Legislature(2015 - 2016)BILL RAY CENTER 208

05/10/2016 09:30 AM RULES


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09:34:43 AM Start
09:35:02 AM HB247
11:09:28 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Presentation of Bill
- Analysis by enalytica, Legislative Consultants
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
9:35:02 AM                                                                                                                    
                                                                                                                                
CHAIR JOHNSON announced that the  only order of business would be                                                               
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."                                                                                           
                                                                                                                                
CHAIR JOHNSON stated that the  fiscal challenges before the state                                                               
are unprecedented.   He said  the state must stop  writing checks                                                               
to the  oil companies.   He  explained that  resource exploration                                                               
incentives of  the past have  worked -  Cook Inlet is  now energy                                                               
sufficient and  for the  first time there  has been  an increased                                                               
flow in  the pipeline  - but under  today's fiscal  situation, he                                                               
opined,  the state  cannot continue  [to give  those incentives].                                                               
Chair Johnson  stated that a  proposed committee  substitute (CS)                                                               
would make significant  cuts to future spending.   He pointed out                                                               
that the industry  "faces those same, harsh  decisions that we're                                                               
making on  a daily basis"; the  fates of the industry  and Alaska                                                               
are intertwined, and the solution  is not about "us versus them,"                                                               
but about working together.  He  said the proposed CS for HB 247,                                                               
Version 29-GH2609\D,  Nauman/Shutts, 5/6/16  would phase  out the                                                               
tax  credit system  for some  small producers.   He  added, "They                                                               
create jobs; they found many  more resources; and there's still a                                                               
lot to be done."                                                                                                                
                                                                                                                                
CHAIR JOHNSON  specified that what  he does  not want is  to trim                                                               
back spending so  much that Alaska is "not open  for business any                                                               
longer."   He  said  the CS  would also  give  new companies  the                                                               
chance  to  develop  new  plans and  finance  new  structures  by                                                               
phasing out the credits.   He reemphasized that the state "cannot                                                               
sacrifice future  oil production  for today's  budget."   He said                                                               
the proposed CS would strike a  balance and is the result of many                                                               
conversations  and review  of  many other  bills  that have  been                                                               
heard in  previous committee  [hearings].  He  described it  as a                                                               
starting point  that would not go  far enough for some  and would                                                               
go too  far for others,  but expressed  his belief that  it would                                                               
allow  the state  to move  forward with  a system  for generating                                                               
revenue  while maintaining  the opportunity  for its  partners to                                                               
continue to do business.                                                                                                        
                                                                                                                                
9:38:15 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON  moved  to  adopt  the  proposed  committee                                                               
substitute (CS)  for HB 247, Version  29-GH2609\D, Nauman/Shutts,                                                               
5/6/16, as a working document.                                                                                                  
                                                                                                                                
CHAIR JOHNSON objected for the purpose of discussion.                                                                           
                                                                                                                                
9:38:45 AM                                                                                                                    
                                                                                                                                
RENA DELBRIDGE,  Staff, Representative Mike Hawker,  Alaska State                                                               
Legislature, presented  the proposed CS  for HB 247,  Version 29-                                                               
GH2609\D,  Nauman/Shutts,  5/6/16  ("Version D"),  on  behalf  of                                                               
Representative  Hawker,  member  of   the  House  Rules  Standing                                                               
Committee, sponsor by request of  the governor.  She said Version                                                               
D would  close out the  state's tax credit program,  beginning in                                                               
January  2017 through  January 2020,  with the  exception of  one                                                               
Middle  Earth exploration  credit, which  currently is  scheduled                                                               
under statute  to sunset by  2022.  She  said in phasing  out the                                                               
credit system on  the North Slope, the state  would transition to                                                               
a method  of carrying forward  lease expenditures such that  if a                                                               
business is not able to deduct  in the current year while credits                                                               
are being phased  out, then industry would still be  able to have                                                               
the net profit tax system benefit of carrying forward losses.                                                                   
                                                                                                                                
9:39:38 AM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  named the following statewide  provisions proposed                                                               
under Version D:  a $75 million  cap per company in the amount of                                                               
credits that can  be cashed back annually; a  priority on refunds                                                               
from  the  oil and  gas  tax  credit  fund  for credit  to  those                                                               
companies  that have  at  least  80 percent  Alaska  hire; and  a                                                               
required disclosure of some information  to the public.  She said                                                               
the Department of  Revenue (DOR) would make public  each year the                                                               
name of  the company  receiving refunds for  credit from  the oil                                                               
and gas  tax credit fund, as  well as the total  dollars refunded                                                               
to that company each year.                                                                                                      
                                                                                                                                
MS.  DELBRIDGE   stated  that  Version  D   would  maintain  some                                                               
provisions  that have  been in  a number  of previous  iterations                                                               
through the legislative process,  including:  provisions relating                                                               
to  unfunded  liability that  would  allow  DOR to  withhold  the                                                               
amount of  an outstanding  liability from  a company's  refund; a                                                               
requirement  for  a  $250,000  surety  bond  and  provisions  for                                                               
prioritizing  those  claims;  and  a  requirement  for  municipal                                                               
producers  to  allocate  their   lease  expenditures  to  taxable                                                               
production,  so   that  they  are   not  receiving   credits  for                                                               
production that is not taxed.                                                                                                   
                                                                                                                                
MS. DELBRIDGE  relayed that the  income tax credits  currently in                                                               
statute to  support instate refineries and  liquefied natural gas                                                               
(LNG) storage  facilities would,  under Version D,  be maintained                                                               
and be  refundable, but no longer  would come out of  the oil and                                                               
gas  tax credit  fund.   The interest  rate on  delinquent taxes,                                                               
including  those  undergoing  audit, would  increase  from  three                                                               
points above  the federal discount  rate to five points  and from                                                               
simple interest to  being compounded quarterly.   She stated that                                                               
new  under Version  D would  be a  provision that  says that  the                                                               
gross  tax  the  state  assesses on  private  royalties  paid  to                                                               
private land  owners may never be  less than zero.   She said the                                                               
aforementioned make up the broad, statewide provisions.                                                                         
                                                                                                                                
9:41:33 AM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE  moved on  to the provisions  under Version  D that                                                               
would be specific to Cook Inlet  and Middle Earth:  credits would                                                               
end  January 1,  2019.   She reiterated  that Middle  Earth would                                                               
retain  its   exploration  credit  through  2022,   as  currently                                                               
provided  in statute.    She said  a  legislative working  group,                                                               
during the  2016 interim,  would develop  a new  oil and  gas tax                                                               
regime  for Cook  Inlet and  Middle Earth,  and it  would present                                                               
that regime to the legislature in  2017.  The intent would be for                                                               
[the new regime]  to take place in 2019, after  the expiration of                                                               
all the  credits.  She clarified  that for 2016, all  the credits                                                               
currently  in  statute for  Cook  Inlet  and Middle  Earth  would                                                               
continue.   She  said  this  is a  25  percent qualified  capital                                                               
expenditure credit;  a 40 percent well  lease expenditure credit;                                                               
and a  25 percent net  operating loss  (NOL) credit.   She stated                                                               
that in  order to  receive any  credit for  Cook Inlet  work from                                                               
2017 going  forward, a company will  have to have had  oil or gas                                                               
production in  Cook Inlet in calendar  year 2016.  She  said that                                                               
at the end of 2016,  the 20 percent qualified capital expenditure                                                               
credit would  be repealed.   Companies would be eligible  in 2017                                                               
and 2018 for  a reduced 20 percent well  lease expenditure credit                                                               
and, in 2017  only, for a 25 percent NOL  credit.  She reiterated                                                               
that the legislative  working group would be designing  a new oil                                                               
and gas  tax regime to take  effect with the expiration  of those                                                               
credits.                                                                                                                        
                                                                                                                                
MS. DELBRIDGE related that specific  to Middle Earth, there would                                                               
be, under  Version D, an extension  of one credit for  the Copper                                                               
River Basin only.  She  indicated that under current statute that                                                               
credit  is set  to  expire in  July 2016;  under  Version D,  the                                                               
credit  would be  extended to  the end  of 2016.   She  said this                                                               
would  provide an  opportunity to  a  company in  the process  of                                                               
drilling wells and "not quite able to meet those deadlines."                                                                    
                                                                                                                                
9:43:35 AM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE stated  that on the North Slope,  the one remaining                                                               
credit,  after the  expiration  in July  2016  of an  exploration                                                               
credit, will be the NOL credit  of 35 percent, which would remain                                                               
in  statute  for  the  next  three  years,  through  2019.    She                                                               
continued as follows:                                                                                                           
                                                                                                                                
     The  only   way  that  you  can   get  this  three-year                                                                    
     transitionary measure is if you  ... have production in                                                                    
     the North Slope of less  than 15,000 barrels per day in                                                                    
     2016 or, if  you are not yet in production  but you are                                                                    
     developing  as  a  unit,  with   an  approved  plan  of                                                                    
     development or  plan of exploration, after  those three                                                                    
     years,   the   net   operating  loss   credit   expires                                                                    
     completely  on the  North Slope.    Meanwhile, we  will                                                                    
     shifting  to a  system of  lease ...  expenditure carry                                                                    
     forward,  so that  expenses  that are  not  able to  be                                                                    
     deducted but  are still eligible lease  expenditures in                                                                    
     a  current  year  are   carried  forward  against  your                                                                    
     liability in  a future year.   That ... shift  to carry                                                                    
     forward  of  lease  expenditures   has  the  effect  of                                                                    
     hardening the gross minimum tax floor at 4 percent.                                                                        
                                                                                                                                
MS. DELBRIDGE,  also regarding  the North  Slope, said  the gross                                                               
value reduction (GVR)  received for new oil -  a timeless benefit                                                               
under current statute  - would, under Version D, be  limited to a                                                               
10-year benefit  beginning once regular  production starts.   She                                                               
said  the  proposed  Version  D   also  addresses  how,  for  tax                                                               
purposes, oil receives  a new oil benefit once  it "graduates and                                                               
becomes normal oil."                                                                                                            
                                                                                                                                
MS.  DELBRIDGE noted  that previous  bill  versions all  included                                                               
provisions  that  would  prevent  the  use  of  the  gross  value                                                               
reduction  from amplifying  the size  of  an NOL,  and Version  D                                                               
would  retain that  provision, as  well.   She offered  to answer                                                               
questions from the committee.                                                                                                   
                                                                                                                                
9:45:54 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK asked  Ms. Delbridge  to offer  more details                                                               
regarding the surety bond.                                                                                                      
                                                                                                                                
MS.  DELBRIDGE noted  that  the surety  bond  provision could  be                                                               
found on pages 26-27  of Version D.  She said  it was a provision                                                               
added  by amendment  in the  House Resources  Standing Committee,                                                               
following concerns,  particularly in the Cook  Inlet Region, over                                                               
some  companies that  have  gone into  bankruptcy  over the  past                                                               
couple  years  and  been  unable  to pay  their  bills  to  local                                                               
businesses  and contractors.   She  said that  in exchange  for a                                                               
business  license  to  conduct  oil  and  gas  activities,  under                                                               
Version D,  a company would need  to file a $250,000  surety bond                                                               
with   the  Department   of   Commerce,   Community  &   Economic                                                               
Development,  and  Version D  lists  what  the company  would  be                                                               
promising to pay.   She said language on [page  27], lines 16-31,                                                               
and continuing  on page 28, lists  the order in which  the claims                                                               
would be prioritized.                                                                                                           
                                                                                                                                
MS.  DELBRIDGE  stated that  the  bond  could  be waived  by  the                                                               
commissioner of  the Department of  Commerce if he/she  finds the                                                               
company is producing  oil and gas in commercial  quantities.  She                                                               
said the surety bond claims  "against us" would be satisfied with                                                               
material, equipment, and supplies  delivered in the state; labor,                                                               
including employee  benefits; taxes  and other amounts  to cities                                                               
and boroughs;  repair of public  facilities; and taxes  and other                                                               
amounts due to the state.                                                                                                       
                                                                                                                                
9:47:46 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked if  the bond  had been  fully vetted                                                               
and whether a  bankruptcy lawyer had been consulted.   He offered                                                               
his understanding that "even the  $250,000 could get caught up in                                                               
the bankruptcy claim."                                                                                                          
                                                                                                                                
MS. DELBRIDGE  replied that she  had not  been in contact  with a                                                               
bankruptcy  attorney.   She said  the provision  had been  in the                                                               
proposed legislation  since it was  heard by the  House Resources                                                               
Standing  Committee, and  it [remained  in the  bill through  its                                                               
hearing  by]  the  House  Finance Committee.    She  offered  her                                                               
understanding that the Department of  Law (DOL) had reviewed [the                                                               
provision],  and  she  said  the  administration  may  have  some                                                               
additional  comments on  the  provision  when its  representative                                                               
comes to testify before the committee on 5/11/16.                                                                               
                                                                                                                                
9:48:31 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KREISS-TOMKINS   asked  if  the   provision  that                                                               
relates to municipal  production relates to the  Beluga field, to                                                               
Municipal Light & Power (ML&P), or any other entities in Alaska.                                                                
                                                                                                                                
MS.  DELBRIDGE offered  her  understanding  that [the  provision]                                                               
would be limited  to ML&P, which has "ownership at  Beluga."  She                                                               
added  that a  municipal producer  like that  would produce,  and                                                               
some  of its  production would  go to  its own  generation, while                                                               
some of it could  be sold to other entities for  other uses.  She                                                               
said the provision  that was in the governor's  original bill and                                                               
"has  carried  through  the  process"  essentially  says  that  a                                                               
municipality that produces  and uses that production  for its own                                                               
generation  is already  not  subject to  taxes  on that  portion;                                                               
therefore, [Version  D] would  clarify that  "you do  not receive                                                               
credits on that portion."  She  continued, "If you sell a portion                                                               
of your  production, and it's  taxable, in that instance  you ...                                                               
can receive credits for that portion ... of your production."                                                                   
                                                                                                                                
9:49:45 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CHENAULT asked Ms.  Delbridge if by production she                                                               
meant the actual  sale of natural gas to some  other entity or if                                                               
it could  mean the natural  gas could be turned  into electricity                                                               
and the electricity could then be sold to someone else.                                                                         
                                                                                                                                
MS. DELBRIDGE answered that there  is no distinction in that, per                                                               
se.  She  clarified, "Essentially, if you're selling  your gas to                                                               
someone else  for generation, rather  than to your own  use, then                                                               
you  ...  would have  that  limitation;  ...  you would  need  to                                                               
allocate your lease  expenditures to receive credits  only on the                                                               
taxable portion."                                                                                                               
                                                                                                                                
9:50:34 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON asked  Ms. Delbridge  to give  examples of                                                               
lease expenditure deductions.                                                                                                   
                                                                                                                                
MS.  DELBRIDGE  stated  that  lease  expenditures  are  currently                                                               
defined in  statute, under AS  43.55.165, as the cost  of getting                                                               
oil  or gas  out  of ground  that  is upstream  of  the point  of                                                               
production.  She  said it is the cost of  actually working in the                                                               
field and  taking the oil or  gas to the processing  facility; as                                                               
soon as  it is  fed into  a transportation line,  it is  past the                                                               
point  of production.   She  said lease  expenditures have  to be                                                               
upstream,  they must  be  necessary and  ordinary  costs for  the                                                               
Internal  Revenue  Service (IRS),  and  they  have to  be  direct                                                               
costs.  She said there is a  long list in statute of those things                                                               
that are excluded, including royalties paid, the cost of                                                                        
acquisitions, and lobbying or public relations.  She offered to                                                                 
pull up the list to read.                                                                                                       
                                                                                                                                
REPRESENTATIVE HERRON said he had just wanted some examples                                                                     
stated for the record.                                                                                                          
                                                                                                                                
9:52:15 AM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease at 9:52 a.m.                                                                                 
                                                                                                                                
9:52:28 AM                                                                                                                    
                                                                                                                                
MS. DELBRIDGE next presented the sectional analysis for Version                                                                 
D, included in the committee packet, which read as follows                                                                      
[original punctuation provided, with some formatting changes]:                                                                  
                                                                                                                                
     Section 1      Adds a new subsection to AS 31.05.030,                                                                      
     Alaska  Oil  and  Gas Conservation  Act.  Requires  the                                                                    
     Alaska Oil  and Gas  Conservation Commission  to verify                                                                    
     the start  of regular production of  new oil. Effective                                                                    
     Jan. 1, 2017.                                                                                                              
                                                                                                                                
     Secs. 2-6      Amend AS 38.05.036 (a), (b), (c), (f)                                                                       
     and  (g), Alaska  Land Act,  Audit of  royalty and  net                                                                    
     profit payments  and costs.  Conforming to  the Section                                                                    
     50 repeal  of AS  41.09, an  old Department  of Natural                                                                    
     Resources  exploration credit  program. Effective  Jan.                                                                    
     1, 2017.                                                                                                                   
                                                                                                                                
     Section 7      Amends AS 40.25.100(a), Public Record                                                                       
     Disclosures,    Disposition    of   tax    information.                                                                    
     Conforming to Section 9,  which requires the Department                                                                    
     of Revenue  to make  public some  taxpayer information.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 8      Amends AS 43.05.225, Administration of                                                                      
     Revenue   Laws,   Interest.   The  interest   rate   on                                                                    
     delinquent taxes is five points  above the 12th Federal                                                                    
     Reserve District rate,  compounded quarterly. Effective                                                                    
     Jan. 1, 2017.                                                                                                              
                                                                                                                                
     Section 9      Adds a new subsection to AS 43.05.230,                                                                      
     Administration  of  Revenue  Laws,  Disclosure  of  tax                                                                    
     returns  and   reports.  Requires  the   Department  of                                                                    
     Revenue to  make public by  April 30 of each  year, the                                                                    
     name of a company from  whom the department purchases a                                                                    
     tax  credit certificate  and the  total  amount of  tax                                                                    
     credit  certificates   purchased  from   each  company.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 10     Amends   AS  43.20.046(e),   Alaska  Net                                                                    
     Income Tax  Act, Gas storage  facility tax  credit. The                                                                    
     Department of  Revenue will no  longer use the  Oil and                                                                    
     Gas  Tax Credit  Fund  to refund  gas storage  facility                                                                    
     credits. The  credits remain  refundable by  DOR. Also,                                                                    
     definition of "unpaid delinquent  taxes" is removed, as                                                                    
     a   new   definition    for   "outstanding   liability"                                                                    
     applicable  to AS  Title 43,  Revenue and  Taxation, is                                                                    
     added in Section 49. Effective Jan. 1, 2017.                                                                               
                                                                                                                                
     Section 11     Amends   AS  43.20.047(e),   Alaska  Net                                                                    
     Income Tax Act, Liquefied  natural gas storage facility                                                                    
     tax credit.  The Department of  Revenue will  no longer                                                                    
     use  the Oil  and Gas  Tax  Credit Fund  to refund  LNG                                                                    
     storage   facility   credits.    The   credits   remain                                                                    
     refundable   by  DOR.   Also,  definition   of  "unpaid                                                                    
     delinquent taxes"  is removed, as a  new definition for                                                                    
     "outstanding  liability"  applicable  to AS  Title  43,                                                                    
     Revenue  and   Taxation,  is   added  in   Section  49.                                                                    
     Effective Jan. 1, 2017. 2                                                                                                  
                                                                                                                                
     Section 12     Amends   AS  43.20.053(e),   Alaska  Net                                                                    
     Income  Tax   Act,  Qualified  in-state   oil  refinery                                                                    
     infrastructure expenditures tax  credit. The Department                                                                    
     of  Revenue will  no longer  use  the Oil  and Gas  Tax                                                                    
     Credit  Fund to  refund instate  refinery credits.  The                                                                    
     credits remain  refundable by  DOR. Also,  reference to                                                                    
     "unpaid  delinquent   taxes"  is  removed,  as   a  new                                                                    
     definition  for "outstanding  liability" applicable  to                                                                    
     AS Title 43, Revenue and  Taxation, is added in Section                                                                    
     49. Effective Jan. 1, 2017.                                                                                                
                                                                                                                                
     Section 13     Amends  AS  43.55.011(i),  Oil  and  Gas                                                                    
     Production  Tax. Ensures  the tax  assessed on  private                                                                    
     royalties  is not  less than  zero.  Effective Jan.  1,                                                                    
     2017.                                                                                                                      
                                                                                                                                
     Section 14     Amends  AS  43.55.011(m),  Oil  and  Gas                                                                    
     Production Tax. Conforming to the  Section 50 repeal of                                                                    
     the  DNR  credit programs  in  AS  38.05.180(i) and  AS                                                                    
     41.09. Effective Jan. 1, 2017.                                                                                             
                                                                                                                                
     Section 15     Amends  AS  43.55.023(b),  Oil  and  Gas                                                                    
     Production  Tax, Tax  credits  for  certain losses  and                                                                    
     expenditures. The 35% net operating  loss credit on the                                                                    
     North Slope terminates  at the end of  2016, except the                                                                    
     35% credit  (refundable) is available through  2019 for                                                                    
     companies producing  less than  15,000 barrels  per day                                                                    
     in   2016,  and   for   companies  without   production                                                                    
     operating under a  unit plan of development  or plan of                                                                    
     exploration  approved  by  the  Department  of  Natural                                                                    
     Resources. The  25% net operating loss  credit in areas                                                                    
     other  than the  North Slope  remains at  25% in  2017,                                                                    
     then terminates.  To receive the credit  in Cook Inlet,                                                                    
     a company  must have regular  production of oil  or gas                                                                    
     in  Cook Inlet  in  calendar year  2016. Also,  ensures                                                                    
     that  the application  of a  gross value  reduction for                                                                    
     new oil cannot  increase the size of  a loss. Effective                                                                    
     Jan. 1, 2017.                                                                                                              
                                                                                                                                
     Section 16     Amends  AS  43.55.023(d),  Oil  and  Gas                                                                    
     Production  Tax, Tax  credits  for  certain losses  and                                                                    
     expenditures. Conforms  to the Section 50  repeal of AS                                                                    
     43.55.023(a),  qualified  capital  expenditure  credit.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 17     Amends  AS  43.55.023(e),  Oil  and  Gas                                                                    
     Production  Tax, Tax  credits  for  certain losses  and                                                                    
     expenditures. Conforms  to the Section 50  repeal of AS                                                                    
     43.55.023(a),  qualified  capital  expenditure  credit.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 18     Amends  AS  43.55.023(l),  Oil  and  Gas                                                                    
     Production  Tax, Tax  credits  for  certain losses  and                                                                    
     expenditures.  Reduces   the  well   lease  expenditure                                                                    
     credit from 40% through 2016,  to 20% in calendar years                                                                    
     2017 and  2018. To receive  this credit in  Cook Inlet,                                                                    
     the producer  must have regular  oil or  gas production                                                                    
     in Cook Inlet in 2016. Effective Jan. 1, 2017.                                                                             
                                                                                                                                
     Section 19     Amends  AS  43.55.023(n),  Oil  and  Gas                                                                    
     Production  Tax, Tax  credits  for  certain losses  and                                                                    
     expenditures. Conforms  to the Section 50  repeal of AS                                                                    
     43.55.023(a),  qualified  capital  expenditure  credit.                                                                    
     Effective Jan. 1, 2017. 3                                                                                                  
                                                                                                                                
     Section 20     Amends  AS  43.55.024(i),  Oil  and  Gas                                                                    
     Production   Tax,    Additional   nontransferable   tax                                                                    
     credits. Companies may apply  the $5 per-barrel new oil                                                                    
     credit only  for oil receiving the  10-year gross value                                                                    
     reduction. Effective Jan. 1, 2017.                                                                                         
                                                                                                                                
     Section 21     Amends  AS  43.55.024(j),  Oil  and  Gas                                                                    
     Production   Tax,    Additional   nontransferable   tax                                                                    
     credits. Once  new oil  is no  longer eligible  for new                                                                    
     oil benefits and is being  taxed as normal oil, the oil                                                                    
     is  also  eligible  for the  sliding-scale  per  barrel                                                                    
     credit. Effective Jan. 1, 2017.                                                                                            
                                                                                                                                
     Section 22     Amends  AS  43.55.025(m),  Oil  and  Gas                                                                    
     Production Tax, Alternative tax  credit for oil and gas                                                                    
     exploration. Extends a Middle  Earth credit for work in                                                                    
     the  Copper  River  Basin  only, to  Jan.  1,  2017.  A                                                                    
     company that  has spudded but  not completed a  well by                                                                    
     Jan. 1, 2017, is  also eligible. The AS 43.55.025(a)(6)                                                                    
     credit  covers  80%  of  eligible   costs,  up  to  $25                                                                    
     million. Effective immediately.                                                                                            
                                                                                                                                
     Section 23     Amends  AS  43.55.025(m),  Oil  and  Gas                                                                    
     Production Tax, Alternative tax  credit for oil and gas                                                                    
     exploration, as  amended by  Section 22.  Conforming to                                                                    
     the Section  52 repeal of AS  43.55.023. Effective Jan.                                                                    
     1, 2020.                                                                                                                   
                                                                                                                                
     Section 24     Amends  AS  43.55.025(o),  Oil  and  Gas                                                                    
     Production Tax, Alternative tax  credit for oil and gas                                                                    
     exploration. Conforms  to the  Section 50 repeal  of AS                                                                    
     43.55.025 (a)(7) and (n). Effective Jan. 1, 2017.                                                                          
                                                                                                                                
     Section 25     Amends  AS  43.55.028(a),  Oil  and  Gas                                                                    
     Production Tax,  Oil and gas  tax credit  fund. Removes                                                                    
     the authority  to use the  fund to pay refunds  for the                                                                    
     income  tax credits  related to  the instate  refinery,                                                                    
     LNG  storage   facility,  and  gas   storage  facility.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 26     Amends  As  43.55.028(a),  Oil  and  Gas                                                                    
     Production  Tax,  Oil  and  gas  tax  credit  fund,  as                                                                    
     amended  by  Sec.  25. Conforming  to  the  Section  52                                                                    
     repeal of AS 43.55.023. Effective Jan. 1, 2020.                                                                            
                                                                                                                                
     Section 27     Amends  AS  43.55.028(e),  Oil  and  Gas                                                                    
     Production  Tax, Oil  and gas  tax credit  fund. Limits                                                                    
     the  maximum state  repurchase of  tax  credits to  $75                                                                    
     million per company, per  year. Requires the Department                                                                    
     of Revenue  to, before purchasing  credit certificates,                                                                    
     find  that  the applicant  is  not  the result  of  the                                                                    
     division  of a  single  entity  into multiple  entities                                                                    
     that would reasonably have been  expected to apply as a                                                                    
     single entity. Effective Jan. 1, 2017.                                                                                     
                                                                                                                                
     Section 28     Amends  AS  43.55.028(e),  Oil  and  Gas                                                                    
     Production  Tax,  Oil  and  gas  tax  credit  fund,  as                                                                    
     amended by Sec.  27. Conforms to the  Section 52 repeal                                                                    
     of AS 43.55.023. Effective Jan. 1, 2020.                                                                                   
                                                                                                                                
     Section 29     Amends  AS  43.55.028(g),  Oil  and  Gas                                                                    
     Production Tax,  Oil and gas tax  credit fund. Requires                                                                    
     the  Dept. of  Revenue  to  adopt regulations  granting                                                                    
     preference to companies with at  least 80% Alaska hire,                                                                    
     in case there is not enough  money in the 4 Oil and Gas                                                                    
     Tax  Credit  Fund to  cover  all  applicants. Also,  as                                                                    
     credits  for   LNG  storage  facilities,   gas  storage                                                                    
     facilities and  instate refineries  would no  longer be                                                                    
     refunded   through    the   fund,    makes   conforming                                                                    
     adjustments. Effective Jan. 1, 2017.                                                                                       
                                                                                                                                
     Section 30     Adds a  new subsection to  AS 43.55.028,                                                                    
     Oil  and Gas  Production Tax,  Oil and  gas tax  credit                                                                    
     fund.  Ensures an  outstanding liability  to the  state                                                                    
     related to  oil and gas  activity is withheld  from the                                                                    
     amount of a  tax certificate purchased by  the Dept. of                                                                    
     Revenue  using the  Oil and  Gas Tax  Credit Fund.  The                                                                    
     department may  use the withheld  amount to  satisfy an                                                                    
     outstanding liability,  providing the liability  is not                                                                    
     being  contested  through  an  appeal  or  adjudicatory                                                                    
     process  established  in  law, without  the  taxpayer's                                                                    
     consent. Satisfying  a liability  in this  manner would                                                                    
     not  affect  the  applicant's   ability  to  contest  a                                                                    
     liability. Effective Jan. 1, 2017.                                                                                         
                                                                                                                                
     Section 31     Amends  AS  43.55.029(a),  Oil  and  Gas                                                                    
     Production Tax,  Assignment of tax  credit certificate.                                                                    
     Conforming to  the Section 50  repeal of  the qualified                                                                    
     capital   expenditure   credit  in   AS   43.55.023(a).                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 32     Amends  AS  43.55.029(a),  Oil  and  Gas                                                                    
     Production Tax,  Assignment of tax  credit certificate,                                                                    
     as  amended by  Sec.  31. Conforms  to  the Section  51                                                                    
     repeal  of  the well  lease  expenditure  credit in  AS                                                                    
     43.55.023(l). Effective Jan. 1, 2019.                                                                                      
                                                                                                                                
     Section 33     Amends  AS  43.55.029(a),  Oil  and  Gas                                                                    
     Production Tax,  Assignment of tax  credit certificate,                                                                    
     as amended by Secs. 31 and  32. Conforms to the Sec. 52                                                                    
     repeal  of   the  net  operating  loss   credit  in  AS                                                                    
     43.55.023(b). Effective Jan. 1, 2020.                                                                                      
                                                                                                                                
     Section 34     Amends  AS  43.55.030(a),  Oil  and  Gas                                                                    
     Production Tax,  Filing of statements. Conforms  to the                                                                    
     repeal of  the qualified capital expenditure  credit in                                                                    
     Section 50. Effective Jan. 1, 2017.                                                                                        
                                                                                                                                
     Section 35     Amends  AS  43.55.030(e),  Oil  and  Gas                                                                    
     Production Tax,  Filing of statements. Conforms  to the                                                                    
     Section 50 repeal of  the qualified capital expenditure                                                                    
     credit, AS 43.55.023(a). Effective Jan. 1, 2017.                                                                           
                                                                                                                                
     Section 36     Amends  AS  43.55.075(b),  Oil  and  Gas                                                                    
     Production  Tax, Limitation  on assessment  and amended                                                                    
     returns.  Conforms  to the  Section  50  repeal of  the                                                                    
     qualified capital expenditure  credit, AS 43.55.023(a).                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 37     Amends  AS  43.55.160(d),  Oil  and  Gas                                                                    
     Production Tax,  Determination of production  tax value                                                                    
     of oil  and gas. Conforms  to the Section 52  repeal of                                                                    
     AS 43.55.023(b). Effective Jan. 1, 2020.                                                                                   
                                                                                                                                
     Section 38     Amends  AS  43.55.160(e),  Oil  and  Gas                                                                    
     Production Tax,  Determination of production  tax value                                                                    
     of  oil and  gas. Requires  that, for  the purposes  of                                                                    
     calculating   a   carried-forward  annual   loss,   any                                                                    
     reduction due to the Gross  Value Reduction for new oil                                                                    
     is  added back  to the  tax calculation.  This prevents                                                                    
     the GVR from  5 increasing the amount of  a loss. Also,                                                                    
     conforms  to the  new lease  expenditure provisions  in                                                                    
     Section 42. Effective Jan. 1, 2017.                                                                                        
                                                                                                                                
     Section 39     Amends  AS  43.55.160(e),  Oil  and  Gas                                                                    
     Production Tax,  Determination of production  tax value                                                                    
     of oil  and gas, as  amended by Sec. 38.  Conforming to                                                                    
     Section 52  repeal of  AS 43.55.023(b).  Effective Jan.                                                                    
     1, 2020.                                                                                                                   
                                                                                                                                
     Secs. 40-41    Amend AS  43.55.160(f) and (g),  Oil and                                                                    
     Gas  Production Tax,  Determination  of production  tax                                                                    
     value of  oil and  gas. For  the gross  value reduction                                                                    
     for new oil, reduces the  period in which the reduction                                                                    
     applies from a lifetime  benefit in current statute, to                                                                    
     a  10-year benefit,  beginning once  regular production                                                                    
     starts from  a lease  or property.  The Alaska  Oil and                                                                    
     Gas   Conservation  Commission   will  determine   when                                                                    
     regular   production  begins.   For  new   oil  already                                                                    
     receiving  the  gross   value  reduction,  the  benefit                                                                    
     terminates Jan. 1, 2026. Effective Jan. 1, 2017.                                                                           
                                                                                                                                
     Section 42     Amends  AS  43.55.165(a),  Oil  and  Gas                                                                    
     Production  Tax,  Lease  expenditures.  For  the  North                                                                    
     Slope,  lease expenditures  include lease  expenditures                                                                    
     incurred in a prior year  that have not been previously                                                                    
     deducted in determining oil and  gas taxes and were not                                                                    
     the  basis  of  a  credit. This  section  allows  lease                                                                    
     expenditures  to carry  over from  a prior  year. Also,                                                                    
     conforming to the Section 50  repeal of AS 43.55.165(j)                                                                    
     and (k). Effective Jan. 1, 2017.                                                                                           
                                                                                                                                
     Section 43     Amends  AS  43.55.165(f),  Oil  and  Gas                                                                    
     Production Tax,  Lease expenditures. Conforming  to the                                                                    
     Section 50 repeal of  the qualified capital expenditure                                                                    
     credit, 43.55.023(a). Effective Jan. 1, 2017.                                                                              
                                                                                                                                
     Section 44     Amends  AS  43.55.170(c),  Oil  and  Gas                                                                    
     Production  Tax,  Adjustments  to  lease  expenditures.                                                                    
     Conforming to  the Section 50  repeal of  the qualified                                                                    
     capital expenditure credit,  AS 43.55.023(a). Effective                                                                    
     Jan. 1, 2017.                                                                                                              
                                                                                                                                
     Section 45     Amends  AS  43.55.180(a),  Oil  and  Gas                                                                    
     Production  Tax,  Required   report.  Conforms  to  the                                                                    
     Section  52  repeal  of 43.55.023.  Effective  Jan.  1,                                                                    
     2020.                                                                                                                      
                                                                                                                                
     Section 46     Amends  AS  43.55.895(b),  Oil  and  Gas                                                                    
     Production  Tax, Applicability  to municipal  entities.                                                                    
     Requires  allocation  of  lease  expenditures  and  tax                                                                    
     credits  between taxable  and exempt  production for  a                                                                    
     municipal entity. Effective Jan. 1, 2017.                                                                                  
                                                                                                                                
     Section 47     Adds  a new  paragraph to  AS 43.55.900,                                                                    
     Oil  and  Gas   Production  Tax,  Definitions.  Defines                                                                    
     "regular  production"  as   defined  in  AS  31.05.170.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 48     Adds  new sections  to AS  43.70, Alaska                                                                    
     Business License  Act. Requires a $250,000  surety bond                                                                    
     for oil and gas  businesses, allowing the Department of                                                                    
     Commerce commissioner to cancel  the requirement once a                                                                    
     business  is   producing  oil  or  gas   in  commercial                                                                    
     quantities.  Provides  a   framework  for  people  with                                                                    
     claims against  a business required to  post the surety                                                                    
     bond;  prioritizes  satisfaction  of types  of  claims.                                                                    
     Effective Jan. 1, 2017.                                                                                                    
                                                                                                                                
     Section 49     Adds  a new  paragraph to  AS 43.99.950,                                                                    
     Revenue  and  Taxation,  General  Provisions,  defining                                                                    
     "outstanding  liability to  the state."  Effective Jan.                                                                    
     1, 2017.                                                                                                                   
                                                                                                                                
     Section 50     On  Jan.   1,  2017,   repeals  multiple                                                                    
     sections of statute, including  the old DNR exploration                                                                    
     credit  programs;  the  qualified  capital  expenditure                                                                    
     credit;  and  pre-2010   tax  statutes.  (See  attached                                                                    
     Summary of Repeals)                                                                                                        
                                                                                                                                
     Section 51     On Jan. 1, 2019,  repeals the well lease                                                                    
     expenditure credit. (See attached Summary of Repeals)                                                                      
                                                                                                                                
     Section 52     On  Jan. 1,  2020,  repeals all  credits                                                                    
     remaining  in  43.55.023.   (See  attached  Summary  of                                                                    
     Repeals)                                                                                                                   
                                                                                                                                
     Section 53     Adds  a new  section  to uncodified  law                                                                    
     creating  a  Legislative  Working Group  to  develop  a                                                                    
     comprehensive tax regime for oil  and gas in Cook Inlet                                                                    
     and Middle  Earth, to  take effect  Jan. 1,  2019, once                                                                    
     the  current  credits  are   phased  out.  The  working                                                                    
     group's proposal is to be  presented to the Legislature                                                                    
     in  the  2017  regular   session,  and  should  include                                                                    
     evaluation  of incentives  other  than direct  monetary                                                                    
     support,    including   loan    guarantees.   Effective                                                                    
     immediately.                                                                                                               
                                                                                                                                
     Section 54     Applicability language.                                                                                     
                                                                                                                                
     Section 55     Transition language related  to the Jan.                                                                    
     1, 2017,  repeal of  the qualified  capital expenditure                                                                    
     credit, AS 43.55.023(a). Effective Jan. 1, 2017.                                                                           
                                                                                                                                
     Section 56     Transition   language  related   to  the                                                                    
     repeal  of  the  well   lease  expenditure  credit.  AS                                                                    
     43.55.023(l) and (n). Effective Jan. 1, 2019.                                                                              
                                                                                                                                
     Section 57     Transition   language  related   to  the                                                                    
     repeal  of the  carry-forward  annual  loss credit,  AS                                                                    
     43.55.023(b). Effective Jan. 1, 2020.                                                                                      
                                                                                                                                
     Section 58     Transition language  related to credits.                                                                    
     Effective Jan. 1, 2020.                                                                                                    
                                                                                                                                
     Section 59     Transition  language  related  to  lease                                                                    
     expenditures  and the  repeal  of  AS 43.55.165(j)  and                                                                    
     (k). Effective Jan. 1, 2017.                                                                                               
                                                                                                                                
     Section 60     Transition    language     related    to                                                                    
     exploration  and seismic  expenditures. Effective  Jan.                                                                    
     1, 2017.                                                                                                                   
                                                                                                                                
     Section 61     Transition   language  authorizing   the                                                                    
     Department   of   Revenue,    Department   of   Natural                                                                    
     Resources,  Department   of  Commerce,   Community  and                                                                    
     Economic  Development,  and  the  Alaska  Oil  and  Gas                                                                    
     Conservation Commission  to adopt regulations  for this                                                                    
     act. Effective immediately. 7                                                                                              
                                                                                                                                
     Section 62     Transition   language  authorizing   the                                                                    
     Department  of   Revenue  and  Department   of  Natural                                                                    
     Resources to  adopt retroactive  regulations. Effective                                                                    
     immediately.                                                                                                               
                                                                                                                                
     Section 63     Immediate  effective  date for  sections                                                                    
     22  (extension  of  Middle  Earth  credit  for  a  well                                                                    
     spudded  but not  completed),  53 (Legislative  Working                                                                    
     Group),  61 (authority  to  adopt  regulations) and  62                                                                    
     (authority to adopt retroactive regulations).                                                                              
                                                                                                                                
     Section 64     Jan.   1,  2019,   effective  date   for                                                                    
     sections 32, 51 and 56.                                                                                                    
                                                                                                                                
     Section 65     Jan.   1,  2020,   effective  date   for                                                                    
     sections 23, 26, 28, 33, 37, 39, 45, 52, 57 and 58.                                                                        
                                                                                                                                
     Section 66     Jan.  1, 2017,  effective  date for  all                                                                    
     other sections.                                                                                                            
                                                                                                                                
10:05:39 AM                                                                                                                   
                                                                                                                                
The committee took an at-ease from 10:06 a.m. to 10:07 a.m.                                                                     
                                                                                                                                
10:07:43 AM                                                                                                                   
                                                                                                                                
CHAIR  JOHNSON   announced  that  the  committee   would  hear  a                                                               
presentation from Janak Mayer.                                                                                                  
                                                                                                                                
10:08:50 AM                                                                                                                   
                                                                                                                                
The  committee took  a brief  at-ease  at 10:09  a.m. to  address                                                               
technical difficulties.                                                                                                         
                                                                                                                                
10:09:38 AM                                                                                                                   
                                                                                                                                
JANAK  MAYER, Chairman  &  Chief  Technologist, enalytica,  noted                                                               
that enalytica is the legislative  consultant to the Alaska State                                                               
Legislature on the  topic of fiscal terms, oil  and gas taxation,                                                               
and natural  gas commercialization [of] Alaska  Liquefied Natural                                                               
Gas (AKLNG).   He said  the presentation would provide  a summary                                                               
of the  core issues related to  the proposed Version D.   He said                                                               
the  first  two slides  compare  differences  between the  latest                                                               
version  of  the  bill  that  passed out  of  the  House  Finance                                                               
Committee  and [the  proposed committee  substitute, Version  D].                                                               
The next  slide looks  at areas of  commonality between  the two.                                                               
The remaining slides  provide additional analysis on  a couple of                                                               
key issues.                                                                                                                     
                                                                                                                                
10:10:39 AM                                                                                                                   
                                                                                                                                
MR. MAYER  drew attention to  slide 2.   He stated that  the core                                                               
focus of Version D  is on the issue of refunded  tax credits.  He                                                               
indicated that  in fiscal year  2016 (FY 16) those  credits would                                                               
cost  the  State  of Alaska  approximately  $500  million,  "with                                                               
substantially more than  that in FY 15 and will  again be more in                                                               
2017."   He said it is  a staggering amount of  money compared to                                                               
the relatively  small amount  of money that  the overall  oil and                                                               
gas fiscal system  brings in "at these low prices."   He said the                                                               
proposed  legislation aims  to steadily  reduce that  amount over                                                               
time until  the refundable tax credits  are completely eliminated                                                               
by 2019/2020.  He said  there is a substantial difference between                                                               
the tax  credits and how they  work for Cook Inlet  and the North                                                               
Slope.   For  Cook Inlet,  the  credits are  used to  incentivize                                                               
activity  in what  is already  a low  and very  attractive fiscal                                                               
regime where there is  no production tax on oil and  a low tax on                                                               
gas.                                                                                                                            
                                                                                                                                
MR.  MAYER reiterated  that  the  proposal for  Cook  Inlet is  a                                                               
gradual  reduction  to  no  credits   by  2019.    Crucially,  he                                                               
continued,  the bill  would hold  the existing  credit system  in                                                               
place until the end of the  year.  He explained that is important                                                               
because numerous  companies have entered solid  contracts between                                                               
now and the end of the  year for work programs, in particular for                                                               
drilling  and  other capital  works,  premised  on the  basis  of                                                               
receiving those  credits.  He  said there are  numerous companies                                                               
that have not received new credits  for that work to be performed                                                               
between now  and the end  of the  year, which he  indicated could                                                               
result in a question of  fundamental financial liability and even                                                               
bankruptcy.  He said the  aggressive approach to ramping down and                                                               
eventually cutting off  the credits was crafted  with a timeframe                                                               
that is fairly thoughtfully calibrated  in terms of understanding                                                               
what  is required  of  new companies  that  are most  financially                                                               
vulnerable to complete  their capital programs in  order to reach                                                               
a point of enabling themselves to a sustained cash flow.                                                                        
                                                                                                                                
10:13:45 AM                                                                                                                   
                                                                                                                                
MR. MAYER  stated that for  the North  Slope, the issue  was also                                                               
about  ended refunded  credits.    He noted  that  for the  North                                                               
Slope,  there is  only one  major refundable  credit left  in the                                                               
system.   He mentioned  some others that  have been  available in                                                               
the  past,  including  the  capital   credit  that  exited  under                                                               
Alaska's  Clear and  Equitable  Share (ACES),  but  said the  one                                                               
major one is the NOL tax  credit.  Unlike other credits, this one                                                               
simply enables  producers to recover  costs they incur  for which                                                               
they do  not have tax liability  in the year in  which they incur                                                               
the costs.  He said typically  a new developer is incurring major                                                               
expenses to  develop a new  project, which  has little to  no tax                                                               
liability to  deduct that against.   However, in the  current tax                                                               
environment, there  is a situation  where even major  producers -                                                               
because  of low  prices and  substantial ongoing  reinvestments -                                                               
have  expenses they  cannot deduct.   He  relayed that  under the                                                               
current system, those  companies with more than  50,000 barrels a                                                               
day  can take  this credit  but have  to claim  it in  the future                                                               
against liability,  while those with  under 50,000 barrels  a day                                                               
can take this as a refund - a tax credit - and get cash.                                                                        
                                                                                                                                
10:15:18 AM                                                                                                                   
                                                                                                                                
MR. MAYER said  the ability to deduct all  expenses, whether they                                                               
are less  than the tax  liability or  exceed it, is  the defining                                                               
feature of  any net  profit tax.   Under a  gross tax  system, he                                                               
added, expenses are  not considered or deducted.   However, under                                                               
a net tax system  they are; what is being taxed  is the profit at                                                               
the end after  subtracting the expenses.  He  stated that because                                                               
in the oil  and gas industry, as in  many industries, investments                                                               
and subsequent revenue occur at  different times in the cycle, it                                                               
is crucial to say that all  expenses, whether able to be deducted                                                               
in this  year or other  years, will  eventually be deducted.   He                                                               
said the  vast majority  of oil  and gas tax  systems do  that by                                                               
saying that anything that cannot  be deducted in the current year                                                               
can be carried forward.  He  opined that Alaska has been somewhat                                                               
unique, in  that instead of  carrying forward expenses  to deduct                                                               
in future years, it offers the NOL  tax credit.  He said that for                                                               
companies with  more than [50,000]  barrels a day, it  performs a                                                               
role  similar to  carrying forward  an expense  deduction to  the                                                               
future, while having the unique  feature for smaller companies of                                                               
allowing them  to take the benefit  of cash right now,  which has                                                               
enhanced  project economics  and  reduced the  amount of  working                                                               
capital needed to pursue various projects.                                                                                      
                                                                                                                                
10:17:27 AM                                                                                                                   
                                                                                                                                
MR.  MAYER said  that  for larger  producers  without tax  credit                                                               
calculated after  the tax  liability is  calculated, there  is no                                                               
longer the  ability to reduce  the amount  of tax paid  below the                                                               
gross minimum  floor.  He said  this has the effect  of hardening                                                               
that gross minimum floor against  future losses.  He stated there                                                               
are a  number of  key differences  in the  way that  would happen                                                               
[under  Version  D]  versus  the  way  it  would  happen  in  the                                                               
governor's  original version  of HB  247, wherein  an elevated  5                                                               
percent hard floor  is "completely hardened" and  the NOL credits                                                               
"can't take  you below."  He  said the $5 per-barrel  credits and                                                               
the small  producer credit  are not  changed by  this; therefore,                                                               
the economics of new production are less impacted.                                                                              
                                                                                                                                
MR.  MAYER  emphasized  that  for  companies  that  had  incurred                                                               
expenses last  year they were not  able to deduct and  hold - NOL                                                               
credits  for future  deduction -  and  for companies  undertaking                                                               
work this  year for  which they are  earning NOL  credits because                                                               
they  are  spending  money  in   excess  of  their  revenues  and                                                               
reinvesting during  difficult times, the impact  of hardening the                                                               
floor immediately would  be that those companies  could no longer                                                               
claim those credits  they assumed they would have  when they made                                                               
the  decision to  undertake the  work.   He indicated  that "they                                                               
have to be claimed at some point  in the future."  He added, "And                                                               
that's  a substantial  change in  ... terms  of investment  for a                                                               
company that had made decisions on that basis."                                                                                 
                                                                                                                                
10:19:34 AM                                                                                                                   
                                                                                                                                
MR.  MAYER  continued,  stating   that  this  approach  is  quite                                                               
different,  because it  says to  companies that  the NOL  credits                                                               
that  they earned  in previous  years and  that they  are earning                                                               
this  year  can  be  continued   and  deducted  against  the  tax                                                               
liability over the next several  years and continue to reduce the                                                               
tax  liability over  the next  couple years  below the  4 percent                                                               
gross floor.  He continued as follows:                                                                                          
                                                                                                                                
     Going  forward though,  for  new expenses,  effectively                                                                    
     that  4  percent  floor  is   hard  against  those  new                                                                    
     expenses.  And so, by  the time, for instance, when one                                                                    
     looks at  a fiscal note, when  we get out to  the later                                                                    
     years - 2019,  2020, and beyond - the  impact starts to                                                                    
     look very similar  to floor hardening, but  then in the                                                                    
     intermediate  times it'll  sort  of  graduate and  move                                                                    
     toward that  harder floor regime, because  credits that                                                                    
     have  already  been  incurred  because  companies  made                                                                    
     decisions  understanding that  they  would receive  the                                                                    
     net  operating  loss  credits  -  that  isn't  suddenly                                                                    
     changed under  these companies the  way it would  be by                                                                    
     immediate  floor hardening.    I think  that's the  key                                                                    
     difference  that ...  means that  in terms  of how  the                                                                    
     regime is  perceived from a stability  perspective what                                                                    
     companies making  these decisions  can live  with, this                                                                    
     might be an entirely viable  way to achieve that end in                                                                    
     a way  that the pure  floor hardening, I  think though,                                                                    
     many, many more problems.                                                                                                  
                                                                                                                                
10:20:53 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  TUCK  commented  that he  was  having  difficulty                                                               
hearing Mr. Mayer.                                                                                                              
                                                                                                                                
10:21:12 AM                                                                                                                   
                                                                                                                                
CHAIR JOHNSON  made inquiries  to attempt  to improve  the audio,                                                               
then asked Mr. Mayer to continue with his presentation.                                                                         
                                                                                                                                
10:22:15 AM                                                                                                                   
                                                                                                                                
MR.  MAYER continued  with  slide  2.   He  said one  fundamental                                                               
distinction that needs  to be understood is that the  switch to a                                                               
loss  carried forward  system  has the  effect  of hardening  the                                                               
floor against  future losses, while not  changing the fundamental                                                               
treatments of  NOL credits that have  been earned thus far.   For                                                               
those  companies  deeply  affected  by  any  move  from  refunded                                                               
credits  to  a   system  of  loss  carry-forwards,   there  is  a                                                               
transition between now  and the end of 2019, on  the North Slope,                                                               
where some  form of refundable credits  will still be given.   He                                                               
said  the refundable  NOL will  continue to  exist for  companies                                                               
with less than  15,000 barrels a day production  or with approved                                                               
plans of  oil development  or exploration  between now  and 2019,                                                               
but will be capped  at a maximum of $75 million  per company.  He                                                               
said  this   would  be  effective  in   reducing  and  eventually                                                               
eliminating the  state's liability  on the refundable  tax credit                                                               
fund.                                                                                                                           
                                                                                                                                
MR. MAYER stated  that the refundable credits  allow many smaller                                                               
companies  to  undertake  substantial  work, in  some  cases  new                                                               
projects  of $1  billion  or more  in  capital expenditure,  with                                                               
substantially less  total capital than they  would otherwise have                                                               
acquired and  with the ability  to achieve total rates  of return                                                               
that are attractive to outside  financing groups, such as private                                                               
equity firms, in a way that might  not otherwise be the case.  If                                                               
legislation  dramatically changes  that,  a  number of  companies                                                               
will have  some difficult  decisions to  make about  whether they                                                               
can continue  without anticipated  programs and restructure  in a                                                               
way that  will allow them  to continue, for example,  by bringing                                                               
in  larger  or  better  capitalized  partners  or  finding  other                                                               
working  interest  owners  to  share   the  burden  or  making  a                                                               
substantial change  in their  work program.   The  refundable NOL                                                               
credit on  the North Slope  has enabled  an entire class  of much                                                               
smaller companies to  be present and do work on  the North Slope,                                                               
and  taking  that away,  even  gradually,  will have  substantial                                                               
impacts.  He emphasized the  importance of understanding that and                                                               
thinking through  that tradeoff  and how  the tradeoff  should be                                                               
made.                                                                                                                           
                                                                                                                                
10:25:36 AM                                                                                                                   
                                                                                                                                
MR. MAYER showed slide 3  and said another difference between the                                                               
committee substitute  for HB  247 that was  created by  the House                                                               
Finance  Standing Committee  and the  one being  proposed by  the                                                               
House Rules  Standing Committee is  regarding time limits  on the                                                               
gross  value reduction  (GVR).   He said  currently there  are no                                                               
time limits on  how long new developments benefit  from the gross                                                               
value  reduction.    The   House  Finance  Committee's  committee                                                               
substitute  would have  allowed the  benefit of  the gross  value                                                               
reduction for  only five  years from first  production.   He said                                                               
that effectually eliminates  a vast amount of the  benefit of the                                                               
gross value reduction, because in  most cases, for the first five                                                               
years  of production,  there  are  substantial, ongoing  drilling                                                               
expenses.     These  drilling  expenses  mean   the  company  has                                                               
relatively  little tax  liability, if  any, in  that time  period                                                               
anyway, so the gross value  reduction applied to those first five                                                               
years has  relatively little effect.   He said a  10-year horizon                                                               
allows for much  more benefit of the gross value  reduction to be                                                               
retained; 15  years would  allow almost all  the benefit,  but 10                                                               
years would  allow at  least a substantial  portion of  the gross                                                               
value  reduction  to  be  returned.   He  said  the  House  Rules                                                               
Standing Committee's  version would allow 10  years, during which                                                               
"the  gross value  reduction should  end  over time  and new  oil                                                               
should, as  they say, graduate to  old oil, but it  should happen                                                               
at a  point in time  when some  substantial part of  the intended                                                               
purpose of  the gross  value reduction of  that benefit  has been                                                               
able to be realized."                                                                                                           
                                                                                                                                
MR. MAYER  said in terms of  Middle Earth tax credits,  the House                                                               
Finance  Standing   Committee's  version  and  the   House  Rules                                                               
Standing Committee's  version are  similar:   there is  a steeper                                                               
cut-off, with an  eventual full elimination of credits.   He said                                                               
that applies to  all Middle Earth credits, with  the exception of                                                               
one specific exploration credit  that would otherwise sunset July                                                               
1,  2016,  but  is  extended  to the  last  completion  of  wells                                                               
(indisc.) of July.                                                                                                              
                                                                                                                                
10:27:42 AM                                                                                                                   
                                                                                                                                
MR. MAYER, regarding  interest due on delinquent  taxes, said the                                                               
House Finance Committee's version set  it at 5 percent compounded                                                               
quarterly for  three years,  then a  [5 percent]  simple interest                                                               
after that point.  He continued as follows:                                                                                     
                                                                                                                                
     That gets  enormously complex when you  think about the                                                                    
     fact  that  we  have   [federal]  plus  3  percent  ...                                                                    
     uncompounded at the moment  we're already changing, and                                                                    
     then this question  of how that change  is applied when                                                                    
     you add a  ... second change into the  system that says                                                                    
     that  some  period of  time  is  one system,  but  then                                                                    
     another.   It  gets very  difficult to  figure out  how                                                                    
     exactly this  should work.   This is  going ...  with a                                                                    
     much simpler  approach of saying  there is  one change,                                                                    
     which is the 5 percent compounded quarterly.                                                                               
                                                                                                                                
MR. MAYER, regarding Alaska hire,  echoed Ms. Delbridge's summary                                                               
that [the House Rules Standing  Committee's version] would create                                                               
a preference for Alaska hire,  not through the amount of refunded                                                               
credits, but  by placing companies  with greater than  80 percent                                                               
Alaska  hire   "higher  in  the   queue  for   refundable  credit                                                               
payments."  Further,  he stated that private  royalties could not                                                               
go below zero.                                                                                                                  
                                                                                                                                
10:02:42 AM                                                                                                                   
                                                                                                                                
MR. MAYER  directed attention to  slide 4, which  reflects common                                                               
proposed  changes in  the House  Finance Committee's  version and                                                               
the House Rules Standing Committee's  version.  He indicated that                                                               
both   versions   address   the  issue   of   refundable   credit                                                               
withholding;  the   House  Rules  Standing   Committee's  version                                                               
clarifies that  a company  would have to  dispute a  liability in                                                               
order for  withholding not to  be used to settle  that liability.                                                               
Regarding  .025(a)(6)  Middle  Earth exploration  credits,  "this                                                               
simply specifies though  they have to be in  Copper River Basin."                                                               
Regarding  municipal   production  expense  deduction,   he  said                                                               
credits and  deductions could  only be  claimed in  proportion to                                                               
taxable production  for [municipalities] that own  production and                                                               
"used for their own purposes."   He indicated there would also be                                                               
the addition  of a  surety bond  that had  been seen  in previous                                                               
versions of the bill.                                                                                                           
                                                                                                                                
10:30:13 AM                                                                                                                   
                                                                                                                                
MR.  MAYER  directed  attention  to  slide  5,  titled  "Refunded                                                               
Credits Reached New High  in FY 2015."  The bar  graph on slide 5                                                               
shows, for example,  that the amount involved would  be more than                                                               
$800 million  in FY 17.   He stated, "It's an  enormous amount of                                                               
money relative to the state's finances  as a whole at the moment;                                                               
under current  forecast those exceed  $1.3 billion between  FY 15                                                               
... [and] FY 17."  He said  it is split fairly evenly between the                                                               
North  Slope and  the non-North  Slope,  the latter  of which  he                                                               
indicated  includes  Cook  Inlet,   which  has  accounted  for  a                                                               
substantial  bulk  of  those  credits.   He  stated,  "These  are                                                               
essentially what are being eliminated over time by this CS."                                                                    
                                                                                                                                
MR.  MAYER turned  to  slide 6,  titled  "Big Difference  Between                                                               
North  Slope  and Cook  Inlet."    He highlighted  the  following                                                               
regarding Cook  Inlet:  no  production tax, a much  smaller basin                                                               
with  much  smaller  production,  less  royalty  revenue,  and  -                                                               
looking  back  at  FY  15  -  vast  amounts  of  credit  outflow,                                                               
indicated by the light gray bars on  the bar chart.  Of the three                                                               
bars, he noted:  the left-hand  bar shows the total for the state                                                               
for  FY 15;  all the  colored bars  above the  zero line  are the                                                               
revenues that come in through the  oil and gas fiscal system; the                                                               
gray bars show  credit outflow in refundable tax  credits of $628                                                               
million.    He  said,  "Fully  $404  [million]  of  that  [credit                                                               
outflow] in FY 15  was in the Cook Inlet."  He  said the two bars                                                               
to the right  of that show estimated numbers for  the North Slope                                                               
and  Cook  Inlet  and clearly  illustrate  the  great  difference                                                               
between the  two, and "ending the  ... outflow of credits  in the                                                               
Cook Inlet is  clearly a particular priority in terms  of I don't                                                               
think anyone  can look  at that situation  and think  that that's                                                               
sustainable."   He said  the North Slope  numbers show  a greater                                                               
degree  between expenditures  and incoming  revenue, and  because                                                               
almost  all  the  money  being  spent,  in  terms  of  refundable                                                               
credits, is in  the form of the NOL tax  credits, the question is                                                               
one of "recognizing expenses and whether  we do it now or whether                                                               
we do that later."  He continued:                                                                                               
                                                                                                                                
     Through  the  refundable  tax  credit,  we  effectively                                                                    
     recognize  those  expenses  now  and  simply  pay  that                                                                    
     amount out.  The alternative  is to have companies hold                                                                    
     those  expenses  as  things that  they  can  deduct  in                                                                    
     future years, and that's what this bill would do.                                                                          
                                                                                                                                
10:33:21 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TUCK asked  Mr. Mayer to confirm  that very little                                                               
in  the  way  of  corporate   income  taxes  for  Cook  Inlet  is                                                               
collected.                                                                                                                      
                                                                                                                                
MR.  MAYER offered  his understanding  that is  correct and  is a                                                               
function  of a  couple  things:   partly  that  Cook  Inlet is  a                                                               
smaller basin with less production, but  it is also a function of                                                               
the corporate  structure wherein  Alaska levied  corporate income                                                               
tax on C  Corporations, and the only companies that  have to be C                                                               
Corporations  are  those that  want  to  list publicly  and  have                                                               
access to capital markets.  He  concluded, "So, if you're able to                                                               
be, for  instance, privately held,  you can use  other structures                                                               
like  S  corporations and  LLCs,  for  instance, that  don't  pay                                                               
Alaska's corporate  income tax,  and ... that  also goes  part of                                                               
the way to explaining what you see there."                                                                                      
                                                                                                                                
REPRESENTATIVE TUCK responded, "And it just  looks like - to me -                                                               
... it's a sliver of everything else, too."                                                                                     
                                                                                                                                
10:34:38 AM                                                                                                                   
                                                                                                                                
MR. MAYER stated that slides 7-9  address the issue of changes on                                                               
the  North Slope  in terms  of  ending refundability  of the  NOL                                                               
credits,  and eventually  ending  the NOL  credit  itself on  the                                                               
North  Slope,  what   that  would  do  to   new  developments  by                                                               
developers  that currently  rely on  that credit  being refunded,                                                               
and what  the impact  is of  the timeframe  over which  the gross                                                               
value reduction  can be  taken.   He drew  attention to  slide 7,                                                               
titled "How  Do Changes Impact  New Field Development?"   He said                                                               
the chart  on the left shows  cash flow, and the  modeling is for                                                               
an 80-odd  million barrel field that  would produce at a  peak of                                                               
about 20,000  barrels a  day, drilling  from 30  wells, including                                                               
producers and injectors over a  period of eight years, with total                                                               
combined capital and drilling costs of $1.3 billion.                                                                            
                                                                                                                                
MR. MAYER  explained the colors  on the left-hand chart.   Purple                                                               
and   light   blue   indicate   drilling   and   capital   costs,                                                               
respectively.   He  said  negative capital  amounts  were in  the                                                               
early  years.   He  related  that  capital  expenses have  to  be                                                               
incurred before,  for example,  drilling pads,  basic facilities,                                                               
and  infrastructure are  built.   The  light  blue indicates  the                                                               
drilling  that occurs  after that  point in  time.   He said  the                                                               
green indicates  the revenue that  comes after the  project comes                                                               
on  line; there  are  ongoing drilling  expenses  for many  years                                                               
"after this  project starts  bringing in  revenue and  even after                                                               
this  becomes cash  flow positive."   Mr.  Mayer said  the dotted                                                               
black line  indicates the  after-tax cash  flow that  the project                                                               
receives,  while   red  indicates   the  government  take.     He                                                               
continued:                                                                                                                      
                                                                                                                                
     You can  see red,  in this case,  is a  positive amount                                                                    
     from a  company's perspective in  the early  years, and                                                                    
     that's the  impact of those  refunded tax  credits that                                                                    
     we're talking  about.  And  so, for instance,  the fact                                                                    
     that those are  refunded and ... received  as a payment                                                                    
     by this  company - that  also means that the  cash flow                                                                    
     that  they receive  is not  as steeply  negative as  it                                                                    
     would  be if  they were  paying, effectively,  the full                                                                    
     amounts of the  CAPEX or the blue  bars, because that's                                                                    
     being offset by the credit that's being received.                                                                          
                                                                                                                                
MR. MAYER  said the chart  shows that  for the first  five years,                                                               
there were  substantial expenses being  incurred.  He  said, "The                                                               
red bars  of government  take are now  negative; ...  things like                                                               
royalty,  corporate  income  tax,  and also  production  tax  are                                                               
relatively  small  compared  to  what   they  are  later  in  the                                                               
picture."  Because  of all that ongoing drilling  and cost, there                                                               
is little  production tax  liability for a  project like  this in                                                               
the first five  years.  The bulk of the  production tax liability                                                               
occurs only after  several years of production, which  he said is                                                               
crucial to  understanding why a  five-year gross  value reduction                                                               
limit  is not  that different  in many  ways to  taking away  the                                                               
gross value reduction altogether.                                                                                               
                                                                                                                                
10:37:56 AM                                                                                                                   
                                                                                                                                
MR. MAYER  turned to slide 8,  titled "10 YR GVR  LIMIT MITIGATES                                                               
IMPACT ON  PROJECT VALUE."   He said the  chart on slide  8 shows                                                               
comparisons  between  the status  quo  and  various results  from                                                               
limiting the gross  value reduction.  The "X" axis  is the number                                                               
of years a  limit is imposed, while  the "Y" axis is  how much of                                                               
the  original value  is being  taken away  by making  the change.                                                               
The  colored lines  indicate  different price  changes:   red  is                                                               
$60/bbl;  orange  is  $70/bbl;  [yellow  is  $80/bbl];  green  is                                                               
$100/bbl; and blue is $130/bbl.   He said the project is marginal                                                               
at $60/bbl;  almost all of the  net present value that  exists in                                                               
this project  at this rate can  be attributed to the  gross value                                                               
reduction.   Without that,  there would be  no net  present value                                                               
left in the project.  He continued:                                                                                             
                                                                                                                                
     For  instance,  when  I  say  take  that  away,  that's                                                                    
     essentially, cost projective, the  same thing as saying                                                                    
     a zero-a-year limit for the  gross value reduction, and                                                                    
     you can see  that at zero, the red line's  at $50/bbl -                                                                    
     all  of the  value is  gone.   If you  allow the  gross                                                                    
     value  reduction for  five years,  that's still  taking                                                                    
     away about  ... $60/bbl -  ... more than 60  percent of                                                                    
     ...  the   project  value.     So,  it's  a   very  ...                                                                    
     substantial impact by having a five-year limit.                                                                            
                                                                                                                                
     That  is less  the case  at higher  prices, but  you're                                                                    
     still  talking higher  prices of  somewhere between  20                                                                    
     and 45  percent of the  value of a project  being taken                                                                    
     away  by going  from an  unlimited GVR  to a  five-year                                                                    
     GVR;  it's  a  very,  very substantial  change  to  the                                                                    
     system.   Whereas,  in a  ten-year case,  those amounts                                                                    
     are all  much less, and  in general  sort of at  the 20                                                                    
     percent mark or  at higher prices - 10  percent or less                                                                    
     of ... value  that's being taken away -  and that's why                                                                    
     consistently we've said  if ... the desire is  to see a                                                                    
     limit  - a  point in  time where  new oil  incentivized                                                                    
     under the  gross value reduction  becomes old oil  - 10                                                                    
     years or  above makes a lot  more sense to us  than ...                                                                    
     five years does, and that  10 years, of course, is what                                                                    
     is represented in this bill.                                                                                               
                                                                                                                                
10:40:34 AM                                                                                                                   
                                                                                                                                
MR. MAYER  directed attention to  slide 9, titled  "ENDING CREDIT                                                               
REFUND  IMPACTS   CAPITAL  NEEDS,   IRR."    He   emphasized  the                                                               
importance of  understanding the  substantial impact  that ending                                                               
credit  refunds  on  smaller  companies  would  have.    He  said                                                               
refunded credits have  enabled a suite of  smaller companies that                                                               
may  not   otherwise  have  the  resources   to  undertake  major                                                               
investments  on the  North  Slope.   Ending  those credits  would                                                               
force major  questions for those  companies in terms of  how they                                                               
continue.  He said the chart  on the bottom-left of slide 9 shows                                                               
cumulative  cash   flow  of   a  model   with  $1.3   million  in                                                               
investments.                                                                                                                    
                                                                                                                                
MR.  MAYER said  a  company "under  this  current credit  system"                                                               
needs to have about $350 million  of capital, because once it has                                                               
spent it,  the project would  be on line and  generating revenue,                                                               
with  a  self-sustaining cash  flow.    He said  eliminating  the                                                               
refunded  credit  changes that  substantially.    For example,  a                                                               
company may need  $150 million to undertake a  project like this.                                                               
So, for companies that have  already made decisions about certain                                                               
projects, the question  is whether they will be  able to continue                                                               
those investments without refunded credits  or with only the next                                                               
three years  of credits at a  $75 million cap.   He said it  is a                                                               
difficult question.   He said there  would be many for  whom that                                                               
sort of activity  is possible if they bring in  another partner -                                                               
ideally one that can add substantial capital.  He continued:                                                                    
                                                                                                                                
     That's particularly  the case when you  think about the                                                                    
     fact that  what you've  also done is  sort of  push up,                                                                    
     effectively, the  ... break-even  or hurdle  price, ...                                                                    
     so that for  any given IRRs that ... one  might need to                                                                    
     achieve to satisfy investors, the  price level at which                                                                    
     that occurs ...  costs ... only about $10  higher.  And                                                                    
     obviously it gets  more difficult to ...  bring in more                                                                    
     capital  when your  entire rates  of  return and  other                                                                    
     things   have  deteriorated   again  because   ...  the                                                                    
     refunded credit is going away.                                                                                             
                                                                                                                                
MR. MAYER  stated that clearly  refunded credits are  a difficult                                                               
expense for the  State of Alaska at the present  time and need to                                                               
be brought under control.  He  said that is particularly the case                                                               
in the  Cook Inlet where what  the bill would do  is "aggressive"                                                               
in "a  well thought  out way."   He  said in  terms of  the North                                                               
Slope,  there is  a difficult  trade-off  that needs  to be  made                                                               
regarding  the impact  of the  refunded credits  paid out  to oil                                                               
companies and  the substantial impacts  that would be  brought by                                                               
eliminating them.  He said it  would have a substantial impact on                                                               
what  sort of  companies could  operate  in the  basin; it  would                                                               
bring hard  choices to those  companies as to whether  they could                                                               
continue and what would be required to enable that to occur.                                                                    
                                                                                                                                
MR. MAYER announced that that completed his presentation.                                                                       
                                                                                                                                
10:44:12 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HERRON referred  to slide  8 and  noted that  the                                                               
House Finance Committee's version of the bill had proposed a 5-                                                                 
year  GVR, while  the House  Rules  Standing Committee's  version                                                               
proposes a 10-year GVR.  He  noted there had been conversation in                                                               
the legislature  about considering a  7-year GVR.  He  asked what                                                               
the project value would be at  $60/bbl and how a 7-year GVR limit                                                               
might benefit the state.                                                                                                        
                                                                                                                                
MR. MAYER answered that a 7-year  time limit would wipe out about                                                               
45 percent  of current project value  at a $50 level,  which is a                                                               
substantial impact.   He said bearing  in mind that only  a small                                                               
portion  of  North  Slope  oil  qualifies  for  the  gross  value                                                               
reduction at  the moment,  "the key  purpose here  ... is  to say                                                               
what we're  worried about is  that eventually, over time,  ... if                                                               
there  is no  limit,  more and  more oil  will  become under  the                                                               
rubric  of the  gross  value  reduction."   He  stated, "In  that                                                               
context, whether it's  7 years or 10 years, it's  not clear to me                                                               
that that is  quite so crucial from the  state's perspective, ...                                                               
as long as there is a limit  that says at some point you graduate                                                               
and become old oil, so  more and more isn't cumulatively becoming                                                               
new oil over time."  He continued:                                                                                              
                                                                                                                                
     Whereas, while  it's not a  major difference,  it seems                                                                    
     to me, from  the state's interest perspective,  it is a                                                                    
     major  difference  in terms  of  the  impact on  a  new                                                                    
     investment and  what the original purpose  of the gross                                                                    
     value reduction  was, and that's  been the  reason that                                                                    
     we have said  so far that if a limit's  going to be put                                                                    
     in place, we really think that  10 years is the sort of                                                                    
     responsible minimum amount.                                                                                                
                                                                                                                                
10:46:19 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  KREISS-TOMKINS asked  Mr. Mayer  to confirm  that                                                               
slide  9 was  supposing  the same  hypothetical  project that  is                                                               
outlined on slide 7.                                                                                                            
                                                                                                                                
MR. MAYER answered that's correct.   He added that slide 9 refers                                                               
to the outcomes outlined on slide 7.                                                                                            
                                                                                                                                
REPRESENTATIVE  KREISS-TOMKINS asked  how  many  barrels of  GVR-                                                               
eligible  oil are  projected to  be produced  next year  and what                                                               
"the effective value on reduced tax liability" would be for GVR-                                                                
eligible oil.  He then referred  to the marked difference for the                                                               
GVR  and  GVR limit  in  varying  price environments  on  project                                                               
value, as shown  on slide 8, and asked if  there had been thought                                                               
or conversation  related to  tying GVR  eligibility to  a certain                                                               
price environment  so that  the GVR is  not triggered  [until the                                                               
price of  oil drops below  a certain  level], because he  said in                                                               
high-price environments, GVR eligibility  is maybe not that vital                                                               
to project viability.                                                                                                           
                                                                                                                                
MR. MAYER  responded that  he did  not know how  much GVR  oil is                                                               
forecast  in the  next year,  but deferred  to the  Department of                                                               
Revenue for that information.  In  terms of tying the GVR benefit                                                               
to the  oil price, he  said Alaska's  oil and gas  production tax                                                               
system started out  with a few simple ideas back  in 2006 and has                                                               
become increasingly complex over the years.  He continued:                                                                      
                                                                                                                                
     Trying  to  take a  benefit  like  this -  particularly                                                                    
     given that there  are ... key other  things that depend                                                                    
     on that, such  as ... if you're eligible  for the gross                                                                    
     value  reduction or  if  it  determines whether  you're                                                                    
     eligible for a fixed $5  versus sliding $8 credits - it                                                                    
     seems  to  me likely  only  to  add substantially  more                                                                    
     complexity.     Which  (indisc.)   creates  a   lot  of                                                                    
     instability for  the companies involved, right?   A key                                                                    
     part of all this is to  say to any company that as much                                                                    
     as possible,  at the time  you make a  final investment                                                                    
     decision, you  can nail  down and know  as much  as you                                                                    
     can, okay?   You have certain exposures  that you can't                                                                    
     change, like  commodity price environment.   But to the                                                                    
     extent that  we can make  things as certain for  you as                                                                    
     possible,  we want  to do  that  to ...  enable you  to                                                                    
     accurately  evaluate  your   economics  and  know  what                                                                    
     you're getting  into.  And  so, to ... the  extent that                                                                    
     you sort of  make benefits like this  contingent on the                                                                    
     oil  price  environment  seems  to me  adds  a  lot  of                                                                    
     complexity, doesn't  necessarily provide a  huge amount                                                                    
     of benefit  to the  state in  the broader  context, but                                                                    
     also  adds, sort  of, instability  into the  system, as                                                                    
     well.                                                                                                                      
                                                                                                                                
10:50:24 AM                                                                                                                   
                                                                                                                                
CHAIR  JOHNSON  asked Mr.  Mayer  if  it  is normal  for  smaller                                                               
companies to  have partners or more  usual for them to  be "going                                                               
it alone."                                                                                                                      
                                                                                                                                
MR. MAYER answered  that it is usual for small  companies to have                                                               
partners.   He added  that to some  extent, credits  have allowed                                                               
small  companies to  do work  in Alaska  without a  partner.   He                                                               
indicated  that  withdrawing  the  credits  would  force  smaller                                                               
companies to consider  how to come up with  the necessary capital                                                               
if  bringing  in a  working  interest  partner  is not  a  viable                                                               
solution.  He  suggested the counter consideration  is whether it                                                               
has  been difficult  to get  as many  independent companies  into                                                               
Alaska as the state might have  liked.  He listed the North Slope                                                               
being an expensive  place to invest and produce and  the issue of                                                               
fiscal instability  as reasons that Alaska,  despite its enormous                                                               
resource  potential,  has  not  "attracted  as  many  independent                                                               
players as  one might like."   He  emphasized the huge  role that                                                               
credits have  played, and  suggested there  would be  cases where                                                               
some smaller companies  could make it work in  Alaska without the                                                               
credits, while  others could not.   He concluded, "I  don't think                                                               
anyone has a completely firm answer to that ... question."                                                                      
                                                                                                                                
CHAIR JOHNSON asked what impact  the hardening of the floor would                                                               
have  on the  industry  and  the state.    He  commented that  it                                                               
certainly would be a tax increase.                                                                                              
                                                                                                                                
MR.  MAYER confirmed  that  Chair Johnson  is  correct about  the                                                               
implicit hardening  of the floor  that occurs by taking  away the                                                               
NOL  credits  and  switching to  a  pure,  expense  carry-forward                                                               
system  that has  the  impact of  effectively  raising the  floor                                                               
against  future  years' expenses.    That  is a  substantial  tax                                                               
increase.  He continued:                                                                                                        
                                                                                                                                
     It, on the one hand,  provides that sort of basic level                                                                    
     of  protection  of  the amount  of  revenue  the  state                                                                    
     receives should we  have an extended period  of ... low                                                                    
     prices.     It   also  ...   creates  a   corresponding                                                                    
     liability, if you  will, that says ... in  the same way                                                                    
     as that  the pure hardening  [of] the floor  would mean                                                                    
     that should prices  stay low for a long  period of time                                                                    
     and  companies' expenses  not  adjust,  you could  have                                                                    
     mounting net  operating loss  credits, and  you've seen                                                                    
     that in  some of the  fiscal notes that  the Department                                                                    
     of Revenue has handed out  previously, in the same way,                                                                    
     under  this   system,  you   have,  sort   of  mounting                                                                    
     expenses.    One  of the  things  that's  important  to                                                                    
     understand ...  is because those expenses  are at above                                                                    
     the line  rather than below  the line amount,  when you                                                                    
     see them in credit terms,  they're one amount of money;                                                                    
     when  you see  them as  expenses, they're  about almost                                                                    
     three times  as much, because, of  course, the question                                                                    
     of multiplying  them or dividing  by 35 percent  of the                                                                    
     amount  of   the  credits.    Those   two  amounts  are                                                                    
     effectively  the same  thing,  right?   Above the  line                                                                    
     they look  almost three times greater,  because they're                                                                    
     not being multiplied  by 35 percent, but in  terms of a                                                                    
     sort of  ongoing liability that effectually,  you know,                                                                    
     is  what's  being  held  over  to  be  claimed  against                                                                    
     companies'  future tax  liabilities,  those two  things                                                                    
     are the  same.   So, one shouldn't  sort of  see bigger                                                                    
     amounts in  terms of expenses being  carried forward on                                                                    
     fiscal  notes and  be suddenly  terrified  by the  fact                                                                    
     that they  grew three times  bigger.  That's  simply an                                                                    
     artifact  of  the  fact that  they're  being  shown  as                                                                    
     expenses to ...  be deducted in the  future rather than                                                                    
     credits  to be  claimed  in the  future; they're  still                                                                    
     basically the same thing.                                                                                                  
                                                                                                                                
MR. MAYER  said in terms  of the  impact on companies,  they have                                                               
already been  paying effective  tax rates  in Alaska,  at current                                                               
prices,  at  or  above  100  percent.    He  stated,  "Obviously,                                                               
hardening the  floor makes  life that much  more difficult  if we                                                               
have an ongoing  low-price environment for those  companies."  He                                                               
continued:                                                                                                                      
                                                                                                                                
     The  key  difference  here  is  that  you're  at  least                                                                    
     allowing the  credits that  have been  earned so  far -                                                                    
     through work  last year, through work  being undertaken                                                                    
     this year  - that companies have  already factored into                                                                    
     all  their planning  in making  those investments,  but                                                                    
     those  can  still  taken,  ...  including  against  the                                                                    
     floor, and that sort of  more gradual imposition of the                                                                    
     harder  floor,   I  think,   is  crucial   in  creating                                                                    
     something that  on the one  hand, provides some  of the                                                                    
     ...  revenue certainty  for the  next couple  years the                                                                    
     state wants if  we have an extended,  ongoing period of                                                                    
     low  prices, while  doing that  in a  way that  doesn't                                                                    
     fundamentally  disrupt  things  for companies  the  way                                                                    
     that pure ... floor hardening might have.                                                                                  
                                                                                                                                
10:56:10 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TUCK  requested that  Mr. Mayer  slow his  pace of                                                               
speaking when answering questions.   He offered his understanding                                                               
that the manner in which the  floor is hardened is related to NOL                                                               
credits, but  asked if  there is  another way  that the  floor is                                                               
hardened.                                                                                                                       
                                                                                                                                
MR.  MAYER  answered that  "while  this  bill doesn't  explicitly                                                               
harden the  floor the way  the others  have done," it  would have                                                               
the implicit  effect of doing  so by  ending the NOL  credits and                                                               
switching,  instead, to  a system  of carrying  forward expenses.                                                               
He continued:                                                                                                                   
                                                                                                                                
     Because those  expenses are  carried forward  above the                                                                    
     line, as it were, there is  no credit any more that can                                                                    
     take  you down  below the  floor.   And so,  for legacy                                                                    
     production, that  means that  when we look  solely from                                                                    
     this point  forward at future  expenses and  what those                                                                    
     future expenses  can do for companies,  they can't take                                                                    
     them below the gross minimum  floor any more.  The only                                                                    
     thing  for  legacy  production that  could  take  those                                                                    
     companies  below  the  floor   is  net  operating  loss                                                                    
     credits that they have already  incurred before the end                                                                    
     of 2016 that  they can continue to  claim against their                                                                    
     gross minimum tax  liability in the future,  if we stay                                                                    
     in that gross  minimum tax world.  And  once those have                                                                    
     worked their  way through the  system, the floor  is at                                                                    
     that   point,  effectively,   for  legacy   production,                                                                    
     completely  hard.   That's slightly  different for  new                                                                    
     production, where  ... things  like ...  small producer                                                                    
     tax credits  and other  things that  ... remain  in the                                                                    
     system could  still reduce liability for  new producers                                                                    
     and for ... new production below the floor amount.                                                                         
                                                                                                                                
REPRESENTATIVE TUCK said  it sounds like there is  a hardening of                                                               
the floor by cancelling net  operating losses for any producer of                                                               
over 15,000 barrels per day, whereas  there is no floor for those                                                               
with less than  15,000 barrels per day.  He  said, "I'm trying to                                                               
find out where  we were on how far the  legacy wells can continue                                                               
taking those net operating losses.   Apparently they can still do                                                               
the  ones that  they have  now."   He asked,  "How far  does that                                                               
carry forward?"                                                                                                                 
                                                                                                                                
MR. MAYER  said for legacy producers  there will not be  any more                                                               
credits  after 2016;  the credits  they  have earned  up to  that                                                               
point  can be  taken against  their  tax liability  for the  next                                                               
several  years, depending  on what  that  tax liability  is.   He                                                               
clarified that once those tax  credits work their way through the                                                               
system, they will be done and completely eliminated.                                                                            
                                                                                                                                
10:59:54 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  TUCK asked  if it  is possible  to forecast  when                                                               
those credits would run out.                                                                                                    
                                                                                                                                
MR.  MAYER   recommended  that  Representative  Tuck   could  get                                                               
specific  information from  the  Department  of Revenue,  because                                                               
enalytica does  not have access to  that sort of tax  payer data.                                                               
He relayed  that a fiscal  note he  had seen indicated  that "the                                                               
revenue difference  between this  and floor hardening  was pretty                                                               
similar" by 2020.                                                                                                               
                                                                                                                                
11:01:01 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  KREISS-TOMKINS  referred  to slide  5,  regarding                                                               
past expenditure payouts, and -  relating that to Chair Johnson's                                                               
opening comments about Alaska's fortune  waxing and waning - said                                                               
he  would like  to  know what  the  quantitative relationship  is                                                               
between credit investment in the  industry and marginal increased                                                               
production or  revenue to  the State  of Alaska  - the  return on                                                               
investment relationship.                                                                                                        
                                                                                                                                
MR.  MAYER responded  that  when  looking at  slide  5, he  would                                                               
emphasize that Cook Inlet and the  North Slope differ in terms of                                                               
credit outlay  and benefit to the  state.  In the  Cook Inlet, he                                                               
explained, there is  no tax on oil  and a very low  tariff tax on                                                               
gas,  and  credits  are  purely   a  means  by  which  the  state                                                               
incentivizes behaviors that it wants to see.  He continued:                                                                     
                                                                                                                                
     What we  have said so far  in our analysis is  when ...                                                                    
     we look  at the  state of  things in  the Cook  Inlet -                                                                    
     particularly  from  the   perspective  of  ongoing  and                                                                    
     additional  investment in  gas, which  seems to  us has                                                                    
     always been  the key ...  aim of the credit  program in                                                                    
     the Cook  Inlet - that  ongoing drilling in  the mature                                                                    
     field is highly economic  under most circumstances that                                                                    
     one can  imagine, particularly when  one has ...  $6 or                                                                    
     higher gas price.                                                                                                          
                                                                                                                                
     ... Development of new  resources is fundamentally made                                                                    
     difficult  by  a  very  limited gas  demand  -  a  very                                                                    
     limited  market to  address -  and ...  unless one  can                                                                    
     find a way  of changing that, credits  have some effect                                                                    
     at  the margin,  in terms  of making  almost impossible                                                                    
     projects otherwise  possibly vaguely  viable and,  as a                                                                    
     result,  we've  seen  ...   one,  new  substantial  gas                                                                    
     project  in ...  the Cook  Inlet  on that  front.   But                                                                    
     then, ultimately,  unless that  question of  market ...                                                                    
     size  and market  access can  be addressed,  credits by                                                                    
     themselves haven't  got a huge  weight in  solving that                                                                    
     problem, and mostly what they've  done is incentivize a                                                                    
     lot of drilling for oil and  cover a lot of costs for a                                                                    
     lot of activity that in  many ways is probably economic                                                                    
     regardless.                                                                                                                
                                                                                                                                
     ... This  is a  program that,  I think,  made a  lot of                                                                    
     sense when  the overall  fiscal system was  bringing in                                                                    
     up to $10  billion in annual revenue,  these were small                                                                    
     amounts  of  money  we're  talking   about  to  try  to                                                                    
     stimulate  activity in  the Cook  Inlet  and turn  that                                                                    
     basin around.   The cost of that program  is much, much                                                                    
     harder to  justify, I think,  in ... the  current time,                                                                    
     given all those things.                                                                                                    
                                                                                                                                
MR.  MAYER  reiterated  that  the  North  Slope  is  a  different                                                               
situation, because  the only substantial credit  remaining is the                                                               
NOL credit, and  that really is a question of  the timing of cash                                                               
flows  rather than  absolute amounts.    He said  that credit  is                                                               
given in  recognition of  expenses that  have been  incurred that                                                               
would  otherwise  be  held  over   and  deducted  against  future                                                               
revenue.   He said,  "It's a  cash outlay now  in place  of lower                                                               
revenue in the future.  By  not having that now, you're solving a                                                               
major,  sort of,  cash flow  timing  problem for  the state,  but                                                               
that's revenue that  one might have in the future,  instead."  He                                                               
continued:                                                                                                                      
                                                                                                                                
     So, understand in  that sense that the  question on the                                                                    
     North  Slope about  net operating  loss refundable  tax                                                                    
     credits is all  about timing of cash flow  and the fact                                                                    
     that the  outlay and ...  spending that money  and then                                                                    
     providing it  to smaller companies  now who  qualify is                                                                    
     really  difficult  from  a   cash  perspective  at  the                                                                    
     moment, but it doesn't  change fundamentally the amount                                                                    
     of  revenue  that  the system  over  time  itself  will                                                                    
     generate.                                                                                                                  
                                                                                                                                
11:06:40 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HERRON  remarked to  Chair Johnson  that by  FY 17                                                               
nearly all  the credits already  will have been earned,  so there                                                               
will be "a  significant invoice when those come due."   He asked,                                                               
"But is this  version - your version  - is it your  intent to get                                                               
rid of  them over time  and then not  pay credits to  people that                                                               
will not seek reduction in the future?"                                                                                         
                                                                                                                                
CHAIR JOHNSON  answered that  he thinks that  is, in  general, an                                                               
accurate statement.   He indicated  that the state would  like to                                                               
continue to  incentivize companies, but  it needs to ask  what it                                                               
can afford.   He questioned  whether the state could  continue to                                                               
write checks to oil companies "in  this environment."  He said he                                                               
thinks Representative  Kreiss-Tomkins "hit the nail  on the head"                                                               
with his remark that the state  had incentives that worked in the                                                               
Cook Inlet  and on the  North Slope,  and the state  continues to                                                               
pay those  out while  in the  midst of a  revenue shortfall.   He                                                               
opined  that the  state  certainly  does not  want  to be  paying                                                               
credits to  companies that are  never going  to pump a  barrel of                                                               
oil, but wants  to incentivize those that might.   He added, "But                                                               
this is what we can afford and what's ... out there."                                                                           
                                                                                                                                
11:08:44 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TUCK restated that he  had had trouble hearing Mr.                                                               
Mayer's  presentation, but  would listen  to the  audio recording                                                               
before the next meeting.                                                                                                        
                                                                                                                                
CHAIR JOHNSON said Ms. Delbridge  would be available to anyone to                                                               
answer questions, and  he proffered that Ms.  Delbridge could get                                                               
specific questions answered by Mr. Mayer.                                                                                       
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB 247 Version D.pdf HRLS 5/10/2016 9:30:00 AM
HB 247
HB 247 Version D Summary.pdf HRLS 5/10/2016 9:30:00 AM
HB 247
HB 247 Version D Sectional.pdf HRLS 5/10/2016 9:30:00 AM
HB 247
enalytica RULES CS.pdf HRLS 5/10/2016 9:30:00 AM
HB 247