Legislature(2015 - 2016)HOUSE FINANCE 519

04/02/2016 08:30 AM FINANCE

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Audio Topic
08:33:57 AM Start
08:34:47 AM HB247
11:53:43 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued from 4/1/16 --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
enalytica
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 2, 2016                                                                                            
                         8:33 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
[NOTE: Continuation of April 1, 2016 5:00 p.m. meeting]                                                                         
                                                                                                                                
8:33:57 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Thompson called the House Finance Committee                                                                            
meeting to order at 8:33 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Janak Mayer, Chairman and Chief Technologist, enalytica                                                                         
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Nikos Tsafos, President and Chief Analyst, enalytica                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 247    TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                    
                                                                                                                                
          HB 247 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Thompson discussed the meeting agenda.                                                                                 
                                                                                                                                
HOUSE BILL NO. 247                                                                                                            
                                                                                                                                
     "An  Act relating  to  confidential information  status                                                                    
     and  public   record  status  of  information   in  the                                                                    
     possession of  the Department  of Revenue;  relating to                                                                    
     interest  applicable  to  delinquent tax;  relating  to                                                                    
     disclosure  of  oil  and   gas  production  tax  credit                                                                    
     information; relating  to refunds  for the  gas storage                                                                    
     facility tax credit, the  liquefied natural gas storage                                                                    
     facility  tax credit,  and the  qualified in-state  oil                                                                    
     refinery   infrastructure   expenditures  tax   credit;                                                                    
     relating to  the minimum  tax for  certain oil  and gas                                                                    
     production;  relating to  the  minimum tax  calculation                                                                    
     for  monthly  installment  payments of  estimated  tax;                                                                    
     relating  to interest  on monthly  installment payments                                                                    
     of  estimated  tax;  relating to  limitations  for  the                                                                    
     application  of tax  credits; relating  to oil  and gas                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures;     relating    to     limitations    for                                                                    
     nontransferable  oil  and  gas production  tax  credits                                                                    
     based on oil production  and the alternative tax credit                                                                    
     for oil  and gas  exploration; relating to  purchase of                                                                    
     tax  credit  certificates  from the  oil  and  gas  tax                                                                    
     credit fund; relating  to a minimum for  gross value at                                                                    
     the   point   of    production;   relating   to   lease                                                                    
     expenditures  and tax  credits for  municipal entities;                                                                    
     adding    a   definition    for   "qualified    capital                                                                    
     expenditure";  adding  a  definition  for  "outstanding                                                                    
     liability  to   the  state";  repealing  oil   and  gas                                                                    
     exploration    incentive    credits;   repealing    the                                                                    
     limitation on  the application  of credits  against tax                                                                    
     liability  for   lease  expenditures   incurred  before                                                                    
     January 1,  2011; repealing  provisions related  to the                                                                    
     monthly installment payments for  estimated tax for oil                                                                    
     and gas produced before January  1, 2014; repealing the                                                                    
     oil  and  gas  production   tax  credit  for  qualified                                                                    
     capital  expenditures  and certain  well  expenditures;                                                                    
     repealing   the    calculation   for    certain   lease                                                                    
     expenditures applicable before  January 1, 2011; making                                                                    
     conforming amendments;  and providing for  an effective                                                                    
     date."                                                                                                                     
                                                                                                                                
8:34:47 AM                                                                                                                    
                                                                                                                                
JANAK  MAYER, CHAIRMAN  AND  CHIEF TECHNOLOGIST,  ENALYTICA,                                                                    
addressed  a PowerPoint  presentation  titled  "HB 247:  Key                                                                    
Issues and Assessment"  dated April 1, 2016  (copy on file).                                                                    
He  provided a  brief  recap on  slide  10 titled  "Alaska's                                                                    
Production  Tax: Origins  in  2006  Proposal." He  explained                                                                    
that if  an entity had nothing  other than a 25  percent net                                                                    
tax rate and combined it with  a 20 percent capital credit -                                                                    
the core ideas that had  eventually gone into Alaska's Clear                                                                    
and Equitable Share  (ACES) - it would curve  the 25 percent                                                                    
effective  tax  rate  down  (25  percent  would  become  the                                                                    
maximum rate);  the 20 percent  capital rate meant  that the                                                                    
25 percent  would not  ever be achieved  and the  line would                                                                    
continue  to  decline to  zero  around  $60 per  barrel.  He                                                                    
elaborated  that the  capital credit  was applied  after the                                                                    
tax  was  calculated and  the  capital  credit was  a  fixed                                                                    
amount  relative  to  price  (assuming  a  fixed  amount  of                                                                    
spending)  and  it  represented  a  larger  portion  of  the                                                                    
profits on a  $40 per barrel of oil versus  the profits on a                                                                    
$100  barrel.  The  capital  credit  created  a  progressive                                                                    
component  to the  curve;  if  there was  nothing  but a  25                                                                    
percent rate  and the capital  credit it would bend  the tax                                                                    
rate down to zero.                                                                                                              
                                                                                                                                
8:37:05 AM                                                                                                                    
                                                                                                                                
Mr.   Mayer  moved   to  slide   12   titled  "ACES:   Steep                                                                    
Progressivity,  High Spending  Support."  He explained  that                                                                    
ACES had  used the basic  design [outlined on slide  10] and                                                                    
built in  additional progressivity.  He detailed  that under                                                                    
ACES  the goal  had  been to  enable the  tax  rate to  keep                                                                    
climbing so it  would reach and exceed 25  percent. When the                                                                    
production tax  per barrel reached  a certain point  ($60 to                                                                    
$80 per barrel  illustrated on the slide) -  below a certain                                                                    
threshold the tax rate was 25  percent - but above a certain                                                                    
threshold it  began climbing in  increments for  each dollar                                                                    
increase  until it  reached an  inflection point.  He stated                                                                    
that for $25 to $50 in  production tax value it increased at                                                                    
one  rate  and at  a  slower  rate  above that.  The  change                                                                    
resulted in a steady increase  (yellow line on ACES chart on                                                                    
slide 12).  He stated that  the inflection flattened  out at                                                                    
$140 per  barrel and  increased more  slowly after  that. He                                                                    
furthered that  the base  rate of 25  percent could  go much                                                                    
higher under ACES  and could also drop to  zero depending on                                                                    
the oil price.  He discussed the reason the  rate could drop                                                                    
to zero. He explained that  notionally statute contained a 4                                                                    
percent  gross minimum  floor -  the idea  of the  floor had                                                                    
been to provide additional protection  to the state when oil                                                                    
prices were low.  In reality, the 20  percent capital credit                                                                    
was  applied  in  the  stack  after  the  net  versus  gross                                                                    
assessment.  He furthered  that  as long  as  there was  any                                                                    
basic level of  capital spending it could mean  a drop below                                                                    
the floor, meaning that the  4 percent gross floor was never                                                                    
actually binding.                                                                                                               
                                                                                                                                
8:39:20 AM                                                                                                                    
                                                                                                                                
Representative  Gara reasoned  that without  the 20  percent                                                                    
capital credit,  ACES would never  have dropped below  the 4                                                                    
percent  tax  floor.  He  remarked   that  it  had  been  an                                                                    
expensive  proposition in  ACES,  which had  been fixed.  He                                                                    
asked for  verification that the  20 percent  capital credit                                                                    
was still allowed in Cook Inlet.                                                                                                
                                                                                                                                
Mr.  Mayer replied  in the  affirmative. He  added that  the                                                                    
full suite of ACES tax  credits plus additional credits were                                                                    
allowed  in Cook  Inlet  without  any corresponding  profits                                                                    
based production tax.                                                                                                           
                                                                                                                                
Representative Gara  stated that  ACES had  a tax  rate that                                                                    
rose and  rose, but  the 20 percent  capital tax  credit was                                                                    
affordable.  He surmised  that in  Cook Inlet  there was  no                                                                    
tax, but  the cap of the  20 percent capital tax  credit was                                                                    
allowed.                                                                                                                        
                                                                                                                                
Mr. Mayer  answered in the  affirmative. In addition  to the                                                                    
20 percent capital  credit there was a 40  percent credit on                                                                    
well work, which was never on the North Slope gas.                                                                              
                                                                                                                                
8:40:14 AM                                                                                                                    
                                                                                                                                
Mr. Mayer continued  to address slide 12  and summarized the                                                                    
debate around  the ACES system.  He explained that  the high                                                                    
progressivity  meant high  marginal  tax  rates because  the                                                                    
rate increased  with each additional dollar  increase in oil                                                                    
price. He  explained that the structure  meant that marginal                                                                    
rates  were upwards  around 86  percent and  higher at  yet-                                                                    
unseen prices. It meant that  in many ways from a producer's                                                                    
economic  perspective,  the spike  in  oil  prices that  had                                                                    
occurred over  the past  6 or  more years  in some  ways had                                                                    
never  really happened.  He explained  that  for each  $1.00                                                                    
increase when 80 to 90 percent  of the increase was going to                                                                    
the  state  rather than  to  the  producer, it  looked  very                                                                    
different in  terms of the producer's  incentive for further                                                                    
reinvestment than under a  slightly less progressive system.                                                                    
More  importantly, it  had also  meant that  there was  very                                                                    
high state  support for spending, which  varied dramatically                                                                    
depending on  a wide  range of  assumptions. For  example, a                                                                    
new producer  without any existing liability  had 45 percent                                                                    
support  for spending  because they  received  a 20  percent                                                                    
capital credit stacked with a  25 percent net operating loss                                                                    
(NOL) credit.  He explained that  the 25 percent  NOL credit                                                                    
was  effectively the  same thing  as the  existing incumbent                                                                    
writing  off  against their  taxes.  He  elaborated that  it                                                                    
would be true if the rate was  a flat 25 percent, but due to                                                                    
progressivity  the benefit  for the  incumbent producer  had                                                                    
varied widely; the  benefit could be 25 percent  plus the 20                                                                    
capital credits;  however, if  an entity  had an  80 percent                                                                    
marginal  tax rate  plus a  20 percent  capital credit,  the                                                                    
marginal benefit  of reduced taxes  on spending  could reach                                                                    
over 100 percent under ACES.  He summarized that there could                                                                    
be very  high effective support for  spending or significant                                                                    
reduction in  revenue from additional  spending. As  long as                                                                    
spending was  low and prices  were high, an  enormous amount                                                                    
of  revenue  came  in  through  the  system;  however,  when                                                                    
spending was high  and prices were low, it was  a major risk                                                                    
to the treasury.                                                                                                                
                                                                                                                                
8:42:53 AM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  pointed to the  two bottom lines  on the                                                                    
chart  (slide  12) and  asked  what  the percent  gross  and                                                                    
percent  net rows  demonstrated. Mr.  Mayer replied  that it                                                                    
continued the same format from  previous slides. He detailed                                                                    
that the percent net illustrated  what it would look like as                                                                    
an effective tax  rate (green line shown on  the chart). The                                                                    
percent  gross   showed  what  it   would  represent   as  a                                                                    
proportion of the gross value  (e.g. compared to a 4 percent                                                                    
gross tax).                                                                                                                     
                                                                                                                                
Vice-Chair  Saddler   surmised  that   the  gross   was  the                                                                    
percentage  of   value  in  a   tax  and  the   percent  net                                                                    
represented the  effective net tax rate.  Mr. Mayer answered                                                                    
in the affirmative.                                                                                                             
                                                                                                                                
Mr. Mayer  turned to slide  13 titled "SB21: Protect  on the                                                                    
Low End,  Give Back at  The High End." The  chart summarized                                                                    
the difference  between SB 21  [oil and gas  tax legislation                                                                    
passed by  the legislature in  2013] versus ACES  related to                                                                    
effective  tax rates.  Exactly  what  the comparison  looked                                                                    
like varied slightly depending on  the level of spending. He                                                                    
explained that  part of the point  of SB 21 was  to make the                                                                    
overall  tax rate  less sensitive  to  changes in  spending;                                                                    
less overall  support for  spending and  more predictability                                                                    
in the  overall system. He  pointed to  a chart on  slide 13                                                                    
and explained  that at oil  prices between $70 and  $110 per                                                                    
barrel the lines  were close, but SB 21 was  lower than ACES                                                                    
(under  the current  assumptions $18  per barrel  of capital                                                                    
and  operating expenditures  in the  Department of  Revenue,                                                                    
Revenue Sources  Book for  FY 16).  He furthered  that using                                                                    
the numbers  from either of  the previous two  years (closer                                                                    
to $20) would  mean the lines depicting SB 21  and ACES were                                                                    
the same in the $70 to $110 price range.                                                                                        
                                                                                                                                
Mr. Mayer considered  what ACES would have  netted versus SB                                                                    
21 (slide 13). He detailed  that when prices were around $80                                                                    
to $100 and spending was in  the $20 range, the numbers were                                                                    
basically  the same.  The key  difference was  what happened                                                                    
when oil prices  were well above $100 to $110  where the tax                                                                    
rate under  SB 21 tapered  off and  reached a maximum  of 35                                                                    
percent. Alternatively,  25 percent was the  nominal or base                                                                    
rate  under  ACES  that  could  go  lower  or  substantially                                                                    
higher. Under  SB 21 the  rate could  reach a maximum  of 35                                                                    
percent and tapered  down at prices below $150  and $160 per                                                                    
barrel. He  explained that in the  same way as ACES  had the                                                                    
20 percent capital  credit that bent the line  down to zero,                                                                    
SB 21 had  the dollar per barrel credit  for old production.                                                                    
He directed  attention to  the "$/bbl  credit" row  and $140                                                                    
per barrel column  on slide 13 to demonstrate  his point. He                                                                    
elaborated on the  "$/bbl credit" row, which  started out at                                                                    
$8 per barrel at the lowest  prices and tapered down to zero                                                                    
at the  highest prices.  The effect of  the tapering  was to                                                                    
bend  the curve  of  the  effective tax  rate;  there was  a                                                                    
maximum tax rate of 35  percent at the highest prices, which                                                                    
could come  down much  lower. He continued  that if  it were                                                                    
not  for  the  4  percent  gross  floor,  the  number  could                                                                    
eventually drop  to zero; however,  that did not  happen for                                                                    
existing production  because one of the  other large changes                                                                    
in SB 21  for legacy production (currently the  vast bulk of                                                                    
the North Slope  tax base) was to make  the comparison after                                                                    
accounting for the dollar per barrel credit.                                                                                    
                                                                                                                                
8:47:20 AM                                                                                                                    
                                                                                                                                
Mr. Mayer continued  to address slide 13.  He explained that                                                                    
under ACES  the capital credit  happened almost last  in the                                                                    
stack. However under SB 21, the  $/bbl credit and net tax it                                                                    
created were  compared to the gross  floor; whichever amount                                                                    
was greater applied. He detailed  that it meant the tax rate                                                                    
would drop down to about 10  percent and would shoot back up                                                                    
again  quickly  to reach  100  percent  around the  $50  per                                                                    
barrel mark.                                                                                                                    
                                                                                                                                
Representative  Gara  stated that  there  were  a number  of                                                                    
older ACES  fields (Oooguruk  and Nikaitchuq)  that received                                                                    
the  lower tax  rate. He  surmised that  the definition  was                                                                    
complex, but that essentially  post-2002 fields received the                                                                    
break.                                                                                                                          
                                                                                                                                
Mr.  Mayer replied  in the  affirmative. He  elaborated that                                                                    
the term "new" pertaining to  oil fields did not necessarily                                                                    
mean  new since  the enactment  of SB  21. He  detailed that                                                                    
various  points   in  time  and  definitions   around  units                                                                    
specified what qualified as a new field.                                                                                        
                                                                                                                                
8:48:56 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  continued to address  slide 13. Under  ACES there                                                                    
was  highly variable  support for  state  spending (i.e.  25                                                                    
percent  to  100  percent), the  benefit  for  an  incumbent                                                                    
producer looked  very different from  the benefit for  a new                                                                    
producer, and the  level could vary widely  depending on the                                                                    
price  of oil  and  the amount  of spending.  Alternatively,                                                                    
under SB 21 the idea  had been to increase predictability in                                                                    
terms of  the overall  level of  state support  for spending                                                                    
and that the  tax rate should be brought down  to 35 percent                                                                    
and  should  apply  to  everyone. The  goal  had  also  been                                                                    
reduced tax rates at high  prices for competitiveness with a                                                                    
4  percent gross  floor, which  would dramatically  increase                                                                    
the tax rate  as prices dropped as an effort  to protect the                                                                    
state.                                                                                                                          
                                                                                                                                
Representative Gara pointed to  the red line representing SB                                                                    
21 on slide  13. He noted that the tax  rate decreased under                                                                    
an $8/bbl credit. He asked  for verification that the credit                                                                    
had  nothing  to do  with  whether  an entity  invested  any                                                                    
money, but was a function of price.                                                                                             
                                                                                                                                
Mr. Mayer answered in the  affirmative. He explained that it                                                                    
was very deliberate.                                                                                                            
                                                                                                                                
Representative  Gara observed  that  at $76  per barrel  the                                                                    
profits tax was  lower than the 4 percent  minimum. He asked                                                                    
for verification  that the  4 percent  minimum kicked  in at                                                                    
prices below $76 per barrel.                                                                                                    
                                                                                                                                
Mr. Mayer  answered in the  affirmative. He  elaborated that                                                                    
the  reason  for the  sharp  inflection  point was  the  two                                                                    
different tax systems;  the inflection point -  based on the                                                                    
series  of assumptions  at  hand  - was  where  there was  a                                                                    
transition between the net and gross tax.                                                                                       
                                                                                                                                
Representative  Munoz   asked  for  a  restatement   of  the                                                                    
explanation.                                                                                                                    
                                                                                                                                
Mr. Mayer  explained that  either there was  a net  or gross                                                                    
tax;  whichever  amount  was   greater  applied.  Under  the                                                                    
assumptions on slide  13 (it varied by  cost structure), the                                                                    
net tax  would eventually  drop to  zero. He  explained that                                                                    
the intersection of  the orange and red  lines indicated the                                                                    
point where  the gross  tax yielded more  than the  net tax;                                                                    
therefore the gross tax applied.                                                                                                
                                                                                                                                
Representative Munoz  asked if  the committee had  been told                                                                    
previously that the  NOL could take the gross  tax below the                                                                    
4 percent.                                                                                                                      
                                                                                                                                
Mr.  Mayer answered  in the  affirmative. He  explained that                                                                    
the  concept was  difficult to  show on  a chart  related to                                                                    
effective  tax rates.  He  detailed that  to  plot and  talk                                                                    
about an effective  tax rate there had to be  a profit to be                                                                    
taxing.  He noted  that  the  lines on  slide  13 stopped  a                                                                    
little below the  $50/bbl mark because at that  point it was                                                                    
no longer  meaningful to  talk about  an effective  tax rate                                                                    
below that  point. He furthered  that there were  $18/bbl in                                                                    
operating   and  capital   expenditures   plus  $10/bbl   in                                                                    
transportation  costs;   below  that  point  there   was  no                                                                    
production tax  value per  barrel to tax.  At that  point an                                                                    
NOL  credit kicked  in and  could further  reduce taxes.  He                                                                    
summarized that it  was reducing taxes at a  time when there                                                                    
was no  profit by definition  and therefore an  infinite tax                                                                    
rate.                                                                                                                           
                                                                                                                                
8:52:55 AM                                                                                                                    
                                                                                                                                
Representative  Gara had  heard  it said  by  some that  the                                                                    
crossover point where SB 21  raised more money was $110/bbl.                                                                    
He pointed  to slide 13  and observed that  the intersection                                                                    
point  appeared to  be closer  to $70  per barrel.  He asked                                                                    
about  the difference.  He asked  for verification  that the                                                                    
chart on slide  13 indicated that ACES  started raising less                                                                    
money than SB 21 at around $70/bbl.                                                                                             
                                                                                                                                
                                                                                                                                
Mr. Mayer  answered that  it depended  entirely on  the cost                                                                    
assumptions  used. He  detailed that  using the  capital and                                                                    
operating expenditures  of FY 14  and FY 15 (instead  of the                                                                    
$18/bbl expenditures  from the current year  Revenue Sources                                                                    
book) the yellow line representing  ACES would be shifted up                                                                    
a bit  more (because ACES  was more sensitive to  costs) and                                                                    
the red line representing SB 21  would be the same at prices                                                                    
between $75 to $100/bbl.                                                                                                        
                                                                                                                                
Representative Gara  asked for  verification that  given the                                                                    
current  cost  structure and  how  it  would affect  the  20                                                                    
percent capital  cost deduction under  the ACES  system, the                                                                    
crossover point was about $70/bbl.                                                                                              
                                                                                                                                
Mr.  Mayer replied  in  the affirmative.  He  added that  as                                                                    
costs declined the crossover point was reduced.                                                                                 
                                                                                                                                
8:54:59 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  moved to slide  14 and discussed "SB  21: Special                                                                    
Incentives for 'new oil.'" He  noted that new oil included a                                                                    
number  of things  developed  over the  course  of the  past                                                                    
decade  and  excluded the  bulk  of  production from  legacy                                                                    
fields. He addressed the gross  value reduction (GVR), which                                                                    
had  been created  for  the purpose  of  reducing the  gross                                                                    
value at  the point  of production (GVPP).  He pointed  to a                                                                    
chart on slide 14 - the  red line pertained to old oil under                                                                    
SB 21 and  the purple line represented new oil  under SB 21.                                                                    
He noted there  was a similar shape to the  curve, but SB 21                                                                    
new oil had a lower effective  tax rate at all of the prices                                                                    
listed.  He explained  that GVR  was  used because  previous                                                                    
proposals (e.g. HB  110) had looked at  establishing a lower                                                                    
rate  for  particular  new  production,   but  it  was  very                                                                    
difficult in  practice to  do that. He  detailed that  a big                                                                    
part  of the  way the  profits-based production  tax on  the                                                                    
North Slope worked was that it  did not "ring fence" or look                                                                    
field by  field. He elaborated  that the state did  not want                                                                    
to get into the business  of identifying which costs went to                                                                    
which  production   streams  in  order  to   determine  what                                                                    
different  tax   rates  for  different  assets   should  be.                                                                    
Instead, on the North Slope  each company was considered one                                                                    
combined  unit  with  one  set  of  costs  and  one  set  of                                                                    
revenues.  To  try  to  reduce the  tax  rate  without  ring                                                                    
fencing,  the  only  way to  distinguish  between  different                                                                    
streams of  production was  at the  level of  production and                                                                    
revenue, which  was easy.  He furthered that  if it  was the                                                                    
only area  to make  an intervention, the  tax rate  could be                                                                    
reduced - not  by reducing the tax rate -  but, for example,                                                                    
if revenue  was 10 to 20  percent less than it  had been, it                                                                    
was effectively the same thing as reducing the tax rate.                                                                        
                                                                                                                                
8:58:08 AM                                                                                                                    
                                                                                                                                
Representative   Gara  remarked   that   the  chart   seemed                                                                    
consistent with a  report issued by DOR, but  he believed it                                                                    
did not  seem consistent  with a  chart provided  earlier in                                                                    
the  week by  Dan  Stickel (assistant  chief economist,  Tax                                                                    
Division, Department of Revenue).  He asked for verification                                                                    
that based  on the  chart on slide  14, the  percentage paid                                                                    
for profits  on production  tax went down  to zero  at about                                                                    
$73/bbl for GVR oil.                                                                                                            
                                                                                                                                
Mr. Mayer  answered in  the affirmative  (based on  the cost                                                                    
assumptions on slide 14).                                                                                                       
                                                                                                                                
Representative Gara  asked for  verification that  for older                                                                    
oil  fields the  floor of  4  percent was  reached at  about                                                                    
$76/bbl. Mr. Mayer answered that  an effective tax rate of 4                                                                    
percent was  never reached; it  went down to  slightly below                                                                    
10 percent.                                                                                                                     
                                                                                                                                
Representative Gara surmised that  10 percent of profits was                                                                    
about  the equivalent  of a  4 percent  gross tax  rate. Mr.                                                                    
Mayer answered in the affirmative.                                                                                              
                                                                                                                                
Representative  Gara  answered   that  the  information  was                                                                    
consistent with  a report provided  by DOR. He  restated the                                                                    
tax  rates.  However,  Mr. Stickel  had  presented  a  chart                                                                    
showing a good amount of  production tax revenue for GVR oil                                                                    
even below oil at $73/bbl. He asked for an explanation.                                                                         
                                                                                                                                
Mr.  Mayer was  not  familiar with  the  specific chart.  He                                                                    
stated that there was still  substantial revenue coming into                                                                    
the fiscal  system at  those prices.  Taxes declined  and in                                                                    
some  cases down  to zero  at precisely  the point  when the                                                                    
royalty  was  becoming  a   bigger  portion  (steadily  more                                                                    
regressive). In general,  SB 21 for new oil  was designed to                                                                    
have an  overall government  take rate  of about  65 percent                                                                    
across a  wide range  of prices; in  order to  achieve that,                                                                    
the rate needed  to go down to zero because  the royalty was                                                                    
increasing and  taking up  more and  more. At  lower prices,                                                                    
revenue was  derived from royalty and  property taxes rather                                                                    
than from production tax.                                                                                                       
                                                                                                                                
Representative  Gara  stated that  the  tax  rate went  down                                                                    
under SB 21  with the exclusions. He  asked for verification                                                                    
that  the  exclusions  (credits)  had  nothing  to  do  with                                                                    
investing money,  they were merely  a function of  price for                                                                    
GVR and old oil.                                                                                                                
                                                                                                                                
Mr. Mayer agreed.  He believed the word  "credit" was almost                                                                    
a misnomer in  that sense. He elaborated that  it was simply                                                                    
an integral part  of the tax system and  was not dissimilar,                                                                    
in some ways, to progressivity under ACES.                                                                                      
                                                                                                                                
9:01:52 AM                                                                                                                    
                                                                                                                                
Representative Pruitt  surmised that  GVR credit  was really                                                                    
just  a   function  of  creating   a  progressive   tax.  He                                                                    
elaborated that  instead of doing  what had been  done under                                                                    
ACES,  the legislature  had elected  to use  the credit.  He                                                                    
believed the  term "credit" was  almost an incorrect  way to                                                                    
describe it.  He agreed  that it  was a  credit, but  it was                                                                    
really just a function of the tax.                                                                                              
                                                                                                                                
Mr.  Mayer answered  that it  was  important to  distinguish                                                                    
between two things. He addressed new  oil and the GVR at the                                                                    
top of slide 14, which  was applied to the GVPP calculation.                                                                    
From  an accounting  or statutory  perspective,  it was  not                                                                    
considered a credit;  it was simply a reduction  in GVPP. He                                                                    
explained that later there was  a fixed $5/bbl credit, which                                                                    
was  accounted for  as a  credit used  against liability  in                                                                    
DOR's data.  He agreed that it  was not a credit  in the way                                                                    
that capital credits under ACES were  - it did not depend on                                                                    
investment   -   it  merely   filled   the   same  role   as                                                                    
progressivity had  under ACES.  He detailed  that it  was an                                                                    
integral part  of the mechanism  to define an  effective tax                                                                    
rate  curve (effective  tax rate  shown in  purple on  slide                                                                    
14). He elaborated that it  was determined by saying that $5                                                                    
represented a  much bigger  portion of a  $40 barrel  than a                                                                    
$140 barrel; therefore, it would  bend the tax rate down. He                                                                    
added that it was listed in  statute as a credit, but it was                                                                    
best understood as  an integral part of the  tax system that                                                                    
existed to shape the effective tax rate.                                                                                        
                                                                                                                                
Representative Pruitt  thought the credit could  be referred                                                                    
to  as  a   deduction  or  reduction.  He   thought  it  was                                                                    
appropriate   to   make    the   distinctions   because   as                                                                    
conversations about  the overall tax credits  continued, the                                                                    
item  would become  lumped  in with  other  tax credits.  He                                                                    
surmised that if the legislature  was going to appropriately                                                                    
speak to  the current tax  regime, it needed  to distinguish                                                                    
between the  intent of the  particular credits  (a reduction                                                                    
or  deduction)  because  it   was  not  an  apples-to-apples                                                                    
comparison.                                                                                                                     
                                                                                                                                
Mr. Mayer agreed.                                                                                                               
                                                                                                                                
9:05:06 AM                                                                                                                    
                                                                                                                                
Mr. Mayer continued  to address slide 14.  He explained that                                                                    
at lower  prices such  as $40/bbl there  was an  NOL credit;                                                                    
later  slides  would show  that  the  credit was  calculated                                                                    
based on production tax  value/barrel (PTV/BBL). The PTV/BBL                                                                    
was determined by GVPP; the  GVP existed to reduce the GVPP.                                                                    
One of  the issues the  administration had raised,  was that                                                                    
at the moment, because of  the way the things cascaded (e.g.                                                                    
the NOL credit was determined  by PTV/BBL), it could be much                                                                    
higher than  35 percent of  an actual NOL. He  would address                                                                    
the issue in more depth later in the presentation.                                                                              
                                                                                                                                
Representative Munoz asked  at what point new  oil should be                                                                    
considered old oil to match the overall tax system.                                                                             
                                                                                                                                
Mr. Mayer answered  that it was a  difficult question. There                                                                    
had been substantial discussion  on the topic surrounding SB                                                                    
21. There had  been discussion about how  much incentive the                                                                    
state wanted  to offer  for new  investment. The  basic idea                                                                    
was  that  legacy   production  required  relatively  little                                                                    
additional  investment compared  to  new projects  - if  the                                                                    
state wanted to  ensure things were economic,  it required a                                                                    
boost. The state  also had to decide how much  of a boost to                                                                    
give to new  development. Once the decisions  had been made,                                                                    
there  were  various ways  of  structuring  the system.  For                                                                    
example,  the state  could determine  that  the GVR  applied                                                                    
indefinitely; or, it  could specify the GVR  was higher, but                                                                    
limited  to  the first  5  to  15  years of  production.  He                                                                    
explained  that similar  economics could  be achieved  for a                                                                    
new producer in both situations.  The decision had been made                                                                    
to have  a slightly lower  rate on  the GVR; it  would apply                                                                    
indefinitely, rather  than worrying about making  changes to                                                                    
incentives  and  other things  that  happen  when it  starts                                                                    
running out. Slowly  over time, SB 21 new  oil represented a                                                                    
bigger  share of  things. He  did not  want to  suggest that                                                                    
fiscal terms  should continue to  be changed;  stability was                                                                    
more important  than anything. However, he  did believe that                                                                    
whether the GVR  should be indefinite or  time-limited was a                                                                    
reasonable question.                                                                                                            
                                                                                                                                
9:08:20 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer   continued  to  address   slide  14.   From  the                                                                    
perspective of field economics things  that change after the                                                                    
first 10 to  15 years of an asset's life,  had a much lesser                                                                    
impact  on   the  economics   of  development   than  things                                                                    
occurring in the first decade.                                                                                                  
                                                                                                                                
Representative  Pruitt  surmised that  if  the  goal was  to                                                                    
incentivize oil,  it may be  appropriate to  understand what                                                                    
the state  expected the total  amount of  new oil to  be. He                                                                    
asked if new oil was projected  to be a major portion of the                                                                    
oil  produced.  He  wondered  about  the  state's  goal  and                                                                    
whether it was  to incentivize new oil. He  reasoned that if                                                                    
the  goal  was to  take  over  the  revenue stream,  it  was                                                                    
something the legislature  should talk about. Alternatively,                                                                    
if the  goal was to work  to stem the decline  and make sure                                                                    
something   was  being   generated,   it   was  a   separate                                                                    
conversation.                                                                                                                   
                                                                                                                                
Mr. Mayer  agreed. He expounded  that at the moment  new oil                                                                    
was a  very small  portion of  the revenue  base -  it would                                                                    
increase over  time. He would  have to  look at DOR  data to                                                                    
determine if there  were any projections for new  oil in the                                                                    
next 12 to 18 years.                                                                                                            
                                                                                                                                
9:10:02 AM                                                                                                                    
                                                                                                                                
Representative Gara referred to  an earlier question about a                                                                    
possible  tweak in  the  oil tax  system.  He addressed  Mr.                                                                    
Mayer's  response  that an  oil  tax  system should  not  be                                                                    
changed  every  year.  He stated  that  the  battle  between                                                                    
higher  and lower  tax legislators  and others  had gone  on                                                                    
since 2004.  He had  once heard that  the two  most unstable                                                                    
tax regimes  (in a  safe place to  conduct business)  were a                                                                    
tax system that was too high  and a system that was too low.                                                                    
He asked if the statement was fair.                                                                                             
                                                                                                                                
Mr. Mayer  agreed. He elaborated  that there were  many ways                                                                    
of assessing  fiscal regime stability,  but it  was possible                                                                    
to look at  some regimes and know that they  would change at                                                                    
some  point   precisely  for   the  reason   highlighted  by                                                                    
Representative Gara. He  noted that it was  not desirable to                                                                    
invest in regimes that were too  onerous, but it was good to                                                                    
consider that there may be  an opportunity for investment in                                                                    
the  future  because  the  rate  may  be  unsustainable.  He                                                                    
elaborated  that regimes  that  were too  generous may  look                                                                    
great initially, but it was  important to be careful because                                                                    
regimes that were too generous could not last.                                                                                  
                                                                                                                                
9:11:44 AM                                                                                                                    
                                                                                                                                
Mr. Mayer relayed that he  was finished with his overview of                                                                    
core fiscal  regime concepts for  the North Slope,  which he                                                                    
hoped  set a  background  to  look at  some  of the  changes                                                                    
proposed under  the original  HB 247. He  noted that  he had                                                                    
spoken  with the  committee in  a meeting  the previous  day                                                                    
about  changes  the  CS contained.  He  addressed  slide  16                                                                    
titled "Monthly  Gross Minimum  Calculation: Neutral  or Tax                                                                    
Hike." He  had relayed that  it was  the type of  thing that                                                                    
seemed  to  be  more  incremental  revenue  raising  than  a                                                                    
statement  of principle  about  something  that should  work                                                                    
differently  in the  tax  system. For  instance,  in 2014  a                                                                    
monthly gross  minimum would have  brought in  an additional                                                                    
$100 million in  revenue to the state. He  addressed a chart                                                                    
showing the  core revenue calculation for  old fields, which                                                                    
began  with   ANS  WC  [Alaska  North   Slope  West  Coast];                                                                    
subtracted  transport, operating  and capital  expenditures,                                                                    
PTV/BBL;  determined 35  percent;  and took  away an  $8/bbl                                                                    
credit.   The  horizontal   access   on  represented   time;                                                                    
different prices  were applied  for the different  months of                                                                    
2014.  For 2014  as a  whole, the  dollar per  barrel credit                                                                    
would have been $8/bbl. The  blue text in the latter columns                                                                    
on the  chart represented the  core of the  net profit-based                                                                    
calculation. He  explained that they  began with  35 percent                                                                    
PTV and subtracted $8/bbl, which  equaled the actual tax; it                                                                    
was then compared  to the green column,  which represented 4                                                                    
percent of the GVPP.                                                                                                            
                                                                                                                                
Mr. Mayer explained that whichever  tax was higher applied -                                                                    
the  PTV was  determined by  which  of the  two columns  was                                                                    
greater. For the  first half to three-quarters  of 2014, oil                                                                    
prices had been  around $100; there had been  a sudden price                                                                    
collapse at  the end of  2014 that  had ended at  $60/bbl in                                                                    
December.  He explained  that  when  calculating the  number                                                                    
annually, it  was clearly  a net  tax year  as opposed  to a                                                                    
gross tax  year. Alternatively, if the  calculation had been                                                                    
done monthly, the first 10  months would have been net taxed                                                                    
and  the last  2  months  would have  been  gross taxed.  He                                                                    
pointed to the November row  on the chart and explained that                                                                    
4 percent of  GVPP was $2.68, which was higher  than the net                                                                    
tax [$1.59].  Taken on  an annualized basis  it was  the net                                                                    
tax all  the way through  because the annual  numbers showed                                                                    
net tax  terms. However, during periods  of price volatility                                                                    
there were  times the  gross minimum could  be charged  on a                                                                    
monthly basis even though the  overall year showed a net tax                                                                    
environment. If  the calculation was done  annually, the end                                                                    
result would be $8.71 per  barrel in the net production tax;                                                                    
whereas,  averaging out  the 12  months reached  a total  of                                                                    
$9.31 [shown at the bottom right of the chart].                                                                                 
                                                                                                                                
Vice-Chair  Saddler asked  how  the  annual 2014  production                                                                    
tax/bbl  had been  determined (slide  16). He  observed that                                                                    
the production tax/barrel column was  the greater of the two                                                                    
previous columns  ["Less $8/bbl"  and "4 percent  of GVPP").                                                                    
He observed  that in  November and  December 2014  the gross                                                                    
tax was higher.                                                                                                                 
                                                                                                                                
9:16:15 AM                                                                                                                    
                                                                                                                                
Mr. Mayer explained  that the first row of  the chart (slide                                                                    
16)  represented  the calculation  on  an  annual basis.  It                                                                    
showed the average price for the year.                                                                                          
                                                                                                                                
Vice-Chair Saddler  asked for verification  that it  was the                                                                    
average price per barrel.                                                                                                       
                                                                                                                                
Mr. Mayer  affirmed that the  top row reflected  the average                                                                    
price  for the  entire year.  He continued  that the  annual                                                                    
calculation worked the same as  the monthly calculations and                                                                    
it  resulted in  a higher  net tax;  therefore, the  net tax                                                                    
applied. He pointed to the  difference between the $8.71 and                                                                    
$9.31  on the  second to  last column  to the  right of  the                                                                    
chart on  slide 16. He  noted that  the chart showed  a high                                                                    
level calculation that treated the  entire North Slope as if                                                                    
it was one tax payer. He  explained that it was a difference                                                                    
of  $0.61/bbl,  which  if applied  to  all  taxable  barrels                                                                    
produced on  the North  Slope it was  a rough  difference of                                                                    
about $100 million.                                                                                                             
                                                                                                                                
Vice-Chair Saddler asked if the  $9.31 was an average of the                                                                    
production  tax/bbl  column.  Mr.   Mayer  answered  in  the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  pointed to a row  labeled increase [last                                                                    
row at  the bottom of the  chart] and asked for  detail. Mr.                                                                    
Mayer  answered that  the row  showed that  $9.31 was  $0.61                                                                    
higher than $8.71.                                                                                                              
                                                                                                                                
Mr. Mayer continued  to address slide 16.  He explained that                                                                    
it was  not clear why someone  would want to assess  the tax                                                                    
on a monthly rather than on  an annual basis. The tax system                                                                    
was done on  an annual basis at present for  the same reason                                                                    
that  personal   and  corporate   income  taxes   were  done                                                                    
annually.  He  explained that  using  a  longer time  period                                                                    
smoothed volatilities associated with revenues and prices.                                                                      
                                                                                                                                
9:18:57 AM                                                                                                                    
                                                                                                                                
Representative  Guttenberg stated  that usually  a situation                                                                    
like the  one presented  on the  chart included  winners and                                                                    
losers.  He wondered  what  differentiated  between the  two                                                                    
groups.                                                                                                                         
                                                                                                                                
Mr. Mayer answered that the  winners and losers on the chart                                                                    
were the state and producers.                                                                                                   
                                                                                                                                
Representative  Guttenberg asked  for  verification that  it                                                                    
did not include competition between producers.                                                                                  
                                                                                                                                
Mr.  Mayer  agreed.  He characterized  the  situation  as  a                                                                    
"heads I  win, tails it's  a draw" gamble. He  detailed that                                                                    
if there  was one uniform  price with no volatility  for the                                                                    
entire  year,  the  question  about  annual  versus  monthly                                                                    
calculations  would  be  irrelevant  in  terms  of  the  end                                                                    
result.  There was  a  difference  when volatility  existed.                                                                    
When  there   is  volatility,  the  state   wanted  to  take                                                                    
advantage of  the months where  more was paid under  a gross                                                                    
tax,  even though  for  the  year it  would  not  be in  the                                                                    
situation.                                                                                                                      
                                                                                                                                
Representative   Pruitt   surmised   that   the   particular                                                                    
provision  only  came  into  play when  focusing  on  the  4                                                                    
percent of GVPP  (when it was the higher of  the two taxes).                                                                    
He believed that  at lower prices the  annual versus monthly                                                                    
calculation was not  a concern. He reasoned  that whether or                                                                    
not it was beneficial to the  state did not become a concern                                                                    
until prices reached the $70  or so breaking point. He asked                                                                    
if his statements were accurate.                                                                                                
                                                                                                                                
Mr.  Mayer replied  that it  was about  volatility and  that                                                                    
some months were in the  net tax environment, whereas others                                                                    
were in a  gross tax environment. He stated  that the entire                                                                    
year  would be  month-by-month in  a tax  calculation; there                                                                    
could  be volatility  and it  would not  make a  difference.                                                                    
Alternatively,  if the  entire  year was  in  the gross  tax                                                                    
environment,  it  would  not   have  an  impact.  Volatility                                                                    
presenting  a  switch  between  gross  and  net  meant  that                                                                    
switching  between  the  two meant  more  money  going  into                                                                    
savings  because it  was  taking advantage  of  the best  of                                                                    
either world on a month-to-month basis.                                                                                         
                                                                                                                                
Representative  Pruitt surmised  that  in  the current  year                                                                    
that  was  projected by  DOR  to  remain  in the  gross  tax                                                                    
scenario, it was not a concern.                                                                                                 
                                                                                                                                
Mr. Mayer  agreed that it  was not  a concern if  there were                                                                    
not substantial increases  in the price of oil  later in the                                                                    
year.                                                                                                                           
                                                                                                                                
9:22:01 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer  addressed  slide  17   titled  "GVR  Raises  Net                                                                    
Operating  Loss  (NOL) Credit  Above  35  Percent of  Actual                                                                    
Loss."  The next  key item  carried over  from the  original                                                                    
bill to the  CS was how the GVR worked  with the NOL credit.                                                                    
He  explained that  the GVR  was  artificially reducing  the                                                                    
GVPP to  reduce the overall tax  rate. He looked at  a chart                                                                    
on the left  and explained that the left  hand column titled                                                                    
"SB 21 GVR"  represented current law for new  oil; the right                                                                    
hand column represented  new oil under the  proposed HB 247.                                                                    
The difference  was what  the evaluation  of the  NOL credit                                                                    
was based  on. Under  current statute it  was 35  percent of                                                                    
the negative production tax value  per barrel [shown in blue                                                                    
on the chart]. Under the SB 21 GVR column the PTV/BBL was                                                                       
-12 percent; however, if it  had been calculated without the                                                                    
GVR the number would have only  been -6 percent. Half of the                                                                    
NOL under assessment  was not an actual loss; it  was a loss                                                                    
that existed solely  as a function of the  GVR. He furthered                                                                    
that  if   the  number   had  been  calculated   before  the                                                                    
application  of  the  GVR  it would  result  in  35  percent                                                                    
government support  for spending through the  NOL (which had                                                                    
been the  intent) as opposed  to the circumstances  shown on                                                                    
the  chart  where support  for  government  spending was  70                                                                    
percent;  it   varied  widely  based   on  price   and  cost                                                                    
assumptions.  There  were   circumstances,  particularly  at                                                                    
lower prices,  where there was substantially  higher than 35                                                                    
percent for government  spending because of the  way the GVR                                                                    
interacted with the calculation of how much the NOL was.                                                                        
                                                                                                                                
Mr. Mayer  considered the lifecycle  of an oil  field. There                                                                    
was initial  capital investment,  the startup of  the field,                                                                    
reduced capital  investment, operating costs,  and revenues.                                                                    
He explained that  the model looked at an  80 million barrel                                                                    
field with  approximately 20,000  barrels of  production per                                                                    
day and  slightly over  $1 billion  in development  cost. At                                                                    
oil prices  of $40/bbl  the cash flows  did not  look great;                                                                    
the  investment would  not make  financial sense  if $40/bbl                                                                    
was assumed for  the lifetime of the project.  He pointed to                                                                    
the chart on slide 17 that  showed a period of negative cash                                                                    
flows in the  early years and some small  amount of revenues                                                                    
at $40  later on. The  solid black line  represented current                                                                    
statute  and  the  dotted  black  line  indicated  making  a                                                                    
correction  related to  how  the GVR  impacted  the NOL.  He                                                                    
pointed out that  cash flows were $10 million  higher at the                                                                    
most under current statute. In  the first years there was no                                                                    
production at all; therefore the GVR  was not an issue - the                                                                    
NOL was  simply 35 percent  of the actual  capital invested.                                                                    
Once revenues began coming in,  but a substantial profit had                                                                    
yet to  be made,  there was  a period of  a couple  of years                                                                    
where the GVR  impacting the calculation came  into play. He                                                                    
noted that if  the chart reflected $70/bbl  there would only                                                                    
be a year or two that  the issue factored in. The impact was                                                                    
bigger at  $40/bbl - as much  as $10 million per  year for a                                                                    
couple of years of production. In  the 8th or 9th year there                                                                    
would be  a small profit,  but the existing  system assessed                                                                    
it as NOL  because it was NOL once the  GVR was factored in.                                                                    
The CS  maintained that the intent  of SB 21 was  to have 35                                                                    
percent support  for government spending for  everyone under                                                                    
all circumstances,  but the issue  pointed out in  the chart                                                                    
did not seem  to be consistent with that;  therefore, it may                                                                    
be worth addressing.                                                                                                            
                                                                                                                                
9:27:30 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  turned to slide  18 regarding a hardening  of the                                                                    
floor  that raised  taxes on  losses. He  spoke to  existing                                                                    
production. He  relayed that SB  21 implemented a  floor for                                                                    
the first  time that bottomed  out at an effective  tax rate                                                                    
of just  under 10 percent  and then things began  climbing -                                                                    
[the effective  tax rate for] existing  production no longer                                                                    
went down to  zero. The bill would raise the  floor from a 4                                                                    
percent to a  5 percent floor (illustrated in  red and green                                                                    
on the chart  on the left). He explained  that effective tax                                                                    
rates could  only be used as  a tool of analysis  going down                                                                    
to just below $50/bbl because  after that there was no value                                                                    
to  tax. The  chart  on  the right  looked  at the  absolute                                                                    
numbers of production tax per  taxable barrel. He pointed to                                                                    
the inflection point around $80/bbl  where the gross minimum                                                                    
kicked in; the  inflection point was slightly higher  in a 5                                                                    
percent world versus a 4  percent world. He pointed out that                                                                    
the red line  (SB 21) and the green line  (HB 247) flattened                                                                    
out, but  there was a  key difference around  $45/bbl, which                                                                    
was the point when the NOL credit kicked in.                                                                                    
                                                                                                                                
Mr. Mayer  explained that  SB 21 had  hardened the  floor in                                                                    
terms of  the dollar  per barrel credit,  but the  one thing                                                                    
that could take the tax below  the floor was the NOL credit.                                                                    
He  noted that  the  concept had  been  a deliberate  policy                                                                    
choice. He elaborated that if  an NOL occurred (there was no                                                                    
longer  a  profit  to  be  taxed),  tax  simply  applied  to                                                                    
activity  and  revenue  even  in  a  loss  making  position.                                                                    
Overall the system  had recognized for a long  time that for                                                                    
all the  reasons discussed, all  of Alaska's  fiscal regimes                                                                    
had tried  at low prices to  reduce the impact of  the gross                                                                    
taxes.  For example,  the Economic  Limit  Factor (ELF)  had                                                                    
used the economic  limit formula, which had  only worked for                                                                    
some period of  time; it had been effectively  to reduce the                                                                    
tax rate  when wells  were less productive.  Current statute                                                                    
reflected a  series of assumptions  from a  different period                                                                    
in  time,   but  even  the   current  gross  tax   had  been                                                                    
established at 4  percent in some price range,  3 percent in                                                                    
another, 2 percent in another, and  so on. The idea had been                                                                    
that  it was  important to  understand and  mitigate that  a                                                                    
gross tax  had a disproportionate  impact at the  lowest oil                                                                    
prices. He  continued that in the  past it had been  hard to                                                                    
imagine there would ever be  an NOL made by major producers;                                                                    
however, it was now the case.                                                                                                   
                                                                                                                                
Mr. Mayer discussed that under  the circumstances, the state                                                                    
may  need to  think about  reducing the  gross floor,  given                                                                    
that it was  effectively an infinite rate of  tax; it should                                                                    
never go below zero, but  there should be the possibility to                                                                    
reduce  it.  He noted  that  it  was  a policy  debate  that                                                                    
peopled differed on. For example,  it was reasonable to take                                                                    
the stance  that the  gross floor was  there to  provide the                                                                    
state with  revenue protection and  they understood  that it                                                                    
was taxing  at a time  when there was  no profit to  tax. He                                                                    
remarked that  it was a  difficult and important  debate. He                                                                    
believed  the  system  had  worked   well  overall  and  had                                                                    
protected  the  better  state  on   the  downside  than  the                                                                    
previous  system;  competitive  regimes  balanced  risk  and                                                                    
reward. He  spoke about North  Dakota versus  Norway related                                                                    
to needing  a system  that was evaluated  at both  ends. The                                                                    
danger was that when prices  were good there was worry about                                                                    
whether  the  state  was  taking enough  on  the  high  end.                                                                    
Alternatively,  when prices  were low,  the state  looked at                                                                    
North Dakota,  which was  much better  protected on  the low                                                                    
end. He believed  there was a substantial  danger related to                                                                    
how  the  minimum  tax  worked  and  whether  it  should  be                                                                    
hardened, increased, or other.                                                                                                  
                                                                                                                                
9:32:37 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer  believed  there was  a  difference  between  the                                                                    
debate  on  hardening  the floor  and  increasing  the  rate                                                                    
(slide  18). He  believed hardening  the floor  would create                                                                    
problems  for numerous  people  and would  run  a danger  of                                                                    
impact  on investment.  However, he  believed the  danger of                                                                    
increasing the  rate from 4 percent  to 5 percent in  a year                                                                    
when times  were bad  was that  companies would  wonder what                                                                    
would  happen in  the next  year. He  encouraged members  to                                                                    
think about  how the changes  appeared from  the perspective                                                                    
of long-term  fiscal regime stability. He  cautioned against                                                                    
creating  anxiety about  what unforeseen  changes the  state                                                                    
may implement in future years.                                                                                                  
                                                                                                                                
9:33:54 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:41:23 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Thompson  noted that the  10:00 a.m.  meeting would                                                                    
be delayed.                                                                                                                     
                                                                                                                                
Mr. Mayer  addressed slide  19 related to  how HB  247 would                                                                    
impact new field development. Slide  19 included a lifecycle                                                                    
model  of  a  hypothetical  new  development,  which  helped                                                                    
represent  some  of  the actual  development  on  the  North                                                                    
Slope. The  model included an  80 million barrel  field with                                                                    
production  of about  20,000 barrels  per  day, which  would                                                                    
require about  $1.3 billion in  capital and  drilling costs.                                                                    
The  model included  an individual  drilling profile  with a                                                                    
look at how  many wells were drilled annually.  He looked at                                                                    
the chart on  the left that showed initial  capital costs in                                                                    
dark blue  and government take  in red. Government  take was                                                                    
negative  in the  early years;  the  NOL credit  contributed                                                                    
some of the capital costs;  therefore, the cash flow was not                                                                    
as low as  the total capital being spent.  Later years began                                                                    
to generate  some government take  and a  significant amount                                                                    
of revenue once costs declined.                                                                                                 
                                                                                                                                
9:43:05 AM                                                                                                                    
                                                                                                                                
Mr. Mayer  turned to  slide 20  titled "Refund  Limits Boost                                                                    
Capital  Needs  and  Lower IRR."  The  slide  addressed  the                                                                    
current impact of proposed refund  limits on new developers.                                                                    
The  range   of  possible  effects  is   quite  significant,                                                                    
depending on whether  it was the only asset  a company owned                                                                    
or if  they had existing  assets that were also  claiming an                                                                    
NOL; it  was a  proposed per company  limit of  $25 million,                                                                    
not a  per asset limit.  The NOL credit  essentially brought                                                                    
forward  a deduction  that a  company  would otherwise  have                                                                    
later in  the cycle  to substantially  reduce the  amount of                                                                    
capital it needed to build a  project. The chart on the left                                                                    
showed cumulative  cash flow  and how  much total  capital a                                                                    
company needed to develop a  project. He explained that if a                                                                    
company wanted  to develop a  project it would not  need the                                                                    
full $1.3  billion because at  some point the  project would                                                                    
become  self-financing  and  self-sustaining.  He  continued                                                                    
that at  some point  costs would be  incurred while  oil was                                                                    
being produced  and the revenues could  go towards financing                                                                    
the additional  drilling. He estimated that  a company would                                                                    
need around $350 million to  develop the project on slide 20                                                                    
under  the current  35 percent  refundable  NOL credits.  He                                                                    
pointed to  the solid black line  on the chart on  the left,                                                                    
which represented  SB 21  GVR with a  refundable NOL  - from                                                                    
that   point  onwards   the  project   would  become   self-                                                                    
sustaining.  The  chart showed  that  by  2022 or  2023  the                                                                    
company would have recovered all  of its initial investments                                                                    
and would be bringing in revenue.                                                                                               
                                                                                                                                
Mr. Mayer  explained that by  reducing the  refundability of                                                                    
the NOL the amount of  capital required to develop a project                                                                    
would increase substantially. The  dotted line at the bottom                                                                    
of the  charge depicted what  would occur if the  credit was                                                                    
non-refundable  and had  to  be claimed  out  of future  tax                                                                    
liabilities. He pointed  out that by 2027, the  lines on the                                                                    
chart merged and became the  same thing; however, the dotted                                                                    
line  was substantially  lower for  the  previous years.  He                                                                    
explained  that  the  scenario required  substantially  more                                                                    
upfront capital of over $500  million (due to the absence of                                                                    
the 35  percent refundable NOL credit);  however, after 2027                                                                    
the company  would pay  less in taxes  and would  recoup its                                                                    
investment at that point.                                                                                                       
                                                                                                                                
9:46:14 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer continued  to address  the chart  on the  left of                                                                    
slide  20. He  explained  that a  dollar  per company  limit                                                                    
scenario fell somewhere between  the black and dotted lines.                                                                    
For example, if there was a  $25 million limit for a company                                                                    
with only one asset, the  project may only slightly increase                                                                    
capital needs (e.g. from $350  million up to $400 million or                                                                    
$450  million). He  added that  the amount  would depend  on                                                                    
other assets  a company  owned and  whether it  was claiming                                                                    
NOL on any of them. In  general, as the limit increased, the                                                                    
impact  it had  for  a company  was  substantially less.  He                                                                    
explained that  if it was a  $75 million limit for  a single                                                                    
asset, it probably  would not have an effect;  however, if a                                                                    
company had  another project that  was eligible for  an NOL,                                                                    
even  a  $75  million  limit  would  have  some  impact.  He                                                                    
explained  that  DOR  would have  to  provide  some  precise                                                                    
numbers  on how  many companies  would be  impacted by  what                                                                    
exact  limit. He  noted that  one  could say  that the  $200                                                                    
million limit proposed  in the CS should be  a binding limit                                                                    
for no one  currently on the North Slope.  He expounded that                                                                    
numbers in  above or below  $100 million had some  impact on                                                                    
some   people,   but   the   precise   impact   would   vary                                                                    
substantially from company to company.                                                                                          
                                                                                                                                
Mr. Mayer  continued that  there were  two large  impacts of                                                                    
any binding limit on the  amount that could be refunded: the                                                                    
amount  of capital  required to  develop a  project and  the                                                                    
corresponding internal  rate of return (IRR).  He pointed to                                                                    
a chart  on the right  of slide  20, which showed  that non-                                                                    
refundable credit meant  a company needed $5  to $10 dollars                                                                    
higher in  oil price  to get  the same IRR  as it  could get                                                                    
under the refundable  credit. He explained that  if the bill                                                                    
implemented a $25  million limit in mid-2016,  it would mean                                                                    
companies currently  undertaking developments could  need 50                                                                    
percent  more capital  than they  anticipated. He  explained                                                                    
that it would be a  very difficult position for companies to                                                                    
be   in.  Additionally,   if  companies   needed  to   raise                                                                    
additional  capital  they   would  need  to  do   it  in  an                                                                    
environment  that did  not require  going back  to investors                                                                    
for additional  capital because  all of  the IRRs  were much                                                                    
lower  than anticipated  due to  the change.  He highlighted                                                                    
several issues including when the  limit would apply, who it                                                                    
would   apply   to,  and   whether   there   were  ways   of                                                                    
grandfathering  in existing  investment  (if  the limit  was                                                                    
strict).  He  noted that  if  the  limit  were high  it  was                                                                    
unlikely to be such a problem  because it was likely to have                                                                    
less  of  an  impact  on current  investment.  Possibly  the                                                                    
largest  concern  was not  about  the  current refunded  NOL                                                                    
credit, but about  what may happen if there was  a major new                                                                    
investment (e.g. development of  a new Kuparuk-sized field).                                                                    
He stated that  it could easily be a total  of $2 billion in                                                                    
NOL credits in the first  couple of years of development. He                                                                    
thought  anyone  should think  about  that  figure and  have                                                                    
concern  about what  it would  mean for  state finances  and                                                                    
whether the state could afford  the amount. He reasoned that                                                                    
over  time a  large field  discovery would  be wonderful  in                                                                    
terms of all  of the future revenues it would  bring, but it                                                                    
could  be a  severe  strain  on the  state  finances in  the                                                                    
short-term.  The hope  was  that a  large  project would  be                                                                    
economic regardless  of the  timing and  he believed  it was                                                                    
reasonable to  put a limit  in place to limit  the potential                                                                    
downside  exposure of  the state.  He  questioned the  right                                                                    
level at which to set a company limit.                                                                                          
                                                                                                                                
9:50:43 AM                                                                                                                    
                                                                                                                                
Mr.   Mayer  addressed   slide  21   titled  "Changes   Make                                                                    
Regressive System  Even More So."  He continued  speaking to                                                                    
new development. He explained  that the biggest impacts came                                                                    
through  the higher  floor.  The idea  of  making the  gross                                                                    
minimum  floor   binding  for  new  oil   meant  going  from                                                                    
effective  tax rates  of  zero at  current  prices to  gross                                                                    
minimum  taxes of  5 percent  at a  time when  there was  no                                                                    
profit to be  taxed. The charts on slide 21  provided a look                                                                    
across  a wide  range of  prices  and how  the structure  of                                                                    
government take was impacted. The  slide used a hypothetical                                                                    
asset of  $1.3 billion in capital  investment and considered                                                                    
what portion  went to the  state and what portion  came from                                                                    
different components  of the system.  The chart on  the left                                                                    
represented SB  21 GVR for  the new  asset; it was  a system                                                                    
designed to create a level  of government take between 60 to                                                                    
65  percent across  a wide  range of  prices. He  noted that                                                                    
production  tax  was  something that  was  levied  when  oil                                                                    
prices were $70/bbl and above.  He explained that across the                                                                    
price   environments,  production   tax   made  a   positive                                                                    
contribution to the state's overall  take from the asset. He                                                                    
detailed that in the early  years production tax through the                                                                    
NOL credit  would be  negative, but in  the later  years the                                                                    
state would receive  tax revenue from the asset.  As long as                                                                    
the oil  price was $60/bbl  to $70/bbl or higher,  over time                                                                    
the revenues would exceed the credits the state spent.                                                                          
                                                                                                                                
Mr. Mayer continued  to address the left chart  on slide 21.                                                                    
At  lower  prices  the credits  would  exceed  revenues.  He                                                                    
expounded  that oil  prices at  $40  to $60/bbl  for the  20                                                                    
years of the  project's life would not be  a good investment                                                                    
and  the  tax credits  paid  in  the  early years  would  be                                                                    
greater than  the recovered revenues.  He noted that  it was                                                                    
only  one  piece   of  the  picture.  There   was  also  the                                                                    
regressive royalty that took a  large share of any available                                                                    
profits in low price  environments. He continued even though                                                                    
production taxes were  negative for the state  if low prices                                                                    
were assumed  for the  lifecycle of  the asset,  the royalty                                                                    
was  high  enough  that  government take  did  not  go  down                                                                    
(dotted  black line)  until prices  below $60/bbl;  negative                                                                    
production  tax  brought  government take  down.  Government                                                                    
take  was  still  regressive  because   the  impact  of  the                                                                    
regressive royalty  was greater than the  impact of negative                                                                    
production  tax  (because  the  value  of  the  credits  was                                                                    
greater than the  value of the taxes). At  $40/bbl the state                                                                    
would receive  close to 100 percent  government take despite                                                                    
the fact that  the credits were contributing  to the company                                                                    
and not the state.                                                                                                              
                                                                                                                                
9:54:25 AM                                                                                                                    
                                                                                                                                
Mr.  Mayer addressed  the chart  on the  right of  slide 21,                                                                    
which  accounted  for  changes  proposed  under  HB  247.  A                                                                    
binding floor meant  that gross tax had to be  paid even for                                                                    
new oil.                                                                                                                        
                                                                                                                                
Representative  Gattis   asked  Mr.  Mayer  to   repeat  his                                                                    
previous point. She believed it was very important.                                                                             
                                                                                                                                
Mr.  Mayer  agreed  that  it  was  an  important  point.  He                                                                    
repeated that  at lower prices (particularly  below $50/bbl)                                                                    
despite whether  the prices were  assumed to remain  at that                                                                    
level for the life of an  asset, the credits paid out at the                                                                    
start of  development were greater  than the  production tax                                                                    
revenues received  in later years,  which was a  negative to                                                                    
the state  in net.  However, the  royalty was  so regressive                                                                    
that when all things were  factored in - government take was                                                                    
regressive and  going up at  the low price levels  of around                                                                    
$40/bbl - it was close to 100 percent.                                                                                          
                                                                                                                                
Representative  Wilson   spoke  about  tax   credits,  which                                                                    
represented the  state investing  in a  project (just  as it                                                                    
would buy  shares of  stock). She  furthered that  the state                                                                    
hoped  the investment  would  become  profitable, where  the                                                                    
state would  still contribute  to its  part and  the company                                                                    
would pay  more, until  a point was  reached when  the state                                                                    
was no  longer investing,  but it  was receiving  money. She                                                                    
asked for the accuracy of her statement.                                                                                        
                                                                                                                                
Mr.  Mayer  answered she  was  correct  in relation  to  the                                                                    
overall workings  of the tax  structure. He  elaborated that                                                                    
the state  contributed 35 percent  of the upfront  costs and                                                                    
received up to  35 percent of the cash flows  that came as a                                                                    
result (in addition to royalties, taxes, and other).                                                                            
                                                                                                                                
Representative  Wilson  reasoned that  if  a  new field  was                                                                    
discovered, it  may not be the  right time for the  state to                                                                    
make a $2  billion investment. She surmised that  it was not                                                                    
necessarily a  bad investment and  it could bring  the state                                                                    
more money for years.                                                                                                           
                                                                                                                                
Mr.  Mayer agreed.  He  stated  that it  was  all about  the                                                                    
timing  of cash  flows  as opposed  to  the actual  amounts.                                                                    
Unlike previous years  and the situation in  Cook Inlet, the                                                                    
only real credit  on the North Slope was the  NOL credit; it                                                                    
was clear when looking at  the overall economics that it was                                                                    
providing  the  same  benefit that  existing  producers  had                                                                    
through the tax  system and was an investment  in the future                                                                    
of production. The only  changes under contemplation changed                                                                    
the timing  of when  the investment was  made -  whether the                                                                    
state  was paying  its  share of  the  capital upfront  like                                                                    
other investors or  later by taking less cash  flows; in net                                                                    
the two strategies  were the same. The  question was whether                                                                    
the state  could afford  the upfront  investment or  not and                                                                    
understanding that it provided  a substantial benefit to the                                                                    
developers.                                                                                                                     
                                                                                                                                
Representative  Wilson surmised  that  the state  must be  a                                                                    
pretty good  investor thus far  because 90 to 95  percent of                                                                    
what  it took  to  fund  government had  come  from the  oil                                                                    
investments.  She asked  whether the  Department of  Natural                                                                    
Resources (DNR)  made the determination  that the  state may                                                                    
want to  invest in a  project because its  profitability was                                                                    
verifiable.  Alternatively, she  wondered  if someone  could                                                                    
come in  and drill a hole  merely to get the  tax credits in                                                                    
the hope that the state would not conduct due diligence.                                                                        
                                                                                                                                
9:59:07 AM                                                                                                                    
                                                                                                                                
Mr. Mayer answered  the state did not have the  control of a                                                                    
direct   equity   investor.   He  elaborated   that   unless                                                                    
particular things  were put in  place to address  the issue,                                                                    
the  due  diligence  was  all  conducted  by  the  companies                                                                    
themselves,  which  were  acting  in  their  economic  self-                                                                    
interest to  make profitable investments. The  state was not                                                                    
making an assessment on its view.                                                                                               
                                                                                                                                
Representative   Wilson  wondered   what  was   broken.  She                                                                    
reasoned that tax credits were  really an investment and she                                                                    
did  not believe  the state  was  giving companies  anything                                                                    
without something  in return. She highlighted  that the goal                                                                    
of  SB 21  was  to  get more  oil,  which  she believed  was                                                                    
working. She wondered what the  administration hoped to gain                                                                    
from the passage of HB 247.                                                                                                     
                                                                                                                                
Mr.  Mayer replied  that when  he looked  at how  SB 21  was                                                                    
working on the North Slope,  he did not believe anything was                                                                    
broken.  He opined  that overall  the  system worked  fairly                                                                    
well.  He elaborated  that the  bill made  changes in  other                                                                    
areas like the GVR and  NOL that he believed were legitimate                                                                    
issues  raised   by  the  administration.  He   thought  the                                                                    
question of what  the state could afford in  terms of timing                                                                    
of  cash flows  was also  a very  legitimate question  to be                                                                    
raising. Particularly, if a $2  billion investment arose, he                                                                    
believed it  was right to  be concerned about what  it could                                                                    
mean  for the  state's ability  to manage  those cash  flows                                                                    
over a  period of years  and to  think about what  the state                                                                    
could  put  in  place  to mitigate  against  the  situation.                                                                    
However, broadly speaking in terms  of the overall regime of                                                                    
taxes  and  credits on  the  North  Slope,  he did  not  see                                                                    
something as broken, but as  something that had worked quite                                                                    
well.                                                                                                                           
                                                                                                                                
10:01:05 AM                                                                                                                   
                                                                                                                                
Representative Wilson asked for  verification that Mr. Mayer                                                                    
would not do  anything to change SB 21 at  the current point                                                                    
in time as it pertained to the North Slope.                                                                                     
                                                                                                                                
Mr. Mayer agreed.                                                                                                               
                                                                                                                                
Representative Gattis asked if  Mr. Mayer would make changes                                                                    
to Cook Inlet.                                                                                                                  
                                                                                                                                
Mr.  Mayer  returned  to  slide  6  titled  "Big  Difference                                                                    
between  North Slope  and Cook  Inlet." He  did not  believe                                                                    
anyone  could  think the  Cook  Inlet  credit structure  was                                                                    
sustainable.                                                                                                                    
                                                                                                                                
                                                                                                                                
Representative  Gara  remarked  that  he did  not  know  the                                                                    
utility of asking someone who  consulted to help build SB 21                                                                    
whether there  was anything wrong  with SB 21. He  asked for                                                                    
verification  that there  were  other  jurisdictions in  the                                                                    
world that  produce oil  very well that  did not  offer cash                                                                    
payments in terms of tax credits.                                                                                               
                                                                                                                                
Mr.  Mayer answered  in the  affirmative.  He reasoned  that                                                                    
Alaska was  probably rare in  structuring things the  way it                                                                    
did. He referred  to Australia, which had  a similar system,                                                                    
it carried expenses forward with  interest and deducted them                                                                    
against future  taxes to try  to maintain the time  value of                                                                    
money.  He   explained  that   Australia  used   the  method                                                                    
precisely  because  it  was concerned  about  managing  cash                                                                    
flows.                                                                                                                          
                                                                                                                                
Representative  Gara  referred  to  Representative  Wilson's                                                                    
point that  the state had  no control  as to whether  it was                                                                    
putting tax credits  into fields that had  no good prospects                                                                    
or  really  great  projects  and  anywhere  in  between.  He                                                                    
reasoned  that  unless  someone  from the  state  was  in  a                                                                    
company  board  room, it  would  not  know whether  the  tax                                                                    
credit  payments given  to a  company were  what led  to the                                                                    
production or other.                                                                                                            
                                                                                                                                
Mr. Mayer  replied in the  affirmative. He did not  think it                                                                    
was  appropriate  to  think  about  the  NOL  credit  as  an                                                                    
incentive to create  new production; it was  simply the same                                                                    
benefit that would happen later through the tax system.                                                                         
                                                                                                                                
10:03:59 AM                                                                                                                   
                                                                                                                                
Mr. Mayer moved  to slide 23 titled  "Activity has Responded                                                                    
in Recent Years" related to  Cook Inlet. He relayed that the                                                                    
presentation  appendix included  an  analysis enalytica  had                                                                    
done for  the House  Resources Committee  on Cook  Inlet and                                                                    
the nature of  what had happened there.  He expressed intent                                                                    
to  provide highlights  of the  analysis. He  discussed that                                                                    
Cook Inlet had gone through  several cycles since the 1950s.                                                                    
He pointed to  a chart on the left of  the slide that showed                                                                    
exploratory  wells spudded;  the chart  on the  right showed                                                                    
development wells  by year of  first oil/gas  they produced.                                                                    
He noted  that in  both cases there  had been  a substantial                                                                    
uptick since  2010. Recent exploration  activity was  on par                                                                    
with some  of the  previous peaks; development  drilling had                                                                    
been  relatively  more stable  over  years,  but the  recent                                                                    
growth  was  some  of  the   highest  growth  in  production                                                                    
drilling in Alaska's history.                                                                                                   
                                                                                                                                
10:05:10 AM                                                                                                                   
                                                                                                                                
Mr. Mayer turned  to slide 24 related to Cook  Inlet oil and                                                                    
gas production. He  explained that when it came  to the Cook                                                                    
Inlet  turnaround that  was frequently  referred to,  it was                                                                    
important to  distinguish between  oil and gas.  He detailed                                                                    
that there had  been peak production of oil in  the 1970s of                                                                    
more than 200,000 barrels per  day, a steep decline into the                                                                    
1980s,  reaching  a low  of  7,500  in  2009, and  a  marked                                                                    
increase in the  past 6 or so years;  current production was                                                                    
about  18,000  barrels  per  day.   He  explained  that  gas                                                                    
production  was   a  very   different  picture,   which  had                                                                    
experienced  a long  plateau  in the  1970s  and 1980s.  The                                                                    
chart  on  the  right  showed  three  lines:  the  red  line                                                                    
represented  gross  production of  gas  from  the well,  the                                                                    
green   line   represented   gas  reinjected   into   fields                                                                    
(particularly into the Swanson  River field), and the orange                                                                    
line   represented  production   net   of  reinjection   and                                                                    
withdrawal.  The actual  gross  production  from the  fields                                                                    
started to decline substantially  in the mid-1990s and would                                                                    
have led  to substantial  falls in  total gas  production in                                                                    
Cook Inlet, but  the blowdown at Swanson River  meant that a                                                                    
lower  plateau  was achieved  for  several  years; the  full                                                                    
impact of  decline had not  occurred until the  blowdown had                                                                    
ceased  in the  middle of  the last  decade, at  which point                                                                    
decline  began again.  Gas had  declined  to around  150,000                                                                    
million cubic feet (mmcf) per day  in the latter part of the                                                                    
previous decade;  however, there had been  some stability in                                                                    
the  last several  years. Turnaround  in oil  production had                                                                    
more  than doubled  over the  last five  years, whereas  gas                                                                    
production had  plateaued. One  of the  key reasons  for the                                                                    
difference,  was that  unlike  oil, gas  was constrained  by                                                                    
physical demand.                                                                                                                
                                                                                                                                
10:07:34 AM                                                                                                                   
                                                                                                                                
Mr. Mayer  addressed a summary  of what had happened  to oil                                                                    
and  gas production  and activity  in Cook  Inlet in  recent                                                                    
years (slide 25).  There had been stable  gas production and                                                                    
oil production  had more than  doubled. He relayed  that the                                                                    
gas market had experienced  a major transition in everything                                                                    
from supply,  demand, prices, competition,  and expectation.                                                                    
Cook Inlet was  becoming a steadily less  material asset and                                                                    
interest  in  reinvesting  capital  was  waning  for  legacy                                                                    
producers  like Chevron  and  Marathon. Additionally,  there                                                                    
had been  suppressed prices  that had  been far  below Henry                                                                    
Hub, which had been seen as  a very high price that "we were                                                                    
not  sure we  were willing  to pay,"  and a  long period  of                                                                    
under  investment occurred  as a  result. He  explained that                                                                    
there had been  changes in all of those  things. He detailed                                                                    
that Hilcorp  was a  new entrant  and mandated  high pricing                                                                    
under its  consent decree; it  was focused on  workovers and                                                                    
turning  the  basin around  and  credits  were part  of  the                                                                    
incentive  to help  the work  along. He  expounded that  the                                                                    
changes  happened  in  all mature  basins  -  older,  mature                                                                    
players  became less  interested  and were  replaced by  new                                                                    
ones. He believed there  were probably particular challenges                                                                    
in Alaska  that made the  process slower, meaning  there had                                                                    
been fewer new entrants  interested in investing. Throughout                                                                    
that process,  credits probably made  it more  attractive to                                                                    
companies like Hilcorp and in  enabling much smaller players                                                                    
to  undertake  activity  that may  not  have  been  possible                                                                    
without the credits.                                                                                                            
                                                                                                                                
Mr. Mayer addressed how sensitive  the outlook in Cook Inlet                                                                    
was  to  changes  in  the   fiscal  system  (slide  25).  He                                                                    
addressed  DNR estimates  of about  1.2  billion cubic  feet                                                                    
(bcf)  in  remaining  reserves  in  the  mature  fields  and                                                                    
estimated an additional 400  bcf in Bluecrest's Cosmopolitan                                                                    
project and  Furie's Kitchen Lights project.  He stated that                                                                    
it  was not  reasonable to  divide the  1.2 bcf  in existing                                                                    
developed fields by annual production  and assume that there                                                                    
was 10  years of production, because  production happened to                                                                    
decline.   Strong   reinvestment    may   continue   plateau                                                                    
production for another  five years or more;  however, it was                                                                    
hard  to look  at the  resource  base alone  and think  that                                                                    
decline would not  occur again in five to  six years. Unless                                                                    
the resource estimate was significantly  on the low side, it                                                                    
was  hard  to imagine  that  even  with substantial  ongoing                                                                    
reinvestment in  mature fields that decline  would not occur                                                                    
again  at some  point in  the future.  He furthered  that at                                                                    
some point there would be  an incremental wedge of new unmet                                                                    
demand   that  would   need  to   be  met   from  somewhere.                                                                    
Fortunately,  Furie  had  brought  new  reserves  online  at                                                                    
Kitchen  Lights  -  how  much  the  reserves  were  remained                                                                    
unknown. The biggest question centered  on the policy aim of                                                                    
the substantial  subsidy that went  into Cook  Inlet through                                                                    
the tax credit regime. He  believed the biggest thing needed                                                                    
was to  ensure that  new development  on new  projects could                                                                    
occur,  if  the aim  was  primarily  about security  of  gas                                                                    
supply to Southcentral Alaska.                                                                                                  
                                                                                                                                
10:11:52 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer continued  to address  slide 25.  He communicated                                                                    
that at  current gas price levels,  brownfield investment in                                                                    
old fields should be profitable  with or without credits. He                                                                    
would  address modelling  to illustrate  the point  later in                                                                    
the  presentation.  By  in large,  credits  were  much  more                                                                    
important when it  came to developing new  resources; it was                                                                    
especially  the  case  because of  the  demand  constraints.                                                                    
There  was only  a very  small incremental  amount of  unmet                                                                    
demand and trying to develop  a new field with nothing other                                                                    
than that  demand was very  difficult to make  the economics                                                                    
work. At  the moment there was  significant uncertainty over                                                                    
the  future  of   the  fiscal  regime  in   Cook  Inlet.  He                                                                    
elaborated that  the past year  there had been  a discussion                                                                    
about potential  caps on  how much was  paid out  and sudden                                                                    
panic  over the  impact  on financing  that occurred  around                                                                    
credits. He  believed that when  looking at the  cash coming                                                                    
in  and  going  out,  it  was hard  to  see  the  regime  as                                                                    
sustainable. Combined with the fact  that the regime was set                                                                    
to  sunset   over  the  next   several  years,   it  created                                                                    
significant  uncertainty  about  what  the  system  actually                                                                    
looked like.  He noted that  - as  many people at  the House                                                                    
Finance Committee  had testified  - there was  nothing worse                                                                    
than  that  uncertainty when  trying  to  run economics  and                                                                    
decide whether or  not to invest. It was  important to think                                                                    
about  the  aim  of  the  fiscal  system  regime,  the  most                                                                    
efficient way  to provide  support for  the security  of gas                                                                    
supply to  Southcentral Alaska,  and if there  was a  way of                                                                    
doing those things as part  of an overall review and setting                                                                    
a  long-term stable  fiscal regime  for  Cook Inlet  (rather                                                                    
than making one  incremental tweak in the  current year with                                                                    
uncertainty about what the future looked like).                                                                                 
                                                                                                                                
10:13:55 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  moved  to  slide 26  and  provided  an  analysis                                                                    
backing  up the  claims  about  brownfield investment  being                                                                    
economic even  without credits versus what  was required for                                                                    
new development. The slide looked  at a hypothetical new gas                                                                    
development in  Cook Inlet.  He qualified  that some  of the                                                                    
costs shown  may be on  the high side  - they were  based on                                                                    
the most  recent new  development in  Cook Inlet,  which had                                                                    
occurred during  a time of  some of the highest  costs seen.                                                                    
He believed there  was solid reason to think  that the costs                                                                    
could come down.  The scenario looked at  building a project                                                                    
scaled  to  produce  more  than 100  to  145  mmcf/day  with                                                                    
investment  of  hundreds  of  millions  of  dollars  in  new                                                                    
facility  capital  costs   (e.g.  platform,  pipelines,  and                                                                    
other).   The  problem   was   that   currently  there   was                                                                    
constrained demand;  demand was well met  by existing mature                                                                    
fields. He  furthered that if demand  increased slightly and                                                                    
mature fields  declined slightly over  the next five  to ten                                                                    
years, it was  not feasible to have a  full development that                                                                    
produced  the desired  project size.  He  elaborated that  a                                                                    
company  may only  have the  ability to  drill two  or three                                                                    
wells  over   the  next  several   years.  He   discussed  a                                                                    
production profile  that built  slowly from  15,000 mmcf/day                                                                    
to  a  peak  of  40,000  mmcf/day in  a  decade's  time.  He                                                                    
explained that the economics of  that type of project looked                                                                    
very  difficult,  particularly if  a  company  had to  spend                                                                    
anything  like the  aforementioned costs  on facilities.  He                                                                    
believed the  costs were representative of  recent activity,                                                                    
but  it  could  drop   substantially  in  future  years.  He                                                                    
furthered  that there  was  a major  capital  outlay in  the                                                                    
early  years   with  not  much  revenue   following  because                                                                    
production would never reach the  capacity the project aimed                                                                    
to  develop.  He  believed   the  scenario  represented  the                                                                    
current reality of new gas development in Cook Inlet.                                                                           
                                                                                                                                
10:16:35 AM                                                                                                                   
                                                                                                                                
Mr. Mayer  addressed six  bar charts  including a  number of                                                                    
metrics   for  the   hypothetical   gas   project  under   a                                                                    
constrained market  (slide 27). The top  three charts looked                                                                    
at  the  split of  total  net  present  value (NPV)  of  the                                                                    
project,  discounted at  a  10 percent  rate.  The red  line                                                                    
represented the  NPV of all  of the credits,  royalties, and                                                                    
other  things   received  by  the  state;   the  green  line                                                                    
represented   the  company's   NPV;   and   the  blue   line                                                                    
represented the federal government's  NPV. He explained that                                                                    
if a  project was  heavy in  capital requirements  but never                                                                    
received  significant  revenue,  the  scenario  was  nothing                                                                    
other than a complete subsidy  by the state. At high prices,                                                                    
the  project  was   potentially  very  marginally  economic;                                                                    
however, returns would still be very low.                                                                                       
                                                                                                                                
Mr. Mayer  addressed the  bottom three  charts on  slide 27,                                                                    
which showed the investor IRR  in red and government take in                                                                    
blue.  The charts  indicated  that it  was  a very  generous                                                                    
fiscal regime  with less  than or  slightly over  40 percent                                                                    
government take;  even in  the very  low rate  of government                                                                    
take and a  huge government subsidy, the IRR  went from less                                                                    
than 10 percent  to the mid-teens under  the highest prices.                                                                    
At  realistic  gas prices,  the  investment  was not  highly                                                                    
attractive  for anyone  - particularly  anyone  with a  high                                                                    
cost of  capital. He  added that  the companies  were mostly                                                                    
reliant  on  private equity  and  people  who required  high                                                                    
rates of return to be  willing to invest. Unless the upfront                                                                    
capital costs could be reduced  substantially, even with the                                                                    
effect  of   65  percent   subsidy,  the   project  remained                                                                    
challenged.   The   project    became   substantially   more                                                                    
challenged  under the  proposed  HB 247.  He summarized  his                                                                    
earlier testimony  that there  were currently  three credits                                                                    
in  Cook  Inlet:  the  25 percent  NOL  credit,  20  percent                                                                    
qualified capital expenditure credit,  and a 40 percent well                                                                    
lease expenditure  credit. He detailed  that the  25 percent                                                                    
credit  was  stackable  with either  of  the  other  credits                                                                    
depending  on the  nature of  the  capital work;  therefore,                                                                    
credits  were   between  45  and   65  percent  for   a  new                                                                    
developer's total capital spending.                                                                                             
                                                                                                                                
Mr.  Mayer explained  that  under HB  247  the credits  were                                                                    
reduced to the  25 percent NOL credit  (both capital credits                                                                    
were taken away), IRR rates  would be lower, and the outlook                                                                    
for  the state  looked substantially  better -  at high  oil                                                                    
prices it  could be breakeven  or slightly positive  for the                                                                    
state.  He  noted  that constrained  new  investment  looked                                                                    
substantially more  challenged for the new  investor. The CS                                                                    
fell in a middle ground  between the status quo and original                                                                    
HB 247 scenarios.  He expounded that in addition  to the NOL                                                                    
credit  it  maintained the  20  percent  capital credit.  He                                                                    
detailed that it would provide  30 percent state support for                                                                    
the  hypothetical project,  but  the NOL  credit would  only                                                                    
apply to new developers  without a production tax liability.                                                                    
He explained  that the support  also applied  to established                                                                    
companies through  the 20  percent capital  credit in  a way                                                                    
that would not happen  through the governor's original bill.                                                                    
How the  approaches were balanced  depended entirely  on the                                                                    
desired outcome.                                                                                                                
                                                                                                                                
10:20:58 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  turned to  slide  28  and addressed  the  second                                                                    
hypothetical  project  the  presentation  considered,  which                                                                    
took  place  in  an unconstrained  market  environment.  The                                                                    
scenario assumed  the same  capital expenses  for facilities                                                                    
(several hundred  million dollars for  platforms, pipelines,                                                                    
and other),  but factored in an  optimal development market.                                                                    
The  project assumed  three  wells per  year  for the  first                                                                    
three years of  development and another well  every year for                                                                    
a decade.  The project  could then  achieve 140  mmcf/day in                                                                    
gas production  and maintain a  steady plateau at  that rate                                                                    
for  several  years. The  project  became  a solid  economic                                                                    
development  under the  unconstrained  market environment  -                                                                    
the  only thing  that was  changed was  the number  of wells                                                                    
drilled and  the amount of  production achieved.  He relayed                                                                    
that the project  looked much more like a  cash flow profile                                                                    
of a health  investment. He explained that  the scenario did                                                                    
not represent the current development  reality in Cook Inlet                                                                    
-  demand was  currently severely  constrained. He  reasoned                                                                    
that without the constraint there  could probably be healthy                                                                    
developments without substantial  credits. However, it would                                                                    
require a change  in the existing demand  dynamic, either in                                                                    
terms of a substantial export consumer or something else.                                                                       
                                                                                                                                
10:22:26 AM                                                                                                                   
                                                                                                                                
Mr. Mayer  moved to  slide 29 and  addressed six  bar charts                                                                    
including  a  number of  metrics  for  the hypothetical  gas                                                                    
project   under   an   unconstrained  market   (slide   27).                                                                    
Currently,  the  economics  showed healthy  IRRs  under  the                                                                    
status  quo  system, an  NOL  credit-only  system, or  in  a                                                                    
system with the NOL and  capital credits. All cases showed a                                                                    
substantial reduction  in support for the  project, but with                                                                    
fairly solid economics, if it  were possible to build such a                                                                    
project  with  substantial  export support  or  increase  in                                                                    
demand.                                                                                                                         
                                                                                                                                
Mr. Mayer addressed  a third project 3 scenario  on slide 30                                                                    
that  did not  require the  development  of a  new field  or                                                                    
spending several hundred million  upfront. The slide did not                                                                    
factor in the  NOL credit because by  definition an existing                                                                    
mature  field  did not  receive  that  credit. With  the  20                                                                    
percent capital  credit and 40  percent drilling  credit the                                                                    
project was highly economic. He  added that the scenario was                                                                    
not   specifically   representative   of   anyone's   actual                                                                    
economics, but broadly  speaking additional ongoing drilling                                                                    
in  mature  fields  looked  economic  in  a  wide  range  of                                                                    
scenarios including vastly less credits.                                                                                        
                                                                                                                                
10:24:21 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer moved  to slide  31  and addressed  6 bar  charts                                                                    
related  to  project  3.  The  scenario  showed  an  IRR  of                                                                    
somewhere between  50 and 100  percent; without  credits the                                                                    
IRR fell  substantially, but  into a  range (20  percent and                                                                    
higher under HB  247 with no credits) he  believed was still                                                                    
very  attractive to  many players.  He furthered  that under                                                                    
the CS the work would continue  to have a 20 percent capital                                                                    
credit; the  heightened rate  of the  40 percent  well lease                                                                    
credit would be removed.                                                                                                        
                                                                                                                                
Representative Gara  referred to discussions over  the years                                                                    
about a shortage of gas  available for existing contracts in                                                                    
Cook  Inlet. He  reasoned that  no one  explored for  fields                                                                    
without  someone to  buy the  gas. He  discussed that  every                                                                    
time a new contract had  come up someone had discovered gas.                                                                    
He  believed  that  the  amount of  gas  available  for  the                                                                    
existing  contracts   was  being  measured   before  someone                                                                    
vocalized needing  a new  contract for  new gas.  He thought                                                                    
that when a  new contract arose and new gas  was needed that                                                                    
people went  out and found  it. He remarked that  Cook Inlet                                                                    
carried a  high premium  close to  $7 or  $8 instead  of the                                                                    
Henry Hub  price of  $2. He noted  that no  production taxes                                                                    
were coming  from Cook Inlet  and asked what would  be wrong                                                                    
with letting  the free market  operate. He reasoned  that of                                                                    
course  there  were  dwindling   gas  supplies  on  contract                                                                    
because that  was how  contracts work. He  asked why  it was                                                                    
all needed.                                                                                                                     
                                                                                                                                
Mr. Mayer  believed it  was an important  debate to  have at                                                                    
present. He  remarked that it  was hard to view  the current                                                                    
numbers in  Cook Inlet as  sustainable. The only  thing that                                                                    
he found  concerning with the  free market response  was the                                                                    
substantial  lag of  time between  existing  demand and  the                                                                    
demand  being filled.  He left  exploration and  the several                                                                    
years it  took to  find gas  out of  his response.  He spoke                                                                    
about  a scenario  where  there was  a  known resource  that                                                                    
needed  to be  evaluated for  development and  sanctioning -                                                                    
the  process would  take several  years. For  most of  those                                                                    
developments    the   ones    with   attractive    economics                                                                    
(particularly    without    economic    support)    included                                                                    
substantial volume  of new  demand. He  believed if  the aim                                                                    
was a security of gas supply  it was hard to think that most                                                                    
of  the money  would be  spent on  that rather  than on  oil                                                                    
development and other things. He  explained that it was hard                                                                    
to know  what credits  got spent on  (e.g. credits  spent on                                                                    
oil versus gas and  new development versus existing fields);                                                                    
the   information  was   obscured  by   confidentiality.  He                                                                    
believed that if  the aim was security of  gas supply, there                                                                    
was an argument to be made  that there could be another four                                                                    
or five years  of plateau if levels of  investment in mature                                                                    
fields persisted,  followed by decline. If  the scenario was                                                                    
left  to the  free  market the  decline would  go  on for  a                                                                    
couple  of years  and  after several  years  of decline  and                                                                    
unmet  demand there  would be  enough of  a new  incremental                                                                    
wedge  to  make  a substantial  development  attractive.  He                                                                    
believed that  there were different  ways of  overcoming the                                                                    
situation, but  a limited and targeted  measure of effective                                                                    
subsidy  solely  around  that  aim  was  not  necessarily  a                                                                    
terrible  idea.  He stated  that  it  was a  very  different                                                                    
proposition  to  widespread credits  for  a  whole range  of                                                                    
activities.                                                                                                                     
                                                                                                                                
10:29:46 AM                                                                                                                   
                                                                                                                                
Co-Chair Thompson announced that  the 10:00 a.m. meeting was                                                                    
canceled. He noted the importance of the topic at hand.                                                                         
                                                                                                                                
Representative  Wilson asked  how  to  make the  distinction                                                                    
between companies  in the development  stage with  loans and                                                                    
economics based on the current  tax system. She wondered how                                                                    
to make the  changes without detriment to  companies who had                                                                    
invested based  on the current system  compared to companies                                                                    
interested in investing because of great tax credits.                                                                           
                                                                                                                                
Mr.  Mayer believed  the question  about companies  that had                                                                    
invested in  Alaska based on  the state's word  [current tax                                                                    
structure]  was difficult.  On  the  one hand,  particularly                                                                    
related to mature  fields, it was hard  to conclude anything                                                                    
other   than  that   additional   drilling  was   attractive                                                                    
regardless of credits. It was  an obvious area to explore if                                                                    
the state  was trying  to scale back  on the  credit expense                                                                    
because it  could be  hard to  see why  the state  needed to                                                                    
spend the money. On the other  hand, it was also true that a                                                                    
company in  particular had invested  in the assets  based on                                                                    
the attractive credit structure  and the legislature was now                                                                    
changing  the terms.  He explained  that if  he were  in the                                                                    
company's shoes,  his biggest concern  would not  be whether                                                                    
the credits  would exist in the  future, but that he  had no                                                                    
idea what the  future tax regime in Cook  Inlet looked like.                                                                    
He furthered that when running  economics on new investment,                                                                    
the  investor would  have to  apply all  types of  penalties                                                                    
because they  did not know  what to expect  in 2, 4,  and 10                                                                    
years'  time.  He explained  that  if  credits were  removed                                                                    
substantially for some  of the work - which  he believed was                                                                    
not  a terrible  idea -  it needed  to go  hand-in-hand with                                                                    
making only one  overall change to the system  in Cook Inlet                                                                    
as opposed to making tweaks over time.                                                                                          
                                                                                                                                
10:33:19 AM                                                                                                                   
                                                                                                                                
Representative Wilson  was trying to determine  if there was                                                                    
a way to  specify that companies that had come  to a certain                                                                    
point would continue under the  current credit system and to                                                                    
cut back  on credits for  future investors. She  wondered if                                                                    
it  was  possible  to  make  changes  to  avoid  devastating                                                                    
current companies  while stopping  the state's  liability in                                                                    
the future.                                                                                                                     
                                                                                                                                
Mr. Mayer answered that the  first thing to consider was the                                                                    
issue of  timing. He  detailed that  it may  not be  as much                                                                    
about total  levels of  credit support as  to when  a change                                                                    
was implemented. He  referred to a couple  of companies with                                                                    
active  development  plans,  which would  be  seriously  and                                                                    
adversely  impacted  if  a change  was  implemented  in  the                                                                    
middle of  the current  year. Whereas,  he believed  most of                                                                    
the developments  could be undertaken by  those companies if                                                                    
the state maintained the current  credits for a year or two.                                                                    
He added that the issue  was separate from ongoing work that                                                                    
was not  new project  development, but  incremental drilling                                                                    
in  existing fields  - almost  all of  the gas  Southcentral                                                                    
currently  depended on,  which was  largely fairly  economic                                                                    
work  to  undertake.  He addressed  the  perception  of  the                                                                    
companies undertaking  the work about the  reasons they came                                                                    
to  Alaska to  invest.  He considered  how  the state  would                                                                    
convey  that changes  to the  fiscal regime  were part  of a                                                                    
process  of establishing  a  long-term  stable and  durable,                                                                    
competitive and  attractive set of  fiscal terms  as opposed                                                                    
to revisiting  the issue  over and over  with no  clarity on                                                                    
what economics would look like.                                                                                                 
                                                                                                                                
Representative  Wilson asked  if  the  committee would  hear                                                                    
from  any gas  companies only  undertaking exploration.  She                                                                    
noted there  was a large  distinction between what  was done                                                                    
for developers versus exploration.                                                                                              
                                                                                                                                
10:36:36 AM                                                                                                                   
                                                                                                                                
Representative Gattis referred to  Mr. Mayer's testimony and                                                                    
surmised  that in  relation to  credits in  Cook Inlet,  the                                                                    
state  was  looking to  keep  companies  in the  queue  when                                                                    
Southcentral looked  for gas and  wanted to  keep continuous                                                                    
gas. She believed  it was important to  consider not pulling                                                                    
the rug  out under  companies when thinking  about potential                                                                    
rolling  brownouts  and  other. Anchorage  depended  on  the                                                                    
state's   source  of   gas.  She   believed   part  of   the                                                                    
consideration should  be about what companies  could produce                                                                    
moving forward.                                                                                                                 
                                                                                                                                
Mr.   Mayer  agreed   with   much  Representative   Gattis's                                                                    
statements, but made a couple  of distinctions. He addressed                                                                    
exploration versus development of  known, but not completely                                                                    
proven  undeveloped  resources.   There  was  a  substantial                                                                    
resource  currently known  that  needed to  be developed  to                                                                    
bring security  for the  next decade  or more.  He expounded                                                                    
that from an  investor's perspective it was  much lower risk                                                                    
work  than  exploration. To  the  extent  that credits  were                                                                    
being  used to  fund exploration  (the precise  numbers were                                                                    
not  public due  to  taxpayer confidentiality)  there was  a                                                                    
legitimate question  about what sort of  work credits should                                                                    
be  supporting. He  believed it  was reasonable  to conclude                                                                    
that  currently  the  highest priority  was  development  of                                                                    
known resources.  Additionally, he  considered how  much the                                                                    
current gas  supply from  mature, declining  fields required                                                                    
the support from  the state and if changes were  made to the                                                                    
fiscal system, how  to ensure it was part of  the context of                                                                    
long-term stability.                                                                                                            
                                                                                                                                
10:39:39 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:50:02 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Mr. Mayer  noted that the  next section of  the presentation                                                                    
was a  wrap up. He asked  if there were any  other questions                                                                    
about the Cook Inlet tax credits.                                                                                               
                                                                                                                                
Representative Wilson  asked what specifically needed  to be                                                                    
done with Cook Inlet to level  things out and have money for                                                                    
the state.                                                                                                                      
                                                                                                                                
Mr. Mayer answered that the  state could not afford to spend                                                                    
what it was  currently spending on tax  credits. He believed                                                                    
there were difficult decisions to  be made about how much to                                                                    
cut back and  how much to target  specific activities versus                                                                    
being  more  broadly  based.  He   noted  that  the  changes                                                                    
required having  a consensus about  the aim of  the program.                                                                    
If the  aim of the  program was  only about the  security of                                                                    
the  Southcentral gas  supply he  believed  two things  were                                                                    
necessary:  setting  a  timeframe  (the next  year  or  year                                                                    
after) and how tightly to constrain the activities.                                                                             
                                                                                                                                
Representative  Wilson   believed  the  current   gas  under                                                                    
production  would last  for 10  years. She  wondered if  the                                                                    
changes  made   in  the   House  Resources   Committee  were                                                                    
sufficient or  whether the  changes did  not go  far enough.                                                                    
She understood  that they  should not  wait until  2022 when                                                                    
most of the credits went away.                                                                                                  
                                                                                                                                
Mr. Mayer agreed that broadly  speaking when considering the                                                                    
gas in the  ground, 10 years' of gas  was accurate. However,                                                                    
there  was  an important  distinction  to  be drawn  between                                                                    
existing mature  fields, which may  have that in  total, but                                                                    
are unable  to produce at  the current plateau rate  to meet                                                                    
the  full demand  for the  full  10 years;  the fields  were                                                                    
likely  to go  into  decline at  some  point. Therefore,  it                                                                    
would  be   important  to   ensure  there   was  incremental                                                                    
additional  production.   He  detailed  that  some   of  the                                                                    
incremental  production  had  already  occurred  in  Furie's                                                                    
Kitchen Lights field - but  the exact capacity was currently                                                                    
unknown. He  surmised that  perhaps there could  be 5  to 10                                                                    
years in supply.                                                                                                                
                                                                                                                                
Representative Wilson  reiterated her question  about action                                                                    
taken by the House Resources Committee.                                                                                         
                                                                                                                                
Mr. Mayer  answered that  it came down  to a  judgement call                                                                    
based on  priorities. The initial CS  focused on maintaining                                                                    
the NOL  credit. He  believed the  reason the  committee had                                                                    
made that decision  was because the NOL  credit applied only                                                                    
to  new  developers  or  explorers.  He  detailed  that  the                                                                    
original bill aimed for support  to go to new developers and                                                                    
not  mature  fields; however,  the  CS  factored in  that  a                                                                    
particular  company invested  in Alaska  due to  the current                                                                    
tax  regime (the  company represented  the bulk  of the  gas                                                                    
supply  for  Southcentral  at  present)  and  aimed  at  not                                                                    
pulling the  rug out. He  remarked that  it was a  much more                                                                    
expensive decision  to make  in terms  of impact.  The House                                                                    
Resources  Committee bill  version maintained  only the  NOL                                                                    
credit and  restricted it to significantly  fewer players on                                                                    
a  limited  basis.  However,  a  similar  level  of  support                                                                    
(provided  under  the CS)  through  the  capital credit  was                                                                    
applicable  to much  broader work  including  work that  was                                                                    
probably economic without it. The  question was about how to                                                                    
weigh the different things in making the decision.                                                                              
                                                                                                                                
10:55:11 AM                                                                                                                   
                                                                                                                                
Representative Wilson  asked how  much more money  they were                                                                    
talking about  in the latter  years. Mr. Mayer  replied that                                                                    
the question related  to the cash impact to  the state could                                                                    
only be answered  by the Department of  Revenue; the details                                                                    
needed  for the  calculation required  confidential taxpayer                                                                    
information.                                                                                                                    
                                                                                                                                
Representative  Pruitt   stated  that   Cook  Inlet   was  a                                                                    
different  discussion  than  the North  Slope.  He  believed                                                                    
interchanging  the two  systems and  the intent  of the  two                                                                    
systems made the issue difficult.  He surmised that from the                                                                    
state's perspective,  the intent of  the North Slope  was to                                                                    
generate revenue  for the state; whereas,  the intent behind                                                                    
Cook Inlet was to provide  gas for the economic stability of                                                                    
Southcentral.  He believed  they  ended up  skewing the  two                                                                    
different systems and the purposes  behind them. He referred                                                                    
to  discussions  within  the legislature  about  whether  it                                                                    
could allow Cook  Inlet to go back to a  free market system.                                                                    
He thought that a free  market scenario had existed prior to                                                                    
the  passage of  the Cook  Inlet Recovery  Act by  the state                                                                    
legislature in 2010. He detailed  that the state had offered                                                                    
incredible  incentives  including  no tax,  royalty  changes                                                                    
depending  on production,  and other;  however,  it did  not                                                                    
increase investment by companies.  He asked how reverting to                                                                    
a free market system would  impact the state. He wondered if                                                                    
they would find  themselves back in the  same situation that                                                                    
had not worked before.                                                                                                          
                                                                                                                                
Mr.  Mayer  replied  that  it   was  unknowable  what  would                                                                    
actually happen due to the  numerous variables. He clarified                                                                    
that the  credits were  not the only  thing that  changed in                                                                    
the period of declining  production and rolling brownouts; a                                                                    
significant  number  of  changes had  occurred  during  that                                                                    
time. The  single biggest change  during the period  was the                                                                    
natural  evolution  in  the  life of  any  basin  where  the                                                                    
investment  became steadily  less  material  over time,  the                                                                    
investor  became  less  interested in  doing  the  intensive                                                                    
workover  work  required to  maintain  the  asset, and  they                                                                    
eventually divested  from the  asset, at  which point  a new                                                                    
company came in. He explained  that the scenario happened in                                                                    
all  mature basins  worldwide.  He  believed the  transition                                                                    
occurred in  Cook Inlet at  a particular time and  was aided                                                                    
and abetted by a couple  of things including low gas prices.                                                                    
With  the  transition of  ownership  came  the following:  a                                                                    
change in the way the  Regulatory Commission of Alaska (RCA)                                                                    
had to  approach gas pricing decisions;  the consent decree;                                                                    
and a multitude of things  that changed the pricing picture.                                                                    
He mentioned  development of storage  and what  the seasonal                                                                    
nature of demand  meant for how gas could  be delivered. All                                                                    
of  the items  had been  key building  blocks in  creating a                                                                    
more stable gas  supply. He concluded that  credits had been                                                                    
important  but were  not the  only thing  that had  changed.                                                                    
Given  those things  and if  it  was true  that drilling  in                                                                    
mature fields was economic in  a wide range of environments,                                                                    
he considered whether it required  the credit to continue at                                                                    
the  current level  or  if it  could be  changed  to a  past                                                                    
level.  He believed  many things  had changed  since a  time                                                                    
when  the system  should have  been economic,  but companies                                                                    
were not lining up to invest.                                                                                                   
                                                                                                                                
Mr. Mayer  discussed that the  impact of a  substantial move                                                                    
towards a more  free market approach was  unknowable in many                                                                    
ways. He furthered  that it was hard to look  at the numbers                                                                    
on  slide  31  and  think (particularly  related  to  mature                                                                    
fields) that  there was not still  substantial incentive for                                                                    
an existing  investor to continue. More  than anything else,                                                                    
for an  existing investor to  want to continue the  work, it                                                                    
required certainty about the stability  of the future of the                                                                    
system as much as anything.  He elaborated that the question                                                                    
of  developing  new resources  went  back  to the  issue  of                                                                    
constrained  demand;  there  may   be  some  role  for  more                                                                    
targeted  support to  enable the  new development  to occur,                                                                    
understanding that it was effectively  a state investment in                                                                    
spare capacity  that was not  currently needed;  however, it                                                                    
would  be  needed  in  the   future  in  order  to  avoid  a                                                                    
disruptive transition.                                                                                                          
                                                                                                                                
11:01:11 AM                                                                                                                   
                                                                                                                                
NIKOS TSAFOS,  PRESIDENT AND  CHIEF ANALYST,  ENALYTICA (via                                                                    
teleconference),  agreed  with  Mr. Mayer's  statements.  He                                                                    
spoke about  free market that  included a certain  amount of                                                                    
instability and  uncertainty, which resulted  from depending                                                                    
on  the  market. The  question  really  was whether  or  not                                                                    
policy makers, the public, and  the market participants were                                                                    
comfortable with  the uncertainty. For example,  there was a                                                                    
large boom in  shale gas production in the Lower  48 but gas                                                                    
price had  also gone  to $12 at  which point  "everyone came                                                                    
out  of the  woodwork  to start  producing  more shale."  He                                                                    
furthered  the way  the  market worked  meant  there may  be                                                                    
periods of time  where there were very high  prices in order                                                                    
to incentivize  the desired  type of  behavior. In  a mature                                                                    
basin  there   was  a  natural  transition   from  long-term                                                                    
contracts  to  shorter-term  contracts;  in  many  ways  the                                                                    
scarcity of  gas in the  Cook Inlet was really  a perception                                                                    
of scarcity.  He elaborated on  the idea that  companies had                                                                    
previously been  able to  get 10  to 20-year  contracts with                                                                    
all the desired flexibility and were  now only able to get 2                                                                    
to  4-year   contracts.  He  expounded   that  it   was  not                                                                    
necessarily that they  were not able to get gas,  but it was                                                                    
necessary  to adjust  to a  completely different  mindset in                                                                    
terms of  how the resource  was managed. He  addressed slide                                                                    
44 titled  "Gas Prices  have Risen Considerably  Post 2004."                                                                    
He discussed that the slide  at the beginning of the meeting                                                                    
put  about  $400 million  of  credits  into Cook  Inlet.  He                                                                    
explained that Cook Inlet had  produced about 100 bcf in the                                                                    
previous year;  at the prevailing  gas price of  $6.00, Cook                                                                    
Inlet  brought  in  about  $600  million  -  the  state  had                                                                    
provided support  for $400 million.  He explained  that that                                                                    
the state  was also  supporting oil in  addition to  gas and                                                                    
new  development  in  addition  to  existing  resources.  He                                                                    
clarified  that it  was not  that there  was a  $600 million                                                                    
market  and  the  state  supported  $400  million,  but  the                                                                    
figures provided a sense of  the magnitude. It was clearly a                                                                    
market that did not function quite properly.                                                                                    
                                                                                                                                
Mr. Tsafos  detailed that in  relation to that  market there                                                                    
were three levers that could  be pulled. The first lever was                                                                    
fiscal (e.g.  credits and  other) and  the second  lever was                                                                    
price. He  referred to an  image of the prevailing  value of                                                                    
gas in  the Cook Inlet (slide  44) and noted that  the price                                                                    
went up  briefly around 2008,  but overall since  about 2007                                                                    
the price  had been fairly  flat. He questioned  whether the                                                                    
price  really reflected  the  scarcity of  gas  in the  Cook                                                                    
Inlet. He elaborated  that it was hard to look  at the price                                                                    
and  believe that  it captured  all  of the  nuances of  the                                                                    
scarcity  of   supply  and  demand.  The   third  lever  was                                                                    
regulatory -  regulatory options  that countries  around the                                                                    
world  had used  to create  stronger markets  and strengthen                                                                    
competition. He  referred back to  the $400 million  to $600                                                                    
million  comparison and  surmised  that based  on the  three                                                                    
levers, the system was weighted  heavily towards fiscal. The                                                                    
relevant question  was not so  much about how to  change the                                                                    
fiscal  lever,  but  how  to   think  more  generally  about                                                                    
rebalancing the policy  toolkit in order to  make the market                                                                    
function  better. He  emphasized  that it  was important  to                                                                    
think  about options  outside of  the  fiscal lever  because                                                                    
there were  other things  a sovereign  could do  to increase                                                                    
the  functionality of  the market.  At the  end of  the day,                                                                    
there  was  potential  supply,  but  there  was  not  really                                                                    
demand; therefore,  it was important  to think about  how to                                                                    
use fiscal policy to develop a better market.                                                                                   
                                                                                                                                
11:06:06 AM                                                                                                                   
                                                                                                                                
Representative Pruitt  thought it was appropriate  to define                                                                    
the situation  as a constrained  market. He believed  it was                                                                    
probably appropriate  to put Cook  Inlet in  the constrained                                                                    
market   category.  He   reasoned   that   the  market   was                                                                    
constrained for reasons beyond  the fiscal consideration. He                                                                    
elaborated  that in  the past  when  there had  been a  free                                                                    
market, the  market had been  determined because most  of it                                                                    
had been utilized in a  utility scenario. He opined that the                                                                    
market had not  truly been free - the customer  had not been                                                                    
paying  the price  the companies  were willing  to sell  the                                                                    
product  for.  Alternatively  the Regulatory  Commission  of                                                                    
Alaska  had  determined  the price.  In  essence  a  certain                                                                    
limitation had been placed on  what the state felt the price                                                                    
would be - it did not allow  the free flow of the market and                                                                    
eventually  found itself  having to  pay additional  amounts                                                                    
because no  one was  making the  investment. He  referred to                                                                    
the current conversation about the  fiscal reality, which he                                                                    
believed was  a determination  of whether  or not  the state                                                                    
wanted to see  a direct payment by the  people utilizing the                                                                    
gas to cover  whatever it cost and  whatever agreement could                                                                    
come  forward  between  the  producer  and  individuals;  or                                                                    
whether or  not it was  a statewide priority  to incentivize                                                                    
through   fiscal   scenarios   (i.e.  credits   or   royalty                                                                    
reductions) to ensure that gas  supply remained available at                                                                    
a reasonable  rate for Southcentral customers.  He asked for                                                                    
the accuracy of his remarks.                                                                                                    
                                                                                                                                
Mr.  Mayer agreed.  He  believed the  point  related to  the                                                                    
three  fundamental  policy  levers  that could  be  used  to                                                                    
address  the  situation. The  Cook  Inlet  Recovery Act  did                                                                    
certain  things in  terms of  the way  the RCA  made pricing                                                                    
decisions,  but overwhelmingly  the  weight  of the  current                                                                    
policy  response  was  on  the   fiscal  subsidy  lever.  He                                                                    
estimated that production  was closer to 80  bcf rather than                                                                    
100  bcf in  terms  of  what was  actually  consumed in  the                                                                    
state. He continued that $400  million in subsidy was almost                                                                    
all of the  value of the gas. He remarked  that it was quite                                                                    
stunning to  think about how  much was paid out  in credits.                                                                    
He  reasoned if  the aim  really was  about security  of gas                                                                    
supply, it was  currently possible to buy almost  all of the                                                                    
gas for the  amount currently spent on  credits. Whether the                                                                    
state  could instead  rely on  a better  approach to  market                                                                    
pricing  (other  things  could be  done  on  the  regulatory                                                                    
structure  of the  market) became  difficult because  one of                                                                    
the  biggest  impediments  was   a  lack  of  competition  -                                                                    
currently the  Cook Inlet market  had only one  major player                                                                    
and because of the structure  of limited demand, there was a                                                                    
limited  ability for  new companies  to come  in. Regulatory                                                                    
interventions to  change the scenario  had been  utilized in                                                                    
many other  places, but those  systems also  created winners                                                                    
and losers  by definition. The  issues needed to  be thought                                                                    
about  very  carefully  when considering  how  to  create  a                                                                    
structure that could move closer  to a free market world and                                                                    
rely less heavily on overwhelming government support.                                                                           
                                                                                                                                
11:10:32 AM                                                                                                                   
                                                                                                                                
Mr. Tsafos agreed that there  were options to think about to                                                                    
create better  markets, which  was the  kind of  policy that                                                                    
created winners  and losers in  terms of creating  demand by                                                                    
looking at  market share  or requiring  a certain  number of                                                                    
contracts for  a diversity in  supply. He clarified  that he                                                                    
was not  suggesting the strategies necessarily  needed to be                                                                    
undertaken by the state, but  there was a question about the                                                                    
regulatory leg of  the policy; thus far it  had been heavily                                                                    
weighted towards  the fiscal. There were  jurisdictions that                                                                    
completely   ignored  both   fiscals   and  regulatory   and                                                                    
basically  only manipulated  the  price.  He explained  that                                                                    
Alaska was  not unusual for  relying one of the  levers more                                                                    
than  others, but  as part  of a  well balanced  approach he                                                                    
thought it was  important to consider how  to reallocate the                                                                    
emphasis.                                                                                                                       
                                                                                                                                
Representative  Gara   referred  to  the   discussion  about                                                                    
winners and losers. He remarked  on the state's $4.4 billion                                                                    
deficit and explained that there  were currently many people                                                                    
on the losing end who could  barely handle the burden of the                                                                    
budget (e.g.  individuals with  disabilities and  other). He                                                                    
did not  know how  much the  state could  afford to  just be                                                                    
nice to  the oil and gas  industry due to the  state's large                                                                    
deficit. The state  had adopted a gas  storage credit, which                                                                    
had benefitted Cook Inlet well.  Additionally, the state had                                                                    
changed the  RCA rules  so producers  could charge  more for                                                                    
their  natural  gas.  He  addressed   that  the  system  was                                                                    
currently demand-constrained (people did  not need the gas),                                                                    
which was  deterring exploration. He believed  that the idea                                                                    
of   adding  extra   subsidies  was   operating  under   the                                                                    
assumption that companies needing  natural gas in the future                                                                    
were not  smart enough  to contract  with explorers  to look                                                                    
for the next  level of supply on their own.  He asked if the                                                                    
state could trust  that at some point  those needing natural                                                                    
gas could contract  with companies to look  for natural gas.                                                                    
He asked if the tax credits would change the behavior.                                                                          
                                                                                                                                
Mr. Mayer answered  that his focus on the  comments was less                                                                    
on  exploration than  it  was on  development  of known  but                                                                    
undeveloped  resources. He  believed there  was a  pure free                                                                    
market  solution  to  the problem,  given  enough  time  and                                                                    
willingness to  survive market  volatility. For  example, if                                                                    
there were  rolling brownouts and substantial  gas shortage,                                                                    
it would  at some point  become economic to develop  the gas                                                                    
phase at Kitchen Lights (a  known, undeveloped resource that                                                                    
would require  substantial investment to bring  online). The                                                                    
question  then   became  about   what  the   volatility  and                                                                    
disruption would be if left to  the free market and how well                                                                    
the  free market  could  solve  the problem.  Alternatively,                                                                    
from a  government policy perspective if  the state provided                                                                    
additional  subsidy   to  enable  those  things   to  occur,                                                                    
compared  to the  amount  of money  currently  spent on  the                                                                    
credits, how to develop  known but undeveloped resources was                                                                    
a much smaller piece of  the current picture. He believed it                                                                    
was reasonable  to ask what  amount of support  was required                                                                    
to  assist some  of the  work that  may not  otherwise occur                                                                    
(and may not  occur without an additional  source of demand)                                                                    
as  opposed to  providing blanket  credit by  subsidy for  a                                                                    
very wide  range of activities  that may have nothing  to do                                                                    
with developing known but undeveloped resources.                                                                                
                                                                                                                                
Representative  Gara appreciated  the remarks  and hoped  it                                                                    
was the  perspective the  state moved  ahead with.  He noted                                                                    
that every $50  million the state could  save in unnecessary                                                                    
subsidies  was  something that  mattered  to  the state.  He                                                                    
furthered  that  the  laws [providing  subsidies]  had  been                                                                    
passed with the  idea of encouraging Cook  Inlet natural gas                                                                    
production  for local  use. He  furthered that  many of  the                                                                    
subsidies  were being  spent  for oil,  which  had not  been                                                                    
intended  to get  the  breaks.  He noted  that  the oil  was                                                                    
paying  no production  tax. He  continued that  many of  the                                                                    
credits  were   going  to  ConocoPhillips  for   its  export                                                                    
facility to  export gas that  it made  money on and  paid no                                                                    
production  tax for.  At some  point he  hoped the  advisers                                                                    
could  help the  state  be as  conservative  as possible  in                                                                    
deciding which  tax subsidies  it should  pay for  under its                                                                    
current  budgetary  circumstances.  He reasoned  that  every                                                                    
dollar  going  towards  something  it did  not  need  to  go                                                                    
towards was  being taken  away from  someone else.  He asked                                                                    
the advisers to consider whether  the state really needed to                                                                    
incentivize  oil   and  export  facilities  that   it  never                                                                    
intended to  incentivize. He added  that there  were private                                                                    
companies that  knew when they  needed to  start contracting                                                                    
with a  company to look  for their  next round of  supply of                                                                    
gas.                                                                                                                            
                                                                                                                                
11:17:38 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  agreed that  the  questions  were important.  He                                                                    
replied  that it  was difficult  to get  into the  specifics                                                                    
without knowing  the precise confidential  taxpayer details.                                                                    
However, it was  hard to look at the activity  and not think                                                                    
that a vast amount of the  credits were going to support oil                                                                    
that  was being  produced  with some  of  the most  generous                                                                    
fiscal terms on the planet.  He surmised that there could be                                                                    
long debates about  what was intended when  the credits were                                                                    
established and how much the  credits were about providing a                                                                    
"sweet" deal on  oil in order to also get  the gas along the                                                                    
way. He believed  that when looking at what  the credits had                                                                    
been at  the time  the change had  been enacted  versus what                                                                    
they were  at present and  what revenues were and  had been,                                                                    
it  had been  easy to  say that  the state  was giving  some                                                                    
credits away  in Cook Inlet,  but when considering  how much                                                                    
the state  was making  overall, it  was a  no brainer  if it                                                                    
brought supply  security. He  explained that  it was  a very                                                                    
different calculation  at present  when looking at  how much                                                                    
the  state was  receiving  and spending  in  Cook Inlet.  He                                                                    
turned to  slide 43 and  addressed exports. On the  one hand                                                                    
he believed  Representative Gara was right  that providing a                                                                    
subsidy to  ensure security of  gas supply  for Southcentral                                                                    
was one thing,  but providing a subsidy for  gas exported to                                                                    
Japan  was a  separate and  more difficult  conversation. He                                                                    
discussed that  Alaska had a  seasonal structure  of demand,                                                                    
and supply  had become steadily  less able to live  with the                                                                    
seasonality.  For  the vast  majority  of  history, the  LNG                                                                    
facility at Kenai  had produced fairly steadily  and had not                                                                    
been particularly seasonal.  He pointed to the  chart on the                                                                    
left  of  the slide:  the  red  line indicated  export  from                                                                    
October to March and the  green line represented export from                                                                    
April  to  September.  He  explained   that  the  lines  had                                                                    
historically been similar, but  had dramatically diverged in                                                                    
the past  couple of  years. The data  showed that  Kenai had                                                                    
become a  seasonal facility  and was  providing some  of the                                                                    
swing capability that  also came from storage  - the ability                                                                    
to moderate the natural seasonality of Alaska's demand.                                                                         
                                                                                                                                
Mr.  Mayer addressed  price  and believed  that  one of  the                                                                    
things that  would get  difficult and  put more  pressure on                                                                    
current prices on storage as  a solution (rather than Kenai)                                                                    
was  related to  the  prices Kenai  received. He  elaborated                                                                    
that historically  the price  had been  $16/mmbtu; currently                                                                    
the price was  about $6/mmbtu. He stated  that when thinking                                                                    
about the price of gas in  Cook Inlet and the costs involved                                                                    
in liquefying  and shipping  gas to  Japan or  elsewhere, it                                                                    
became  much harder  to see  why anyone  would want  to keep                                                                    
doing that at  present. He elaborated that it  was one thing                                                                    
when the  owner of  the facility  (a depreciated  asset) was                                                                    
also the owner of the upstream  - it was possible to see how                                                                    
that  could work  if  they  did not  have  to  buy the  gas.                                                                    
However, an  owner of the  upstream facility had to  buy the                                                                    
gas from a producer (e.g.  ConocoPhillips was getting out of                                                                    
its upstream  position) or the upstream  producer was having                                                                    
to pay the  liquefaction under a toll,  the economics became                                                                    
much more  difficult; it was hard  to see how export  at the                                                                    
moment would continue to offer  the same seasonal flex as it                                                                    
had in the past couple of years.                                                                                                
                                                                                                                                
11:21:23 AM                                                                                                                   
                                                                                                                                
Co-Chair Thompson relayed that  the meeting would adjourn at                                                                    
12:00 p.m.                                                                                                                      
                                                                                                                                
Mr.  Mayer  turned  to  slide 33  and  addressed  a  summary                                                                    
section  of  the  presentation  comparing  status  quo,  the                                                                    
original HB  247, and the  CS. He addressed the  North Slope                                                                    
and discussed the issue of  annual versus monthly assessment                                                                    
of things like  the per barrel credit and  how it interacted                                                                    
with minimum  tax. The status  quo would continue  an annual                                                                    
assessment.  The  change  would   require  companies  to  do                                                                    
something that  was close to  lodging their  annual finished                                                                    
tax return  on a  monthly basis;  it was  the sort  of thing                                                                    
that generated  additional revenue in times  of volatility -                                                                    
it  would  have  brought  in  an  additional  $100  million.                                                                    
However, as  far as he  could see  it was really  more about                                                                    
incremental revenue raising than  about some pressing change                                                                    
needing to occur in the structure of the overall system.                                                                        
                                                                                                                                
Mr. Mayer  continued to  address slide 33  and spoke  to the                                                                    
GVR  and NOL  credit.  He reiterated  his earlier  testimony                                                                    
that for new  developments in times of low  oil prices there                                                                    
could be  several years  where a  company could  be eligible                                                                    
for  NOL, but  producing  oil making  revenue. He  continued                                                                    
that  rather than  uniform 35  percent support  for everyone                                                                    
(in  some  cases a  company  could  get  much more  than  35                                                                    
percent support for a loss or  an NOL credit when it was not                                                                    
technically  making a  loss in  certain circumstances),  the                                                                    
bill and CS  proposed to change the system so  the NOL would                                                                    
not  be calculated  taking into  account the  effect of  the                                                                    
GVR. He observed that the  change would have a substantially                                                                    
negative  impact on  some companies.  He referred  to recent                                                                    
testimony by Caelus  Energy LLC that the  change would erode                                                                    
about 13 percent  of the NPV of its investment  in Nuna [oil                                                                    
development  project]. He  believed  it was  clear that  the                                                                    
intent of SB  21 had been 35 percent  support for government                                                                    
spending across  all circumstances  and the  proposed change                                                                    
would fix that;  it was not a major impact  to the treasury,                                                                    
but  was a  question about  how the  system was  designed to                                                                    
work.                                                                                                                           
                                                                                                                                
Mr. Mayer  addressed proposed changes  to the  gross minimum                                                                    
tax on slide  33. The bill proposed to harden  the floor for                                                                    
all production, which  would mean no longer  letting the NOL                                                                    
credit take producers  with a liability below  the 4 percent                                                                    
floor. For new GVR-eligible  production, which currently had                                                                    
no  floor  other than  zero,  would  also  have a  hard  and                                                                    
binding floor. Additionally, the  rate would increase from 4                                                                    
percent up to  5 percent. The CS maintained  the status quo:                                                                    
a  4 percent  gross  floor for  legacy  production with  the                                                                    
ability for the  NOL to take the tax below  that amount; and                                                                    
no  effective floor  for  GVR production.  He  spoke to  NOL                                                                    
credit reimbursement  and had considered that  it was really                                                                    
about a benefit  a company would otherwise  receive later in                                                                    
the tax  system being brought forward  at a time when  a new                                                                    
developer had  no liability; however, there  was a potential                                                                    
liability  to  the state  in  the  event  that a  major  new                                                                    
Kuparuk-size development was discovered.                                                                                        
                                                                                                                                
11:25:24 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  turned  to  slide  34  and  explained  that  the                                                                    
proposed  change of  HB 247  was a  $25 million  per company                                                                    
limit along with restrictions on  large companies (with more                                                                    
than $10 billion  in revenues) from being able  to claim the                                                                    
reimbursement  credit at  all. Whereas,  the CS  had a  much                                                                    
higher per company  limit of $200 million.  He addressed the                                                                    
GVPP  calculation and  explained that  HB 247  specified the                                                                    
number could not go below  zero. There had been a slope-wide                                                                    
system of  deduction of costs (including  deduction of costs                                                                    
for  transport prior  to calculating  revenue), whereas  the                                                                    
change could limit the  deductibility of some transportation                                                                    
costs. He elaborated  that the CS would  maintain the status                                                                    
quo.  He relayed  that  the bulk  of  the refundable  credit                                                                    
outflow went to Cook Inlet  tax credits, but only a fraction                                                                    
of  the state's  petroleum  revenue came  from that  region.                                                                    
Cook Inlet  also had a  25 percent NOL credit.  He clarified                                                                    
that the  NOL credit was  very different in Cook  Inlet than                                                                    
on  the   North  Slope  because   it  was  not  part   of  a                                                                    
corresponding  profit-based  production  tax.  Additionally,                                                                    
the  20  percent  capital   credit  established  under  ACES                                                                    
continued, but  without the  ACES-type production  tax (only                                                                    
no tax  on oil, a  flat gross minimum tax  on gas, and  a 40                                                                    
percent  well   lease  expenditure   -  up  to   65  percent                                                                    
government support for spending).  The proposed change under                                                                    
HB 247 was  to repeal the qualified  capital expenditure and                                                                    
well lease expenditure credits (effective  July 1, 2016) and                                                                    
leaving only  the 25  percent NOL credit.  The focus  on the                                                                    
NOL  was  a   way  of  specifying  the   state's  desire  to                                                                    
concentrate on  the new  developers (not  mature production)                                                                    
and for  the situation  to take care  of itself  by tapering                                                                    
out  when people  actually had  production.  There had  been                                                                    
discussion that implementing the change  on July 1 had major                                                                    
impacts  on  companies  with  existing  capital  commitments                                                                    
through the next  year. Therefore, the CS  would implement a                                                                    
phased series of changes starting  in the middle of the next                                                                    
year that would go into  effect fully by 2018. Additionally,                                                                    
the CS would continue some  level of support for the ongoing                                                                    
work in the  mature fields - the NOL would  be reduced to 10                                                                    
percent,  maintain   a  20   percent  capital   credit,  and                                                                    
effectively phase out the well lease expenditure credit.                                                                        
                                                                                                                                
11:28:40 AM                                                                                                                   
                                                                                                                                
Representative  Gara  remarked  that  much  of  the  changes                                                                    
largely   effected  small   producers   and  explorers.   He                                                                    
discussed that at about $76/barrel  companies paid a profits                                                                    
tax of about 10 percent, which  slowly rose to 35 percent at                                                                    
$155/barrel); however, at prices  below the 35 percent mark,                                                                    
the big three  companies received a 35  percent deduction of                                                                    
operating and capital costs. He  remarked that the deduction                                                                    
was not  classified as  a credit, but  he believed  that was                                                                    
what it  is. He noted  that small companies received  a cash                                                                    
payment or NOL, but he believed  it was fair to say that the                                                                    
big companies  were getting the  deduction. He asked  if his                                                                    
statements were accurate.                                                                                                       
                                                                                                                                
Mr.  Mayer  agreed.  He  elaborated  the  structure  existed                                                                    
because in  most circumstances the companies  were paying an                                                                    
effective  35  percent  marginal  rate  (the  amount  varied                                                                    
slightly depending on price) and  not an average rate. Slide                                                                    
34 provided a picture of the  overall system for a new field                                                                    
with  GVR.  Legacy  production   had  a  similar  amount  of                                                                    
government take at the $50  to $70 range, which increased by                                                                    
about 5  percent at higher  prices. Overall, it was  still a                                                                    
system  that  was designed  to  deliver  between 60  and  70                                                                    
percent government take; there  was not an enormous giveaway                                                                    
at  those price  levels. The  purpose of  the declining  tax                                                                    
rate at  those price  levels was  precisely the  place where                                                                    
the royalty  became a steadily  greater share of  the total.                                                                    
The only  way to achieve  government take in that  range was                                                                    
to  reduce the  production tax  within that  price range  in                                                                    
order to compensate for the increasing royalty.                                                                                 
                                                                                                                                
Representative  Gara  noted  that they  needed  to  consider                                                                    
overall fairness. He  wanted to bring attention  to the fact                                                                    
that they  [the large producers] were  essentially receiving                                                                    
a 35 percent tax credit even  though it was much higher than                                                                    
the tax rate they paid at those prices.                                                                                         
                                                                                                                                
Representative Pruitt asked  if in light of  the current oil                                                                    
prices, there were other  jurisdictions that were increasing                                                                    
taxes on oil and gas.                                                                                                           
                                                                                                                                
Mr.  Mayer answered  that other  regimes were  contemplating                                                                    
both increases and decreases [in  taxes]. He elaborated that                                                                    
jurisdictions  with more  diversified  economies that  could                                                                    
survive  economic downturns  and  were  concerned about  the                                                                    
future  and  wanting  to  maintain  a  desirable  investment                                                                    
climate  and not  kill a  mature industry,  were looking  at                                                                    
reductions. Alternatively,  places that were  more dependent                                                                    
on  oil revenues  may not  want to  increase taxes  although                                                                    
they may  realize it was  not ideal policy. For  example, in                                                                    
the United  Kingdom (U.K.), substantial  cuts had  been made                                                                    
to taxes in the North Sea;  the cuts had been implemented by                                                                    
the same  government that had enacted  substantial tax hikes                                                                    
in 2011. The  government had recognized that  the hikes they                                                                    
had put  in place had  made life difficult and  could result                                                                    
in a  boom in decommissioning,  given the mature age  of the                                                                    
basin. Consequently there had  been very substantial cuts in                                                                    
profit-based petroleum taxes in the  U.K. in the current and                                                                    
previous  year.  The  purpose  of   the  cuts  had  been  to                                                                    
communicate that the  government knew it was  an industry in                                                                    
peril, particularly  at current  prices, and they  wanted to                                                                    
do everything possible to maintain  it. He provided Columbia                                                                    
as  another example  and explained  that the  government had                                                                    
reduced tax  and contract rates for  certain offshore blocks                                                                    
to  try  to maintain  ongoing  exploration  despite the  low                                                                    
prices.                                                                                                                         
                                                                                                                                
Mr. Mayer addressed  the two tax increases he  was aware of.                                                                    
Russia  had a  very  regressive fiscal  system  that took  a                                                                    
large  share   in  taxes.  He   detailed  that   Russia  had                                                                    
previously  scheduled  reductions  in  the  rates,  but  the                                                                    
action  had been  postponed and  they  were now  considering                                                                    
increasing  the taxes.  He  remarked on  a  recent New  York                                                                    
Times  article,  which  highlighted that  the  current  slim                                                                    
profit would  be taken  away [if  taxes were  increased] and                                                                    
there would  no longer  be capital  to reinvest.  The author                                                                    
had  specified   that  the  situation  reflected   the  "oil                                                                    
industry equivalent  of eating  the seed corn."  He remarked                                                                    
that it was potentially a  sacrifice of a significant amount                                                                    
of long-term interest due  to short-term desperation. Brazil                                                                    
had also increased taxes. He  detailed that the increase was                                                                    
about  a dispute  between state  and federal  government. He                                                                    
explained  that   royalties  went  to  the   state  and  the                                                                    
remainder of  the tax  system revenues  went to  the federal                                                                    
government. There  was a dispute  about the way  the royalty                                                                    
was calculated  in Rio  de Janeiro where  many of  the large                                                                    
deep  water  pre-salt  projects were  located  -  the  state                                                                    
claimed the  pricing formula used  to determine  the royalty                                                                    
was unfair and  undervalued the resource and  if the federal                                                                    
government would  not increase  the amount, the  state would                                                                    
levy its  own state-based tax. The  federal government would                                                                    
not  change the  way it  was calculated;  therefore, because                                                                    
the state  is highly  resource-dependent it  had implemented                                                                    
an   additional  tax   that   substantially  increased   the                                                                    
breakeven price for the  large, expensive, offshore pre-salt                                                                    
fields.                                                                                                                         
                                                                                                                                
11:36:45 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer continued  to answer  the  question. He  believed                                                                    
when governments  that had implemented tax  increases looked                                                                    
at the  economics of the  long-term investment they  did not                                                                    
necessarily think  the policy was ideal;  however, they were                                                                    
struggling with ideal policy versus  the short-term needs of                                                                    
the state.                                                                                                                      
                                                                                                                                
Representative Pruitt  spoke to Russia and  its increase. He                                                                    
stated that  Russia still had  its own national  oil company                                                                    
Rosneft, which  would not see  an impact. He wanted  to know                                                                    
what the  state should expect  if it looked at  the increase                                                                    
to the private sector. He  wondered if the private sector in                                                                    
Russia  would  maintain  its  investment   or  back  off  if                                                                    
additional  increases occurred.  He recognized  that Rosneft                                                                    
did  not  have  that  implication and  continued  to  invest                                                                    
without  the  other  challenges.  He referred  to  a  recent                                                                    
Reuters article  specifying that  Rosneft benefitted  from a                                                                    
$2 to  $3 lifting cost,  which was substantially  lower than                                                                    
anything facing Alaska. He asked  about the ramifications of                                                                    
a tax increase. He wondered  if Alaska would see a reduction                                                                    
in production on the North Slope.                                                                                               
                                                                                                                                
Mr.  Mayer  replied  that  it   varied  widely  between  the                                                                    
original bill and the CS.  Under the original bill depending                                                                    
on how  items like  floor hardening,  per company  limits on                                                                    
NOL  refundability,  and when  and  how  they were  applied,                                                                    
could have a substantial  negative impact on investment. For                                                                    
instance, how the per company  limit was approached and when                                                                    
it was  put in place  in relation to  the NOL credit,  had a                                                                    
big impact  on whether it  was an overwhelming  negative for                                                                    
the  economics  of  smaller producers  currently  investing.                                                                    
Related  to the  hardening  of the  [tax]  floor there  were                                                                    
varying  degrees;  however,   all  variations  substantially                                                                    
increased taxes on an industry  that did not have profits to                                                                    
make.  He  believed all  of  those  things could  negatively                                                                    
impact investment.                                                                                                              
                                                                                                                                
11:39:55 AM                                                                                                                   
                                                                                                                                
Mr.   Tsafos  agreed   with  Mr.   Mayer's  statements.   He                                                                    
elaborated  that  any  investor  was  looking  at  both  the                                                                    
current and future  tax systems, which was also  tied to the                                                                    
fiscal  health of  the state.  He thought  much of  it would                                                                    
come down to  what kind of risk premium the  state placed on                                                                    
Alaska. He  referred to Mr. Mayer's  earlier testimony about                                                                    
making changes to  a tax system in  increments [and creating                                                                    
uncertainty   for  investors].   Generally,  more   resource                                                                    
dependent  states  tended  to  have  more  volatile  systems                                                                    
because  they  tried  to protect  themselves  due  to  their                                                                    
dependency on  resource revenues. Whereas,  more diversified                                                                    
economies  could withstand  some of  the ups  and downs.  He                                                                    
stated that  it should  not be considered  only as  taxes on                                                                    
oil  and  gas,  but  as the  overall  risk  assessment  that                                                                    
prospective  investors  place  on   what  would  happen.  He                                                                    
elaborated  that   companies  considering   investment  were                                                                    
taking a 10  to 15-year bet on the broader  fiscal health of                                                                    
the state.                                                                                                                      
                                                                                                                                
Vice-Chair   Saddler  asked   why  it   was  important   for                                                                    
constituents to  understand Alaska's  system of oil  and gas                                                                    
tax credits, what it was  trying to accomplish, and what the                                                                    
bill sought to change.                                                                                                          
                                                                                                                                
Mr.  Mayer replied  that  it was  important  because it  was                                                                    
about  the  long-term  sustainability  and  viability  as  a                                                                    
resource-dependent  state, about  the current  state of  the                                                                    
state's finances, and how to  balance the two. He elaborated                                                                    
that the  long-term viability of  the state  required steady                                                                    
reinvestment  (particularly   as  long  as  the   state  was                                                                    
resource-dependent) predominantly on the  North Slope and it                                                                    
required an  investment climate  that remained  favorable to                                                                    
do  so.  He  believed  that  under  SB  21  there  had  been                                                                    
substantial   improvement   and  reinvestment,   which   was                                                                    
starting  to  show  some  results   in  terms  of  flattened                                                                    
decline; he  noted that the changes  became more challenging                                                                    
to maintain  as prices  declined. On  the other  hand, there                                                                    
were  aspects  of the  current  system  that created  severe                                                                    
financial strain when oil prices  were low. The biggest part                                                                    
was the sheer  amount of credit subsidies in  Cook Inlet; it                                                                    
was hard to  think the situation was  sustainable. The state                                                                    
also had  a problem related to  the timing of cash  flows on                                                                    
the  North Slope;  it was  not  about providing  money as  a                                                                    
subsidy as much as it was  the ordinary operating of the tax                                                                    
system, but being structured in  a way that payments did not                                                                    
necessarily coincide with revenue.                                                                                              
                                                                                                                                
Mr. Mayer  relayed that  the current  system worked  well in                                                                    
some ways and  enabled a level of government  take to occur,                                                                    
which  may  otherwise  be  more  difficult;  it  provided  a                                                                    
benefit  to companies  that would  not exist  otherwise. The                                                                    
relevant  question  was  whether the  state  could  maintain                                                                    
those benefits  or create limits in  the current constrained                                                                    
environment. Specifically,  he questioned whether  the state                                                                    
would have  the ability to  pay out hundreds of  millions of                                                                    
dollars (potentially billions of  dollars) in any given year                                                                    
in  the  event  a  new  large  development  was  discovered.                                                                    
Alternatively,  he questioned  whether it  was necessary  to                                                                    
put  limits  in  place  to   constrain  that  potential.  He                                                                    
believed those  were the core  questions needing  answers at                                                                    
present. There  were other considerations introduced  by the                                                                    
bill related  to the minimum  [tax] floor and other  ways of                                                                    
raising  revenues. He  believed the  options were  a way  of                                                                    
recognizing that although the  revenue situation was urgent,                                                                    
the state  may not  want to  get into  incrementally raising                                                                    
revenue if  it could  potentially erode  investor perception                                                                    
of the system  stability for what was  probably a relatively                                                                    
small  gain.  He  questioned whether  the  state  wanted  to                                                                    
substantially raise  taxes on revenue  at a time  when there                                                                    
was  no  actual  profit  to tax  and  whether  the  decision                                                                    
represented smart policy.                                                                                                       
                                                                                                                                
11:45:17 AM                                                                                                                   
                                                                                                                                
Representative  Wilson  spoke  to  exploration  credits  and                                                                    
asked if it  would make more sense for the  state to take on                                                                    
an  investor mindset  prior to  the  start of  a project  in                                                                    
order to determine whether it  should invest in the project.                                                                    
She  reasoned that  much  of the  state's  revenue would  go                                                                    
towards the  investment. She referred to  the current system                                                                    
where companies  decided whether  or not  to invest  and the                                                                    
state became a player by default.                                                                                               
                                                                                                                                
Mr. Mayer replied  that he would not  focus the conversation                                                                    
on  exploration credits,  which essentially  expired in  the                                                                    
current  year  in  most cases.  He  noted  that  exploration                                                                    
activity could  still be supported  through the  NOL credit.                                                                    
Where  the   issue  became  particularly  relevant   was  in                                                                    
relation  to  the  state's exposure  (predominantly  on  the                                                                    
North Slope)  through the refundable NOL  credit, whether it                                                                    
should be  capped, and how. The  bill and the CS  proposed a                                                                    
per-company  cap  on how  much  could  be refunded.  Another                                                                    
option was  to specify that  refundability was not  the norm                                                                    
of  the tax  system, but  it was  something that  had to  be                                                                    
applied for.  For example,  in the  future a  producer would                                                                    
need  to ask  for special  consideration if  they could  not                                                                    
afford  the full  royalty for  the first  5 to  10 years  of                                                                    
operation.  He elaborated  that  it would  be  some type  of                                                                    
process  where a  company would  present the  administration                                                                    
with their economics to request  eligibility for the credit.                                                                    
He  believed the  issue was  a judgement  question and  that                                                                    
there would be merit in giving it consideration.                                                                                
                                                                                                                                
Representative Wilson  did not  believe the state  wanted to                                                                    
stop  investing  in  things  that  would  provide  a  future                                                                    
return. She asked if there  were any other regimes that were                                                                    
involved in  deciding whether  to invest  in a  company. She                                                                    
reasoned that the state should  not invest in a company that                                                                    
was a step away from bankruptcy.                                                                                                
                                                                                                                                
Mr. Mayer  answered that  he could  think of  relatively few                                                                    
tax  royalty regimes  operating  in  the way  Representative                                                                    
Wilson suggested. By in large,  tax royalty regimes apply in                                                                    
more hands-off  government jurisdictions and also  tended to                                                                    
be  more diversified  with a  wider range  of tax  base. The                                                                    
regimes  tended to  operate through  the tax  system because                                                                    
they were interested in setting  overall policy, not getting                                                                    
into the  details of particular  projects and how  to assess                                                                    
them. The  alternative was that  many of the  most resource-                                                                    
dependent  locations  used  things like  production  sharing                                                                    
contracts  and  active  national oil  companies.  Often  the                                                                    
contract was  negotiated with the  national oil  company and                                                                    
not  directly  negotiated  with   the  government.  In  that                                                                    
scenario, there  was a very direct  conversation between the                                                                    
international  and national  oil  companies  about what  the                                                                    
economics  looked like,  what the  terms would  be, who  was                                                                    
investing  what, and  how the  returns  would be  allocated.                                                                    
That  level  of  detail and  involvement  was  significantly                                                                    
easier to  facilitate in the  environment he  had specified,                                                                    
than through a tax royalty  system. He believed the question                                                                    
was  if  the goal  was  increased  control over  how  things                                                                    
worked, how much it made sense  for a tax royalty system. He                                                                    
reasoned  that someone  could make  an  argument to  operate                                                                    
that way, but it would  look very different than tax royalty                                                                    
regimes in many places.                                                                                                         
                                                                                                                                
11:49:57 AM                                                                                                                   
                                                                                                                                
Representative  Wilson was  struggling  with  how the  state                                                                    
should decide whether  to invest or not  invest in something                                                                    
that would  have a huge  impact in the future.  She believed                                                                    
it was a different conversation  than Cook Inlet at present.                                                                    
As a representative from the  Interior, she wanted resources                                                                    
to go  to her region  instead of being exported.  She stated                                                                    
that was  more of a subsidy  for one area compared  to other                                                                    
parts  of  the   state.  She  believed  it   was  even  more                                                                    
concerning if the  state subsidized for someone  else to use                                                                    
the state's gas.                                                                                                                
                                                                                                                                
Representative  Guttenberg believed  it was  appropriate for                                                                    
the legislature to  be considering the situation  at any oil                                                                    
price. He remarked  that the presentation was  solely on the                                                                    
North  Slope and  Cook  Inlet. He  was  concerned about  the                                                                    
Frontier Basins. He  reasoned that at present  they were not                                                                    
major players,  but at some  point in the future  that would                                                                    
change  and they  would  represent a  critical  part of  the                                                                    
state's  economy. He  asked how  to  keep their  environment                                                                    
stable   and  prevent   hindering  their   explorations  and                                                                    
efforts.                                                                                                                        
                                                                                                                                
Mr.  Mayer believed  the comments  were very  reasonable; if                                                                    
current  arrangements were  extended  for  the situation  he                                                                    
imagined  the fiscal  impact  would not  be  massive in  the                                                                    
broader scheme of things.                                                                                                       
                                                                                                                                
Co-Chair   Thompson  thanked   the   presenters  for   their                                                                    
presentation.  He  asked  members  to  provide  any  written                                                                    
questions to his office.                                                                                                        
                                                                                                                                
HB  247  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  Thompson discussed  the agenda  for the  following                                                                    
meeting.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
11:53:43 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:53 a.m.                                                                                         

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