
committee  soon.     The  department  would  like   to  run  some                                                               
scenarios.  The first project  by Doyon, Limited, works out great                                                               
because it  is on state  land, but  Doyon's second project  is on                                                               
its own  private land and would  have a very different  cash flow                                                               
to  the  state.   He  said  DOR may  not  get  into the  multiple                                                               
variations and  different price scenarios,  but maybe a  few less                                                               
options  for each  possible scenario  so as  not to  inundate the                                                               
committee with 50 more slides.                                                                                                  
                                                                                                                                
6:36:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR commented that  in regard to evaluating these                                                               
different tax  structures it is  frequently heard that  there not                                                               
be winners  and losers, or that  one company size not  be favored                                                               
over another, or development opportunity.   She said HB 247 moves                                                               
away  from  some of  the  other  credits  to net  operating  loss                                                               
structurally,  but  keeps  35  percent for  North  Slope  and  25                                                               
percent for  Cook Inlet.   She asked  what the reasoning  was for                                                               
that  and whether  DOR has  considered  doing the  same for  both                                                               
areas and why that would be good or bad.                                                                                        
                                                                                                                                
MR. ALPER answered that the  35 percent Net Operating Loss Credit                                                               
on the  North Slope came along  for the ride with  the 35 percent                                                               
base tax  rate in Senate Bill  21.  That change  was only applied                                                               
to the  North Slope.  However,  the portion of the  tax code that                                                               
talks about the  base rate did not parse it  out, it actually put                                                               
that  35 number  in statute.    That is  why Alaska  has this  35                                                               
percent tax rate  in Cook Inlet.  It would  certainly be possible                                                               
to put in  a 35 percent operating loss credit  without a terribly                                                               
complicated  amendment.   That would  increase the  state's cost,                                                               
the state's  liability.  A part  of the rationale for  the higher                                                               
operating loss  credit on the  North Slope is that  the companies                                                               
actually are paying those taxes.   So, there is some measure of a                                                               
playing field  leveler in  play here.   For  example, if  a major                                                               
producer spends one  more dollar on some new  field, the producer                                                               
reduces its  taxable income and  therefore saves 35 cents  on its                                                               
taxes.   Regardless  of the  Per-Taxable-Barrel  Credit, the  tax                                                               
savings  is at  the marginal  rate of  35 percent,  so the  state                                                               
offers  a 35  percent operating  loss credit  to the  new company                                                               
that does not have profits.   Up until such time as the incumbent                                                               
producers in Cook  Inlet are actually paying taxes,  there is not                                                               
really a playing field to level;  the state does not need to give                                                               
a higher benefit to the company  on its loss credits to make them                                                               
equitable with the  taxpayer if the taxpayer's  effective rate is                                                               
zero for  the next five years.   At such  time as there is  a new                                                               
Cook Inlet  tax regime,  it seems  to him that  a new  Cook Inlet                                                               
operating loss credit would be an important component of that.                                                                  
                                                                                                                                
6:39:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON,  following up on  Representative Tarr's                                                               
question, said  the other factor is  the whole issue of  the need                                                               
for natural  gas in  Southcentral Alaska.   [indisc.  - technical                                                               
sound difficulty] ... more parity with the North Slope.                                                                         
                                                                                                                                
MR. ALPER replied that that is  an excellent point.  Although not                                                               
as overwhelming or as imminent as  it might have been a few years                                                               
ago, there remains some sense of  gas supply anxiety for the Cook                                                               
Inlet utilities.   If the state  needs to provide a  higher level                                                               
of  benefit to  keep that  gas  being produced,  especially in  a                                                               
world where  the proposal is  to eliminate the  drilling credits,                                                               
it is a reasonable  argument to say that 35 percent  as a sort of                                                               
a  compromise  number  going  forward  might  be  viable.    [The                                                               
administration]  is  not  proposing  that  and he  is  not  in  a                                                               
position  to offer  that, but  while going  from 50,  60, to  25,                                                               
going to 35 might certainly blunt the impact.                                                                                   
                                                                                                                                
6:40:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON inquired whether DOR  has done any models on                                                               
the Agrium bill  [HB 100] and the potential impact  of the credit                                                               
that is proposed by that bill.                                                                                                  
                                                                                                                                
MR. ALPER responded  that he is familiar with  the provisions and                                                               
the economics embedded in [HB  100] because he wrote DOR's fiscal                                                               
note for  the bill and  the bill analysis  for the governor.   He                                                               
said it  is an interesting  concept and has  a lot of  upside for                                                               
the state without  that much downside simply because  there is no                                                               
upfront cash  expended.   It is very  different as  envisioned to                                                               
any of the  credits that the administration is  looking to reform                                                               
here in  that it would  require the  producer, Agrium, to  do all                                                               
the work  and make the  commitment to redevelop its  facility and                                                               
then  begin purchasing  large  amounts  of gas  and  then earn  a                                                               
profit  and  start  having a  corporate  income  tax  obligation.                                                               
Then, any  credit that Agrium earned  through HB 100 would  be an                                                               
offset  against Agrium's  corporate income  tax liability.   What                                                               
that bill  could do potentially  is provide the security  for gas                                                               
suppliers to  drill and develop  new fields.  For  example, Furie                                                               
Operating Alaska, LLC, ("Furie") may  have made a large discovery                                                               
and has  signed some  relatively small sales  contracts.   But if                                                               
Furie is  in fact sitting on  a large resource, Furie  would like                                                               
to be able to  develop it but cannot do that unless  it has a way                                                               
to sell it.  Something like  a rebuilt Agrium facility might go a                                                               
long way towards  giving Furie the security it needs  to do that,                                                               
and in that  case it would make  it easier to modify  some of the                                                               
Cook Inlet tax  credits because there would be a  lot less supply                                                               
anxiety going forward.                                                                                                          
                                                                                                                                
REPRESENTATIVE OLSON  asked whether  there is something  that the                                                               
administration might support.                                                                                                   
                                                                                                                                
MR.  ALPER answered  he  is  not in  position  to  speak for  the                                                               
administration  and does  not know  if the  governor has  taken a                                                               
position on HB 100.  He added that  he did his best to analyze HB                                                               
100 and  model it as dispassionately  as he could and  talk about                                                               
the potential benefits.   It is a hard year to  have a tax credit                                                               
bill, given there  is negative cash flow to the  state, the state                                                               
is losing  money, and the state  has big deficits.   He is before                                                               
the committee with  a bill to reduce the state's  spending on tax                                                               
credits by several hundred million dollars,  so it is hard to add                                                               
another credit.   However, there is a lot of  argument to be made                                                               
for targeted, smaller,  focused credits which have  a really good                                                               
multiplier for the state's economics.                                                                                           
                                                                                                                                
6:43:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON, regarding  the Cook  Inlet, recalled  the                                                               
legislature's  consultants stating  that $5-$7/Mcf  is sufficient                                                               
gas  price to  develop even  the  most expensive  gas around  the                                                               
world.   So, he surmised,  those credits  are not needed  for gas                                                               
production in almost  every scenario.  If the  state continues to                                                               
pay the credits  in Cook Inlet and getting the  multiple of 8,000                                                               
or more  barrels a day, the  state will be paying  annual credits                                                               
in  the range  of $200-$400  million.   The state  is effectively                                                               
subsidizing $68-$136  per barrel, even  if some of  the companies                                                               
are drilling for gas but the  credits were not needed to get that                                                               
drilling.   He inquired whether  there is a mechanism  that could                                                               
be applied to separate oil  from gas, given the combined drilling                                                               
costs and combined capital costs equation.                                                                                      
                                                                                                                                
MR. ALPER replied that the figure  of $136 comes from an analysis                                                               
done by  Representative Seaton in  which the 8,000 barrels  a day                                                               
of increased  oil production seen in  Cook Inlet in the  last few                                                               
years is divided  among the $400 million that the  state spent on                                                               
credits last  year.  Obviously,  he noted, that does  not provide                                                               
the benefit with the gas.  As large  as this number is, it is not                                                               
outrageous because  the numbers  are real -  the state  did spend                                                               
$400 million.   As  far as  dividing costs  between oil  and gas,                                                               
that is  always complicated.  In  2010 a decoupling bill  spent a                                                               
lot  of time  before  this committee  and one  issue  was how  to                                                               
adequately separate  costs between  oil and  gas.   The BlueCrest                                                               
Energy,  Inc., ("BlueCrest")  project might  be easier  than most                                                               
just  because  BlueCrest  has  a   very  different  and  distinct                                                               
drilling location  for its oil  project versus its gas  project -                                                               
the resources  themselves are in the  same part of the  earth but                                                               
are  vertically  above each  other;  however,  that is  more  the                                                               
exception  than the  rule.   He deferred  to Mr.  Dan Stickel  to                                                               
speak to DOR's ability to separate oil and gas expenditures.                                                                    
                                                                                                                                
6:47:15 PM                                                                                                                    
                                                                                                                                
DAN STICKEL, Assistant Chief  Economist, Tax Division, Department                                                               
of Revenue (DOR),  offered his understanding that  currently if a                                                               
unit  within  Cook  Inlet  produced   both  oil  and  gas,  those                                                               
commingled costs would  be separated based on the  gross value at                                                               
the  point of  production  of the  oil  versus the  gas.   If  60                                                               
percent of the value came from  oil, then 60 percent of the costs                                                               
would be attributed to the oil.   Before calculating the tax, the                                                               
zero tax  ceiling for oil  would be  applied along with  the 17.7                                                               
cents per Mcf ceiling for gas.                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON  posed a scenario  of a new field  with all                                                               
the investments and earned credits  up front, and with production                                                               
coming later that  varies in how much  gas and how much  oil.  He                                                               
asked whether DOR, if working on  that kind of a scheme, would go                                                               
back and  recover some credits  from the  company if it  had more                                                               
gas than  oil if credits were  not being given for  gas since the                                                               
price is adequate to support gas  development.  He said he cannot                                                               
recall the conversation from when decoupling was discussed.                                                                     
                                                                                                                                
MR. ALPER  offered his belief  that the decoupling bill  ended up                                                               
with a  formula tied to gross  value at the point  of production.                                                               
He said  it is in-artful and  in-exact, but it would  be possible                                                               
to  a  certain  extent  to do  a  more  comprehensive  separation                                                               
although it would  be a workload within the department.   He said                                                               
he  thinks  the question  that  Representative  Seaton is  really                                                               
asking  is,  "Could we  establish  a  different level  of  credit                                                               
support for  oil versus gas?"   He said  he thinks that  could be                                                               
done  but he  needs to  check with  a few  people about  what the                                                               
hurdles and pitfalls might be  because the ultimate desire of the                                                               
Cook Inlet  Recovery Act was  to get a  big benefit to  make sure                                                               
people  found enough  gas to  keep the  lights on.   However,  he                                                               
reported, an analysis  done by DOR found that  about one-third of                                                               
that money  got spent on oil  that might not have  been necessary                                                               
to  get the  oil  developed because  the oil  had  a more  stable                                                               
market and was not  as much of a life or death  situation.  If it                                                               
is wanted to do two different  things for oil versus gas, he said                                                               
DOR would have to look at how  to implement it but he believes it                                                               
could be done.                                                                                                                  
                                                                                                                                
6:50:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON remarked  that he thinks oil is  an issue in                                                               
parts of Cook  Inlet, particularly to Tesoro who used  to get all                                                               
its oil in  Cook Inlet but is now bringing  it around from Valdez                                                               
or elsewhere because there is not an adequate supply.                                                                           
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB247 ver A.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - DOR-TAX-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - FUNDCAP-OIL & GAS TAX CREDIT FUND-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Sectional Analysis.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Oil Credit Bill - Key Features 2-2-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HSE RES - 2.24.16 HB 247 2nd Presentation- fiscal details part 1a.pdf HRES 2/25/2016 8:30:00 AM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HSE RES HB247 DOR Fiscal Details and Scenario Modeling (Part 2a) 2-26-16.pdf HRES 2/27/2016 10:00:00 AM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247