Legislature(2017 - 2018)BARNES 124

02/22/2017 06:30 PM RESOURCES

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Audio Topic
06:35:48 PM Start
06:36:17 PM HB111
08:02:34 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change from 6:00 p.m. --
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Oil & Gas Industry Testimony:
Kara Moriarty, President/CEO, AK Oil & Gas Assoc.
Damian Bilbao, VP, Commercial Ventures, BP
Pat Foley, Sr., VP Operations, Caelus Energy LLC
Jeff Hastings, Kuukpik SAExploration LLC
**Streamed live on AKL.tv**
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
                                                                                                                                
6:36:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE  BILL  NO.  111,  "An  Act relating  to  the  oil  and  gas                                                               
production tax,  tax payments, and credits;  relating to interest                                                               
applicable  to  delinquent  oil   and  gas  production  tax;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
6:36:33 PM                                                                                                                    
                                                                                                                                
KARA  MORIARTY, President/CEO,  Alaska  Oil  and Gas  Association                                                               
(AOGA),  informed the  committee AOGA  is a  private professional                                                               
trade organization representing  the majority of the  oil and gas                                                               
industry  in  Alaska,  and  provided  a  PowerPoint  presentation                                                               
entitled,  "House Resources  Committee HB  111."   She began  her                                                               
presentation,  and  pointed  out   state  and  local  governments                                                               
received  over $2.1  billion  in taxes  and  revenue last  fiscal                                                               
year.   Members  of  AOGA reviewed  HB  111, considering  several                                                               
principles  [slide  3].   An  additional  important principle  is                                                               
stability,  which was  discussed  during a  previous hearing  [on                                                               
2/20/17].  Ms.  Moriarty noted that the  information presented at                                                               
the  aforementioned previous  hearing was  out of  date, and  the                                                               
presenter  implied industry  and  AOGA are  disingenuous and  not                                                               
credible [slide  4].   She said she  was personally  insulted and                                                               
explained the reason industry addresses  the issues of stability,                                                               
competition, and  jobs worldwide is  because they are  factors in                                                               
making  investment  decisions,  and changes  in  government  take                                                               
impact the  three aforementioned  issues.  Ms.  Moriarty stressed                                                               
HB 111  will not  provide stability  or increase  competition and                                                               
the number  of jobs  in Alaska.   She  returned attention  to the                                                               
previous testimony,  and advised more recent  information in this                                                               
regard  is available;  in fact,  information  from January  2016,                                                               
indicated  that  as oil  prices  went  down, governments  offered                                                               
fiscal  incentives,  and  most   of  the  world  recognized  that                                                               
increasing taxes  would discourage  investment in  a time  of low                                                               
prices [slide 5].                                                                                                               
                                                                                                                                
6:41:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR asked  Ms. Moriarty  to continue  her presentation                                                               
without further reference to the previous testifier.                                                                            
                                                                                                                                
MS. MORIARTY returned attention to slide 5.                                                                                     
                                                                                                                                
REPRESENTATIVE  BIRCH appreciated  hearing updated,  current, and                                                               
accurate information  and requested the committee  hear testimony                                                               
from  the Oil  and Gas  Competitiveness Review  Board (O&G  CRB),                                                               
Department  of Revenue  (DOR), [established  in  Senate Bill  21,                                                               
passed in the 28th Alaska State Legislature].                                                                                   
                                                                                                                                
CO-CHAIR TARR  said any member  of the committee may  contact O&G                                                               
CRB, and  its testimony before  the committee will  be considered                                                               
as time allows.                                                                                                                 
                                                                                                                                
6:43:21 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY directed attention to  slide 6 that summarized which                                                               
sections of  HB 111 constitute  a tax increase or  increased cost                                                               
to industry,  and which sections  are credit reform -  the stated                                                               
intent  of certain  policymakers.   Although updated  DOR reports                                                               
are forthcoming,  she said it is  known that last year  there was                                                               
over $6.6  billion in  total investment on  the North  Slope, and                                                               
industry earned "a  fraction of that in credits on  the slope, at                                                               
$393  million ...."   Based  on total  production, she  estimated                                                               
North Slope revenue  to state and local government  at $2 billion                                                               
last year, and  advised credits are a good return  on the state's                                                               
investment   as   will   be   demonstrated   by   the   following                                                               
presentation.   Beginning  the sectional  review of  HB 111,  she                                                               
said  Section  1,  which  increases  interest  to  six  years  of                                                               
compounded  interest, will  increase  industry's  costs, and  has                                                               
nothing  to do  with tax  credits [slide  7].   The provision  in                                                               
Section  2, which  was part  of legislation  proposed last  year,                                                               
raises  the minimum  tax and  is a  significant increase  ranging                                                               
from 25 percent to an  infinite increase, which industry believes                                                               
will  lead to  the loss  of  one drilling  rig for  at least  six                                                               
months  [slide 8].   Ms.  Moriarty  stressed HB  111 will  impact                                                               
investment decisions and more specific  testimony will be offered                                                               
in this  regard.   Hardening the floor  is another  tax increase,                                                               
and  although Section  3 is  directly related  to credits,  using                                                               
credits against  the minimum tax  is the only way  some companies                                                               
can continue  to invest  [slide 9].   She recalled  concerns have                                                               
been  expressed  by  legislators  about  the  complexity  of  the                                                               
state's tax  system, and suggested  the second part of  Section 3                                                               
should be  removed because it  changes the  tax to a  monthly tax                                                               
[slide 10].   Continuing  to Section 5,  she noted  net operating                                                               
loss credits  (NOLs) historically have  matched the tax  rate and                                                               
this section  penalizes companies  for investing in  Alaska while                                                               
they are losing  money.  Furthermore, reducing  the net operating                                                               
loss (NOL) rate  was not part of legislation  proposed last year,                                                               
and previous  testimony from DOR  has established  the importance                                                               
of NOLs  for all  companies.   She pointed  out according  to DOR                                                               
testimony,  House  Bill 247  [passed  in  the 29th  Alaska  State                                                               
Legislature]  was  designed  to  protect  NOL  credits,  and  she                                                               
questioned the  change in policy  [slide 11].  In  addition, NOLs                                                               
level  the playing  field for  certain companies  in Alaska,  and                                                               
reducing the NOL and eliminating  cash payments - as does Section                                                               
6 -  will eliminate all  cash credits  on the North  Slope [slide                                                               
12].   Ms.  Moriarty discussed  the  history of  tax credits  and                                                               
provisions of  Senate Bill  21 that  maintained an  effective tax                                                               
rate of approximately 25 percent over  a range of oil prices, and                                                               
that  returned an  element  of progressivity  to  the tax  system                                                               
through a per  barrel credit.  Changes to  the "so-called credit"                                                               
changes  the  structure  of  the  tax and  is  an  immediate  tax                                                               
increase [slide  13].  Experts  recognize that the per  barrel is                                                               
not  really a  credit, and  she read  testimony presented  by DOR                                                               
last year  characterizing the  credits as an  "offset to  the tax                                                               
and   is  designed   to  create   a  progressive   element  ...."                                                               
Therefore, the proposal  in Section 7 is a  fundamental change to                                                               
an  integral part  of  the tax  system, and  also  does not  have                                                               
anything to  do with  tax credit  reform [slide  14].   Section 9                                                               
creates uncertainty  as to when  credits are earned and  to which                                                               
companies Section  9 applies [slide  15].  Continuing  to Section                                                               
10, she  said preventing gross  value at the point  of production                                                               
(GVPP) from going below zero  creates uncertainty and has nothing                                                               
to do  with tax credits  [slide 16].   She concluded nine  of the                                                               
eleven  policy sections  of  HB 111  would  increase cost  and/or                                                               
taxes on industry  at a time of  low oil prices [slide  17].  Ms.                                                               
Moriarty agreed the oil and  gas industry is evolving in response                                                               
to  global   changing  markets,  emerging   technology,  enhanced                                                               
monitoring  systems, and  geopolitical  changes; however,  fiscal                                                               
systems can remain stable [slide 18].                                                                                           
                                                                                                                                
6:54:18 PM                                                                                                                    
                                                                                                                                
MS.  MORIARTY, referring  to six  changes in  the state's  fiscal                                                               
policy, noted  AOGA only  supported the  Cook Inlet  Recovery Act                                                               
[passed  in  the  26th  Alaska  State  Legislature]  and  certain                                                               
provisions  of   Senate  Bill  21,   but  did  not   propose  the                                                               
aforementioned  changes  [slide  18].   She  advised  Alaska  has                                                               
potential  and good  geology,  but  HB 111  will  not bring  more                                                               
production  and investment,  will make  Alaska less  competitive,                                                               
and  may lead  to  lost  long-term revenue  through  the loss  of                                                               
royalty,  production, corporate  income  tax,  and property  tax.                                                               
Further,  increasing  government take  through  HB  111 will  not                                                               
solve Alaska's fiscal crisis.   She stressed that the industry is                                                               
part of the solution [to the  fiscal crisis] as it is the largest                                                               
revenue generator  for the state  [slide 19].  Ms.  Moriarty said                                                               
HB  111  will  hurt  Alaska's   overall  economy  and  urged  the                                                               
committee to reconsider the bill.                                                                                               
                                                                                                                                
REPRESENTATIVE  BIRCH  objected  to   the  interruptions  to  the                                                               
foregoing presentation,  and said all  of the information  in the                                                               
presentation is relevant.                                                                                                       
                                                                                                                                
6:59:31 PM                                                                                                                    
                                                                                                                                
DAMIAN  BILBAO,  Vice President  of  Commercial  Ventures, BP  in                                                               
Alaska,  informed the  committee BP  sees HB  111 -  as currently                                                               
written - as  a risk to the Alaska economy  and a disincentive to                                                               
investment  in Alaska.   He  expressed support  for the  previous                                                               
testimony  by  AOGA  and  others,   and  reminded  the  committee                                                               
producing oil in Alaska is tough  and expensive work.  Mr. Bilbao                                                               
said  North  Slope fields  would  naturally  decline at  over  10                                                               
percent each year without a  material level of investment such as                                                               
drilling,  facilities  work,  and   innovation  to  mitigate  the                                                               
decline.   Although  there  has been  a  recent increase,  Alaska                                                               
production currently represents  less than 5 percent  of U.S. oil                                                               
production,  down from  over 25  percent  in the  '80s, and  must                                                               
continue to  compete for  investment.   He directed  attention to                                                               
the Alaska economy,  and advised that Alaska's  fiscal gap should                                                               
not be  addressed at  the expense  of the  health of  the state's                                                               
economy, which  is directly linked  to the amount of  oil flowing                                                               
through  the Trans-Alaska  Pipeline  System (TAPS).   Mr.  Bilbao                                                               
said the principles  used by BP to assess oil  fiscal policy were                                                               
tested  against HB  111,  and  BP concluded  HB  111  would be  a                                                               
damaging policy for  Alaska.  The first  principle is encouraging                                                               
more oil  flow down TAPS, and  HB 111 makes investment  in Alaska                                                               
less  competitive, because  it makes  production more  expensive.                                                               
In fact,  higher taxes  mean higher costs,  and lower  profits in                                                               
Alaska -  compared to  other options -  and will  send investment                                                               
dollars elsewhere.   The second  principle is extending  the life                                                               
of Prudhoe  Bay and  Kuparuk oil  fields, and  the change  to the                                                               
sliding scale  tax credit  for legacy production  would be  a tax                                                               
increase,  and would  shorten the  economic life  of each  field.                                                               
The third  principle is encouraging more  independents working on                                                               
the North  Slope, and HB 111  would push independents off  of the                                                               
North  Slope  as   a  result  of  weaker   economics  and  fiscal                                                               
uncertainty.   The fourth  principle is  not picking  winners and                                                               
losers, and  under HB  111 any company  investing in  Alaska, and                                                               
expecting a  certain return, would  be a loser.   He acknowledged                                                               
the legislature  has a difficult  task to address the  fiscal gap                                                               
without damaging  the economy; however,  changes to  Alaska's oil                                                               
taxes  and  tax  policy  must be  narrowly  tailored  to  correct                                                               
deficiencies without causing long-term harm.                                                                                    
                                                                                                                                
7:07:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PARISH  asked what flaws  BP sees in  the existing                                                               
tax  system  that  can  be corrected  to  positively  impact  the                                                               
state's bottom line in the short-term.                                                                                          
                                                                                                                                
MR. BILBAO advised  the current policy is providing  what is best                                                               
for the state in delivering  more production, more discoveries on                                                               
the  North Slope,  and more  exploration by  independents in  the                                                               
short- and long-term.                                                                                                           
                                                                                                                                
PAT  FOLEY,  Senior  Vice President,  Alaska  Operations,  Caelus                                                               
Energy  Alaska  (Caelus),  expressed  support  for  the  previous                                                               
testimony  and said  his presentation  would direct  attention to                                                               
the high level impacts of HB  111, specifically to Caelus and its                                                               
projects.   He  reminded  the committee  Caelus  is an  explorer,                                                               
developer,  producer, and  a partner  with  the state  developing                                                               
resources.    Caelus acquired  Pioneer's  assets,  thus has  been                                                               
working for 15  years on the North  Slope [slide 2].    Mr. Foley                                                               
said   state  oil   policy  will   impact  projects,   companies'                                                               
economics, and  the timing of  projects, and gave the  example of                                                               
the  Nuna project,  which anticipates  peak production  of 25,000                                                               
barrels per  day, will  create hundreds  of jobs,  and represents                                                               
$2.2  billion in  state revenue  from royalty,  net profit  share                                                               
leases, and production tax.  For  a project like Nuna, modeled at                                                               
$70 per barrel oil, the changes  brought forth by HB 111 have the                                                               
effect  of increasing  the oil  price required  for a  successful                                                               
project by  $5-$7 dollars per barrel  [slide 3].  When  the Smith                                                               
Bay project - which projects over  100,000 barrels of oil per day                                                               
-  begins  production,  Caelus  will not  be  eligible  for  cash                                                               
credits, thus  Smith Bay  will not  draw a  huge payment  of cash                                                               
credits from the state [slide 4].   Mr. Foley said Caelus has the                                                               
potential of placing 2 billion  additional barrels of oil through                                                               
TAPS,  creating 2,100  direct jobs,  and adding  contributions to                                                               
the state  economy of $34 billion  [slide 5].  He  provided slide                                                               
6,  which illustrated  how Alaska  is  going out  of business  by                                                               
selling  the  oil  it  has   produced,  and  thus  depleting  its                                                               
resource;  therefore,   to  save  Alaska's   economy,  additional                                                               
projects must be found, and tax  policy will have a direct impact                                                               
on  whether  projects  are  completed,  and  the  pace  of  their                                                               
completion.   Mr. Foley  explained certain provisions of the bill                                                               
are harmful to all North  Slope investors, and others are harmful                                                               
to  new  companies.    Relative  to  tax  policy,  he  questioned                                                               
Alaska's  fiscal  goal  and  policy,  and  whether  each  of  the                                                               
elements in  HB 111  are helpful to  attract investment  and grow                                                               
the economy,  or are harmful  [slide 7].   He opined  although HB                                                               
111 addresses  the immediate  cash concerns of  the state,  it is                                                               
harmful to  Alaska's economy in  the long-term.   Finally, Caelus                                                               
used an  economic model to  analyze the impact of  each component                                                               
of the bill  on the Nuna project, and he  provided a graph [slide                                                               
8].                                                                                                                             
                                                                                                                                
7:17:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH  asked  for  the amount  of  the  expected                                                               
outlay for the Nuna project.                                                                                                    
                                                                                                                                
MR.  FOLEY  answered Caelus  has  spent  about $200  million  for                                                               
drilling  two  wells  and  installing  facilities.    Another  $1                                                               
billion is yet to be spent.                                                                                                     
                                                                                                                                
REPRESENTATIVE PARISH inquired as to the cost of Smith Bay.                                                                     
                                                                                                                                
MR. FOLEY said  two exploration wells have been  drilled at Smith                                                               
Bay, and although  development is conceptual at  this time, total                                                               
development cost will exceed $10 billion.                                                                                       
                                                                                                                                
REPRESENTATIVE  PARISH questioned  how  much of  the $11  billion                                                               
outlay in Smith Bay will be  recovered in cash subsidies, and how                                                               
much will be held against future tax liability.                                                                                 
                                                                                                                                
MR. FOLEY  explained by  the time Caelus  develops Smith  Bay, it                                                               
will be producing  in excess of 35,000 barrels per  day, and thus                                                               
would  not be  eligible for  cash credits;  therefore, all  lease                                                               
expenditures would roll forward as NOLs.                                                                                        
                                                                                                                                
REPRESENTATIVE RAUSCHER asked for Mr.  Foley's opinion on what is                                                               
good tax policy.                                                                                                                
                                                                                                                                
MR. FOLEY  restated Caelus purchased Pioneer's  assets, committed                                                               
to  exploration  wells at  Smith  Bay,  and sanctioned  the  Nuna                                                               
project  under  the  Senate  Bill  21  tax  policy  regime.    He                                                               
concluded  the Senate  Bill 21  tax  policy attracted  newcomers,                                                               
leveled playing  fields, and encouraged  investment on  the North                                                               
Slope;  however, subsequent  to the  passage of  House Bill  247,                                                               
Caelus's projects became less valuable.    In further response to                                                               
Representative Rauscher,  he said  if HB 111  passes, investments                                                               
in the state will be slowed,  the economy will be harmed, and the                                                               
industry will have to wait for higher [oil] prices.                                                                             
                                                                                                                                
7:22:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH stated  Senate  Bill 21  is an  unequivocal                                                               
success.   The fiscal note attached  to HB 111 indicated  that by                                                               
2025, there would be a massive  tax increase of over $300 million                                                               
for the  state.   He observed the  most significant  component of                                                               
state revenue  is royalty share,  which is  typically one-eighth,                                                               
or 12.5  percent, and  asked about the  impact of  higher royalty                                                               
shares on newer fields and investment decisions.                                                                                
                                                                                                                                
MR.  FOLEY  explained at  Oooguruk  Unit,  Caelus has  one-eighth                                                               
leases that are additionally burdened  by a 30 percent net profit                                                               
share, and  also has one-sixth  leases.  Originally, all  the oil                                                               
and gas leases  in the state had a fixed  one-eighth royalty, and                                                               
then  a  net profit  share  component  was  added, which  was  an                                                               
additional 30  percent or  40 percent, or  a bid  variable share.                                                               
He  opined the  state realized  the aforementioned  system caused                                                               
accounting difficulties, and  no longer issues leases  with a net                                                               
profit  share.    Leases   near  infrastructure  carry  one-sixth                                                               
royalty, and leases  in very remote areas  still carry one-eighth                                                               
royalty leases.                                                                                                                 
                                                                                                                                
CO-CHAIR JOSEPHSON  clarified that  if the  bill as  written does                                                               
not succeed,  Caelus would remain  eligible for  cashable credits                                                               
because it produces under 50,000 barrels.                                                                                       
                                                                                                                                
7:25:26 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  said yes,  Caelus would remain  eligible; in  fact, to                                                               
develop  Smith Bay  will  take  two or  three  years of  building                                                               
infrastructure before  first oil, and  all of the costs  would be                                                               
eligible for  credit.  After  production begins, Caelus  would be                                                               
producing over 50,000 barrels per  day and would not be eligible.                                                               
For a total  development cost of $10 billion,  Caelus would spend                                                               
$3 billion  to $4 billion in  advance, and another $7  billion or                                                               
more drilling  wells, thus  the first  tranche might  be eligible                                                               
for cash credits under the current fiscal system.                                                                               
                                                                                                                                
CO-CHAIR  JOSEPHSON surmised  under the  existing fiscal  system,                                                               
[cashable credits  would be]  .35 [percent] of  $3 billion  to $4                                                               
billion, and  after production in  excess of 50,000  barrels, the                                                               
state  would use  a  formula  to secure  NOLs  after capital  and                                                               
operating expense deductions.                                                                                                   
                                                                                                                                
MR. FOLEY  returned attention to  slide 4 that  illustrated total                                                               
cash paid  to the state, for  a project like Smith  Bay, would be                                                               
about  $15  billion   in  royalty,  and  about   $10  billion  in                                                               
production taxes.   Further,  if Caelus  carried-forward [costs],                                                               
the  payment  of  production  taxes would  be  delayed,  but  the                                                               
payment of royalty would not.                                                                                                   
                                                                                                                                
CO-CHAIR  JOSEPHSON  stated  his   concern  about  informing  his                                                               
constituency  that the  state made  $1.2 billion  in fiscal  year                                                               
2017 (FY 17), but it could  make tens of billions of dollars over                                                               
the  life of  a  certain oil  and gas  project  by spending  $3.5                                                               
billion  for  development  cost,  without any  guarantee  of  the                                                               
result.                                                                                                                         
                                                                                                                                
7:29:01 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY  said  he  considers  the  state  a  co-investor  with                                                               
industry, and considers  cash credits not as a subsidy,  but as a                                                               
co-investment; for example, a $1  billion investment by the state                                                               
in a  project similar to  Smith Bay would  yield a return  of $28                                                               
billion in  royalty, production tax,  and ad valorem, which  is a                                                               
return of  28:1.  In  further response to Co-Chair  Josephson, he                                                               
said a  return on investment  may not be bankable,  and certainty                                                               
varies  between   an  exploration  activity  and   a  development                                                               
activity, however,  after a commitment  is made  for development,                                                               
the chances of success are very high.                                                                                           
                                                                                                                                
CO-CHAIR TARR asked  Mr. Foley to discuss  Caelus's benefits from                                                               
royalty relief.                                                                                                                 
                                                                                                                                
7:31:30 PM                                                                                                                    
                                                                                                                                
MR. FOLEY said at Oooguruk,  a royalty modification was agreed to                                                               
when the project was sanctioned, and  all the leases in the field                                                               
are  either a  one-eighth royalty,  30 percent  net profit,  or a                                                               
one-sixth royalty.   When the  royalty modification  was granted,                                                               
all of  the net profits stayed  the same, and the  royalties were                                                               
reduced  to 5  percent  until one  of the  net  profit share  key                                                               
leases begins  to make a  net profit share  payment.  He  said he                                                               
anticipates  the royalty  modification for  Oooguruk will  end at                                                               
some point  within the next three  years.  In a  separate royalty                                                               
modification  application   for  the  Nuna  project,   a  royalty                                                               
modification was  granted with a  condition that first  oil would                                                               
begin by late  in 2017 or in  2018; as the odds of  that are low,                                                               
Caelus will apply for an extension.                                                                                             
                                                                                                                                
CO-CHAIR TARR observed the state  has been willing to use royalty                                                               
modification as a means to recognize  the impact of low prices to                                                               
the industry.                                                                                                                   
                                                                                                                                
MR. FOLEY said yes.   He  added that three North Slope fields and                                                               
six  or seven  Cook Inlet  marginal  fields have  been helped  by                                                               
royalty modifications.                                                                                                          
                                                                                                                                
REPRESENTATIVE BIRCH  questioned whether NOLs are  limited to $35                                                               
million per year by House Bill 247.                                                                                             
                                                                                                                                
7:34:48 PM                                                                                                                    
                                                                                                                                
MR. FOLEY clarified  one of the provisions of House  Bill 247 cut                                                               
all credits in one-half, so any  one company can recoup up to $61                                                               
million in any one year.                                                                                                        
                                                                                                                                
REPRESENTATIVE BIRCH expressed his  understanding the state would                                                               
not have a  significant investment, but the  payment [of credits]                                                               
would be "metered out over some period of time."                                                                                
                                                                                                                                
CO-CHAIR JOSEPHSON restated  his concern that even  if the amount                                                               
of  the annual  outlay per  company is  capped, with  the present                                                               
system, the state  has no control over what  credits are accruing                                                               
above the  cap.   Thus the state  would accrue  another liability                                                               
similar to pension systems and school debt reimbursement.                                                                       
                                                                                                                                
REPRESENTATIVE  PARISH   questioned  what   the  effect   to  the                                                               
economics of the Smith Bay project  would be if the state were to                                                               
offer $3.5 billion as a no-cost loan, instead of as a subsidy.                                                                  
                                                                                                                                
MR. FOLEY agreed  the state could take several  actions to return                                                               
Caelus to  the financial  position the  tax credits  provided; in                                                               
fact, low-interest rate loans, the  ability to carry-forward loss                                                               
credits  until  they  can  be utilized,  and  any  investment  in                                                               
infrastructure, would be helpful.                                                                                               
                                                                                                                                
7:37:28 PM                                                                                                                    
                                                                                                                                
JEFF   HASTINGS,   Chairman/CEO,  SAExploration,   and   Managing                                                               
Partner, Kuukpik SAE, informed the  committee SAExploration is an                                                               
explorer  and  current  holder  of  tax  credits,  and  its  main                                                               
business is  as a prime contractor  to the oil and  gas community                                                               
in  Alaska.   He provided  a brief  history of  the company,  and                                                               
stressed its  commitment to  preferentially hire  Native Alaskans                                                               
and  Alaska   residents,  and  to  using   Alaska  suppliers  and                                                               
subcontractors [slide 2].   Mr. Hastings provided a  list of over                                                               
190 Alaska suppliers  his company uses [slide 3].   As background                                                               
information,  he  said  seismic   operations  are  typically  the                                                               
beginning of  an exploration  program, sometimes  before leasing.                                                               
Seismic data is critical information  essential to the success of                                                               
an  exploration  program,  and  after  investment  drawn  by  the                                                               
passage of Senate  Bill 21, the company used  new technologies to                                                               
produce  higher resolution  images  of  subsurface, which  garner                                                               
information   in  direct   correlation  to   recent  discoveries.                                                               
Further, seismic  data is critical to  finding new opportunities,                                                               
and  reserves for  the  future [slide  4].   Slide  5 provided  a                                                               
snapshot of a  single seismic program, and  illustrated the Aklaq                                                               
3D Seismic  Program in 2016  that employed 15  subcontractors and                                                               
75  suppliers.   Thus, one  job  brought benefits  to over  1,060                                                               
Alaskan families and  generated $57 million in  revenue, of which                                                               
$49 million stayed in Alaska.   Mr. Hastings explained seismic is                                                               
one part of  exploration prior to development, and slide  6 was a                                                               
chart of annual seismic revenue  in millions of dollars from 2012                                                               
to  2017.    After  the   passage  of  Senate  Bill  21,  capital                                                               
investment in seismic  data increased to a peak  of $217 million,                                                               
which decreased  to $105 million  following the first  tax credit                                                               
appropriation  cut  in the  fall  of  2015,  and to  $50  million                                                               
following the second  tax credit appropriation cut  in the summer                                                               
of 2016.   Slide  7 illustrated annual  seismic programs  for all                                                               
Alaska  contractors that  gather  seismic  information, over  the                                                               
same period of  time that ranged from a peak  of eleven programs,                                                               
to a  low of  two, following both  tax credit  appropriation cuts                                                               
[slide  7].   Because seismic  occurs early  in exploration,  the                                                               
number  of seismic  programs  underway is  a  good indication  of                                                               
future capital spending in the  industry.  Mr. Hastings said from                                                               
his  perspective,  Senate Bill  21  resulted  in an  increase  of                                                               
capital  spending,  which  resulted  in  new  discoveries.    The                                                               
elimination of  the tax credit  appropriation budget in  2015 and                                                               
2016  has had  several  negative effects:    capital spending  is                                                               
down,  the state  has not  released  a schedule  of payments  for                                                               
current tax credit liabilities;  liquidity needed for contractors                                                               
is  gone; many  contractors remain  unpaid for  services rendered                                                               
[slide  8].   As  a  result of  the  delayed  tax credit  payout,                                                               
SAExploration was  forced to restructure  its company and  seek a                                                               
way  to   extend  payments  to  its   Alaska  subcontractors  and                                                               
suppliers  until the  state  pays its  tax credits.    To do  so,                                                               
SAExploration eliminated 98 percent  of its shareholders' equity,                                                               
the majority  of which was  held by Alaskan employees  [slide 9].                                                               
Mr. Hastings  stated his commitment  to working and  investing in                                                               
Alaska's oil and gas fields  has continued for three decades, and                                                               
he  intends  to stay,  along  with  SAExploration's partner,  the                                                               
village of Nuiqsut.                                                                                                             
                                                                                                                                
7:48:51 PM                                                                                                                    
                                                                                                                                
MR. HASTINGS  advised the  oil and gas  community is  making hard                                                               
choices -  many are working at  cost - and many  are depending on                                                               
the state  to make the right  choices related to the  state's tax                                                               
regime.   He said HB  111 all  but eliminates a  secondary market                                                               
for tax  credits, and the  elimination of cash payments  for NOLs                                                               
hurts explorers.   Furthermore,  it is unknown  when and  how tax                                                               
credits will be paid, and  this information is necessary in order                                                               
for  his  company  to  operate  in the  future.    A  sustainable                                                               
structure is  needed that is  competitive on a global  scale, and                                                               
which  may require  additional infrastructure,  lower costs,  and                                                               
more  of a  partnership with  the  state.   He cautioned  against                                                               
creating a tax environment that eliminates investment in Alaska.                                                                
                                                                                                                                
7:51:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH recalled  previous  DNR  testimony about  a                                                               
large  repository of  seismic data  on the  North Slope  that the                                                               
state  could  monetize.   He  asked  whether the  state  acquired                                                               
information for which it has not paid.                                                                                          
                                                                                                                                
MR.  HASTINGS  explained  his  company  works  three  ways:    1.                                                               
contracts directly  to an oil  and gas producer that  applies for                                                               
the  credit, and  after ten  years the  data is  made public;  2.                                                               
speculative  data in  which his  company would  acquire data  and                                                               
sell licenses for the data,  typically a speculative survey sells                                                               
at  multiple of  1.25  return; 3.  contracts  with a  speculator.                                                               
Regarding the  data referred  to by the  commissioner of  DNR, he                                                               
said there are  thousands of linear and square  miles [of seismic                                                               
data] that will become public domain within the next five years.                                                                
                                                                                                                                
7:55:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PARISH assumed the actions  of the state as a free                                                               
purveyor   of   seismic   data  have   a   negative   impact   on                                                               
SAExploration.                                                                                                                  
                                                                                                                                
MR. HASTINGS  clarified if the  data were to stay  proprietary to                                                               
the owner, and is not released  to the public after ten years, it                                                               
would  yield about  a  multiple of  1.5  [return on  investment].                                                               
However, industry  expects a  return of 1.25,  and that  the data                                                               
will become public domain.                                                                                                      
                                                                                                                                
REPRESENTATIVE PARISH observed the  secondary market is uncertain                                                               
of the  status of tax  credit payments.   He suggested  the state                                                               
could issue a larger allocation  of tax credit payments disbursed                                                               
on a  competitive basis,  for example,  ninety-nine cents  on the                                                               
dollar.                                                                                                                         
                                                                                                                                
MR. HASTINGS confirmed  all parties in the  secondary market need                                                               
cash and  would have differing  thresholds; however,  his company                                                               
has restructured to  survive the delay and low  [oil] prices, and                                                               
would be reluctant  to accept a steeply discounted  offer for its                                                               
current tax credits.                                                                                                            
                                                                                                                                
CO-CHAIR  TARR  advised  the  committee  written  testimony  from                                                               
Hilcorp  can  be  found  in the  committee  packet,  and  invited                                                               
testimony   will   be    heard   from   ExxonMobil   Corporation,                                                               
ConocoPhillips  Alaska,   Inc.,  and   Great  Bear   on  2/24/17.                                                               
Further,  committee questions  regarding previous  testimony have                                                               
been  submitted, and  the responses  from DOR  and other  sources                                                               
have been distributed.                                                                                                          
                                                                                                                                
[HB 111 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB111 Opposing Document-Caelus Energy House Resources Testimony 2.22.17.pdf HRES 2/22/2017 6:30:00 PM
HB 111
HB111 Opposing Document-AOGA House Resources Testimony 2.22.17.pdf HRES 2/22/2017 6:30:00 PM
HB 111
HB111 Opposing Document-BP House Resources Testimony 2.22.17.pdf HRES 2/22/2017 6:30:00 PM
HB 111
HB111 Opposing Document-SAExploration Testimony 2.22.17.pdf HRES 2/22/2017 6:30:00 PM
HB 111
HB111 Opposing Document-Hilcorp Letter 2.22.17.pdf HRES 2/22/2017 6:30:00 PM
HB 111
HB111 Supporting Document - Support Letter 2.22.17.pdf HRES 2/22/2017 6:30:00 PM
HRES 3/6/2017 6:30:00 PM
HB 111
HB111 ver O 2.8.17.PDF HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Fiscal Note DOR-TAX 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 Sectional Analysis 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Sponsor Statement 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111