Legislature(2015 - 2016)SENATE FINANCE 532

04/17/2016 08:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 130 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
-- Testimony <Invitation Only> --
+ Janak Mayer, Chairman and Chief Technologist, TELECONFERENCED
enalytica
+= HB 143 AIDEA BONDS: SWEETHEART CREEK HYDRO PROJ. TELECONFERENCED
Moved CSHB 143(FIN) Out of Committee
+= HB 268 AIDEA:DIVIDEND TO STATE;INCOME;VALUATION TELECONFERENCED
Moved HB 268 Out of Committee
+= HB 290 EXTENDING THE REAL ESTATE COMMISSION TELECONFERENCED
Moved HB 290 Out of Committee
+= HB 314 AK REG ECON ASSIST. PROGRAM; EXTEND TELECONFERENCED
Moved SCS HB 314(FIN) Out of Committee
+= HB 259 RELOCATION ASSISTANCE FOR FED. PROJ/PROG TELECONFERENCED
Moved HB 259 Out of Committee
+= HB 289 BOARD OF BARBERS AND HAIRDRESSERS TELECONFERENCED
Moved SCS HB 289(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 130                                                                                                           
                                                                                                                                
     "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."                                                                                                                     
                                                                                                                                
8:08:05 AM                                                                                                                    
                                                                                                                                
JANAK  MAYER, CHAIRMAN  AND  CHIEF TECHNOLOGIST,  ENALYTICA,                                                                    
reminded  the committee  that he  had finished  the previous                                                                    
day with an  overview of the North Slope.  He would continue                                                                    
with   the  presentation   "CS  SB   130:  KEY   ISSUES  and                                                                    
ASSESSMENT,"  (copy  on file).  He  informed  that he  would                                                                    
review  slides pertaining  to the  changes proposed  for the                                                                    
North Slope and Cook Inlet in SB 130.                                                                                           
                                                                                                                                
Mr. Mayer commenced his presentation with slide 18, "NOL-                                                                       
HARDENING SHIFTS REVENUE, TAXES LOSSES":                                                                                        
                                                                                                                                
     Effective tax rate under ACES could fall to zero                                                                           
     because capital credits were applied after gross floor                                                                     
                                                                                                                                
     SB21 applied a hard gross floor under $/bbl credits -                                                                      
     meaning skyrocketing net tax rate at low prices                                                                            
                                                                                                                                
     Concern to protect state at low prices always valid,                                                                       
     but must balance risk and reward at low and high end                                                                       
                                                                                                                                
     Preventing NOL credit from 'piercing' floor moves                                                                          
     state revenue from future to present; total is the                                                                         
     same                                                                                                                       
                                                                                                                                
Mr. Mayer thought that the  concept of possible hardening of                                                                    
the gross floor to be one  of the more contentious topics in                                                                    
SB 130. He mentioned that at  low oil prices the gross floor                                                                    
bent  up the  effective tax  rate very  steeply under  SB 21                                                                    
[oil  and gas  production tax  legislation passed  in 2013],                                                                    
while taking  over 100 percent  of the available  profit. He                                                                    
referred  to the  graph  on  the lower  left  of the  slide,                                                                    
entitled "Effective Production Tax  Rate," which showed that                                                                    
in  the previous  tax regime,  the effective  tax rate  went                                                                    
down  to zero  in the  $50 per  barrel oil  price range.  He                                                                    
pointed out that  it was not possible to  show effective tax                                                                    
rates if the price of oil was lower than $46 per barrel.                                                                        
                                                                                                                                
Mr. Mayer  continued discussing slide 18.  He explained that                                                                    
when discussing the question of  the hardening of the floor,                                                                    
there was  no profit  to consider.  He recalled  stating the                                                                    
previous day  that SB 21  completely hardened the  floor for                                                                    
legacy  production, for  all purposes  but  one credit  that                                                                    
that went  below and  was the Net  Operating Loss  (NOL). He                                                                    
explicated that by  definition a producer only  earned a NOL                                                                    
when there was  no profit to be made,  and expenses exceeded                                                                    
revenues.  A NOL  credit was  the portion  of expenses  that                                                                    
could  not be  taken against  a production  tax, and  was in                                                                    
fact a  loss. To  ponder NOLs, it  was necessary  to examine                                                                    
other means  than effective tax  rates, which  by definition                                                                    
were undefined under that scenario.                                                                                             
                                                                                                                                
Mr. Mayer  highlighted the  chart "Production  Tax $/Taxable                                                                    
BBL"  on the  right hand  side of  slide 18,  which examined                                                                    
absolute  monetary  terms  of  production  tax  per  taxable                                                                    
barrel. He  noted that the  red line  demonstrated scenarios                                                                    
under  SB   21/CSSB  130;  versus  the   green  line,  which                                                                    
demonstrated  what  would  happen under  CSHB  247(FIN).  He                                                                    
observed  that  the two  lines  coincided  for most  of  the                                                                    
chart, excepting  the period  between the  oil price  of $45                                                                    
per barrel through $46 per  barrel and below. The difference                                                                    
in the  lines was indicative  of the hardening of  the floor                                                                    
proposed in CSHB 247(FIN).                                                                                                      
                                                                                                                                
8:12:40 AM                                                                                                                    
                                                                                                                                
Mr. Mayer continued  to discuss slide 18,  pointing out that                                                                    
the green line  of the right-hand graph had  a steep decline                                                                    
to  about  $80  per  barrel,  at which  there  was  a  sharp                                                                    
inflection point. He noted that  the same point was mirrored                                                                    
on the first chart, and  reflected when the gross tax kicked                                                                    
in. The point  signified the beginning of the  area where as                                                                    
oil prices fell, revenues to  the state fell more slowly and                                                                    
tax   rates  increased   sharply.   The  scenario   remained                                                                    
consistent until  the $46 per  barrel level, at  which point                                                                    
NOLs kicked in. He furthered  that under CSHB 247, there was                                                                    
a  secondary floor  that kicked  in and  was reflected  in a                                                                    
visible  difference in  the  two lines.  He  thought it  was                                                                    
important  to understand  that  additional revenue  achieved                                                                    
under the scenario was not  actually new revenue, but rather                                                                    
revenue brought from the future to the present.                                                                                 
                                                                                                                                
Mr.  Mayer  thought  an important  concept  was  the  unique                                                                    
hybrid of  a net tax  and a gross tax.  If there was  a pure                                                                    
gross tax, costs would not  be considered or deducted in any                                                                    
form   against  any   tax.  He   thought   that  there   was                                                                    
fundamentally a  net tax  system, and  the core  premise was                                                                    
deduction of  costs against tax. When  there were additional                                                                    
costs  that could  not be  deducted (because  a company  was                                                                    
making a  loss), the company  was entitled at some  point to                                                                    
deduct the costs.  He discussed the question  of whether the                                                                    
additional  deduction  would  happen in  the  current  year,                                                                    
whether  it  would take  the  company  below the  4  percent                                                                    
floor, or whether  the company would simply have  to pay the                                                                    
4  percent  floor  regardless  of the  loss  and  carry  the                                                                    
additional  costs into  the future.  By  carrying the  costs                                                                    
(NOL credit) into the future,  at some point the costs would                                                                    
be deducted and  would have a corresponding  impact on state                                                                    
revenues. He stated that the  impact on state revenues would                                                                    
either be  in the future  in a  more profitable time,  or in                                                                    
the  present time.  He summarized  that the  scenario was  a                                                                    
question  of the  timing  of cash  flows,  not the  absolute                                                                    
amount.                                                                                                                         
                                                                                                                                
8:16:02 AM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche  thought it  was interesting  that slide                                                                    
18 did  not contain  the phrase "loss  carry forward"  as it                                                                    
was a  key issue on  the slide. He  wondered why it  was not                                                                    
highlighted.                                                                                                                    
                                                                                                                                
Mr. Mayer replied that enalytica  had tried to highlight the                                                                    
final sentence on the slide,  which stated that piercing the                                                                    
floor  "moves  state revenue  from  future  to present."  He                                                                    
noted that the credit itself  could be referred to either as                                                                    
a NOL or a loss  carry-forward credit. He thought perhaps in                                                                    
the context  of the slide, thinking  of it as a  loss carry-                                                                    
forward credit highlighted the topic better.                                                                                    
                                                                                                                                
Mr.  Mayer continued  to discuss  slide  18, and  emphasized                                                                    
that  the  system was  already  highly  regressive, and  any                                                                    
company that  was cash flow  negative was struggling  to re-                                                                    
invest. He  thought the  proposed tax  regime would  make it                                                                    
harder for such  companies, while helping to  bridge some of                                                                    
the state's  short-term financial problems. The  state would                                                                    
make it  more difficult  for companies by  taking additional                                                                    
cash when  they were  cash-flow negative, and  displacing it                                                                    
by having  them pay less  tax in  the future. He  thought it                                                                    
was important for  the public to understand that  one of the                                                                    
impacts of bringing  revenue from the future  to the present                                                                    
was that  if left  an additional trail  of NOL  credits into                                                                    
the  future, which  may  be difficult  to  explain when  oil                                                                    
prices  rose and  the  obligation  had to  be  met. Such  an                                                                    
obligation, made when times were  bad, would reduce possible                                                                    
future revenues.                                                                                                                
                                                                                                                                
Vice-Chair Micciche pointed  out that all of  what Mr. Mayer                                                                    
stated was true  if there was not a sunset  to a loss carry-                                                                    
forward.                                                                                                                        
                                                                                                                                
Mr. Mayer concurred.                                                                                                            
                                                                                                                                
8:19:02 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer  discussed  slide  19,  "NS  Changes:  New  Field                                                                    
Example":                                                                                                                       
                                                                                                                                
     How do changes impact new field development?                                                                               
                                                                                                                                
     Sample NS investment: Cumulative CAPEX and DRILLEX of                                                                      
     $1.3 bn; average annual OPEX of about $15/bbl                                                                              
                                                                                                                                
     Peak production of 20 mb/d; 30 wells (production and                                                                       
     injection) drilled over 8 years                                                                                            
                                                                                                                                
     Ongoing DRILLEX in early years means bulk of tax                                                                           
     liability occurs only after several years of                                                                               
     production                                                                                                                 
                                                                                                                                
Mr. Mayer explained  that he had modelled the  life cycle of                                                                    
a typical new  development on the North  Slope. He continued                                                                    
that  the  modelling started  with  a  well-type curve  that                                                                    
considered  well   productivity,  well  costs,   a  drilling                                                                    
schedule, facilities costs, and  building the project up. He                                                                    
directed attention  to the  graph on the  left hand  side of                                                                    
slide 19,  "Cashflow and Components: $70/BBL,"  which showed                                                                    
cash flows from the hypothetical project.                                                                                       
                                                                                                                                
Mr. Mayer  discussed the "government  take" category  in red                                                                    
on  the graph,  which was  shown  as negative  in the  early                                                                    
years  and positive  in the  later years.  He mentioned  the                                                                    
topic of  the reimbursable net operating  loss (NOL) credit,                                                                    
and explained  that the government take  category showed the                                                                    
impact of the credit in the  early years of the project. The                                                                    
developer (without  an existing  liability) would  be paying                                                                    
cash through  the credit system  up front for some  share of                                                                    
the development  costs; and  as time  went by,  the negative                                                                    
portion  represented the  share of  the cash  coming to  the                                                                    
state through  the fiscal system. He  reminded the committee                                                                    
that the  graph was representative  of the point of  view of                                                                    
the company.                                                                                                                    
                                                                                                                                
He  referred  to  questions  in  a  previous  meeting  about                                                                    
thinking of the  credits as a snapshot in  time, and pointed                                                                    
out that in  doing so, one was unable to  see the subsequent                                                                    
account of all the revenues that would follow.                                                                                  
                                                                                                                                
Mr. Mayer  continued to discuss  the chart on slide  19, and                                                                    
thought it  was interesting  to observe an  ongoing schedule                                                                    
of drilling  wells to maintain plateau-level  production. He                                                                    
pointed  out that  for most  companies, there  would not  be                                                                    
substantial production tax  liability under any profit-based                                                                    
production  tax   under  the   time  period.  The   core  of                                                                    
production  tax received  by the  state (illustrated  by the                                                                    
red bars  as they  became substantially greater)  was really                                                                    
received later. One  of the big impacts of  both versions of                                                                    
the bill would  be reducing the gross  value reduction (GVR)                                                                    
to a  window of 5 years.  He pointed out that  5-year window                                                                    
coincided  with the  time where  there was  very little  tax                                                                    
being paid. The idea of the  GVR was to reduce the effective                                                                    
tax  rate; unfortunately  by  limiting it  to  5 years,  the                                                                    
effective tax rate  was reduced precisely in  a period where                                                                    
there was very little tax being paid in the first place.                                                                        
                                                                                                                                
8:24:19 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  addressed slide 20,  "5-year GVR limit  has major                                                                    
impact on project value":                                                                                                       
                                                                                                                                
    5-year GVR limit has major impact on project value                                                                          
                                                                                                                                
     Project is marginal at $60/bbl; elimination of GVR can                                                                     
     wipe out all value at that price                                                                                           
                                                                                                                                
     Because most tax liability occurs after end of major                                                                       
     spending, short GVR limit provides little benefit                                                                          
                                                                                                                                
     5-year GVR limit destroys over 60% of project value at                                                                     
     $60/bbl, relative to status quo                                                                                            
                                                                                                                                
     Impact of 10 year limit much lower; 15 year limit                                                                          
     preserves almost all of status quo value                                                                                   
                                                                                                                                
Mr.  Mayer clarified  that the  slide  looked at  comparison                                                                    
with the status  quo to various possible time  limits on the                                                                    
GVR. He recalled conversations that  happened when SB 21 was                                                                    
debated,  regarding whether  the  GVR should  be an  ongoing                                                                    
benefit without a time limit,  or the opposite. Stakeholders                                                                    
at  the  time  had  considered a  higher  benefit  that  was                                                                    
shorter in  time; versus an  ongoing benefit, which  was the                                                                    
choice  that was  ultimately made.  He thought  the decision                                                                    
was made largely to discourage  changes in the way companies                                                                    
invested  and developed  a field,  such as  trying to  put a                                                                    
project  in a  more compressed  time frame  to maximize  the                                                                    
benefit.  He thought  there was  concern  about capping  the                                                                    
benefit.  He opined  that if  the value  was capped,  a time                                                                    
longer  than 5  years was  necessary to  capture any  of the                                                                    
value offered.                                                                                                                  
                                                                                                                                
Mr. Mayer continued discussing the  graph on slide 20, which                                                                    
showed  how much  of  the  total value  of  the project  was                                                                    
effectively destroyed by introducing  some time limit on the                                                                    
GVR.  He noted  that  the differently  colored lines  showed                                                                    
different price  levels, and compared the  net present value                                                                    
of a project under the status  quo versus a 5-year limit. By                                                                    
imposing the  5-year GVR limit,  he observed that  just over                                                                    
60 percent of the total value  of the project was taken away                                                                    
from  the investor.  By imposing  a 10-year  limit, it  only                                                                    
removed closer to  20 percent. By imposing  a 15-year limit,                                                                    
very little  of the value  was taken  away, and most  of the                                                                    
value  could  be  taken  by the  investor  during  the  time                                                                    
period. He  detailed that the  impact was  particularly high                                                                    
at the $60  per barrel price level, since at  that level the                                                                    
project  was marginal.  He  concluded that  at  the $60  per                                                                    
barrel price,  the value  the project  had for  the investor                                                                    
was due to the GVR, and  without it there would be no value.                                                                    
He continued  that with  a zero  limit it  would effectively                                                                    
take away  the GVR  altogether, thereby  100 percent  of the                                                                    
value was taken away from the project.                                                                                          
                                                                                                                                
Senator Bishop looked  at the manner in which  Mr. Mayer had                                                                    
laid out the  examination of the GVR limit.  He pondered the                                                                    
5-year GVR limit,  as well as the  difficult environment for                                                                    
production of oil and gas,  and wondered about incentive for                                                                    
drilling in the state.                                                                                                          
                                                                                                                                
Mr.  Mayer  thought  it  was   important  to  consider  that                                                                    
investments  were undertaken  while presuming  that the  GVR                                                                    
was not  bound by time  limits. He continued  that companies                                                                    
that  had  made  big  expensive decisions  were  faced  with                                                                    
considering diminishment  of their investment in  an already                                                                    
low-priced  environment for  its project.  He discussed  oil                                                                    
prices, and the  effect of a 5-year GVR  limit phenomenon on                                                                    
project decisions.                                                                                                              
                                                                                                                                
8:28:43 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy asked  what other  sovereign nations  were                                                                    
doing in  the same price  environment. He wondered  if other                                                                    
nations were  changing relationships with oil  companies and                                                                    
investments.                                                                                                                    
                                                                                                                                
Mr. Mayer stated  that choices varied around  the world; and                                                                    
there  were  places  that  were  actively  and  aggressively                                                                    
trying  to cut  taxes to  maintain the  oil industry,  while                                                                    
there were  other places that  did not have the  same luxury                                                                    
and fiscal strain necessitated toughened  terms. He used the                                                                    
example  of   the  United  Kingdom   (U.K.),  which   had  a                                                                    
hydrocarbon basin in  the North Sea that came  online in the                                                                    
same  era as  the North  Slope. He  noted that  in 2011  the                                                                    
government (under  former Prime  Minister John  Cameron) had                                                                    
substantially  raised   taxes  to   try  and   solve  budget                                                                    
problems,  and   a  result  was  seeing   was  the  industry                                                                    
increasingly  on   the  brink  of  the   economic  limit  of                                                                    
production. As a result, in  the previous two years the U.K.                                                                    
had very  dramatically cut  away a huge  portion of  the oil                                                                    
and gas taxation system to keep  the fields going as long as                                                                    
possible.                                                                                                                       
                                                                                                                                
Mr.  Mayer used  a counter  example of  Russia, which  had a                                                                    
highly  regressive  gross  taxation  system  that  placed  a                                                                    
substantial   burden  on   companies.   Russia  was   highly                                                                    
resource-dependent  and had  put off  scheduled cuts  to the                                                                    
taxes.  He  furthered that  Russia  was  in the  process  of                                                                    
contemplating raising  taxes on  industry, despite  it being                                                                    
widely  understood that  such a  measure was  for short-term                                                                    
survival   and  was   destructive  in   the  long-term.   He                                                                    
referenced an article  in The New York  Times that described                                                                    
the scenario as  "the oil industry equivalent  of eating the                                                                    
seed  corn." He  thought it  was widely  understood that  in                                                                    
doing  so,  Russia  was  taking away  the  cash  that  would                                                                    
otherwise be needed to reinvest to keep the fields running.                                                                     
                                                                                                                                
8:31:25 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly   asked  about  Mr.  Mayer's   reference  to                                                                    
possible decommission  of the fields  in the U.K.  Mr. Mayer                                                                    
restated that it was possible  to have a negative investment                                                                    
boom  when there  was activity  to shut-in  and decommission                                                                    
producing fields.                                                                                                               
                                                                                                                                
Vice-Chair  Micciche thought  one  of  the difficult  things                                                                    
about a complicated net tax  system was how many levers were                                                                    
involved. He understood what Mr.  Mayer was trying to convey                                                                    
on slide  20, but  remarked that  the price  of oil  did not                                                                    
remain  static. He  asked about  a realistic  way to  assume                                                                    
pricing environments over  a 15-year time span  when one was                                                                    
evaluating a change to the GVR.                                                                                                 
                                                                                                                                
Mr. Mayer  stated that  enalytica had  tried to  show graphs                                                                    
representing  the price  of  oil  in a  range  from $60  per                                                                    
barrel to  $120 per barrel, and  had not gone below  $60 per                                                                    
barrel  since the  example project  was already  marginal at                                                                    
$60  per barrel.  He explained  that there  were losses  and                                                                    
negative  present  value to  consider  when  looking at  the                                                                    
project below  $60 per  barrel, and  the math  stopped being                                                                    
particularly intuitive.  He concluded that he  was trying to                                                                    
show that while  the portion of value taken  away by putting                                                                    
in  a GVR  limit  was greatest  at low  oil  prices, it  was                                                                    
possible to try  and maintain much of the  value between the                                                                    
10 and  15 year  limits and vastly  preferable to  a shorter                                                                    
duration.                                                                                                                       
                                                                                                                                
8:33:55 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer  discussed slide  21,  "prevent  GVR raising  NOL                                                                    
above 35% of actual loss":                                                                                                      
                                                                                                                                
     Prevent GVR raising NOL above 35% of actual loss                                                                           
                                                                                                                                
     The purpose of the Gross Value Reduction (GVR) is to                                                                       
     lower the effective tax rate on new production                                                                             
                                                                                                                                
     One surprising and counter-intuitive effect is to                                                                          
     raise the effective rate of the NOL credit                                                                                 
                                                                                                                                
     Issue after production from new development starts,                                                                        
     but ongoing drilling costs mean NOL eligible                                                                               
                                                                                                                                
     Exacerbated at low prices, but impact <$10mm yr for                                                                        
     20mb/d new development                                                                                                     
                                                                                                                                
Mr. Mayer referred to the question  of the GVR raising a NOL                                                                    
above 35  percent of an  actual loss. He explained  that the                                                                    
slide  would show  why the  effect happened  and why  it was                                                                    
important to  address. He  directed attention  to a  list of                                                                    
calculations  on   the  lower  left  of   the  slide,  which                                                                    
illustrated using  the effects  of the GVR  in SB  21 versus                                                                    
the effect of CSSB 130. He  restated that the GVR was really                                                                    
a sort of  fiction to imagine there was less  revenue from a                                                                    
project  than there  actually was,  in aid  of lowering  the                                                                    
effective tax  rate on new  production, and focusing  on the                                                                    
revenue side of the equation.                                                                                                   
                                                                                                                                
8:35:12 AM                                                                                                                    
                                                                                                                                
Mr. Mayer highlighted  the figures on the left  hand side of                                                                    
the  slide, and  discussed  the  effect of  SB  21 with  GVR                                                                    
versus CS  SB 130.  He noted  that if the  GVR had  not been                                                                    
factored in  (at $40 bbl  in the  example) there would  be a                                                                    
loss of $6  per barrel. With the GVR factored  in, one could                                                                    
see loss of $12 per barrel.  He qualified that it was not an                                                                    
actual  loss, but  an artifact  of  the way  the tax  system                                                                    
worked. He elaborated that the  way statute was written, the                                                                    
NOL credit  was assessed based  on the production  tax value                                                                    
per barrel. He continued  that particularly in the low-price                                                                    
oil  environment,  there  were  many occasions  on  which  a                                                                    
company could get much more than  a 35 percent NOL credit in                                                                    
proportion to its actual loss.                                                                                                  
                                                                                                                                
Mr.  Mayer directed  attention  to the  graph  on slide  21,                                                                    
which   illustrated  the   after-tax   cash   flow  of   new                                                                    
development  at oil  priced $40  per barrel;  and took  into                                                                    
account NOLs with the GVR  or without GVR. He indicated that                                                                    
there was a  big effect in the period  time after production                                                                    
had  started, while  there was  still  ongoing drilling.  It                                                                    
could be observed on the graph  that between years 8 and 10,                                                                    
the there  was a value of  a NOL credit being  given despite                                                                    
the fact that  the company was only very  slightly cash flow                                                                    
positive.  He thought  at the  time  of SB  21 everyone  had                                                                    
agreed that  the state  wanted a  tax system  that uniformly                                                                    
gave  35  percent  government support  for  spending  across                                                                    
almost  all circumstances;  however because  of the  way the                                                                    
statute  operated, it  turned out  to be  much more  than 35                                                                    
percent support for spending in  particular. He thought both                                                                    
committee  substitutes tried  to address  the matter  by not                                                                    
factoring  in  the   impact  of  the  GVR   when  NOLs  were                                                                    
calculated, because it was understood  that it was something                                                                    
artificial to reduce the tax rate  and should not be used to                                                                    
inflate the NOL credit.                                                                                                         
                                                                                                                                
8:38:32 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer discussed  slide 22,  "Floor hardening  Makes Tax                                                                    
System more regressive":                                                                                                        
                                                                                                                                
     Floor hardening Makes Tax System more regressive                                                                           
                                                                                                                                
     State of Alaska making negative production tax in                                                                          
     today's prices; but overall gov't take is still high                                                                       
                                                                                                                                
     Impact of floor hardening is to shift up government                                                                        
     take in lower oil prices                                                                                                   
                                                                                                                                
     In times of high investment / low prices (as in 2016),                                                                     
     effective government take exceeds 100%                                                                                     
                                                                                                                                
Mr. Mayer  thought there were important  considerations when                                                                    
looking at the question of  further floor hardening on a new                                                                    
field. For new GVR-eligible production,  it was not just the                                                                    
NOL credit that could reduce  the tax burden below the gross                                                                    
minimum.  He pointed  out  that the  gross  minimum did  not                                                                    
apply to  new production  because the  $5 per  barrel credit                                                                    
and  the small  producer  credit (along  with other  things)                                                                    
could take  the project below  the floor. He noted  that the                                                                    
two charts  on slide  22 showed  some of  the impact  of the                                                                    
changes. He noted that previous  versions of the same charts                                                                    
had shown  a relatively  uniform level of  60 percent  to 65                                                                    
percent  government  take  on   new  production,  while  the                                                                    
current  charts showed  closer to  a  70 percent  government                                                                    
take, which was reflective of  the impact of cutting off the                                                                    
GVR at 5 years.                                                                                                                 
                                                                                                                                
Mr. Mayer continued  discussing the charts on  slide 22, and                                                                    
relayed  that  in  the  case  of a  5-year  GVR  limit,  new                                                                    
production  in  many  circumstances would  actually  have  a                                                                    
higher level  of government take than  legacy production. He                                                                    
furthered that  in such a  scenario, most of the  benefit of                                                                    
the GVR  was taken  away. He  qualified that  the production                                                                    
only had a  $5 per barrel credit, and not  the sliding up to                                                                    
$8 per barrel  credit that applied to  legacy production. He                                                                    
emphasized that  at whatever the  level of  government take,                                                                    
the system was  designed to treat something  that was fairly                                                                    
flat and neutral over a wide  range of prices. At the lowest                                                                    
price  levels, it  could be  observed  that government  take                                                                    
started climbing  rapidly, because of the  regressive effect                                                                    
of the royalty.                                                                                                                 
                                                                                                                                
Mr. Mayer  cdrew attention to  the dashed black line  on the                                                                    
chart on the  left side, "Level &  Composition of Government                                                                    
Take: CSSB130  GVR," which represented the  government take,                                                                    
and  was the  sum of  all of  the bars.  He highlighted  the                                                                    
green bars at  the lowest prices, at  which point production                                                                    
tax was effectively  a negative component of  the system. He                                                                    
explained  that production  tax was  negative at  the lowest                                                                    
prices  because  the  value   of  the  credits  the  project                                                                    
received was  greater than  the value  that the  state would                                                                    
subsequently  recoup  through   the  production  tax  system                                                                    
during the life  of the project. He pointed out  that in the                                                                    
$60  per barrel  to $70  per barrel  range and  upwards, the                                                                    
value of the production tax  the state received later in the                                                                    
production  cycle   would  be   greater  than   the  initial                                                                    
investment in credits;  but would be less in  the lower cost                                                                    
environments.  He summarized  that the  negative green  bars                                                                    
were pulling  the black line (representing  government take)                                                                    
down  so  that  it  was  lower than  the  stacked  total  of                                                                    
positive bars.  He summarized that the  regressive effect of                                                                    
the royalty at the lowest oil  prices was so great that even                                                                    
though there was a net  contribution to the producer through                                                                    
the production tax  system, the royalty was  still taking so                                                                    
much  of  the   value  it  would  be   considered  a  highly                                                                    
regressive system.                                                                                                              
                                                                                                                                
Mr. Mayer continued  to address slide 22,  and discussed the                                                                    
effect  of floor  hardening. He  compared the  chart on  the                                                                    
left with  the chart on  the right  hand side of  the slide,                                                                    
noting  the  points at  which  the  regressive part  of  the                                                                    
curves  kicked in.  The curve  on  the chart  on the  right,                                                                    
"Level  &  Composition  of Government  Take:  CSHB247  GVR,"                                                                    
started to get  regressive below $60 per  barrel, as opposed                                                                    
to below  $40 per barrel or  $50 per barrel on  the graph on                                                                    
the left side.                                                                                                                  
                                                                                                                                
8:43:24 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer  highlighted  slide   23,  "Refund  limits  boost                                                                    
Capital needs and Lower IRR":                                                                                                   
                                                                                                                                
     Refund limits boost Capital needs and Lower IRR                                                                            
                                                                                                                                
     Refundable credit limit would increase capital needs                                                                       
     by up to 50% (from $350mm to $400-$550mm)                                                                                  
                                                                                                                                
     Application to projects currently under development                                                                        
     could have major adverse impacts                                                                                           
                                                                                                                                
     Near-Kuparak-sized new development could easily incur                                                                      
     >$2bn in NOL credits in development years                                                                                  
                                                                                                                                
     If per-company limit on refundability is the solution,                                                                     
     what is the right level? $100mm? $85mm?                                                                                    
                                                                                                                                
Mr. Mayer specified that the  slide considered at impacts of                                                                    
putting  limits  on  refundability  of the  NOL  credit.  He                                                                    
relayed   that  one   of  the   key   impacts  of   up-front                                                                    
reimbursement  of  NOL  tax  credits  was  that  it  enabled                                                                    
projects to  be undertaken  by companies  with substantially                                                                    
less capital than might otherwise  be required. The chart of                                                                    
the  left looked  at  cumulative cash  flow  of the  example                                                                    
project,  and  showed  a  descending   line  with  a  trough                                                                    
(showing  negative cumulative  cash flow),  representing the                                                                    
amount of capital needed to  build the project. Although the                                                                    
hypothetical  project   assumed  $1.3  billion   of  capital                                                                    
investment,  the whole  amount  was not  needed  to build  a                                                                    
project.  After enough  wells were  drilled, there  would be                                                                    
enough  production and  revenue  that the  project would  be                                                                    
self-sustaining.                                                                                                                
                                                                                                                                
Mr.  Mayer continued  to  discuss the  graphs  on slide  23,                                                                    
which  examined  the  impact  of   if  NOL  credit  was  not                                                                    
refundable, and  was only taken  from future  production tax                                                                    
liability. Additionally, the slide  examined the impact of a                                                                    
limit on  how much could  be refunded and what  it signified                                                                    
for the amount of capital  a company required. He mused that                                                                    
if  there were  to  be  no refundability  of  the credit,  a                                                                    
project  that previously  took $300  million  in capital  to                                                                    
execute  would  then  take  more than  $500  of  capital  to                                                                    
execute,  which would  represent a  50 percent  increase. He                                                                    
emphasized  that the  graphs were  representative of  things                                                                    
actually  underway on  the North  Slope,  and pondered  what                                                                    
such  a direction  would communicate  to companies  that had                                                                    
already  moved forward  on projects.  He added  that another                                                                    
impact   of  not   having  up-front   refunded  credit   was                                                                    
substantially  reducing the  internal rates  of return  that                                                                    
applied  to any  given price.  He thought  it represented  a                                                                    
shift  in the  amount of  capital needed  for companies  for                                                                    
start  a   project  during  a  time   the  economics  looked                                                                    
substantially  less attractive  than previously.  He thought                                                                    
it  was demonstrated  why  the refund  limits  would have  a                                                                    
major impact  on existing investments, particularly  were it                                                                    
applied any time in the near future.                                                                                            
                                                                                                                                
8:46:46 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  thought putting a  cap on the  refundability (but                                                                    
short of  ending it) would have  a similar impact, but  to a                                                                    
lesser degree. He directed attention  to the charts on slide                                                                    
23, where the larger dashed line  showed the impact of a $25                                                                    
million  cap  on NOL  credits.  He  qualified that  the  $25                                                                    
million cap  was imposed imagining that  the example project                                                                    
being considered was  the only a project a  company had, and                                                                    
could take the  full value of the $25 million  credit on the                                                                    
project. He stated that there  were several companies on the                                                                    
North Slope with more than  one project involved, and that a                                                                    
company  may have  other  assets in  which  they were  still                                                                    
investing  money and  from which  they were  taking the  $25                                                                    
million NOL  credit. The extent  to which a limited  cap had                                                                    
an  impact  varied company  by  company  based on  what  its                                                                    
capital  program  looked like  and  whether  it was  already                                                                    
taking a  NOL credit elsewhere.  He pointed out that  the CS                                                                    
for HB  247(FIN) had proposed  a $100 million cap,  and most                                                                    
recent  analyses looking  at  amounts  of companies  capital                                                                    
projects  recently  claimed  indicated   that  it  could  be                                                                    
managed under a  $100 million cap. He noted  that the Senate                                                                    
Resources  Committee had  proposed  an $85  million cap.  He                                                                    
thought could  think of at  least one company that  would be                                                                    
impacted by  an $85  cap and would  have to  think carefully                                                                    
about the implications  and about how to  afford its capital                                                                    
program going forward.                                                                                                          
                                                                                                                                
8:48:32 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  thought an important  consideration was  to limit                                                                    
was liability  to the state from  future major developments.                                                                    
He discussed the  impact that credits could have  if a major                                                                    
Kuparak-sized  new development  were to  occur, which  could                                                                    
incur upwards of $2 billion  in total credits that the state                                                                    
would be  liable for under  the current system.  He pondered                                                                    
that such  a development  could equate to  $7 million  or $8                                                                    
million  per  year  for  a   couple  of  years  during  pre-                                                                    
production  development.  He  pointed   out  that  during  a                                                                    
constrained price  environment, it  was a  deeply concerning                                                                    
prospect for  the state. He  wondered about the  right level                                                                    
at which to  try and constrain future  outliers while having                                                                    
as little possible disruption of  work that was currently in                                                                    
place on the North Slope.                                                                                                       
                                                                                                                                
Vice-Chair Micciche  thought that  in any tax  system, there                                                                    
were  those that  could "play"  the system.  He thought  the                                                                    
state had a system in which  a company could play a field of                                                                    
marginal  value because  of the  healthy  credits that  were                                                                    
available. He asked  if Mr. Mayer could  discuss the effects                                                                    
of putting a limit on units.                                                                                                    
                                                                                                                                
Mr. Mayer thought  that if it were possible to  do so, there                                                                    
were many reasons  to support the idea of a  limit on units.                                                                    
He thought  the level of  analysis was directed  at exposure                                                                    
to  a  project  rather  than   exposure  to  a  company.  He                                                                    
mentioned "ring  fencing," which was to  distinguish between                                                                    
units or  projects, while  each asset  had its  own separate                                                                    
tax  return and  its own  separate accounting  of costs.  He                                                                    
thought  that the  major  limiting factor  was  that at  the                                                                    
moment, the state  had a Slope-wide system  where company by                                                                    
company reported  its costs  to be  audited, but  costs were                                                                    
not distinguished by asset.                                                                                                     
                                                                                                                                
8:51:17 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Micciche mentioned  the  Armstrong project,  and                                                                    
thought  that although  it  was exciting,  the  cost to  the                                                                    
state would  be substantial. He  wondered what the  value of                                                                    
the project might look like  in the long term. He questioned                                                                    
if there was  any way to define future projects,  and have a                                                                    
cap per  unit, as  opposed to  existing projects  that might                                                                    
deliver more  value to the  state. He emphasized  that while                                                                    
the  legislature   wanted  to  understand  the   effects  on                                                                    
companies, it had to manage the effects on the state.                                                                           
                                                                                                                                
Mr.  Mayer  thought the  advantage  of  a project  like  the                                                                    
Armstrong project could  be immense, but could put  a lot of                                                                    
cash flow strain on the state  in the short term. He did not                                                                    
have a good  answer in terms of  a good way to  focus on the                                                                    
unit rather than  the company, but agreed to  come back with                                                                    
more information at a later time.                                                                                               
                                                                                                                                
Senator Hoffman  did not know  if the state wanted  to limit                                                                    
the amount  to specific units, but  thought perhaps limiting                                                                    
the number of  projects a company could  have would diminish                                                                    
the state's liability. At the  present time, a company could                                                                    
have an unlimited number of projects.                                                                                           
                                                                                                                                
Senator  Dunleavy  asked  if   Mr.  Mayer  would  discuss  a                                                                    
schedule of  investments. He  discussed falling  oil prices,                                                                    
and wondered if  the state should be looking  at a continual                                                                    
investment  concept,  so  that  production  was  continually                                                                    
going towards maintaining the pipeline.                                                                                         
                                                                                                                                
Mr.  Mayer agreed  with  Senator  Dunleavy that  incremental                                                                    
constant reinvestment was  the only way to  stem decline. He                                                                    
observed an  impressive amount of  investment in  the recent                                                                    
years, even considering the ongoing  downturn in oil prices.                                                                    
He acknowledged  the current strain  of bearing the  cost of                                                                    
credits in  a low  price environment,  and thought  the long                                                                    
term  issue was  that it  could not  possibly be  maintained                                                                    
with oil prices at such a low.                                                                                                  
                                                                                                                                
8:55:30 AM                                                                                                                    
                                                                                                                                
Senator   Dunleavy  asked   if  Mr.   Mayer  would   discuss                                                                    
investment mentality, and how tax  policy might come to bear                                                                    
in middle and long term potential investments.                                                                                  
                                                                                                                                
Mr. Mayer emphasized  that there was no  single attribute of                                                                    
a fiscal  system more important  than stability,  and Alaska                                                                    
had changed its  fiscal system many times  over the previous                                                                    
decade. He  thought there were  certain things, such  as the                                                                    
GVR  and  if  it  inflated   the  NOL  credits,  which  were                                                                    
important to look at as oversights  of the SB 21 process. He                                                                    
thought many other things (such  as floor hardening or other                                                                    
measures) required  trading any  short term gain  for longer                                                                    
term  issues that  were created  in how  investors perceived                                                                    
stability of the state's fiscal  regime. He asserted that no                                                                    
one  wanted  to   invest  in  a  regime   that  changed  the                                                                    
fundamentals of its fiscal system every couple of years.                                                                        
                                                                                                                                
Senator Dunleavy  asked Mr. Mayer  if from  his perspective,                                                                    
Alaska was a  place that changed its tax  systems more often                                                                    
than others.                                                                                                                    
                                                                                                                                
Mr. Mayer was  not aware of many  jurisdictions that changed                                                                    
their fiscal regime  as often as Alaska  debated and changed                                                                    
its regime.                                                                                                                     
                                                                                                                                
Co-Chair Kelly asked if there  was anything in the bill that                                                                    
Mr. Mayer could predict that would increase production.                                                                         
                                                                                                                                
Mr.  Mayer  answered  in  the  negative,  and  thought  that                                                                    
whichever version of the bill  was passed, it did not change                                                                    
the  fact that  there was  major credit  outlay in  the Cook                                                                    
Inlet. He thought  that efforts to try and  limit the credit                                                                    
outlay, and to  some extent put a floor  under the revenues,                                                                    
were driven by  the short term financial needs  of the state                                                                    
as opposed to the long term investment climate.                                                                                 
                                                                                                                                
Co-Chair Kelly  used an analogy to  ask Mr. Mayer if  SB 130                                                                    
would increase or decrease production.                                                                                          
                                                                                                                                
Mr. Mayer was not sure that  the analogy was the best way in                                                                    
which to  think about the  important question of  the future                                                                    
of production.                                                                                                                  
                                                                                                                                
Co-Chair Kelly  thought that it  was obvious  that hardening                                                                    
the floor  and other measures would  decrease investment and                                                                    
decrease production.                                                                                                            
                                                                                                                                
8:59:12 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon mentioned that  the state had a long-term                                                                    
relationship   with  oil   and  gas   explorers,  producers,                                                                    
transporters,  and other  businesses around  the state.  She                                                                    
thought  it was  possible for  the state  to examine  itself                                                                    
like a  business, and  consider how to  move forward  in the                                                                    
current  fiscal climate.  She referred  to the  assertion by                                                                    
the governor that the state  could no longer function in the                                                                    
same  capacity,   and  had  less  ability   to  invest.  She                                                                    
commented that similarly to the  state, the oil industry was                                                                    
also  reducing  its  workforce and  laying  down  rigs.  She                                                                    
referred to  proposals for new revenue  and shared taxation,                                                                    
to  help  compensate  for the  current  credit  system;  but                                                                    
thought  the  problem was  projecting  into  the future  and                                                                    
considering the deficit.                                                                                                        
                                                                                                                                
Co-Chair MacKinnon  continued discussing the  state's fiscal                                                                    
situation and  new revenue proposals.  She used  the example                                                                    
of  taxes   on  alcohol,  tobacco,  gambling,   mining,  and                                                                    
fishing; all  of which could  not supplant the  dollars that                                                                    
the state was expending under  the tax credit situation. She                                                                    
did not  want to change  the oil tax regime,  but emphasized                                                                    
that the state  did not have the resources in  the long term                                                                    
to pay for its expenses.  She wondered how to create balance                                                                    
with industry in the state.                                                                                                     
                                                                                                                                
Co-Chair  MacKinnon  continued to  use  the  analogy of  the                                                                    
state  as  a  business,  and drew  a  parallel  between  the                                                                    
state's finances  and those of  companies in the  state. She                                                                    
asked  the  committee  to  use time  to  have  a  roundtable                                                                    
discussion on  the topic of  what the state  should consider                                                                    
(as  a sovereign)  to  retool  what it  had  to invest.  She                                                                    
emphasized that  the state  wanted to invest  and be  a good                                                                    
business   partner.  She   rejected   the   idea  that   the                                                                    
legislature was trying  to alter oil tax  policy, but rather                                                                    
trying to balance the existing system  and act as a board of                                                                    
directors of a good business.                                                                                                   
                                                                                                                                
9:05:43 AM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche  thought there  was a difference  in the                                                                    
way the  state had  been politically  fickle on  tax policy;                                                                    
yet thought that even though it  had settled on a system, it                                                                    
should still  periodically evaluate  and adjust  blatant and                                                                    
significant flaws  in the policy.  He thought the  state was                                                                    
engaged in  a healthy  evaluation. He  stated that  he could                                                                    
give a  healthy debate on the  value of SB 21,  but noted it                                                                    
had  unintended consequences  that  could  be addressed.  He                                                                    
expressed that he  was a supporter of the  oil industry, but                                                                    
thought it was important to  evaluate adjustments and find a                                                                    
balance.                                                                                                                        
                                                                                                                                
Co-Chair  MacKinnon commented  that she  wanted industry  to                                                                    
know  that the  state  was responding  as  a business  would                                                                    
respond; and trying to protect  its shareholders, and not at                                                                    
the expense of one industry.                                                                                                    
                                                                                                                                
Senator Bishop  discussed competition on a  global commodity                                                                    
price  comparison, and  thought Alaska  was starting  with a                                                                    
disadvantage.  He concurred  with comments  of the  previous                                                                    
speaker. He  discussed the  six times  in eleven  years that                                                                    
the  tax  structure  had been  changed.  He  emphasized  the                                                                    
importance  of  modelling  the structure  with  stakeholders                                                                    
from  government  and  industry   present  to  arrive  at  a                                                                    
tentative agreement to be considered  by the legislature. He                                                                    
referenced  resource  development   in  Aberdeen,  Scotland;                                                                    
which had experienced  a boom and bust cycle.  He brought up                                                                    
an area of North Dakota that was facing a decline.                                                                              
                                                                                                                                
9:09:49 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy  thought production on the  North Slope was                                                                    
an anomaly due to the Cold  War and dependence on oil in the                                                                    
Middle East. He  referred the North Sea. He  referred to new                                                                    
technology, and  less expensive places  in which  to invest.                                                                    
He   thought    that   individual   legislators    and   the                                                                    
administration were  not on  the same  page. He  thought the                                                                    
administration was focused on  natural gas. He thought there                                                                    
were  groups that  had saturated  the public  with the  idea                                                                    
that no  further cuts could  be made,  and the idea  that it                                                                    
was necessary to draw from  savings. He referred to Alaska's                                                                    
Clear  and Equitable  Share (ACES),  and thought  it was  an                                                                    
opportunistic  attempt  to  reap   benefits  from  high  oil                                                                    
prices.                                                                                                                         
                                                                                                                                
Senator  Dunleavy continued,  and pondered  that no  one had                                                                    
anticipated   that  the   price   of  oil   would  drop   so                                                                    
precipitously. He  thought that there were  people in Alaska                                                                    
that  believed  it was  not  possible  to reduce  government                                                                    
further, and  the bill  being considered  was an  example of                                                                    
trying to  glean money  where available.  He thought  it was                                                                    
time  to  decide  realistically  what  the  actions  of  the                                                                    
legislature  would do  to the  state's future  relationships                                                                    
and investments  in oil; as  well as what the  actions would                                                                    
do  to the  permanent  fund.  He thought  that  many of  the                                                                    
issues  were linked  and difficult  to separate.  He thought                                                                    
the state  had done a  tremendous amount of  budget reducing                                                                    
over  the  previous  two  years. He  pointed  out  that  the                                                                    
permanent fund  was not 100 percent  invested within Alaska.                                                                    
He  pondered  that  the Alaska  Permanent  Fund  Corporation                                                                    
would  most likely  not invest  in the  state. He  mentioned                                                                    
that  the  robust  native corporations  had  much  of  their                                                                    
investments  outside  of  the state.  He  thought  that  the                                                                    
recent  policy changes  had made  the state  an unattractive                                                                    
investment.                                                                                                                     
                                                                                                                                
9:13:28 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly  referred  to   points  he  disagreed  with,                                                                    
including that  the assertion that  the state  had responded                                                                    
to the fiscal  situation. He asserted out  that industry had                                                                    
laid of  thousands of people,  while the state had  laid off                                                                    
only up  to 50.  He disagreed  with Vice-Chair  Micciche and                                                                    
thought that changing  the state's tax regime 6  times in 11                                                                    
years  was   fickle.  He   emphasized  that   nothing  being                                                                    
considered  in  the  bill   would  increase  production.  He                                                                    
recounted working with the  previous administration with the                                                                    
goal  of increasing  oil production  to up  to $1.1  million                                                                    
barrels  of oil.  He thought  the  state had  missed a  huge                                                                    
opportunity when  the price of oil  had been up to  $140 per                                                                    
barrel  and   the  state  was   operating  under   ACES.  He                                                                    
acknowledged  that it  had  earned the  state  money at  the                                                                    
serious cost  of loss of  investment. He was  not supportive                                                                    
of ACES.                                                                                                                        
                                                                                                                                
Co-Chair  Kelly  discussed  the   benefits  of  oil  company                                                                    
investment,  including jobs.  He continued  to say  that the                                                                    
only jobs  that the legislature  had been trying  to protect                                                                    
were  state jobs.  He discussed  the taxing  environment and                                                                    
thought there  were unpredictable  effects. He  thought that                                                                    
it was intuitive that nothing  the committee was doing would                                                                    
increase  production. He  thought issues  in the  Cook Inlet                                                                    
were different, but considered that  happenings on the North                                                                    
Slope should not  be under discussion. He did  not think the                                                                    
legislature should be considering altering SB 21.                                                                               
                                                                                                                                
9:18:02 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman thought  that  all  committee members  were                                                                    
concerned about the state's fiscal  situation, and wanted to                                                                    
do what  was right for  the state.  He spoke to  the state's                                                                    
dependency on the  oil industry. He mentioned  the number of                                                                    
changes that  had happened in  recent years, and  thought it                                                                    
reflected  on  the  politics  of  the  legislature  and  the                                                                    
governor.  He reminded  the committee  that the  legislature                                                                    
was there to take care  of the people's business. He thought                                                                    
committee  members looked  across  party  lines. He  thought                                                                    
there was  promise in  the state, more  so than  most people                                                                    
could realize  at the current  time. He felt that  the state                                                                    
needed to  tighten its belt  more. He thought  the permanent                                                                    
fund  dividend (PFD)  was crucial  to Alaskans,  and thought                                                                    
Alaskan's  were  looking  at  the issue  more  so  than  any                                                                    
others. He considered  that extreme care should  be taken in                                                                    
any course of action concerning  the PFD. He emphasized that                                                                    
the state  should be  thankful for the  gifts the  state had                                                                    
provided.                                                                                                                       
                                                                                                                                
Senator  Olson   expressed  optimism  for  the   state,  and                                                                    
attributed it  to having young  children. He  looked forward                                                                    
to the future, and spoke about being a child in the state.                                                                      
                                                                                                                                
9:21:30 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  asked Mr. Mayer  to provide  guidance in                                                                    
the  context of  the state  being a  business and  a partner                                                                    
with  components in  different  professions and  industries.                                                                    
She asked  Mr. Mayer to  provide the committee  with written                                                                    
comments on how the state could  be a good partner, and move                                                                    
forward  in  a  balanced  way.  She  asked  him  to  address                                                                    
historical  tension   between  a  sovereign   and  taxation,                                                                    
understanding  the  inability  of   the  state  to  continue                                                                    
forward  under the  current structure.  She referred  to the                                                                    
AKLNG project,  in which  the state  was proposing  being an                                                                    
equity owner.                                                                                                                   
                                                                                                                                
Mr. Mayer  stated that clearly the  overwhelming problem was                                                                    
(in  the low  priced  oil environment)  the balance  between                                                                    
revenues  the  state  received from  its  overall  petroleum                                                                    
fiscal system and the amount  it was spending on credits. He                                                                    
stated that  the Cook  Inlet and the  North Slope  were very                                                                    
different,  in terms  of the  amount of  revenue versus  the                                                                    
amount of  credits going out;  and the balance was  more off                                                                    
when  looking  at Cook  Inlet  versus  the North  Slope.  He                                                                    
thought  it was  important to  consider the  purpose of  the                                                                    
credits and how they functioned.  In Cook Inlet, the credits                                                                    
were concerned with spending  money to incentivize favorable                                                                    
behaviors; while on the North  Slope, the credits were about                                                                    
timing  of cash.  He explicated  that  when considering  the                                                                    
refund of NOL credit and  floor hardening, the point was the                                                                    
time at which costs were recognized.                                                                                            
                                                                                                                                
Mr.  Mayer  commented  that  it  was  clear  that  what  was                                                                    
happening in  Cook Inlet was  unsustainable. He  stated that                                                                    
many companies  were committed  to serious  capital programs                                                                    
for the current  year, and he thought it  was very important                                                                    
to  ensure that  the  companies could  continue the  capital                                                                    
programs in the current year.  He thought there was a strong                                                                    
argument  to  say  that  companies   could  be  pushed  into                                                                    
bankruptcy by  the state trying  to take away  support. From                                                                    
the   following  year   onwards,   he   thought  there   was                                                                    
possibility to  take away a  lot of  the support and  not to                                                                    
have to do so in an excessively gradual way.                                                                                    
                                                                                                                                
Mr.  Mayer  thought  there   were  harder  more  intractable                                                                    
problems  on the  North Slope,  because they  were concerned                                                                    
with  timing of  cash flows.  He  referred to  slide 23  and                                                                    
pondered   if   the  state   should   try   and  limit   the                                                                    
refundability of the credits.  Limiting the refundability of                                                                    
the  credits was  a  method of  constraining  the cash  flow                                                                    
problem, but had  major impacts on who could  operate in the                                                                    
basin. He  remarked on  the state's  policy of  the previous                                                                    
years of  using a  system to try  and encourage  small, less                                                                    
well capitalized companies to  try and diversify and operate                                                                    
in the basin,  and thought it had been  successful thus far.                                                                    
He  thought that  changing  the policy  would  have a  major                                                                    
impact  on  the  amount  of  capital  required  to  do  such                                                                    
projects, and therefore the sorts  of companies who could do                                                                    
them. Major shifts in the  policy could mitigate the state's                                                                    
cash crunch, but  would have a major impact  on whether some                                                                    
currently  operating companies  could  continue. He  thought                                                                    
the great  risk for the  state was  in trying to  manage the                                                                    
cash timing  crunch versus having major  detrimental effects                                                                    
in the long run.                                                                                                                
                                                                                                                                
9:26:10 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  suggested that an important  framing question for                                                                    
a state with major financial  assets was how to leverage the                                                                    
assets to decrease volatility,  and provide stability during                                                                    
a cash crunch.  He considered how much the  state would make                                                                    
difficult  decisions  in  the present,  that  had  potential                                                                    
major impacts for the future;  and conversely to what degree                                                                    
the  state would  try and  minimize long-term  consequences,                                                                    
understanding   that  it   made  short-term   finances  more                                                                    
difficult.                                                                                                                      
                                                                                                                                
SB  130  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
9:27:01 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:53:20 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                

Document Name Date/Time Subjects
HB 314 SCSHB 314(FIN) ver G.pdf SFIN 4/17/2016 8:00:00 AM
HB 314
HB 289 S CS HB 289(FIN) ver E.pdf SFIN 4/17/2016 8:00:00 AM
HB 289
HB 289 S CS HB 289 (FIN) Sectional Analysis.docx SFIN 4/17/2016 8:00:00 AM
HB 289