Legislature(2017 - 2018)SENATE FINANCE 532

04/28/2017 09:00 AM FINANCE

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Audio Topic
09:03:49 AM Start
09:04:57 AM Presenation: Senate Fiscal Plan
01:33:08 PM HB111
03:26:01 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Recessed to 1:30 p.m.
+ Presentation: Senate Fiscal Plan TELECONFERENCED
+ HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)                                                                                         
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     relating  to carried-forward  lease expenditures  based                                                                    
     on losses  and limiting those lease  expenditures to an                                                                    
     amount  equal  to  the  gross value  at  the  point  of                                                                    
     production of  oil and gas  produced from the  lease or                                                                    
     property  where  the  lease expenditure  was  incurred;                                                                    
     relating to  information concerning tax  credits, lease                                                                    
     expenditures, and  oil and gas  taxes; relating  to the                                                                    
     disclosure of that information  to the public; relating                                                                    
     to an  adjustment in  the gross value  at the  point of                                                                    
     production;  and  relating  to  a  legislative  working                                                                    
     group."                                                                                                                    
                                                                                                                                
1:33:08 PM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon discussed the agenda.                                                                                        
                                                                                                                                
1:33:51 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:34:03 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
KARA  MORIARTY,  PRESIDENT   AND  CHIEF  EXECUTIVE  OFFICER,                                                                    
ALASKA OIL  AND GAS ASSOCIATION, discussed  the presentation                                                                    
"Senate Finance  Committee -  HB 111,"  (copy on  file). She                                                                    
stated that  the Alaska Oil  and Gas Association  (AOGA) was                                                                    
the state's professional oil and  gas trade association; and                                                                    
its  members   represented  the  majority   of  exploration,                                                                    
production, and refining companies  in the state. She stated                                                                    
that  HB  111 represented  the  seventh  change in  oil  tax                                                                    
policy in twelve years.                                                                                                         
                                                                                                                                
Ms.  Moriarty thought  that some  had misrepresented  AOGA's                                                                    
position  on past  oil tax  policy changes  in the  previous                                                                    
decade.  She stated  for the  record that  industry had  not                                                                    
asked the  legislature to  make any  changes in  the current                                                                    
year.  She  asserted  that the  current  tax  structure  had                                                                    
clear, undeniable  proof existed that the  law attracted new                                                                    
companies  to the  state and  had created  a fiscal  climate                                                                    
that encouraged companies to invest  more, which had in turn                                                                    
facilitated the ultimate goal of  getting more oil in to the                                                                    
Trans-Alaska pipeline system. Ms.  Moriarty wondered why the                                                                    
legislature  was considering  abandoning and  reversing what                                                                    
she considered to be a successful policy.                                                                                       
                                                                                                                                
Ms. Moriarty looked at slide 3, "House Majority Goals":                                                                         
                                                                                                                                
     There  is  no  silver  bullet for  solving  our  fiscal                                                                    
     problem. To  maintain the Alaska  that we want  to live                                                                    
     in,  we  need  a   durable  solution  that  includes  a                                                                    
     combination  of measures:  a  Percent  of Market  Value                                                                    
     draw  from the  Earnings  Reserve  Account (within  the                                                                    
     Alaska Permanent  Fund); a reasonable  broad-based tax;                                                                    
     a   moderate   and   protected  PFD   payout;   and   a                                                                    
     restructuring  of   the  oil   and  gas   tax  credits.                                                                    
     Implemented together,  these four pillars will  lay the                                                                    
     foundation for a prosperous future for all Alaskans.                                                                       
                                                                                                                                
     - Reps.  Paul Seaton &  Neal Foster (House  Finance Co-                                                                    
     Chairs)                                                                                                                    
                                                                                                                                
Ms. Moriarty discussed slide 4, "Governor Walker's Goals":                                                                      
                                                                                                                                
     Alaska  is  facing  annual deficits  of  more  than  $3                                                                    
     billion - even  after budget cuts of 44  percent in the                                                                    
     past four years. Without a  plan we'll burn through our                                                                    
     budget  reserves  in  less  than  two  years.  The  New                                                                    
    Sustainable Alaska Plan calls for a combination of                                                                          
          1. Spending reductions                                                                                                
          2. Sustainable use of Permanent Fund earnings                                                                         
          3. Modest tax increases                                                                                               
          4. Oil and gas tax credit reform                                                                                      
                                                                                                                                
     https://gov.alaska.gov/administration-focus/new-                                                                           
     sustainable-alaskaplan/                                                                                                    
                                                                                                                                
Ms. Moriarty  showed slide  5, "Senate  Resources CS  for HB                                                                    
111":                                                                                                                           
                                                                                                                                
     HB 111 "eliminates the state's  cash exposure by ending                                                                    
     the program  of refundable oil  and gas tax  credits to                                                                    
     small  or new  companies.  Transitions to  a system  of                                                                    
     carrying  forward  operating  losses  for  use  against                                                                    
     future tax  liability, while  protecting the  basic tax                                                                    
     components in statute today."                                                                                              
                                                                                                                                
     Senate  Resources   Committee,  Summary   of  Committee                                                                    
     Substitute, 4/24/17                                                                                                        
                                                                                                                                
Ms. Moriarty suggested  that it was the goal  of the leaders                                                                    
of the  House, Senate,  and the  governor to  eliminate cash                                                                    
credits   as  proposed   by  the   bill.  She   thought  the                                                                    
elimination of  the credits  would increase  government take                                                                    
and impact the economics  of several potential projects. She                                                                    
stated  that  the  version  of  the  bill  being  considered                                                                    
addressed  several concerns  AOGA had  outlined in  previous                                                                    
bill hearings. She considered that  previous versions of the                                                                    
bill had multiple  sections that had nothing to  do with oil                                                                    
and gas  tax credits  and were simply  tax increases  on the                                                                    
industry.  She   thought  the  Senate   Resources  Committee                                                                    
version  of the  bill seemed  to be  focus primarily  on the                                                                    
goal of eliminating cash credits.  She mentioned a memo from                                                                    
AOGA  dated  March 13,  2017  that  had addressed  technical                                                                    
questions and concerns (copy on file).                                                                                          
                                                                                                                                
1:37:45 PM                                                                                                                    
                                                                                                                                
Ms. Moriarty spoke  to slide 6, "Senate Resources  CS for HB                                                                    
111 Meets Governor's Goals":                                                                                                    
                                                                                                                                
     HB   1111   resolves   four  high   priority   concerns                                                                    
     identified by the governor:                                                                                                
                                                                                                                                
     1.  Transition   Alaska  away  from  the   business  of                                                                    
         providing cash credits/rebates to the oil and gas                                                                      
         industry                                                                                                               
     2.  Reduce  the state's liability related  to potential                                                                    
         large future investments                                                                                               
     3.  Defer the  state's direct participation in the cost                                                                    
         of a new project until it comes into production                                                                        
     4. The oil industry should participate as part of the                                                                      
         overall fiscal plan for Alaska                                                                                         
                                                                                                                                
     Source: DOR Presentation 4/14/17                                                                                           
                                                                                                                                
Ms.  Moriarty referred  to a  statement  by Commissioner  of                                                                    
Revenue Randall  Hoffbeck that  suggested the  blended gross                                                                    
tax/net  tax structure  was well  designed  for the  state's                                                                    
position.                                                                                                                       
                                                                                                                                
Ms.  Moriarty continued  discussing  slide  6, and  believed                                                                    
that  with the  elimination of  cash credits,  the state  no                                                                    
longer  had participation  in new  projects. She  emphasized                                                                    
that not  only did the  oil industry participate as  part of                                                                    
the  state's fiscal  plan, but  it was  the state's  largest                                                                    
taxpayer  to date.  She continued  that the  state took  the                                                                    
largest profit  share at every  oil price, and HB  111 would                                                                    
increase government  take. She  referred to a  recent report                                                                    
from OMB that outlined  different categories of expenditures                                                                    
per capita,  but failed to mention  different income streams                                                                    
per capita.  She detailed  that in  FY 16,  the oil  and gas                                                                    
industry  contributed just  over $2.1  billion to  state and                                                                    
local governments, which equated  to over $2,800 per Alaskan                                                                    
in the previous fiscal year.                                                                                                    
                                                                                                                                
Ms.  Moriarty  stated  that  she had  a  personal  stake  in                                                                    
solving the  state's fiscal issues. She  urged the committee                                                                    
to  not pursue  changes that  would dramatically  impact the                                                                    
investment climate for Alaska.  She thought the state needed                                                                    
a  policy  that  would  continue  to put  more  oil  in  the                                                                    
pipeline, which would benefit the  entire state economy. She                                                                    
thanked the committee for the opportunity to testify.                                                                           
                                                                                                                                
Co-Chair  MacKinnon acknowledged  Senator  Cathy Giessel  in                                                                    
the gallery.                                                                                                                    
                                                                                                                                
1:41:32 PM                                                                                                                    
                                                                                                                                
DAN SECKERS,  TAX COUNSEL, EXXONMOBIL, testified  in support                                                                    
of  the  CS  by  the  Senate  Resources  Committee.  He  was                                                                    
supportive  of the  comments of  the previous  testifier. He                                                                    
underscored the concern that oil  tax credits (cash credits)                                                                    
reform  had been  transformed into  changing  policy in  the                                                                    
state  when companies  were struggling.  He thought  that an                                                                    
effort  to  raise taxes  when  companies  were losing  money                                                                    
would not help  the economy. He thought the  proposed CS did                                                                    
address the central issue of  the reform of cashable credits                                                                    
while allowing the state to remain globally competitive.                                                                        
                                                                                                                                
Mr. Seckers continued  his remarks, and thought  that the CS                                                                    
being  considered maintained  the  core structure  of SB  21                                                                    
[oil and  gas tax  legislation passed  in 2013].  He thought                                                                    
that SB 21  had led to more production,  revenues, and jobs.                                                                    
He  stated  that  ExxonMobil had  never  qualified  for  the                                                                    
cashable tax credit  program, and did not  expect to qualify                                                                    
for the program in the future.                                                                                                  
                                                                                                                                
1:44:40 PM                                                                                                                    
                                                                                                                                
Mr. Seckers  mentioned the  memo authored  by AOGA  that was                                                                    
referenced by the previous  testifier. He discussed concerns                                                                    
about  elements of  the bill,  including  the net  operating                                                                    
loss (NOL) carry-forwards. He referred  to Section 23 of the                                                                    
bill,  which  provided that  the  NOL  tax credit  would  be                                                                    
carried  forward  as  an  operating  loss.  He  thought  the                                                                    
provision also  created an ordering rule,  and provided that                                                                    
the current  year expenses  were claimed  before an  NOL was                                                                    
claimed. He discussed the current  tax structure and thought                                                                    
there would be  a crossover point, at which time  the tax on                                                                    
the  net profit  would equal  the  tax on  gross profit.  He                                                                    
thought the  additional deductions had no  value. He thought                                                                    
the  recovery  of  losses  was foundational  to  a  net  tax                                                                    
system,  and to  eliminate  the recovery  would make  Alaska                                                                    
less competitive.                                                                                                               
                                                                                                                                
Mr. Seckers  considered the  credits that  could be  used to                                                                    
reduce  the minimum  tax. He  thought the  CS was  not clear                                                                    
with regard  to application  of credits against  the minimum                                                                    
tax. He  thought the more  clarity provided in  statute, the                                                                    
better off everyone would be.                                                                                                   
                                                                                                                                
Mr. Seckers addressed the issue  of gross revenue exclusion,                                                                    
which  he   thought  many  fields  would   qualify  for.  He                                                                    
reiterated the  need for  clarity in  the bill  to establish                                                                    
the intent of the legislature.                                                                                                  
                                                                                                                                
Mr. Seckers highlighted an issue  in Section 23 of the bill.                                                                    
The  section  provided  for uplift  and  he  commented  that                                                                    
ExxonMobil  was  unlikely to  ever  qualify  due to  current                                                                    
production. The  section stated that  the uplift  could only                                                                    
be  used  once  the  field  (generating  the  uplift)  began                                                                    
commercial   production,  which   he   thought  created   an                                                                    
ambiguity. He recalled that HB  247 [oil and gas legislation                                                                    
passed the previous year]  changed law regarding determining                                                                    
qualifications for  a gross  revenue exclusion.  He wondered                                                                    
about  the definitions  of  'production'  and thought  there                                                                    
should be standardization of terms.                                                                                             
                                                                                                                                
Mr.  Seckers   concluded  by  saying  that   Alaska  was  an                                                                    
important part  of ExxonMobil's  portfolio, and  the company                                                                    
planned  to be  in  the state  for many  years  to come.  He                                                                    
thought that  if taxes  were increased,  opportunities would                                                                    
diminish accordingly. He  thought that the goal  of having a                                                                    
globally  competitive  fiscal regime  was  one  of the  most                                                                    
important issues for the state.  He understood the cash flow                                                                    
crisis, as  well as the  attention paid to  cashable credits                                                                    
and how  the issue was  being addressed. He  reiterated that                                                                    
the  CS preserved  the core  structure  of SB  21, which  he                                                                    
believed  had been  working by  leading to  more production,                                                                    
and had led to more royalty payments and taxes.                                                                                 
                                                                                                                                
1:51:40 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Bishop  asked  if  ExxonMobil  had  changed  its                                                                    
capital investment  strategy globally since the  downturn in                                                                    
oil prices.                                                                                                                     
                                                                                                                                
Mr. Seckers relayed that ExxonMobil  had taken a harder look                                                                    
at investments,  and stated that in  low price environments,                                                                    
investments received greater scrutiny.                                                                                          
                                                                                                                                
Co-Chair  MacKinnon  referred  to the  previous  testifier's                                                                    
mention of SB  21, and asked Mr. Seckers to  specify oil tax                                                                    
policy rather  than use a bill  number. She asked if  he was                                                                    
familiar with  the advisory opinion  issued in March  by the                                                                    
tax director from DOR. She  wondered if Mr. Seckers would be                                                                    
challenging  the  interpretation,  and whether  he  saw  the                                                                    
opinion as  a new interpretation,  or rather as  an accurate                                                                    
description of tax policy that had been in place.                                                                               
                                                                                                                                
Mr. Seckers  stated that he  was familiar with  the advisory                                                                    
opinion,  and  it  was  still  under  consideration  by  his                                                                    
company.   He  thought   the   impact   on  the   ExxonMobil                                                                    
Corporation may not be as  severe as for other taxpayers. He                                                                    
did not agree with the  opinion. He thought that the opinion                                                                    
was a  strained interpretation and  was not sure  it matched                                                                    
the  intent of  SB 21.  He stated  that the  corporation had                                                                    
been surprised by the opinion, but would follow the law.                                                                        
                                                                                                                                
Co-Chair  MacKinnon questioned  DOR's interpretation  of the                                                                    
Senate Resources  Committee version of HB  111. She referred                                                                    
to Ms.  Moriarty's earlier comments and  had understood that                                                                    
DOR took  the position  that the  bill would  decrease costs                                                                    
for taxpayers.  She wondered if testifiers  were speaking to                                                                    
the advisory  opinion or to  the bill being  considered. She                                                                    
thought  current policy  had been  reinterpreted differently                                                                    
by the administration's tax director.  She thought there was                                                                    
a different alignment as to  how different components of tax                                                                    
policy were in play and how deductions were taken.                                                                              
                                                                                                                                
1:56:07 PM                                                                                                                    
                                                                                                                                
Mr. Seckers recalled that the  reference to the tax increase                                                                    
was  from  the  CS  rather than  the  advisory  opinion.  He                                                                    
continued  that  the impact  of  the  bill was  relative  to                                                                    
various companies.  He did  not know  the foundation  of the                                                                    
assessment by the department in  saying that there was a tax                                                                    
decrease. He discussed the contents  of the advisory opinion                                                                    
as  related  to  the  CS.  He  thought  that  the  CS  would                                                                    
represent  an  immediate  tax  increase   for  a  number  of                                                                    
companies due to being subjected to a minimum tax.                                                                              
                                                                                                                                
Co-Chair  MacKinnon stated  that the  committee was  working                                                                    
with  DOR to  understand why  the Senate  CS would  decrease                                                                    
taxes.                                                                                                                          
                                                                                                                                
Co-Chair  MacKinnon asked  if  ExxonMobil received  cashable                                                                    
credits from the state.                                                                                                         
                                                                                                                                
Mr. Seckers stated that the  corporation had never qualified                                                                    
for, nor received any cashable credits from the state.                                                                          
                                                                                                                                
1:58:47 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:01:38 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
SCOTT  JEPSEN,  VICE  PRESIDENT   OF  EXTERNAL  AFFAIRS  AND                                                                    
TRANSPORTATION,  CONOCOPHILLIPS, discussed  the presentation                                                                    
"Senate Finance  Committee - SCS CSHB111\P"  (copy on file).                                                                    
He turned  to slide 2,  "Activities Since Tax  Reform (SB21)                                                                    
Passed":                                                                                                                        
                                                                                                                                
     · Added two rigs to the Kuparuk rig fleet, 2013-2014                                                                       
     · Two new-build rigs delivered in 2016                                                                                     
        •Doyon 142 and Nabors CDR3                                                                                              
        •Averaged 4.5 rigs at Kuparuk/Alpine during 2016                                                                        
     · Sanctioned ERD Rig in 2016                                                                                               
     · North East West Sak - DS1H                                                                                               
     · New drill site at Kuparuk (DS 2S) - on stream a year                                                                     
        ago                                                                                                                     
     · Sanctioned 18 additional wells at Alpine CD5                                                                             
     · Sanctioned Greater Mooses Tooth 1 in 2015                                                                                
     · Permitting Greater Mooses Tooth 2                                                                                        
     · Willow discovery and acquisition of 737,000 state                                                                        
       and federal acres in December 2016 lease sale                                                                            
     · Significant other industry investment                                                                                    
                                                                                                                                
Mr. Jepsen  emphasized that  the list  of activities  on the                                                                    
slide  represented billions  of  dollars  of investment  and                                                                    
tens of  thousands of barrels  of new production  coming on-                                                                    
stream.  He  highlighted  the Will  discovery,  which  could                                                                    
equate  to  100,000  of  barrels per  day  and  billions  of                                                                    
dollars  of  investment.  He  relayed   that  SB  21  had  a                                                                    
substantial  impact on  the state  in  terms of  production,                                                                    
jobs, revenue,  and getting more  oil down  the Trans-Alaska                                                                    
pipeline  system. He  discussed the  Greater Mooses  Tooth 1                                                                    
project, which  had employed 1,000 people.  He mentioned new                                                                    
exploration potential.                                                                                                          
                                                                                                                                
Mr. Jepsen  thought everyone was well  aware that production                                                                    
had increased in 2016. He  discussed increased production in                                                                    
2017.  He directed  attention to  a bar  graph on  the lower                                                                    
right  hand corner  of the  slide,  to show  ConocoPhillips'                                                                    
capital investment  in the state.  He highlighted  that 2012                                                                    
was  the last  year of  Alaska's Clear  and Equitable  Share                                                                    
(ACES),  and the  company had  invested  about $800  million                                                                    
while  oil prices  were about  $100 per  barrel. Every  year                                                                    
since the company's capital budget had gone up.                                                                                 
                                                                                                                                
Mr.  Jepsen  noted  that  ConocoPhillips   peak  year  as  a                                                                    
corporation was 2014,  when it spent about  $17 billion. The                                                                    
company had about  $1 billion invested in  Alaska. He stated                                                                    
that  part of  the reason  ConocoPhillips still  invested in                                                                    
the  state was  because there  was a  competitive investment                                                                    
climate.  He thought  SB 21  had been  a key  to sanctioning                                                                    
various projects. He  stated that the decision  to invest in                                                                    
all of the  projects listed on the slide  had been dependent                                                                    
upon the economics and tax investment climate at the time.                                                                      
                                                                                                                                
2:06:43 PM                                                                                                                    
                                                                                                                                
Senator  Micciche asked  what increased  production did  for                                                                    
reducing  the  proportion  of  expense  for  a  company  and                                                                    
therefore the return to the state.                                                                                              
                                                                                                                                
Mr. Jepsen  explained that  when ConocoPhillips  produced an                                                                    
incremental  barrel on  the North  Slope,  it decreased  the                                                                    
overall transportation cost for  every barrel that went down                                                                    
TAPS.  He  stated  that  the company's  cost  for  TAPS  was                                                                    
largely fixed,  so the  greater the  number of  barrels, the                                                                    
cost  per  barrel decreased,  which  in  turn increased  the                                                                    
taxable  value for  the state  (both for  royalty taxes  and                                                                    
severance tax purposes).                                                                                                        
                                                                                                                                
Senator Micciche  asked if increased production  resulted in                                                                    
a  lower  transportation  cost  per  barrel  and  a  greater                                                                    
proportion of dollars that went to the state.                                                                                   
                                                                                                                                
Mr. Jepsen answered in the affirmative.                                                                                         
                                                                                                                                
Mr. Jepsen looked  at slide 3, "FY 2017 Cash  Flow - Current                                                                    
Law -  all 2016 RSB  Assumptions," which showed a  graph. He                                                                    
wanted to  expand on a  comment by a previous  testifier. He                                                                    
stated that  ConocoPhillips was  not a  member of  AOGA, but                                                                    
did  support Ms.  Moriarty's testimony  provided earlier  in                                                                    
the meeting.  He thought that  the company was in  line with                                                                    
most of  her earlier  comments with regard  to the  bill. He                                                                    
thought that one  of the goals of SB 21  had been to provide                                                                    
a leveled  share of  revenue over a  broad range  of prices,                                                                    
and he thought the  chart demonstrated the accomplishment of                                                                    
the goal.                                                                                                                       
                                                                                                                                
Mr. Jepsen  continued to  discuss the bar  graph on  slide 2                                                                    
and pointed out the y-axis  that depicted net cash flow, and                                                                    
the x-axis showed  oil price. He described  the colored bars                                                                    
which represented  the different  shares of cash  flow under                                                                    
current law.  He highlighted  the state share  in the  $60 -                                                                    
$100  per barrel  price range,  which  he felt  demonstrated                                                                    
that the  intent of  SB 21 had  been accomplished.  He noted                                                                    
that the  graph showed that  the state share was  always the                                                                    
largest of the categories. He  highlighted that in the lower                                                                    
price  quadrant,  the state  share  was  positive while  the                                                                    
investor  share  was negative.  He  alleged  that the  state                                                                    
share had  components of gross  taxes including  royalty and                                                                    
property tax.                                                                                                                   
                                                                                                                                
Mr. Jepsen  continued discussing  slide 3. He  observed that                                                                    
the state share was  always approximately 20 percent greater                                                                    
than the investor share. He  thought that SB 21 had achieved                                                                    
a balance and  had provided a better  investment climate. He                                                                    
thought that if the balance  was changed by increasing taxes                                                                    
to  order to  increase  the state's  take,  it would  impact                                                                    
investments in the state.                                                                                                       
                                                                                                                                
2:10:15 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen showed slide 4, "Summary":                                                                                           
                                                                                                                                
     •  Total  cost  matters.  Alaska is  a  high  region  -                                                                    
     increasing taxes increases costs  and makes Alaska less                                                                    
     competitive.                                                                                                               
                                                                                                                                
     •  The  House  version,  CSHB111,  would  significantly                                                                    
     increase the tax structure  and would negatively impact                                                                    
     ConocoPhillips investment decisions.                                                                                       
                                                                                                                                
     •  SCS CSHB111  addresses refundable  cash credits  and                                                                    
     keeps Alaska competitive.                                                                                                  
          • NOL carry forward provisions may not provide                                                                        
          benefit at low oil prices.                                                                                            
                                                                                                                                
     • The  fundamental structure  of SB21  is working  - it                                                                    
     has  it has  stimulated investment,  resulting in  jobs                                                                    
     and  increased  production for  the  first  time in  14                                                                    
     years. Let it continue to work.                                                                                            
                                                                                                                                
Mr.  Jepsen  felt  that   there  was  currently  significant                                                                    
competition  for investment  dollars, particularly  from the                                                                    
shale  plays in  the Lower  48. He  pointed out  that prices                                                                    
were down, cash flow was down,  and the ability to invest in                                                                    
new  projects was  limited by  the amount  of cash  that was                                                                    
available. He  discussed large purchases  of acreage  in the                                                                    
Permian  Basin  [a  sedimentary  basin  largely  in  Western                                                                    
Texas]. He  commented that  in the area  of the  basin wells                                                                    
were cheap to  drill, cheaper to operate,  closer to market,                                                                    
had lower transportation costs,  and fewer regulatory issues                                                                    
than in Alaska.                                                                                                                 
                                                                                                                                
Mr. Jepsen discussed  the concept of total  cost and factors                                                                    
such   as  taxes,   royalty   rates,   capital  costs,   and                                                                    
transportation  costs. He  asserted  that  Alaska was  high-                                                                    
cost,  and  for  ConocoPhillips,  the  cost  of  supply  was                                                                    
approximately  $40 to  $50 per  barrel. In  other locations,                                                                    
the company  could develop resources  for $35 per  barrel or                                                                    
less, which  he thought was consistent  across the industry.                                                                    
He  warned that  if the  legislature increased  the cost  to                                                                    
companies,  the  companies  would be  less  competitive  and                                                                    
would thereby direct less profit to the state.                                                                                  
                                                                                                                                
Mr.  Jepsen commented  that HB  111,  as it  had passed  the                                                                    
House,  represented a  substantial tax  increase that  would                                                                    
have negatively  impacted investments  by companies  such as                                                                    
ConocoPhillips.  He was  pleased that  the Senate  Resources                                                                    
Committee  had  adopted  a  CS   that  did  not  change  the                                                                    
fundamental  tax structure,  but  did  address cashable  tax                                                                    
credits. He  commented that like  ExxonMobil, ConocoPhillips                                                                    
had  never  qualified  for  cashable  credits  and  had  not                                                                    
generated an NOL to date.                                                                                                       
                                                                                                                                
Mr.  Jepsen  thought the  provisions  in  the bill  did  not                                                                    
affect  ConocoPhillips;  and  if  the  bill  passed  in  its                                                                    
current  form, it  would not  have a  significant impact  on                                                                    
investments. He asserted that the  CS preserved the core tax                                                                    
framework under  the current tax  law, which he  thought was                                                                    
important.  He emphasized  the importance  of  how the  bill                                                                    
would be translated from statute into regulation.                                                                               
                                                                                                                                
2:14:15 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen  spoke to the issue  of NOLS. He referred  to the                                                                    
comments of  previous testifiers,  and he thought  that NOLS                                                                    
might  not  provide  benefit  to the  investor  at  low  oil                                                                    
prices.  He   observed  that  since  2013   there  had  been                                                                    
significant  investments  in  the   state,  which  had  been                                                                    
leveraged  by having  a positive  tax climate.  He mentioned                                                                    
increased   jobs,   greater    production,   benefits   from                                                                    
throughput in  TAPS, and  greater revenue  to the  state. He                                                                    
thought  the bill  preserved  the core  of  the current  tax                                                                    
framework,  and   thought  it  would  result   in  continued                                                                    
investment in the state.                                                                                                        
                                                                                                                                
Senator Hughes  asked if  Mr. Jepsen  could speak  about the                                                                    
NOL carry-forwards at low oil prices.                                                                                           
                                                                                                                                
Mr. Jepsen  discussed the carry-forward  of NOLS.  He stated                                                                    
that  currently if  a company  incurred a  NOL, it  would be                                                                    
carried  forward as  an  expense, and  the  amount would  be                                                                    
deducted from  cash flow before calculating  taxes and using                                                                    
per-barrel credits. If  there was a period of  low prices, a                                                                    
company could  meet the minimum  tax without needing  to use                                                                    
the  NOL carry-forward.  He explained  that if  the NOL  was                                                                    
applied  before  the per-barrel  credits,  the  NOL was  not                                                                    
providing a benefit.                                                                                                            
                                                                                                                                
Senator Micciche asked to turn  back to slide 3. He inquired                                                                    
about  the negative  cash flow  reflected on  federal taxes,                                                                    
and asked if the tax impact was not isolated to Alaska.                                                                         
                                                                                                                                
Mr. Jepsen  answered in  the negative.  He stated  that when                                                                    
there was negative cash flow,  it would be reflective of the                                                                    
overall position as a company.                                                                                                  
                                                                                                                                
Senator Micciche asked if there  would be negative cash flow                                                                    
on federal taxes if Alaska was isolated.                                                                                        
                                                                                                                                
Mr. Jepsen  stated that ConocoPhillips  could still  incur a                                                                    
negative federal tax liability.                                                                                                 
                                                                                                                                
2:18:03 PM                                                                                                                    
                                                                                                                                
PAT  FOLEY,  SENIOR  VICE  PRESIDENT  -  ALASKA  OPERATIONS,                                                                    
CAELUS  ENERGY, testified  about the  bill. He  commented on                                                                    
the  price of  oil and  the budget  deficit. He  stated that                                                                    
Caelus had  laid off  about 20 percent  of its  workforce in                                                                    
the  previous  year and  a  half.  He informed  that  Caelus                                                                    
previously  had   capital  budgets  of   approximately  $200                                                                    
million, but  in 2017  the capital budget  was less  than $2                                                                    
million. He  expressed admiration for the  tenacity that the                                                                    
state  government was  displaying  in  tackling the  state's                                                                    
fiscal problems.                                                                                                                
                                                                                                                                
Mr. Foley understood  that there would be  a transition away                                                                    
from  cashable tax  credits. He  beseeched the  committee to                                                                    
find a  way to get earned  tax credits paid. He  stated that                                                                    
Caelus  viewed   its  relationship  with  the   state  as  a                                                                    
partnership.  He believed  that the  long-term solution  for                                                                    
the  state  was  to  grow North  Slope  oil  production.  He                                                                    
emphasized that  tax policy  would affect  future investment                                                                    
in the state.                                                                                                                   
                                                                                                                                
Mr. Foley  referred to  a presentation  the previous  day by                                                                    
Rich  Ruggiero   (copy  on  file),  and   his  reference  to                                                                    
competitiveness. He  agreed with  the presenter  that Alaska                                                                    
needed to  remain competitive  to attract  future investment                                                                    
dollars. He  recounted that the  consultant had  pointed out                                                                    
the  complexity  of  the  tax structure  in  the  state.  He                                                                    
referenced slide  15 in  Mr. Ruggiero's  presentation, which                                                                    
showed what a project would look  like if a company had cash                                                                    
credits. He  discussed the bill  as it had been  passed from                                                                    
the House.                                                                                                                      
                                                                                                                                
Mr.  Foley discussed  the difficulty  of attracting  funding                                                                    
for projects with  an unexpectedly lower rate  of return. He                                                                    
drew attention  to slides  20 through  24 of  Mr. Ruggiero's                                                                    
presentation,  which addressed  the difference  of the  same                                                                    
tax regime  between legacy producers  versus a  new entrant.                                                                    
He  found  it   surprising  that  in  the   $70  per  barrel                                                                    
environment, the same  big project was worth  six times more                                                                    
(net present  value) to a  large company. He  explained that                                                                    
the difference  had to do  with the tax efficiency  of lease                                                                    
expenditures.  He alleged  that  when a  large company  made                                                                    
investments,  it could  avoid a  tax liability  immediately.                                                                    
Conversely, when a new entrant  made the same investment, it                                                                    
received the  benefit of  the investment  dollars 5  or more                                                                    
years in the future.                                                                                                            
                                                                                                                                
2:23:54 PM                                                                                                                    
                                                                                                                                
Mr.  Foley   further  discussed  the  presentation   by  Mr.                                                                    
Ruggiero, and  could not prove  or disprove the  claims made                                                                    
therein. He opined  that the cashable tax credit  was put in                                                                    
place  to  help   level  the  playing  field   to  make  the                                                                    
investment of a new entrant on  similar footing to that of a                                                                    
big producer.                                                                                                                   
                                                                                                                                
Mr.  Foley   discussed  Caelus'  purchase  of   assets  from                                                                    
Pioneer, and considered that Pioneer  left the state because                                                                    
they could  make a greater  return on investment  dollars in                                                                    
their core Texas business. He  stated that Caelus bought the                                                                    
assets because the price was  right, the assets were worthy,                                                                    
and there  was an  attractive tax policy  in place.  The tax                                                                    
credits reduced the  capital that was required  to make some                                                                    
investments.                                                                                                                    
                                                                                                                                
Mr. Foley  discussed tax credits and  subsequent earnings by                                                                    
the state. He  mentioned Caelus' Nuna Project,  which had $1                                                                    
billion yet  to be expended  for oil production  starting in                                                                    
2019. He estimated that peak  oil production for the project                                                                    
would  be  25,000  barrels  per  day.  He  referred  to  the                                                                    
company's Smith  Bay project, and  after drilling  two wells                                                                    
the  company  believed  there  was  more  than  six  billion                                                                    
barrels  of  oil in  place.  He  thought extraction  of  the                                                                    
resource   would   cost   about  $10   billion   in   future                                                                    
investments, and was  unsure of when and how  much oil could                                                                    
be extracted commercially.                                                                                                      
                                                                                                                                
2:26:26 PM                                                                                                                    
                                                                                                                                
Mr. Foley discussed  HB 111, which he  thought represented a                                                                    
significant  tax increase  after losing  the benefit  of tax                                                                    
credits. He  opined that the  bill destroyed  project value,                                                                    
did not  encourage investment,  and did  not result  in more                                                                    
oil through TAPS. He thought  the Senate Resources Committee                                                                    
version of  the bill was  a great improvement over  the bill                                                                    
that was passed  from the house. He thought  the new version                                                                    
of  the   bill  expanded  utilization  of   the  tax  credit                                                                    
certificates he had.                                                                                                            
                                                                                                                                
Mr.  Foley  asked  the  committee   to  consider  two  minor                                                                    
modifications  of the  bill: the  addition  of a  production                                                                    
threshold in Section 23  (pertaining to lease expenditures),                                                                    
and expansion of  a definition in Section  12 (pertaining to                                                                    
alternate  tax credits  for exploration).  He explained  his                                                                    
reasoning and  gave examples of how  the modifications could                                                                    
be made  and what entities  might benefit from  the changes.                                                                    
He  qualified that  his suggested  changes  did not  address                                                                    
issuances or  validity of tax  credits, but rather  only the                                                                    
time frame.                                                                                                                     
                                                                                                                                
2:29:24 PM                                                                                                                    
                                                                                                                                
Mr.   Foley  referred   to   previous  testifiers   comments                                                                    
regarding  the ordering  of tax  calculation. He  asked that                                                                    
the will of  the legislature be captured  in statute, rather                                                                    
than relying upon regulation and departmental practice.                                                                         
                                                                                                                                
Mr. Foley believed Caelus could  be part of the solution. He                                                                    
thought the  goal of the  legislature was to  increase North                                                                    
Slope production and increase  oil through TAPS. He asserted                                                                    
that the  tax policy and  decisions made by  the legislature                                                                    
would  affect  how  much investments  were  made  and  would                                                                    
thereby affect  job and future revenues.  He appreciated the                                                                    
challenge faced by the legislature,  and believed the Senate                                                                    
had  a good  plan to  provide for  a complete  resolution of                                                                    
some of the  fiscal problems faced by the  state. He pleaded                                                                    
the committee to take immediate action.                                                                                         
                                                                                                                                
2:32:06 PM                                                                                                                    
                                                                                                                                
Senator Micciche commented that  the state was obsessed with                                                                    
leveling  the playing  field.  He asked  if  there were  any                                                                    
wells that  Mr. Foley knew of  that differentiated companies                                                                    
by size  in an  attempt to level  the playing  field through                                                                    
credits and other benefits.                                                                                                     
                                                                                                                                
Mr.  Foley asserted  that it  was  not an  issue of  company                                                                    
size. He thought  that Alaska had a  tremendous oil business                                                                    
for  40 years,  and there  had  been a  narrowing number  of                                                                    
participants. He  thought if  the state's  goal was  to have                                                                    
more companies on the North  Slope, he thought it made sense                                                                    
to have tax policy that encouraged newcomers.                                                                                   
                                                                                                                                
Vice-Chair Bishop  asked if Caelus had  changed its position                                                                    
on how it directed capital around  the world in the last two                                                                    
years.                                                                                                                          
                                                                                                                                
Mr. Foley  restated that historically the  company had spent                                                                    
about $200 million on an  annual capital budget, and in 2017                                                                    
the  company's capital  budget was  $2 million.  He reported                                                                    
that  currently  Caelus  was  putting  100  percent  of  its                                                                    
capital into Alaska.                                                                                                            
                                                                                                                                
Senator  Olson referred  to Mr.  Foley's comments  about the                                                                    
legislature  acting  expeditiously  to resolve  the  state's                                                                    
fiscal issues. He  wondered Mr. Foley had  also considered a                                                                    
broad-based tax as part of the state's fiscal solution.                                                                         
                                                                                                                                
Mr.  Foley  had no  opinion  about  the right  solution  for                                                                    
Alaska's fiscal  issues. He believed  in finding  a solution                                                                    
that  did  the greatest  amount  of  good for  the  greatest                                                                    
number of people in the state.                                                                                                  
                                                                                                                                
2:34:58 PM                                                                                                                    
                                                                                                                                
DAMIAN  BILBAO, VICE  PRESIDENT OF  COMMERCIAL VENTURES,  BP                                                                    
(via teleconference),  thought the  Senate Resources  CS for                                                                    
HB 111  was an  improvement from the  version passed  by the                                                                    
other body.  He asserted that  the bill would  amend current                                                                    
oil  policy that  had a  proven record  of positive  results                                                                    
including   increased   production   in   TAPS,   additional                                                                    
exploration success, and new players  on the North Slope. He                                                                    
encouraged  the  committee to  put  policies  in place  that                                                                    
would enable future production.                                                                                                 
                                                                                                                                
Mr. Bilbao  shared four  principles that  BP used  to assess                                                                    
oil fiscal policy:                                                                                                              
                                                                                                                                
     1.  Does  the  policy  encourage  more  oil  production                                                                    
     through TAPS.                                                                                                              
                                                                                                                                
     2. Is  the policy an  extension in the life  of Prudhoe                                                                    
     Bay and the Kuparuk River Unit.                                                                                            
                                                                                                                                
     3. Does  the policy increase the  number of independent                                                                    
     companies on the North Slope.                                                                                              
                                                                                                                                
     4.  Does the  policy refrain  from picking  winners and                                                                    
     losers.                                                                                                                    
                                                                                                                                
Mr. Bilbao made note of  increased oil production in TAPS in                                                                    
2016, and as well in the  first quarter of 2017. He asserted                                                                    
that Prudhoe Bay and Kuparuk  were the backbone of the North                                                                    
Slope, with  new fields needing  production from  the legacy                                                                    
fields  to  be  able  to  continue to  flow  down  TAPS.  BP                                                                    
believed that  more companies  on the  North Slope  was good                                                                    
for  the  state  and  good for  industry.  He  thought  that                                                                    
increased   government   take   and   an   unstable   fiscal                                                                    
environment  discouraged  new   independent  companies  from                                                                    
coming to  Alaska. He  thought that the  bill fell  short of                                                                    
satisfying BP's fourth principle of oil fiscal policy.                                                                          
                                                                                                                                
2:38:06 PM                                                                                                                    
                                                                                                                                
Mr.  Bilbao read  excerpts from  an editorial  entitled "Oil                                                                    
taxes  would  be  bad  for   young  engineers,"  written  by                                                                    
University  of  Alaska  Fairbanks engineering  students  and                                                                    
published in the  Juneau Empire on April 19,  2017 (copy not                                                                    
on file):                                                                                                                       
                                                                                                                                
     That  same  dream  is  what compels  us  to  voice  our                                                                    
     thoughts  on the  debate  going on  in  Juneau. In  our                                                                    
     mind, implementing punitive taxes  on the industry that                                                                    
     serves  as  the  backbone  of our  state's  economy  is                                                                    
     short-sighted  and  at  odds  with  prudent  long  term                                                                    
     endeavors.                                                                                                                 
                                                                                                                                
     In our view, House Bill  111, the current oil tax bill,                                                                    
     will  jeopardize the  opportunities  we young  Alaskans                                                                    
     are preparing  for in school.  It is not a  question of                                                                    
     whether Alaska  has sufficient natural  resources, like                                                                    
     oil and  gas, to sustain  our economy for  decades into                                                                    
     the future.  Just this year, Alaskans  have heard about                                                                    
     incredible new  discoveries that could provide  a major                                                                    
     boost  to the  state's oil  production. Companies  like                                                                    
     Caelus, ConocoPhillips, and Repsol  are sitting on huge                                                                    
     finds that  could re-energize our oil  and gas industry                                                                    
     for  decades. As  engineers in  training,  we want  the                                                                    
     opportunity  to be  a part  of bringing  those projects                                                                    
     from concept to reality.                                                                                                   
                                                                                                                                
     …as students looking at the  prospect of trying to find                                                                    
     meaningful employment  in Alaska  in the  coming years,                                                                    
     we  hope our  views  will carry  some  weight to  those                                                                    
     receptive  to our  plight. We  are a  diverse group  of                                                                    
     individuals  from   all  over   the  world   who  bring                                                                    
     different  viewpoints  and  experiences with  us.  What                                                                    
     unites us  is a  passion for  engineering and  a deeply                                                                    
     vested  interest  in  Alaska's  future.  Squeezing  the                                                                    
     industry that  serves as our  state's bread  and butter                                                                    
     will  not  improve  our  prospects,  or  those  of  any                                                                    
     Alaskans, for family-sustaining jobs.                                                                                      
                                                                                                                                
     Please, to  our elected officials and  policymakers, as                                                                    
     you struggle  with the pressing  issue of how  to solve                                                                    
     the  state's cash  flow problem,  take no  actions that                                                                    
     might  provide a  short-term boost,  but  will lead  to                                                                    
     fewer   opportunities  for   the  next   generation  of                                                                    
     Alaskans. Regardless,  we appreciate  the hard  work of                                                                    
     our public  servants who are  working around  the clock                                                                    
     to plug  the budget  hole, and  trust that  policy will                                                                    
     outweigh  politics  when  deciding which  choices  will                                                                    
     benefit Alaskans most in the long run.                                                                                     
                                                                                                                                
Mr. Bilbao thanked the authors of the editorial on behalf                                                                       
of BP.                                                                                                                          
                                                                                                                                
2:41:38 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:44:23 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
JEFF  HASTINGS,  MANAGING  MEMBER,   KUUKPIK  SAE  AND  CEO,                                                                    
SAEXPLORATION,  discussed the  presentation "Senate  Finance                                                                    
Committee"  (copy on  file). He  thanked  the committee  for                                                                    
giving him  the opportunity to  offer the perspective  of an                                                                    
Alaskan contractor.                                                                                                             
                                                                                                                                
Mr. Hastings looked at slide 2, "Kuukpik - SAE - Born in                                                                        
Alaska":                                                                                                                        
                                                                                                                                
   · Our team has been partnered with the Kuukpik                                                                               
     Corporation for the past 20 years                                                                                          
  · The company employs an average of 400 people per year                                                                       
  · The Kuukpik-SAE JV is a consistent revenue source to                                                                        
        o Kuukpik Corporation and its shareholders                                                                              
        o The village of Nuiqsut                                                                                                
        o The hundreds of Alaskan families that benefit                                                                         
          from each program                                                                                                     
   · We are committed to preferentially hire Native                                                                             
    Alaskans, Alaska residents and Alaskan Contractors                                                                          
       o We are proud of our 80%+ Alaskan hire rate                                                                             
                                                                                                                                
Mr.   Hastings  relayed   that  Kuukpik-SAE   was  a   prime                                                                    
contractor,  sometimes  an explorer,  and  a  holder of  tax                                                                    
credit certificates.  He directed attention to  the graph on                                                                    
slide 2  entitled 'Aklaq 3D  Seismic Program,'  which showed                                                                    
the effect  on various groups  in the state. He  pointed out                                                                    
that  the  Aklaq  program had  benefitted  more  than  1,000                                                                    
Alaska  families.  The  project   had  generated  about  $57                                                                    
million  in revenue,  $49  million of  which  was earned  by                                                                    
Alaskan contractors and suppliers.                                                                                              
                                                                                                                                
2:46:37 PM                                                                                                                    
                                                                                                                                
Mr.  Hastings  turned  to  slide 3,  "Our  Core  Business  -                                                                    
Collecting Seismic Data":                                                                                                       
                                                                                                                                
   · Seismic Operations are the pointy end of the spear -                                                                       
     we create the data so exploration wells can be drilled                                                                     
                                                                                                                                
   · Seismic data is critical information, essential to the                                                                     
     success of an exploration program                                                                                          
                                                                                                                                
   · Recently, use of new technology is producing higher                                                                        
     resolution images of the subsurface                                                                                        
                                                                                                                                
        o Information that is a direct correlation to the                                                                       
          new   discoveries   which   have   recently   been                                                                    
          announced                                                                                                             
                                                                                                                                
   · The information gathered from the seismic data is                                                                          
     critical to finding new opportunities, new reserves to                                                                     
     sustain us into the future.                                                                                                
                                                                                                                                
Mr.  Hastings  likened the  collection  of  seismic data  to                                                                    
owning and operating a cat scan.                                                                                                
                                                                                                                                
Mr.  Hastings showed  slide 4,  "Why is  Seismic Exploration                                                                    
Different?":                                                                                                                    
                                                                                                                                
   · We do not drill for or develop oil                                                                                         
       o We do the CAT scan…we are not the surgeons                                                                             
                                                                                                                                
   · When the Tax Credit Program was created by the State                                                                       
     and affirmed by the voters-we started and completed                                                                        
     several multimillion dollar projects under the program                                                                     
                                                                                                                                
        o Special provisions were written for .023 and .025                                                                     
          credits specifically to incentivize companies to                                                                      
          collect seismic data because without it, there is                                                                     
          less exploration drilling                                                                                             
        o Seismic is treated differently because the                                                                            
          companies that pay to have seismic collected may                                                                      
          not be the company that will ever drill wells.                                                                        
        o The State receives something of immediate value                                                                       
          when Seismic tax credit projects are completed                                                                        
          and the data is delivered.                                                                                            
                                                                                                                                
2:49:07 PM                                                                                                                    
                                                                                                                                
Mr.   Hastings  discussed   slide  5,   "Historical  Seismic                                                                    
Investment,"  which showed  a graph  representing historical                                                                    
annual  seismic revenue  from 2012  through  2017. He  noted                                                                    
that embedded in  the blue bars on the graph  was the number                                                                    
of  seismic programs  that were  shot in  each year  for the                                                                    
entire industry in the state.                                                                                                   
                                                                                                                                
Mr. Hastings  drew attention to  three vertical red  bars on                                                                    
the graph  representing milestone  dates for the  passage of                                                                    
SB 21, and  tax credit appropriation cuts. He  pointed out a                                                                    
dramatic  increase  in revenue  and  the  number of  seismic                                                                    
programs acquired  after the passage  of SB 21.  He asserted                                                                    
that  there had  been an  increase in  capital spending,  an                                                                    
increase in  exploration drilling, and  increased production                                                                    
as  a direct  result of  SB 21.  He pointed  out an  over 50                                                                    
percent reduction in  the amount of activity  in the seismic                                                                    
industry  in the  state after  the tax  credit appropriation                                                                    
cut.  He  observed  that  the   cuts  had  negative  effects                                                                    
including decreased  capital spending within  the contractor                                                                    
community, less  confidence in the  state to settle  what it                                                                    
owed, and reduced liquidity to continue investments.                                                                            
                                                                                                                                
Mr. Hastings continued discussing  slide 5, and thought that                                                                    
the  chart represented  a  barometer of  the  health of  the                                                                    
exploration industry in the state.  He thought the state had                                                                    
asked  the industry  to invest  in  seismic and  exploration                                                                    
drilling; and the companies had  done so in partnership with                                                                    
the  state.  He felt  that  investment  confidence had  been                                                                    
eroded.                                                                                                                         
                                                                                                                                
Senator Micciche asked  about the average mean  on the graph                                                                    
on  slide  5.  He  considered  the five  to  ten  years  for                                                                    
permitting,  development, and  production;  and wondered  if                                                                    
there  was   a  right  spend  estimate   for  adequate  data                                                                    
available.                                                                                                                      
                                                                                                                                
Mr.  Hastings  thought  that  there   had  been  a  dramatic                                                                    
increase in  the number  of programs,  and the  amount being                                                                    
spent after the passage of SB  21. He pointed out that there                                                                    
had not  been many  independents or seismic  explorers going                                                                    
to  work   in  2013.  He   discussed  the  expense   of  new                                                                    
technology, and  thought SB  21 had allowed  for the  use of                                                                    
advanced technology  to find bigger  deposits that  had been                                                                    
previously overlooked.                                                                                                          
                                                                                                                                
2:54:43 PM                                                                                                                    
                                                                                                                                
Mr. Hastings  spoke to slide 6,  "The Impact of HB  111 SRES                                                                    
CS on Kuukpik/SAE":                                                                                                             
                                                                                                                                
   · 120 day clock on seismic .025's is a great start                                                                           
        o Our applications are simple                                                                                           
        o Once data is delivered and verified by the DNR,                                                                       
          DOR has the ball                                                                                                      
             ƒBoth of these tasks should be able to run in                                                                     
               parallel                                                                                                         
                                                                                                                                
   · Bill language does not fully address DOR Tax Division                                                                      
     Advisory Bulletin 2017-01                                                                                                  
        o This bulletin destroyed the secondary market for                                                                      
          pure seismic explorers                                                                                                
   · Expand the corporate income tax language                                                                                   
                                                                                                                                
   · Set a payment schedule                                                                                                     
                                                                                                                                
   The State of Alaska created a  program to incentivize the                                                                    
   seismic industry to invest millions and hire thousands of                                                                    
   Alaskans. Our work is the first step  in putting more oil                                                                    
   down the pipeline. We played by the rules you set out and                                                                    
   now we need the State to live up to their end of the                                                                         
   deal.                                                                                                                        
                                                                                                                                
Mr. Hastings  lauded the Senate Resources  Committee for its                                                                    
work in  making changes  to the bill.  He thought  there was                                                                    
good elements  in the committee's  version of the  bill, but                                                                    
suggested some  elements could be tweaked.  He reminded that                                                                    
an absence of cash payment  from the state, the industry had                                                                    
to rely  on the  secondary market. He  considered that  in a                                                                    
low  price environment,  there was  not a  way to  get to  a                                                                    
credit  if the  floor was  hardened. He  thought that  there                                                                    
would be no way to be  paid back for what the explorers were                                                                    
owed. He suggested there should  be a consideration for NOLs                                                                    
that could  not be carried  forward for seismic  explorers -                                                                    
either add the ability to go  below the floor, or expand the                                                                    
tax  language to  include other  corporate taxpayers  in the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr.  Hastings continued  to discuss  slide 6.  He emphasized                                                                    
that  his company  was accountable  to its  shareholders. He                                                                    
emphasized that without a plan  to be reimbursed for the $80                                                                    
million in  tax credits it  was owed, it was  detrimental to                                                                    
the fiscal health of his company.                                                                                               
                                                                                                                                
Mr.  Hastings  considered that  the  state  had created  the                                                                    
program to  incentivize the seismic industry,  which was the                                                                    
first step in  getting oil to the pipeline.  He wondered how                                                                    
to return to what had  been considered an investment between                                                                    
the state and the seismic proprietors.                                                                                          
                                                                                                                                
2:59:11 PM                                                                                                                    
                                                                                                                                
Mr. Hastings turned to slide 7, "The Reality":                                                                                  
                                                                                                                                
   · For SAE, the delayed tax credit payout forced the                                                                          
     company to a crossroads                                                                                                    
        o Option 1: seek protection under the chapter 11                                                                        
          bankruptcy code and leave all our Alaska vendors                                                                      
          hanging                                                                                                               
        o Option 2: restructure the company and work with                                                                       
          our Alaskan subcontractors and suppliers to find                                                                      
          a way to extend payments                                                                                              
                                                                                                                                
   · We chose to restructure - eliminating 98% of our                                                                           
     shareholders equity, the majority of which was held by                                                                     
     employees, many of whom are Alaskans                                                                                       
                                                                                                                                
     We are Alaskans and are committed to staying                                                                               
                                                                                                                                
Mr. Hastings commented  on the effects of  volatility in the                                                                    
tax structure.  He commented that the  appropriations vetoes                                                                    
had  forced  the  company  to   consider  bankruptcy  or  to                                                                    
restructure  the company  to  adjust  outgoing payments.  He                                                                    
discussed  his  history in  the  state,  and discussed  lost                                                                    
equity in the  company. He was appreciative of  the work the                                                                    
Senate Resources  Committee had  done, but felt  more needed                                                                    
to be done to change the bill.                                                                                                  
                                                                                                                                
He reiterated that  the seismic business was  a barometer of                                                                    
the health of  the oil and gas industry, as  it was first in                                                                    
the  exploration   effort  and  the  first   expense  to  be                                                                    
eliminated when areas were no  longer deemed competitive. He                                                                    
thought the  state had the  ability to continue  the working                                                                    
partnership with  industry that  developed after  passage of                                                                    
SB 21.  He asserted that  the industry needed  confidence in                                                                    
the state's plan to pay  its liabilities and have a reliable                                                                    
tax  system. He  urged the  committee  to work  to keep  the                                                                    
industry competitive.                                                                                                           
                                                                                                                                
3:02:36 PM                                                                                                                    
                                                                                                                                
Senator Hughes  asked about  the value  of tax  credits that                                                                    
were not paid to Mr.  Hastings' company, and for an estimate                                                                    
of the total owed to all seismic companies.                                                                                     
                                                                                                                                
Mr. Hastings  shared that his  company had  certificated $24                                                                    
million of  $90 million worth  of tax credits that  had been                                                                    
assigned. The  company was still  waiting for  the remaining                                                                    
balance  to be  issued by  DOR. He  qualified that  for this                                                                    
reason  the company  had thought  that the  Senate Resources                                                                    
Committee's addition of a 120-day  clock on issuances of the                                                                    
credits was  important. He  referred to  the 023  versus the                                                                    
025 credits,  for which  there was  no timeline.  He thought                                                                    
that his  company had  about $44  million worth  of assigned                                                                    
025 tax credits.                                                                                                                
                                                                                                                                
Senator  Micciche   asked  if   all  of  the   seismic  data                                                                    
commissioned   by   potential  producers   that   controlled                                                                    
acreage,   or  if   the   company  sometimes   independently                                                                    
collected  seismic data.  He wondered  about the  proportion                                                                    
between the two activities.                                                                                                     
                                                                                                                                
Mr.  Hastings  explained  that as  a  prime  contractor  the                                                                    
company was  contracted by  legacy producers  or independent                                                                    
companies  to collect  data, which  the producers  owned and                                                                    
was proprietary. He  relayed that an area  where there might                                                                    
be fractured lease holes, or  in times of low capital budget                                                                    
spending;  there  was  a more  vibrant  speculative  seismic                                                                    
industry.  He thought  that increased  activity from  SB 21,                                                                    
especially  the  increased  seismic  program,  had  been  70                                                                    
percent proprietary work and 30 percent speculative work.                                                                       
                                                                                                                                
Senator  Micciche  assumed  that  the $66  million  in  owed                                                                    
credits was all speculative.                                                                                                    
                                                                                                                                
Mr. Hastings answered in the affirmative.                                                                                       
                                                                                                                                
3:06:40 PM                                                                                                                    
                                                                                                                                
Senator Olson asked about the  company restructuring (due to                                                                    
unpaid  tax credits)  that Mr.  Hastings had  mentioned, and                                                                    
asked what kind of effect it had on the people of Nuiqsut.                                                                      
                                                                                                                                
Mr.  Hastings  stated that  the  people  of Nuiqsut  were  a                                                                    
direct beneficiary of the revenues  of the company (it was a                                                                    
51/49 partnership)  and there was a  net profitability share                                                                    
to the  village. When the  company did not  receive revenues                                                                    
that were  owed, the village  did not as well.  He specified                                                                    
that the village had not  received expected revenues for the                                                                    
last two years.                                                                                                                 
                                                                                                                                
Senator Olson referred to earlier  comments and asked if Mr.                                                                    
Hastings was in  favor of the concept  that seismic activity                                                                    
was the  only activity that  benefitted from a  120-day time                                                                    
clock.                                                                                                                          
                                                                                                                                
Mr. Hastings  remarked that his  company's tax  credits were                                                                    
not  under a  scenario that  could move  an NOL  forward. He                                                                    
stated that  if the tax  credits and the application  of the                                                                    
tax credits  were not complex  in nature,  he did not  see a                                                                    
reason why they should not be  a benefit. He thought that if                                                                    
types  of tax  credits were  not equal  perhaps they  should                                                                    
have a  slightly different  time frame;  however in  no case                                                                    
should the tax credits be open-ended.                                                                                           
                                                                                                                                
3:09:22 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Bishop was  frustrated  that the  state was  not                                                                    
paying its bills. He thanked  Mr. Hastings for the preferred                                                                    
hiring  practices  of his  company.  He  wondered about  the                                                                    
hiring  practices  of  other  companies.  He  asked  if  the                                                                    
company rented all its rolling stock and camps.                                                                                 
                                                                                                                                
Mr.  Hastings stated  that  when  SB 21  was  put in  place,                                                                    
Kuukpik/SAE  had  partnered  with Alaska  Equipment  Rentals                                                                    
(AER)  in Fairbanks  to purchase  rolling stock  and invest.                                                                    
The  partnership continued,  which  had  been favorable  for                                                                    
both  companies over  the previous  few years.  He commented                                                                    
that   Alaska   sub-contractors  had   extended   themselves                                                                    
financially, and he appreciated AER doing so.                                                                                   
                                                                                                                                
Vice-Chair Bishop  commented that  after AER  went out  on a                                                                    
limb, it was now perhaps bankrolling the state.                                                                                 
                                                                                                                                
Mr. Hastings viewed the investment  in seismic projects as a                                                                    
partnership.                                                                                                                    
                                                                                                                                
Vice-Chair Bishop apologized to  Mr. Hastings, and all other                                                                    
parties that had not been  paid for outstanding tax credits.                                                                    
He remarked that a promise made was a debt unpaid.                                                                              
                                                                                                                                
3:11:58 PM                                                                                                                    
                                                                                                                                
Senator  Hughes referred  to questions  by Senator  Micciche                                                                    
regarding  the remaining  $66 million  in  tax credits,  and                                                                    
speculative seismic  work. She wondered  if there was  a way                                                                    
to  determine  what  portion  of  speculative  work  yielded                                                                    
production. She  referred to slide  5, and  the illustration                                                                    
of  dropping activity  after  the  tax credit  appropriation                                                                    
cut.  She   commented  on  the  future   and  wondered  what                                                                    
prospects  could expected  for future  generations based  on                                                                    
seismic  data gathering.  She asked  if  Mr. Hastings  could                                                                    
speak  to  the  importance of  speculative  and  proprietary                                                                    
work.                                                                                                                           
                                                                                                                                
Ms.  Hastings  thought  that   new  technology  had  clearly                                                                    
demonstrated how  important seismic activity was  in finding                                                                    
new reserves. He used the  example of Colville River area, a                                                                    
small area of the North  Slope. He commented that there also                                                                    
new drilling  technology to  increase drilling  recovery and                                                                    
increase production.  He observed  that the increase  in the                                                                    
amount  of   seismic  activity   was  directly   related  to                                                                    
discoveries that had  happened. He thought that  the drop on                                                                    
the graph  on slide 5  was related  to the combination  of a                                                                    
low commodity price and a  lack of confidence working in the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr.  Hastings  thought  that unless  the  level  of  seismic                                                                    
activity and exploratory wells  continued to increase, there                                                                    
would be  an issue with  the amount  of product in  TAPS. He                                                                    
was concerned it would not  be possible to replace reserves.                                                                    
He thought the  industry needed confidence that  there was a                                                                    
good   investment  environment   in   the   state,  and   an                                                                    
environment that was competitive on a global scale.                                                                             
                                                                                                                                
3:16:15 PM                                                                                                                    
                                                                                                                                
Senator Hughes  asked Mr. Hastings to  speak specifically to                                                                    
the  speculative  work and  what  percentage  turned out  to                                                                    
bring in revenue.                                                                                                               
                                                                                                                                
Mr. Hastings  discussed the speculative market,  and the 10-                                                                    
year period  before the data  became public. He  stated that                                                                    
the  speculative   market  allowed  (especially  at   a  low                                                                    
commodity  price) for  more people  to participate,  look at                                                                    
the seismic  data, lease the property,  and more exploratory                                                                    
wells to potentially be drilled.                                                                                                
                                                                                                                                
Co-Chair MacKinnon  noted that the legislature  had tried to                                                                    
pay  for  tax  credits  multiple times,  but  had  not  been                                                                    
successful.                                                                                                                     
                                                                                                                                
3:18:21 PM                                                                                                                    
                                                                                                                                
KATE BLAIR,  GOVERNMENT AND PUBLIC AFFAIRS  MANAGER, TESORO,                                                                    
read from her written testimony (copy on file):                                                                                 
                                                                                                                                
     For the  record, my  name is  Kate Blair  and I  am the                                                                    
     Public  and Government  Affairs Manager  for Tesoro  in                                                                    
     Alaska.                                                                                                                    
                                                                                                                                
     Tesoro   Corporation   is   an   integrated   refining,                                                                    
     logistics,  and marketing  company  with assets  across                                                                    
     the western  United States. We operate  7 refineries in                                                                    
     6 states, including  our first in Nikiski.  We also own                                                                    
     a  series  of  pipelines,   tank  farms,  marine,  rail                                                                    
     assets, and a network of  retail fuel stations. We have                                                                    
     a proud 48  year legacy in Alaska,  supplying jet fuel,                                                                    
     gasoline, and diesel to Alaskans.                                                                                          
                                                                                                                                
     Tesoro  does not  weigh in  on oil  and gas  production                                                                    
     taxes in Alaska, as we  are not a production tax payer,                                                                    
     however any  loss of production in  Alaska would affect                                                                    
     the   in-state  refinery   and  potentially   make  our                                                                    
     economics   more   challenging.   We   have   therefore                                                                    
     testified  on previous  versions  of this  bill to  ask                                                                    
     that your colleagues  be mindful of any  changes to the                                                                    
     current production tax system  and its potential effect                                                                    
     on overall production.                                                                                                     
                                                                                                                                
     Tesoro  relies on  access to  in-state  crude from  the                                                                    
     Cook Inlet  and the North  Slope. We refine  every drop                                                                    
     of oil that  comes out of the Cook Inlet  basin, and we                                                                    
     purchase  approximately one-third  of TAPS  throughput,                                                                    
     160,000-170,000 barrels  of North Slope crude  per day,                                                                    
     shipping it from  Valdez for refining in  Nikiski or to                                                                    
     our refineries along the west  coast. Last year, Tesoro                                                                    
     signed  a  royalty oil  contract  with  the State  that                                                                    
     allows us  to purchase  20,000- 25,000 barrels  per day                                                                    
     of the State's royalty share  of oil, with a benefit to                                                                    
     Alaska of $45-56 million.                                                                                                  
                                                                                                                                
     The testimony  of the  producing companies  will inform                                                                    
     you on how the current  CS will affect their investment                                                                    
     decisions   and  ultimately,   production.  We   would,                                                                    
     however, like  to comment  on the  changes made  to the                                                                    
     refinery  infrastructure  tax credits,  which  directly                                                                    
     affects Tesoro.                                                                                                            
                                                                                                                                
     Tesoro is  not advocating  for an extension  or changes                                                                    
     to the refinery tax credit  itself. Our concern is with                                                                    
     how  the  credit's  value will  be  realized  with  the                                                                    
     removal of the Tax Credit Fund.                                                                                            
                                                                                                                                
     The  CS  maintains  the   cashability  of  the  credit,                                                                    
     however it creates ambiguity in  how credit refunds are                                                                    
     paid  through the  appropriation  process, which  could                                                                    
     create a system where the  state is picking winners and                                                                    
     losers.  The CS  directs the  Department of  Revenue to                                                                    
     adopt   regulations,  standards,   and  procedures   to                                                                    
     allocate  the  money   among  claims.  Without  clearly                                                                    
     defined regulations, such as  those established for the                                                                    
     tax credit  fund, we are concerned  that the department                                                                    
     could consistently allocate funds  in a way that favors                                                                    
     one type  of tax  payer over another.  We ask  that you                                                                    
     consider  adding language  in Section  6 that  requires                                                                    
     the appropriation of funds to  reflect the same process                                                                    
     and regulations as the current  tax credit fund, with a                                                                    
     statutory  limit  and  a clear  process  to  allocating                                                                    
     available money.                                                                                                           
                                                                                                                                
3:22:10 PM                                                                                                                    
                                                                                                                                
Ms. Blair continued speaking from her written testimony:                                                                        
                                                                                                                                
     Additionally,   because  the   credit  is   subject  to                                                                    
     appropriation  by the  legislature without  a statutory                                                                    
     lower  limit, it  is possible  that no  funds could  be                                                                    
     allocated to  refund credits and those  credits must be                                                                    
     carried forward  to future years, however,  the current                                                                    
     carry-forward limit  is five years.  Hypothetically, if                                                                    
     there  is  no  money  appropriated  over  a  five  year                                                                    
     period, those earned credits  could expire before their                                                                    
     value is realized by the company that has earned them.                                                                     
                                                                                                                                
     We  recommend  that  the  committee  alter  the  carry-                                                                    
     forward  period on  the credit  from  the current  five                                                                    
     year  limit to  mirror production  credits that  do not                                                                    
     have a carry-forward time limit  and provide an uplift.                                                                    
     This would  provide consistency in the  tax policy, and                                                                    
     ensure that companies  that make qualified investments,                                                                    
     under  the current  refinery infrastructure  tax credit                                                                    
     program,  can realize  the value  of  the credits  that                                                                    
     they earn and  the time value of  their money. Further,                                                                    
     because the bill  is scheduled to sunset  in 2019, this                                                                    
     would  be a  relatively short  commitment by  the state                                                                    
     and  would  provide  the refiners  assurance  that  the                                                                    
     credits they earn  will retain their value  if money is                                                                    
     not appropriated for their rebates.                                                                                        
                                                                                                                                
Senator von  Imhof asked for  a copy of Ms.  Blair's written                                                                    
testimony.                                                                                                                      
                                                                                                                                
Ms.  Blair  agreed   to  provide  a  written   copy  of  her                                                                    
testimony.                                                                                                                      
                                                                                                                                
Senator Micciche  discussed Alaskan ownership  of companies.                                                                    
He mentioned the preferential  hiring practices as discussed                                                                    
by  Vice-Chair  Bishop. He  asked  about  the proportion  of                                                                    
resident hire at the Nikiski refinery.                                                                                          
                                                                                                                                
Ms. Blair spoke  to the company's resident  hire rate, which                                                                    
was approximately  97 percent for  employees in  Alaska. She                                                                    
reminded  that resident  hire  was  calculated by  permanent                                                                    
fund dividend eligibility.                                                                                                      
                                                                                                                                
Co-Chair MacKinnon discussed the schedule for the following                                                                     
day.                                                                                                                            
                                                                                                                                

Document Name Date/Time Subjects
042817 Revised 4 28 17 SFC SB26.pdf SFIN 4/28/2017 9:00:00 AM
SB 26
042817 COP HB 111 Senate Finance Testimony Apr 28 2017.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
042817 Hastings_HB111 Senate finance testimony final.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
042817 AOGA Testimony SFIN HB 111 04 28 17.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
042817 HB 111 SFIN Official Testimony Tesoro.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Marks Cost Recovery Hard Floor Crossover 042817.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Public Testimony Letters 1.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Public Testimony Letters 2.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Public Testimony Crondahl.pdf SFIN 4/28/2017 9:00:00 AM
HB 111