Legislature(2015 - 2016)

04/18/2016 03:30 PM FINANCE

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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."                                                                                                                     
                                                                                                                                
3:38:00 PM                                                                                                                    
                                                                                                                                
JANAK MAYER, CHAIRMAN AND CHIEF TECHNOLOGIST, ENALYTICA,                                                                        
introduced himself.                                                                                                             
                                                                                                                                
NIKOS TSAFOS,  PRESIDENT AND  CHIEF ANALYST,  ENALYTICA (via                                                                    
teleconference),  discussed the  presentation titled  "CS SB                                                                    
130: Key  Issues and Assessment"  (copy on  file), beginning                                                                    
with slide 25, "CI Overview and Changes: Activity":                                                                             
                                                                                                                                
     Activity has responded in recent years                                                                                     
                                                                                                                                
     Exploration  drilling in  Cook Inlet  has gone  through                                                                    
     several cycles since 1950s                                                                                                 
                                                                                                                                
     Recent  exploration activity  (post 2010)  on par  with                                                                    
     previous exploration peaks                                                                                                 
                                                                                                                                
     Development  drilling has  been  more  stable over  the                                                                    
     years                                                                                                                      
                                                                                                                                
     Recent growth placing  three-year rolling average among                                                                    
     highest in state's history                                                                                                 
                                                                                                                                
Mr. Tsafos highlighted slide 26, "Cook Inlet Oil and Gas                                                                        
Production: Basic facts":                                                                                                       
                                                                                                                                
     Oil: Peak  in 1970 at 226  mb/d; trough in 2009  at 7.5                                                                    
     mb/d; upturn post 2010 (+10.5 mb/d)                                                                                        
                                                                                                                                
     Gross Gas:  Peak in  1990 at 853  mmcf/d; big  drops in                                                                    
     1994-1998 and 2005-2013; stable in 2014-15                                                                                 
                                                                                                                                
     Net Gas: Peak  in 1996; 1990s plateau  from blowdown at                                                                    
     Swanson River; fall post 2005, then stable                                                                                 
                                                                                                                                
3:43:42 PM                                                                                                                    
                                                                                                                                
Mr. Tsafos discussed slide 27, "CI Overview and Changes:                                                                        
Scorecard":                                                                                                                     
                                                                                                                                
     the Cook inlet oil and gas market: A scorecard                                                                             
                                                                                                                                
          What has happened to oil and gas production and                                                                       
          activity in the Cook Inlet in recent years?                                                                           
                                                                                                                                
               Oil production has risen from 7.5 mb/d in                                                                        
               2009 to almost 18 mb/d                                                                                           
                                                                                                                                
               Gas production has  stabilized after years of                                                                    
               steadier decline                                                                                                 
                                                                                                                                
          How has the gas market adjusted in recent years?                                                                      
                                                                                                                                
               Cook Inlet has  undergone major transition in                                                                    
               supply,   demand,  prices,   competition  and                                                                    
               expectations                                                                                                     
                                                                                                                                
               Some of  these changes are typical  in mature                                                                    
               basins-others are unique to Cook Inlet                                                                           
                                                                                                                                
          What's the outlook and how sensitive is the                                                                           
          outlook to changes in oil/gas fiscal system?                                                                          
                                                                                                                                
               DNR:  1,183  bcf  in remaining  2P  reserves;                                                                    
               1,600 bcf w/  Cosmopolitan and Kitchen Lights                                                                    
               (ballpark)                                                                                                       
                                                                                                                                
               Continued   drilling  at   old  fields   plus                                                                    
               Cosmopolitan  and   Kitchen  Lights:  current                                                                    
               market well supplied                                                                                             
                                                                                                                                
               At  current  (gas) price  levels,  brownfield                                                                    
               investment   should   be   profitable   under                                                                    
               stricter fiscal regime                                                                                           
                                                                                                                                
               Credits  more  important for  developing  new                                                                    
               resources,     especially     with     demand                                                                    
               constraints                                                                                                      
                                                                                                                                
               Currently   much   uncertainty  over   future                                                                    
               regime  -   setting  a   stable,  sustainable                                                                    
               system is paramount                                                                                              
                                                                                                                                
3:55:10 PM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche felt  it would be nice  to determine the                                                                    
potential  demand based  on all  of  the different  factors.                                                                    
Mr. Tsafos responded that there  were multiple strategies to                                                                    
attract investment.                                                                                                             
                                                                                                                                
Co-Chair MacKinnon announced that there would be further                                                                        
meetings related to the oil and gas tax structure.                                                                              
                                                                                                                                
Mr. Mayer continued to discuss slide 27.                                                                                        
                                                                                                                                
4:04:48 PM                                                                                                                    
                                                                                                                                
Mr.   Mayer  looked   at  slide   28,  "Project   1:  Market                                                                    
constrained (assumptions)":                                                                                                     
                                                                                                                                
    Large upfront investment but constrained gas market                                                                         
     Limited ability to sell gas: can only drill a well                                                                         
     every few years                                                                                                            
                                                                                                                                
Mr.  Mayer discussed  slide 29,  "CI  Overview and  Changes:                                                                    
Project  1;  Project  1,  Market  Constrained  Results."  He                                                                    
stated that the slide  represented three separate scenarios:                                                                    
Status Quo; CS SB 130(RES), CS HB 247(FIN).                                                                                     
                                                                                                                                
4:11:51 PM                                                                                                                    
                                                                                                                                
Senator Dunleavy  wondered if  there would  be a  decline in                                                                    
demand for credit without any  changes. Mr. Mayer replied in                                                                    
the affirmative.                                                                                                                
                                                                                                                                
Senator  Dunleavy felt  that idle  rigs  would decrease  the                                                                    
credits. Mr. Mayer agreed.                                                                                                      
                                                                                                                                
Senator Dunleavy  remarked that  the environment may  not be                                                                    
attractive for a  capital constrained company to  move a rig                                                                    
to the North Slope in a small market. Mr. Mayer agreed.                                                                         
                                                                                                                                
4:15:14 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:15:37 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
4:15:44 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  highlighted slide 30,  "CI Overview  and Changes:                                                                    
Project 2":                                                                                                                     
                                                                                                                                
     Project 2: Market un-constrained (assumptions)                                                                             
                                                                                                                                
     Large upfront investment but un-constrained gas market                                                                     
                                                                                                                                
    Continued drilling lead to a plateau of 130 mmcf/d                                                                          
                                                                                                                                
     Scenario would require a step change in existing                                                                           
     supply-demand dynamics in Cook Inlet                                                                                       
                                                                                                                                
Mr.  Mayer addressed  slide 31,  "CI  Overview and  Changes:                                                                    
Project 2; Project 2: Un-constrained Results."                                                                                  
                                                                                                                                
Mr. Mayer  highlighted slide 32,  "CI Overview  and Changes:                                                                    
Project 3":                                                                                                                     
                                                                                                                                
    Project 3: Drilling in existing field (assumptions)                                                                         
                                                                                                                                
     Drilling expenditures at existing production-smaller                                                                       
     upfront investment                                                                                                         
                                                                                                                                
     No market constrains assumed                                                                                               
                                                                                                                                
     This is a point-forward analysis-it ignores sunk,                                                                          
     entry or acquisition costs                                                                                                 
                                                                                                                                
4:18:05 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer discussed  slide 33,  "CI  Overview and  Changes:                                                                    
Project 3; Project 3: Drilling Existing Field Results."                                                                         
                                                                                                                                
Vice-Chair Micciche  looked at slide 31,  which demonstrated                                                                    
that the  elimination of the  production tax had  no effect.                                                                    
The only  difference in the  reduction of the  internal rate                                                                    
of return and  the increase in the revenue to  the state was                                                                    
the  level  of the  reduction  of  credits between  the  two                                                                    
bills. Mr. Mayer replied in the affirmative.                                                                                    
                                                                                                                                
Vice-Chair  Micciche shared  that he  had further  questions                                                                    
that he would address later.                                                                                                    
                                                                                                                                
4:22:51 PM                                                                                                                    
                                                                                                                                
Co-Chair   MacKinnon  stated   that  the   purpose  of   the                                                                    
presentations were  meant to set  an examination of  how the                                                                    
credits were utilized in the state.                                                                                             
                                                                                                                                
Mr. Mayer encouraged  the committee to see  that the credits                                                                    
in Cook Inlet were  about incentivizing activities that were                                                                    
less  affordable than  in the  past. The  North Slope  could                                                                    
remain, but the  net operating loss credit  was about timing                                                                    
of tax flows rather than the total amount.                                                                                      
                                                                                                                                
Senator  Dunleavy remarked  that the  Cook Inlet  dealt with                                                                    
mostly  gas. He  wondered if  there could  be increased  oil                                                                    
production  in  Cook  Inlet.  Mr.   Mayer  replied  that  it                                                                    
depended  on   the  oil  price,   rather  than   the  credit                                                                    
environment.                                                                                                                    
                                                                                                                                
Senator Dunleavy  shared that transportation  and production                                                                    
costs  were lower  in Cook  Inlet than  the North  Slope. He                                                                    
remarked that he would ask  a similar question the following                                                                    
day. Mr. Mayer agreed.                                                                                                          
                                                                                                                                
Co-Chair MacKinnon wondered whether  the credit market would                                                                    
see Alaska  in a more  stable environment, should  the state                                                                    
use the savings to have an  annuity payment or a fixed draw.                                                                    
Mr. Mayer replied that it was  always good to have assets to                                                                    
smooth  the   volatility  that   comes  with   depending  on                                                                    
commodity prices.                                                                                                               
                                                                                                                                
Co-Chair MacKinnon felt that it  would be a positive step to                                                                    
change the current structure. Mr. Mayer agreed.                                                                                 
                                                                                                                                
SB  130  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
4:28:21 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:32:30 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                

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