Legislature(2015 - 2016)BARNES 124

03/07/2016 01:00 PM RESOURCES

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Audio Topic
01:10:12 PM Start
01:11:08 PM HB247
03:05:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Dept. of Revenue Oil & Gas Tax Credit Overview
by Ken Alper, Director, Tax Division
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 7, 2016                                                                                          
                           1:10 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Benjamin Nageak, Co-Chair                                                                                        
Representative David Talerico, Co-Chair                                                                                         
Representative Bob Herron                                                                                                       
Representative Craig Johnson                                                                                                    
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Andy Josephson                                                                                                   
Representative Geran Tarr                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mike Hawker, Vice Chair                                                                                          
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
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."                                                                                           
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 247                                                                                                                  
SHORT TITLE: TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                 
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/19/16       (H)       READ THE FIRST TIME - REFERRALS                                                                        
01/19/16       (H)       RES, FIN                                                                                               
02/03/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/03/16       (H)       Heard & Held                                                                                           
02/03/16       (H)       MINUTE(RES)                                                                                            
02/05/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/05/16       (H)       Overviews    Continued    from    2/3/16                                                               
                         Meeting:                                                                                               
02/10/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/10/16       (H)       Heard & Held                                                                                           
02/10/16       (H)       MINUTE(RES)                                                                                            
02/12/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/12/16       (H)       Heard & Held                                                                                           
02/12/16       (H)       MINUTE(RES)                                                                                            
02/13/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/13/16       (H)       -- Public Testimony Postponed --                                                                       
02/22/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/22/16       (H)       Heard & Held                                                                                           
02/22/16       (H)       MINUTE(RES)                                                                                            
02/24/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/24/16       (H)       Heard & Held                                                                                           
02/24/16       (H)       MINUTE(RES)                                                                                            
02/25/16       (H)       RES AT 8:30 AM BARNES 124                                                                              
02/25/16       (H)       Heard & Held                                                                                           
02/25/16       (H)       MINUTE(RES)                                                                                            
02/25/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/25/16       (H)       Heard & Held                                                                                           
02/25/16       (H)       MINUTE(RES)                                                                                            
02/26/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/26/16       (H)       Heard & Held                                                                                           
02/26/16       (H)       MINUTE(RES)                                                                                            
02/27/16       (H)       RES AT 10:00 AM BARNES 124                                                                             
02/27/16       (H)       Heard & Held                                                                                           
02/27/16       (H)       MINUTE(RES)                                                                                            
02/29/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/29/16       (H)       Heard & Held                                                                                           
02/29/16       (H)       MINUTE(RES)                                                                                            
02/29/16       (H)       RES AT 6:00 PM BARNES 124                                                                              
02/29/16       (H)       Heard & Held                                                                                           
02/29/16       (H)       MINUTE(RES)                                                                                            
03/01/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/01/16       (H)       Heard & Held                                                                                           
03/01/16       (H)       MINUTE(RES)                                                                                            
03/02/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/02/16       (H)       Heard & Held                                                                                           
03/02/16       (H)       MINUTE(RES)                                                                                            
03/02/16       (H)       RES AT 6:00 PM BARNES 124                                                                              
03/02/16       (H)       Heard & Held                                                                                           
03/02/16       (H)       MINUTE(RES)                                                                                            
03/07/16       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   During  the hearing on  HB 247,  provided a                                                             
PowerPoint presentation on behalf  of the governor entitled, "Oil                                                               
and  Gas  Tax  Credit  Reform-  HB247,  Additional  Modeling  and                                                               
Scenario Analysis - Part 2a."                                                                                                   
                                                                                                                                
DAN STICKEL, Assistant Chief Economist                                                                                          
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  During the hearing on HB 247, answered                                                                   
questions on behalf of the governor.                                                                                            
                                                                                                                                
CHERIE NIENHUIS, Commercial Analyst                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During the hearing on HB 247, answered                                                                   
questions on behalf of the governor.                                                                                            
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:10:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  BENJAMIN NAGEAK  called  the  House Resources  Standing                                                             
Committee  meeting  to  order at  [1:10]  p.m.    Representatives                                                               
Olson,  Seaton, Josephson,  Johnson,  Talerico,  and Nageak  were                                                               
present at  the call to  order.  Representatives Tarr  and Herron                                                               
arrived as the meeting was in progress.                                                                                         
                                                                                                                                
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:11:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
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."                                                                                           
                                                                                                                                
1:11:26 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
on  behalf of  the governor,  provided a  PowerPoint presentation                                                               
entitled,  "Oil  and Gas  Tax  Credit  Reform- HB247,  Additional                                                               
Modeling and Scenario  Analysis - Part 2a."   Displaying slide 2,                                                               
"What We'll  Be Discussing,"  he said  today's presentation  is a                                                               
continuation of the deeper details  of the proposed provisions in                                                               
HB 247.   He said  he will start by  looking at how  the proposed                                                               
minimum tax  in the bill  would affect  some of the  economics of                                                               
current  production and  then he  will look  at how  the proposed                                                               
credit changes  would impact the analysis  of a new field  on the                                                               
North Slope and in Cook Inlet.                                                                                                  
                                                                                                                                
MR.  ALPER  turned  to  slide  3,  "North  Slope  Production  Tax                                                               
Snapshot With Impact of Minimum Tax  Changes."  He then turned to                                                               
slide 4, "Assumptions," to outline  the assumptions used in DOR's                                                               
modeling.    He  said  the   department's  model  is  called  the                                                               
Snapshot,  a comingled  map  of  all of  the  oil fields  working                                                               
together, and  therefore it doesn't incorporate  the specifics of                                                               
any individual producer.  He  drew attention to DOR's assumptions                                                               
shown in yellow from DOR's  fall 2015 Revenue Sources Book, which                                                             
forecasts for  fiscal year (FY)  2017:  average per  barrel (bbl)                                                               
transportation cost - $11.16; state  royalty rate - 12.5 percent;                                                               
average  state corporate  income  tax (CIT)  rate  - 6.5  percent                                                               
based on  apportionment formula applied to  the state's statutory                                                               
9.4  percent rate;  federal  CIT  rate -  35  percent; total  per                                                               
barrel  of [deductible]  upstream capital  expenditures ("capex")                                                               
and  operating expenditures  ("opex") -  [$31.62]; total  FY 2017                                                               
production [at  1,000 barrels/day] - $504,900;  and state's share                                                               
of property tax per barrel produced - $1.25.                                                                                    
                                                                                                                                
MR. ALPER explained that the chart  on slide 5, "FY 2017 snapshot                                                               
(legacy oil)," is the format  used during DOR's presentations for                                                               
Senate  Bill  21  [passed in  2013,  Twenty-Eighth  Alaska  State                                                               
Legislature].  The chart shows  the split of producer, state, and                                                               
federal share of  profit across a range of prices.   The versions                                                               
of  the chart  that were  before the  committee a  few years  ago                                                               
didn't contemplate the lower prices being  seen today.  At an oil                                                               
price of  $50 a barrel  state take is 98  percent and at  $40 the                                                               
state take is in excess of  100 percent because the companies are                                                               
effectively  losing  money  and  because of  the  impact  of  the                                                               
minimum tax.   At $90 total state and federal  government take is                                                               
60 percent;  at $60 total government  take is 70 percent;  and at                                                               
$70 total government take is 62 percent.                                                                                        
                                                                                                                                
1:15:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON,  regarding the  state taking  in excess                                                               
of 100  percent at a price  of $40, inquired whether  the credits                                                               
have been subtracted.                                                                                                           
                                                                                                                                
MR. ALPER  replied no,  the calculation here  is simply  that the                                                               
divisible  profit  is less  than  $0  because the  companies  are                                                               
losing money on cash flow.  So,  any state take, in this case the                                                               
minimum tax, is more than 100 percent of the divisible profit.                                                                  
                                                                                                                                
1:15:36 PM                                                                                                                    
                                                                                                                                
MR. ALPER  said the chart on  slide 6, "FY 2017  snapshot (legacy                                                               
oil) with  5 [percent]  min. tax,"  is the  same analysis  if the                                                               
minimum tax  were increased from  4 percent to  5 percent.   At a                                                               
price of $80 a barrel total  state and federal government take is                                                               
60  percent; [at  $90 government  take totals  60 percent  and at                                                               
$130 government take totals 66  percent]; at $70 total government                                                               
take is 64 percent.  At a price  of $50 a 5 percent minimum state                                                               
tax would  take 102 percent  of divisible  profits.  So,  when in                                                               
marginal  places  where  there  are no  profits  to  divide,  the                                                               
increase to the minimum tax has the most impact.                                                                                
                                                                                                                                
MR. ALPER  stated that the  chart on  slide 7, "FY  2017 snapshot                                                               
(new oil),"  provides the same analysis  on new oil, oil  that is                                                               
eligible  for the  Gross Value  Reduction  (GVR).   For new  oil,                                                               
government takes  across the board are  quite a bit lower  at the                                                               
higher prices, ranging from 57-58 percent.   At $50 state take is                                                               
81 percent  as opposed to  98 percent for  legacy oil.   The main                                                               
reason for  this difference is  that new  oil is not  required to                                                               
pay at  the minimum tax level.   Producers are able  to use their                                                               
per taxable  barrel credits to  reduce payments all the  way down                                                               
to $0 and therefore  they are able to pay at  the lower level, so                                                               
the total state and federal government take is 88 percent.                                                                      
                                                                                                                                
MR. ALPER displayed  slide 8, "FY 2017 snapshot (new  oil) with 5                                                               
[percent]  min.  tax  and  hard  floor,"  and  pointed  out  that                                                               
layering in  the changes  proposed in  HB 247  would result  in a                                                               
dramatic change  at, say, a price  of $50 because in  addition to                                                               
having to pay  the higher minimum tax of 5  percent the producers                                                               
must pay a minimum tax.   Under current law, new oil eligible for                                                               
GVR benefits  can go  to zero, while  the proposed  changes would                                                               
prevent that.   Therefore, at the lower prices,  the economics on                                                               
slide 8 are  similar to the economics on slide  6 because the GVR                                                               
becomes immaterial due to the imposition of the minimum tax.                                                                    
                                                                                                                                
1:17:48 PM                                                                                                                    
                                                                                                                                
Mr. ALPER next  discussed the distribution of  revenues for North                                                               
Slope  production with  the proposed  minimum tax  changes [slide                                                               
9].  He explained that the  two charts on slide 10, "Distribution                                                               
of Revenues for Legacy Oil, $40,"  represent a barrel of oil that                                                               
is divided.  The  charts take the value of a  barrel oil and show                                                               
what  the cost  is,  what  the state's  share  is,  and what  the                                                               
different tax slices are  of the value.  At a price  of $40 it is                                                               
a  money-losing proposition  and therefore  numbers go  below the                                                               
zero line.  [Under current law of  Senate Bill 21], at a price of                                                               
$40 the producers  have an estimated operating loss  of $7.39 per                                                               
barrel (blue bar)  and the total government take  is $5.86 (green                                                               
bar).   If HB  247 was passed  as written, the  main change  at a                                                               
price of $40 would be the  5 percent minimum tax, which would add                                                               
about $.26 to the state's take  and which is $.26 that would come                                                               
out of the producers' piece.                                                                                                    
                                                                                                                                
MR.  ALPER  displayed slide  11,  "Distribution  of Revenues  for                                                               
Legacy Oil, $60," and continued  the aforementioned discussion at                                                               
a price of $60.   At $60 the industry does  see profits, he said,                                                               
although  relatively  small  ones  compared  to  historic  norms.                                                               
[Under current law],  at $60 the producer share  of the divisible                                                               
profit after all costs  and all taxes would be $5.72.   If HB 247                                                               
passed  as written,  there would  be the  reduction of  $.26 that                                                               
brings the producer share of  the divisible profit down to $5.46.                                                               
Government take  would go up by  the same $.26 to  $13.01.  These                                                               
numbers  line  up to  that  roughly  70 percent  government  take                                                               
calculation seen a few slides ago.                                                                                              
                                                                                                                                
MR. ALPER showed  slide 12, "Distribution of  Revenues for Legacy                                                               
Oil, $80," and continued the  aforementioned discussion at an oil                                                               
price of $80.  He said this  is the highest price that DOR looked                                                               
at for  the purpose of  the analysis  for this presentation.   At                                                               
$80  there is  no change  - the  producer share  is $15.56  under                                                               
current law  and would  still be  $15.56 if  HB 247  were passed.                                                               
This is because at a price of $80  the minimum tax is not part of                                                               
the calculation;  there is  enough profit  and enough  value that                                                               
the state  is actually  receiving the full  35 percent  tax, less                                                               
per  taxable barrel  credits,  and therefore  the  change to  the                                                               
minimum tax  doesn't have  any impact.   This  would also  be the                                                               
case at any price above $80 a barrel.                                                                                           
                                                                                                                                
1:20:22 PM                                                                                                                    
                                                                                                                                
MR. ALPER pointed out that the  next three slides are the same as                                                               
the previous three, only rather than  for legacy oil they are for                                                               
new  oil, oil  that is  eligible  for the  Gross Value  Reduction                                                               
(GVR).   Moving to  slide 13, "Distribution  of Revenues  for New                                                               
Oil, $40,"  he said  that [under current  law] the  producers are                                                               
losing $6.39  per barrel.   If HB  247 was passed,  the producers                                                               
would  lose $7.65  per  barrel,  an increase  of  $1.25, and  the                                                               
government take would correspondingly increase by $1.25.                                                                        
                                                                                                                                
MR. ALPER displayed  slide 14, "Distribution of  Revenues for New                                                               
Oil, $60," and noted that  the producer share [under current law]                                                               
is $6.76; if HB 247 was passed  it would be $5.46, which is $1.30                                                               
less.   [Government take would be  raised to $13.01.]   The after                                                               
effects of  HB [247] would  make these numbers look  identical to                                                               
the non-GVR  oil, essentially.   By throwing  in the  minimum tax                                                               
requirements  of legacy  oil  at  the lower  prices  there is  no                                                               
benefit to the Gross Value Reduction.                                                                                           
                                                                                                                                
1:21:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  posed a hypothetical scenario  in which                                                               
the GVR concept was in effect  in 1967 when oil was discovered in                                                               
Prudhoe Bay.   He asked whether under the  existing definition of                                                               
GVR the Prudhoe Bay oil would still be treated as new oil today.                                                                
                                                                                                                                
MR. ALPER replied that the definition  of new oil in statute is a                                                               
field that  was unitized subsequent to  2003.  Had a  net profits                                                               
tax  regime with  a new  oil provision  been passed  back in  the                                                               
1960s, yes,  if Prudhoe were  to fit under that  definition then,                                                               
there is  no mechanism by  which oil  would graduate and  go from                                                               
being new  oil to being  old oil.   Once something  qualifies for                                                               
new  oil,  the  way  Alaska statutes  are  currently  written  it                                                               
remains new oil indefinitely.                                                                                                   
                                                                                                                                
1:22:16 PM                                                                                                                    
                                                                                                                                
MR. ALPER addressed  slide 15, "Distribution of  Revenues for New                                                               
Oil, $80."   He reminded members  that for legacy oil  at a price                                                               
of $80 there would be no  impact from the changes contemplated by                                                               
HB 247.   However, he  continued, for new  oil there would  be an                                                               
increase of  $.97 because of  the GVR  benefits.  The  cross over                                                               
point, the place  where a producer would switch  over from paying                                                               
at  the minimum  tax  rate to  paying  at the  full  tax rate  is                                                               
actually a few dollars higher.                                                                                                  
                                                                                                                                
MR. ALPER next discussed DOR's  field life cycle modeling for the                                                               
North Slope [slide  16].  Turning to slide 17,  "North Slope Life                                                               
Cycle Modeling  Assumptions," he  explained that DOR  modeled two                                                               
field  sizes on  the North  Slope, a  small field  of 50  million                                                               
barrels of oil (MMbo)  and a large field of 750  MMbo.  The small                                                               
field is analogous  to some of the smaller fields  that have come                                                               
into production  in the last few  years as well as  some that are                                                               
under  development, or  under active  exploration or  delineation                                                               
right now.   The 750 million  barrel field is a  much larger type                                                               
of field,  something along  the lines of  the Alpine  Field [also                                                               
known  as Colville  River Unit].   Although  it doesn't  directly                                                               
model  the  expectations  of,  say,  the  large  Armstrong/Repsol                                                               
development [Pikka  Unit], it  could in  some ways  be seen  as a                                                               
proxy for that.                                                                                                                 
                                                                                                                                
1:24:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked whether a  50 MMbo field is analogous                                                               
to 15,000 barrels a day at peak production in the life cycle.                                                                   
                                                                                                                                
MR. ALPER responded yes, about 15,000 barrels a day.                                                                            
                                                                                                                                
1:24:22 PM                                                                                                                    
                                                                                                                                
MR. ALPER  continued his discussion  of the  assumptions outlined                                                               
on slide  17, noting that  in modeling  the two field  sizes, two                                                               
types of  producers were modeled  - those producers  eligible for                                                               
cash  refunds and  that  under  HB 247  would  be  imposed a  $25                                                               
million limit per company per  year, and those new producers with                                                               
worldwide  revenue greater  than $10  million that  under HB  247                                                               
would not  be eligible to  receive any  credit in cash  and would                                                               
have to roll it all forward  until production occurs.  The prices                                                               
modeled  were for  $40,  $60, and  $80  held static,  uninflated,                                                               
through the life  of the field as well as  the fall 2015 forecast                                                               
price, which is in the $50s  now and moving up gradually into the                                                               
$70s for  the bulk  of the  study time.   The fall  2015 forecast                                                               
numbers will  often split the  difference of  the $60 and  $80 as                                                               
far as  the net  result.   The two tax  systems modeled  were the                                                               
status quo system  with new fields qualifying for  the 20 percent                                                               
GVR  that would  be in  place throughout  the life  cycle of  the                                                               
field, and  the system that would  be put in place  under HB 247.                                                               
He said DOR is willing to  do custom modeling per the committee's                                                               
request.  Today's  modeling includes all the  changes proposed in                                                               
HB 247:   an increase and hardening of the  minimum tax; limit on                                                               
the  credits/refunds by  the dollar  amount, worldwide  revenues,                                                               
and the  10-year expiration  of Net  Operating Loss  Credits; and                                                               
that  the GVR  cannot be  used to  increase the  size of  the net                                                               
operating loss (NOL).                                                                                                           
                                                                                                                                
MR. ALPER  displayed slide 18,  "North Slope Life  Cycle Modeling                                                               
Assumptions,  50  mmbo  field   assumptions,"  and  outlined  the                                                               
assumptions for this  size field:  field life cycle   - 30 years;                                                               
peak  oil production  - 15,000  barrels  per day;  transportation                                                               
cost -  $10 per  barrel from  wellhead to Pump  Station 1  to the                                                               
pipeline  to  marine  transport;  royalty rate  -  12.5  percent;                                                               
capital expenditure  - $18 per  barrel, generally  frontloaded in                                                               
the  beginning of  a  project; operating  expenditure  - $15  per                                                               
barrel,  which  is  more  back   loaded,  running  alongside  the                                                               
production  itself;  property  tax  - $1.25  per  barrel;  [state                                                               
corporate income tax (SCIT) rate  - 6.5 percent of production tax                                                               
value (PTV)  after production tax;  and federal  corporate income                                                               
tax rate  - 35  percent of PTV  after SCIT].   He noted  that the                                                               
production,  and state  and federal  corporate  income tax  rates                                                               
line up with the existing rates.                                                                                                
                                                                                                                                
1:26:51 PM                                                                                                                    
                                                                                                                                
MR. ALPER  moved to slide  19, "North Slope Life  Cycle Modeling,                                                               
50 mmbo Status  Quo, $40/bbl," the first of  four modeling slides                                                               
for a  50 MMbo field  under the status quo  tax system.   He said                                                               
the series of three  graphs on this slide will be  seen on all of                                                               
the slides related to life cycle  modeling.  The upper left graph                                                               
is the state's cash flow  from the production tax program itself.                                                               
Any numbers below the line (red  bars) are paying out credits, so                                                               
are negative  revenues.  Any  numbers above the line  (blue bars)                                                               
are positive  payments under the production  tax.  At a  price of                                                               
$40 there  is not much positive  payment.  The upper  right graph                                                               
is total  state take, which is  in many ways more  important, and                                                               
includes the  royalty, the corporate  income tax,  [property tax,                                                               
and production tax],  with the production tax  depicted in green.                                                               
The  lower  left  graph  is   the  producer's  cash  flows.    It                                                               
represents  the  producer's  spending   money  and  getting  some                                                               
fraction of  it back  in credits.   The lower  right chart  is an                                                               
aggregate  and summary  of the  data to  come up  with discounted                                                               
numbers.   He said  DOR chose  to use a  net present  value (NPV)                                                               
discount rate  of 6.15 percent.   Elaborating, he said  this type                                                               
of  analysis originated  last year  with  some specific  requests                                                               
made to the Tax Division  by Representative Seaton.  The division                                                               
did  the  modeling at  that  time  based  on  what was  then  the                                                               
Permanent  Fund Corporation's  expected  10-year  return, so  "we                                                               
were  saying the  state's loss  of  money."   The permanent  fund                                                               
subsequently revised that  number upward to 6.9  percent, but the                                                               
model still  uses the 6.15 percent.   The modeling uses  the same                                                               
number for  the producers  as for  the state.   The  hurdle rates                                                               
used  by  the companies  tend  to  be  a  little bit  higher,  he                                                               
allowed, companies want to make a  higher rate of return on their                                                               
money than  6 percent.   But,  he explained,  in the  interest of                                                               
equity and  symmetry the same  discounted cash flow was  used for                                                               
the investor as for the state.                                                                                                  
                                                                                                                                
1:29:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON, regarding  the modeling  on slide  19,                                                               
surmised  that  Company X  was  successful  in finding  a  15,000                                                               
barrel a day field  and would do so for 30 years.   Noting that a                                                               
lot of  companies haven't  found anything  yet, he  surmised that                                                               
these slides are portraying a success story.                                                                                    
                                                                                                                                
MR. ALPER answered yes, the company  has found a field and now is                                                               
starting to develop it.   What is seen in the  graph in the lower                                                               
left corner  is all  the spending  that ramps  up as  the company                                                               
starts building the oil field and bringing it into production.                                                                  
                                                                                                                                
1:30:31 PM                                                                                                                    
                                                                                                                                
MR. ALPER returned  to his discussion of slide 19  and noted that                                                               
no  matter how  big or  small  the field  and no  matter the  tax                                                               
structure  of status  quo or  under HB  247, no  field makes  any                                                               
money at  a price  of $40 a  barrel.  By  the time  positive cash                                                               
flow is reached  for a field of  15,000 barrels a day  at a price                                                               
of $40 the state will have  cashed out $221 million in production                                                               
tax credits.  Very little tax  will ever actually be paid because                                                               
of  the continued  low prices.    Referring to  the bottom  right                                                               
chart,  he reported  that the  effective discounted  loss to  the                                                               
state  through  the  production   tax  system  is  negative  $153                                                               
million.   Things are better for  the state when the  royalty and                                                               
other state revenues are included,  but still the state's overall                                                               
cash flow loss is  $24 million.  When the time  value of money is                                                               
included (the  discounted cost) the  state loses $58  million and                                                               
the producers themselves will have  spent $365 million and gained                                                               
$384 million,  so the  producers are  barely cash  flow positive.                                                               
However, because of  the time value of money,  the producers show                                                               
a substantial loss of $99 million.                                                                                              
                                                                                                                                
1:31:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  inquired whether any credits  are available                                                               
after 50,000 barrels a day.                                                                                                     
                                                                                                                                
MR. ALPER  replied yes, but  pointed out  that the peak  for this                                                               
model  is  15,000 barrels  a  day.    If  a producer  drills  and                                                               
produces more  than 50,000 barrels  a day, the producer  gets its                                                               
credits but  cannot turn  them into  cash -  the credits  must be                                                               
rolled forward and used against the producer's tax liability.                                                                   
                                                                                                                                
REPRESENTATIVE  OLSON  remarked that  the  producer  can get  the                                                               
credits but cannot use them.                                                                                                    
                                                                                                                                
MR. ALPER responded  not exactly and explained  that the producer                                                               
can use  the credits to reduce  its production tax payments.   So                                                               
long as  the price  is high  enough to support  a tax  payment, a                                                               
producer could offset that all the  way down to $0 or the minimum                                                               
tax depending on  the credit.  A producer can  use the credits to                                                               
reduce its  tax payments, but cannot  use them to get  cashed out                                                               
by the  state.  Responding  further to Representative  Olson, Mr.                                                               
Alper said he  will address the cap of 50,000  barrels a day when                                                               
he gets to the analysis for large  fields.  Even if a new company                                                               
builds a giant  field, that new company would put  itself in that                                                               
50,000 category under the status quo analysis pretty quickly.                                                                   
                                                                                                                                
1:33:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  whether the  basic presumption  for                                                               
including  the production  tax net  present value  (NPV) of  6.15                                                               
percent in the analysis is so a  look doesn't need to be taken at                                                               
alternative  investment  of  that  money.   In  other  words,  he                                                               
surmised, the state is paying out  cash and if that cash had been                                                               
left in the  permanent fund the state would have  expected a 6.15                                                               
percent 10-year average of return.                                                                                              
                                                                                                                                
MR. ALPER answered yes, exactly right.   The state does have time                                                               
value to  its money.   Traditionally  and historically  the state                                                               
has not really contemplated that  because it sort of operates the                                                               
government on a cash basis.   But now suddenly the state is using                                                               
savings and there is opportunity cost  to using those savings.  A                                                               
similar  conversation  was  had  in  this  committee  during  the                                                               
interest  rate conversation.   The  provisions of  the bill  that                                                               
would change the  interest rates are also  designed to compensate                                                               
the  state for  the money  it would  have earned  had that  money                                                               
stayed  in  savings.    The companies  themselves  use  the  term                                                               
"hurdle rate," which relates to  their opportunity for investment                                                               
options  around the  world and  the companies  will invest  money                                                               
with the expectation of earning a  cash flow profit on it as well                                                               
as a discounted rate of return  on that profit.  The 6.15 percent                                                               
is  used  here  with  the understanding  that  quite  likely  the                                                               
typical company operating  in Alaska is going to  expect a larger                                                               
number  than 6.15  percent, which  would reduce  those discounted                                                               
value  numbers.    "The  higher the  interest  rate  that  you're                                                               
charging yourself on your future  money," he explained, "the less                                                               
money a dollar in the future is worth today."                                                                                   
                                                                                                                                
1:35:24 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  resumed  his presentation  and  addressed  slide  20,                                                               
"North Slope Life  Cycle Modeling, 50 mmbo Status  Quo, $60 bbl."                                                               
Referring  to the  upper  left  graph, he  noted  that much  more                                                               
[positive cash flow] (blue  bars) is seen at a price  of $60.  At                                                               
a price  of $60 the  companies will  be paying production  tax by                                                               
the fifth  or sixth year  when they get towards  peak production.                                                               
That  production tax  adds up  to $183  million against  the $162                                                               
million  that the  state pays  out  in credits.   However,  while                                                               
there is a bit of  positive production tax, applying the discount                                                               
rate results in  a production tax net present value  to the state                                                               
of  negative $37  million.   Regarding  total  state take  (upper                                                               
right graph), he noted that  green represents the production tax,                                                               
blue is  royalty, purple is  state corporate income tax,  and red                                                               
is  state property  tax.    The state  receives  $380 million  in                                                               
positive cash  flow out of  this field at a  price of $60  in the                                                               
status  quo, with  a net  present  value of  about $136  million.                                                               
Referring to  the lower  left graph, he  explained that  the cash                                                               
flow for the  producer is negative (red bars) while  the field is                                                               
under construction,  but after construction  the cash  flow turns                                                               
to  profits after  taxes  (green bars).    The producer  receives                                                               
about $400 million  in positive cash flow and  a discounted value                                                               
of $112 million.                                                                                                                
                                                                                                                                
1:36:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether the  production tax  net                                                               
present value of  negative $37 million can be  translated to mean                                                               
that the state  is advancing credits early in a  project and over                                                               
the life  of the project the  state is not going  to recover that                                                               
money by approximately $37 million.                                                                                             
                                                                                                                                
MR. ALPER  provided a reply by  assuming two scenarios -  one the                                                               
status quo and  the other a field that never  happened and so the                                                               
money remained in the permanent fund  for the duration.  Had that                                                               
money stayed in the permanent  fund earning a 6.15 percent return                                                               
over the  multiple years,  the state would  have had  $37 million                                                               
more at the end  of the day than if the state had  paid it out in                                                               
tax credits  and received  it in production  tax with  that field                                                               
invested.  He  pointed out that this is purely  on the production                                                               
tax and does not include the other state revenue.                                                                               
                                                                                                                                
1:38:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON   noted  that  in   the  aforementioned                                                               
example the money was kept in  the permanent fund, but posited it                                                               
would be  more likely  that the  money would not  be kept  in the                                                               
permanent  fund.   In  this  case there  would  then be  assorted                                                               
arguments about  what the  state did  do with  the money  and who                                                               
benefitted from it.                                                                                                             
                                                                                                                                
MR.  ALPER   responded  that  that   is  why  the   state  hasn't                                                               
historically discounted  its cash flows  - the state has  more or                                                               
less operated  on a cash basis.   More likely in  the recent past                                                               
and an  era of  short-term or  expected short-term  deficits, the                                                               
money would  be in the  Constitutional Budget Reserve  (CBR), not                                                               
the permanent  fund.  The  CBR itself now  has the great  bulk of                                                               
its money  in very  liquid cash-type  investments that  earn less                                                               
than that.   Until about a  year ago the  bulk of the CBR  was in                                                               
the  "sub-account,"  which  was  invested diversely  out  in  the                                                               
financial markets and  earned a comparable rate of  return to the                                                               
permanent fund itself.  The  limitations on the CBR's sub-account                                                               
were that  there needed to be  five years' worth of  money.  Once                                                               
prices fell  as catastrophically as  they did as quickly  as they                                                               
did,  almost immediately  the  state no  longer  had five  years'                                                               
worth of money  in the CBR and the decision  was made last spring                                                               
to liquidate CBR's securities portfolio and turn it into cash.                                                                  
                                                                                                                                
1:39:56 PM                                                                                                                    
                                                                                                                                
MR. ALPER continued his presentation,  moving to slide 21, "North                                                               
Slope  Life Cycle  Modeling, 50  mmbo Status  Quo, $80/bbl."   He                                                               
explained that  at higher  prices more  taxes and  more royalties                                                               
are seen.  At an oil price  of $80 there is a positive production                                                               
tax value to  the state of $110 million in  discounted cash flow,                                                               
and $364 million  in total cash flow.  To  the owner and producer                                                               
of the field, a  price of $80 over the life  cycle of the project                                                               
creates $287 million in value.                                                                                                  
                                                                                                                                
MR. ALPER brought attention to  slide 22, "North Slope Life Cycle                                                               
Modeling, 50 mmbo Status Quo, Fall  2015 FC Prices."  He said the                                                               
fall 2015  forecast price  is somewhere in  between $60  and $80.                                                               
In this scenario the state's  production tax net present value is                                                               
a positive  $40 million and total  state take is $255  million in                                                               
value.  The producer is at $203 million in net present value.                                                                   
                                                                                                                                
1:40:57 PM                                                                                                                    
                                                                                                                                
MR.  ALPER explained  that slides  23-26  look at  the same  four                                                               
price  scenarios  under the  changes  proposed  by  HB 247.    He                                                               
compared slide 23,  "North Slope Life Cycle Modeling,  50 mmbo HB                                                               
247, $40 /  bbl," to the status  quo on slide 19,  and noted that                                                               
the state's  cash flow in the  status quo is a  payout of $50-$60                                                               
million a  year in  credits during  the peak  construction years.                                                               
Under HB  247, however, the credits  paid out by the  state would                                                               
never be more than $25 million a  year due to the proposed cap of                                                               
$25 million per  company per year.  Larger numbers  would also be                                                               
seen a  couple of years in  the future because the  company would                                                               
be rolling its  tax credits forward and getting  them against its                                                               
taxes in  the years after the  company is under production.   For                                                               
example,  in the  sixth or  seventh  year the  state's cash  flow                                                               
would be  nearly negative $20  million because the  company would                                                               
have about $7-8 million in tax  liability that would be offset by                                                               
the $25  million of carried  forward credit and then  the company                                                               
would get  the remaining  $18 million in  actual credits.   Under                                                               
the status quo at a price of  $40 (slide 19) the state is out-of-                                                               
pocket $221 million,  while under the proposed changes  of HB 247                                                               
the state would be out-of-pocket  $150 million.  Under the status                                                               
quo  the state's  net  present value  is  negative $153  million,                                                               
while under the  proposed changes of HB 247 it  would be negative                                                               
$95 million.   Under  the status quo  the producer's  net present                                                               
value is  negative $99 million,  while under the  bill's proposed                                                               
changes it would be negative $155 million.                                                                                      
                                                                                                                                
1:42:50 PM                                                                                                                    
                                                                                                                                
MR. ALPER  compared slide 24,  "North Slope Life  Cycle Modeling,                                                               
80 mmbo HB  247, $60 / bbl," to  the status quo on slide  20.  He                                                               
pointed out  that a  price of  $60 a barrel  is something  like a                                                               
break-even model  for the state.   The state's net  present value                                                               
under the  status quo  is negative $37  million, while  under the                                                               
proposed  changes of  HB 247  it would  be negative  $10 million.                                                               
Under the  status quo a producer's  net present value would  be a                                                               
profit of  $112 million, while  under the proposed changes  of HB                                                               
247 it would  be $93 million, an erosion of  less than 20 percent                                                               
to the  producer and an improvement  to the state's cash  flow of                                                               
about  $60 million  over  the life  of the  project.   Under  the                                                               
status quo  the state's net  cash flow  gain is $380  million and                                                               
net present  value [is  $136 million],  while under  the proposed                                                               
changes of  HB 247 the state's  net cash flow gain  would be $412                                                               
million and net present value [would  be $163 million].  So, at a                                                               
price of $60 there would be  a small impact on the project itself                                                               
but not an impact that DOR considers catastrophic.                                                                              
                                                                                                                                
1:44:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON understood  that the red bars  in the upper                                                               
left graph on slide 24 represent  the investment by the state, or                                                               
money out from  the state.  He further understood  that the lower                                                               
left graph  on slide  24 shows  the negative  for a  producer but                                                               
that there  are two  or three  years of net  gain for  a producer                                                               
while the state is still seeing a net outflow.                                                                                  
                                                                                                                                
MR. ALPER  answered that it  is actually two years  because there                                                               
is actually  a zero  bar all  the way  on the  left of  all these                                                               
scenarios for  the state because  no one starts  claiming credits                                                               
until after the first year of work.   In the upper left chart for                                                               
the state there  are six red/negative bars but  the last negative                                                               
bar is  actually year seven;  however, by  years six and  seven a                                                               
producer is in a positive place.   So there are two years where a                                                               
producer is  having positive cash  flow while the state  is still                                                               
repaying credits.  Referring to  the upper right chart, Mr. Alper                                                               
noted that  the state's positive  cash flow under  the provisions                                                               
of HB 247 would  start in year six because once  a producer is in                                                               
production the  state starts receiving  a royalty.  In  year five                                                               
the state  would receive about  $13 million in  primarily royalty                                                               
revenue and would pay out  $20 million in continuing tax credits,                                                               
so  the state  would be  negative $7  million.   In year  six the                                                               
state would receive  about $28 million in revenue  (blue bar) and                                                               
would pay out  about $15 million [green bar], so  the state would                                                               
now start being in a positive cash flow.                                                                                        
                                                                                                                                
1:46:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON requested clarification  on which of the                                                               
graphs on slide 24 were being compared.                                                                                         
                                                                                                                                
MR. ALPER replied that  Representative Seaton's original question                                                               
was comparing the  state's cash flow [upper left  graph] with the                                                               
producer's cash  flow [lower left graph].   Representative Seaton                                                               
was  making  the  observation  that  the  producer  gets  into  a                                                               
positive cash flow  while the state is still  paying out credits.                                                               
Mr. Alper agreed that that is true for one or two years.                                                                        
                                                                                                                                
1:47:06 PM                                                                                                                    
                                                                                                                                
MR. ALPER  resumed his  presentation.  He  stated that  slide 25,                                                               
"North Slope Life Cycle Modeling, 50  mmbo HB 247, $80 / bbl," is                                                               
the "after" comparison to the  status quo or "before" depicted on                                                               
slide 21  for an  oil price of  $80 a barrel.   Referring  to the                                                               
upper left  graph he said the  credits that would be  paid out by                                                               
the state would be restricted  by [the proposed $25 million cap].                                                               
Mr. Alper  pointed out that the  scale on the three  graphs keeps                                                               
changing throughout  the different  slides.   When there  is more                                                               
money the  scale needs to be  extended because if the  scale were                                                               
to be kept  constant the numbers would be nearly  invisible for a                                                               
large portion of  it.  The state's positives  from the production                                                               
tax at $80 oil  reach as much as almost $60 million  a year.  The                                                               
state's total take  at the peak of that is  close to $100 million                                                               
a year.   A discounted total  state take cash flow  of about $380                                                               
million is  seen with the  changes envisioned  in the bill.   The                                                               
comparable number  [for the status  quo at  $80 on slide  21] was                                                               
$364 million.   The state would  gain about $16 million  in value                                                               
over the life cycle of the  project, while the producers would go                                                               
from $289  million to $277  million, a loss  of $12 million.   As                                                               
prices get  higher the changes  envisioned in HB 247  become much                                                               
less material.   Most provisions  of the bill are  protecting the                                                               
state's interest at low price.   Although the impact is higher at                                                               
a price of $60, the impact is less at $80.                                                                                      
                                                                                                                                
MR. ALPER displayed  slide 26, "North Slope  Life Cycle Modeling,                                                               
50 mmbo HB 247, Fall 2015  FC Prices," stating that the fall 2015                                                               
forecast price  is somewhere  in between.   In this  scenario the                                                               
state would have  a positive production tax net  present value of                                                               
$60  million, while  under  the  status quo  it  is $40  million.                                                               
[Under the  proposed changes in  HB 247] the state's  net present                                                               
value would  be $274 million,  while under  the status quo  it is                                                               
$255  million.   Under HB  247  the producer's  cash net  present                                                               
value would  be $189 million,  while under  the status quo  it is                                                               
$203  million.   So, about  $14 million  of the  producer's value                                                               
would be taken by the changes envisioned in HB 247.                                                                             
                                                                                                                                
1:49:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked about the fall 2015 forecast price.                                                                 
                                                                                                                                
MR. ALPER  responded that the  price for the current  fiscal year                                                               
is $50  and the FY  2017 price is  $56.   He deferred to  Mr. Dan                                                               
Stickel to provide further details.                                                                                             
                                                                                                                                
DAN STICKEL, Assistant Chief  Economist, Tax Division, Department                                                               
of  Revenue (DOR),  answered that  the  fall forecast  has a  few                                                               
years of  price increases and prices  end up leveling out  in the                                                               
$70  real range.   For  instance,  looking out  through 2024  the                                                               
price is $84.53 in nominal terms, which is $70-$71 real range.                                                                  
                                                                                                                                
MR. ALPER added  that DOR is using  uninflated numbers throughout                                                               
the life  cycle here.   So, when  $60 is seen  or $50  million is                                                               
seen, those  are current-year dollars;  DOR did not build  in any                                                               
sort of  inflation.   The department has  a forecasted  oil price                                                               
that is  going up slightly.   The last year of  DOR's forecast is                                                               
in 2025 and  that 2025 number is  then held flat for  the rest of                                                               
the life cycle of these fields -  in that $70-ish range.  That is                                                               
why  these forecast  numbers come  out  splitting the  difference                                                               
nicely between the  $60 and $80 because for the  bulk of the time                                                               
period it is a $70 forecast.                                                                                                    
                                                                                                                                
1:51:13 PM                                                                                                                    
                                                                                                                                
MR. ALPER  next discussed the  large field  model.  He  turned to                                                               
slide 27, "North Slope Life  Cycle Modeling Assumptions, 750 mmbo                                                               
field assumptions," the  first of four modeling slides  for a 750                                                               
MMbo  field  under the  status  quo  tax  system.   He  said  the                                                               
assumption for the life of a field  this size is 40 years and the                                                               
assumption  for peak  oil production  is 120,000  barrels a  day.                                                               
The capital  cost is assumed  to be $13  a barrel, which  is less                                                               
than the  cost of  $18 for  a smaller field  due to  economies of                                                               
scale  from drilling  pads and  processing facilities.   However,                                                               
$13 multiplied  by 750 million  barrels is close to  $10 billion;                                                               
$10 billion is what it would  cost the producer that develops and                                                               
builds such a  field.  The department must  contemplate what that                                                               
means  in its  tax  credit  modeling when  someone  comes up  and                                                               
spends $10 billion on the North Slope.                                                                                          
                                                                                                                                
1:52:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON understood  that  a 750  MMbo field  is                                                               
comparable in size  to Alpine, Alaska's third largest  field.  He                                                               
inquired whether Alpine received credits when it was started.                                                                   
                                                                                                                                
MR. ALPER answered  that Alpine began operating in  2004 and peak                                                               
production was 124,000  barrels a day in 2007.   Alpine went into                                                               
production under the Economic Limit  Factor (ELF) system, a gross                                                               
production tax,  and therefore there were  not credits associated                                                               
with that field's buildout or  construction.  Unitization of that                                                               
field was  prior to  2003 so  it does not  enjoy the  Gross Value                                                               
Reduction (GVR).   For all intents and purposes  Alpine is legacy                                                               
oil.  When the switch was  made in 2006 to the production profits                                                               
tax  (PPT) [Twenty-Fourth  Alaska State  Legislature, House  Bill                                                               
488], people talked  about the weighted average of  the tax rates                                                               
among the different  fields that were in production  on the North                                                               
Slope and  attention was  brought to  the fact  that many  of the                                                               
smaller fields  were below a 1  percent effective tax rate.   The                                                               
Kuparuk River  Unit had fallen  to a very low  tax rate.   All of                                                               
the  taxes were  coming,  really, from  Prudhoe  Bay and  Alpine;                                                               
Prudhoe Bay  because it  was so  large and  its wells  still very                                                               
productive and Alpine simply because it  was so new it was in its                                                               
peak  productivity  per well  and  there  was a  relatively  high                                                               
multiplier that was paying a 10  percent or higher gross tax rate                                                               
in 2006 when the switchover was made from ELF to PPT.                                                                           
                                                                                                                                
1:54:16 PM                                                                                                                    
                                                                                                                                
MR. ALPER returned to his  presentation.  He brought attention to                                                               
slide 28, "North Slope Life  Cycle Modeling, 750 mmbo Status Quo,                                                               
$40/bbl," the first of four modeling  slides for a 750 MMbo field                                                               
under the status  quo tax system.  He noted  that the numbers are                                                               
bigger  for this  field size  and correspondingly  the scales  on                                                               
each of the  slide's three graphs are bigger.   In this scenario,                                                               
the state's  share through  the tax credit  program is  just less                                                               
than $3  billion; that is what  the state would be  paying out in                                                               
cash to get this field up and  running.  Given the low price, the                                                               
value  the state  gets  from  that is  relatively  small, so  the                                                               
discounted loss  [the production  tax net  present value]  to the                                                               
state is about  negative $2 billion.  When  royalty and corporate                                                               
tax are included, the state ends  up with just over $3 billion in                                                               
total revenues  over the life  of the project against  a negative                                                               
$2.8  billion  in cash  flow.    Thus,  the  total gain  is  $367                                                               
million,  but  the  discounted  value  of  the  state's  gain  is                                                               
negative $1.016  billion.   The producer is  also losing  a large                                                               
amount of money  under the status quo, with a  [producer cash net                                                               
present value] of  negative $1.768 billion.   Continuing with the                                                               
thesis that was begun earlier, no  one is going to make any large                                                               
investments in  Alaska going  forward if it  is thought  that the                                                               
price of oil is going to stay at $40 indefinitely.                                                                              
                                                                                                                                
1:56:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON asked whether  slide 28 is depicting GVR                                                               
oil or legacy oil.                                                                                                              
                                                                                                                                
MR. ALPER replied  that DOR's assumption for the  modeling of any                                                               
new fields on  the North Slope is that they  will be eligible for                                                               
the GVR.   So,  there are  two primary  assumptions for  this new                                                               
oil.  First, should a field  be profitable, the production tax is                                                               
going to  be reduced by the  multiplier that takes a  fraction of                                                               
the gross  and subtracts  it from the  production tax  value; so,                                                               
this  new oil  will enjoy  a lower  tax rate.   Second,  at lower                                                               
prices this  oil would  receive the  $5 Per-Barrel  Credit rather                                                               
than  the sliding-scale  Per-Barrel  Credit.   The $5  Per-Barrel                                                               
Credit can reduce  the producer's production tax  liability to $0                                                               
because there is no minimum tax in a GVR field.                                                                                 
                                                                                                                                
1:57:09 PM                                                                                                                    
                                                                                                                                
MR. ALPER continued his presentation,  moving to slide 29, "North                                                               
Slope Life  Cycle Modeling,  750 mmbo Status  Quo, $60/bbl."   He                                                               
noted that  at a price  of $60 under  the status quo  the credits                                                               
are  still very  large during  the early  years of  construction,                                                               
approaching $2.9  billion.   In about 10  years the  state starts                                                               
seeing positive production tax cash  flow; prior to that the Per-                                                               
Barrel Credit  is enough to wipe  the tax down to  $0.  Referring                                                               
to the upper left graph, he  drew attention to the years where it                                                               
appears  that nothing  is  happening and  explained  that in  the                                                               
early  years  of  production  from   this  field  there  is  some                                                               
production tax liability,  but it is wiped out to  $0 by the Per-                                                               
Barrel Credit, which is why a gap  of nothing is seen.  The state                                                               
does start  getting royalties  as soon  as production  begins and                                                               
the state  gets positive cash  flow in  about year eight,  but by                                                               
the time  the state gets to  that place it is  negative cash flow                                                               
somewhere between $2.5 and $3  billion.  The producer, meanwhile,                                                               
at  the 6.15  percent discount  rate, is  in a  mildly profitable                                                               
circumstance of  $312 million.   The producer  has a lot  of cash                                                               
flow at  $7.4 billion, but  because of how frontloaded  a project                                                               
like this  is it  is quite  likely that a  decision would  not be                                                               
made to  invest in a  large, expensive  project like this  if the                                                               
expected  oil  price was  in  the  $60  range.   He  offered  his                                                               
presumption  that   producers  would   not  make  this   kind  of                                                               
investment unless  they expected  the price of  oil to  be higher                                                               
than $60 for the next 40 years.                                                                                                 
                                                                                                                                
1:58:43 PM                                                                                                                    
                                                                                                                                
MR. ALPER addressed  slide 30, "North Slope  Life Cycle Modeling,                                                               
750 mmbo Status  Quo, $80/bbl."  He said the  upfront cost to the                                                               
state at  this price under the  status quo is still  in the range                                                               
of $2.8 billion  being spent in credits.  The  difference is that                                                               
the state  gets to positive cash  flow a bit quicker  and gets to                                                               
really good cash flow somewhere down  the line.  In the eighth to                                                               
tenth  year of  production,  during the  peak  years where  those                                                               
120,000 barrels a  day are flowing, the state is  going to get $1                                                               
billion a  year in revenue.   He  recalled testimony by  Mr. Bill                                                               
Armstrong [President,  Armstrong Oil &  Gas Inc.] that  the state                                                               
will  get $1  billion  a year  in revenue.    However, Mr.  Alper                                                               
pointed out, that $1 billion comes  on the heels of several years                                                               
where  the  state is  paying  multiple  hundreds of  millions  of                                                               
dollars per  year during the  construction and  development phase                                                               
of the  project.  The  producer's cash  flow in this  scenario is                                                               
much more robust  - a discounted cash flow of  $2.2 billion and a                                                               
discounted cash  flow to  the state  of $3.5  billion.   So, this                                                               
scenario is great except for the  part about the state not having                                                               
the  money  to  pay  for   the  upfront  costs,  leading  to  the                                                               
conversation about what to do about that.                                                                                       
                                                                                                                                
MR. ALPER brought attention to  slide 31, "North Slope Life Cycle                                                               
Modeling, 750  mmbo Status  Quo, Fall 2015  FC Prices,"  and said                                                               
this scenario  falls somewhere between  and is the  forecasted FY                                                               
fall 2015  Revenue Sources Book prices.   In this case  the state                                                             
has  about $2.5  billion in  value  and the  producer about  $1.4                                                               
billion.   Once again, however,  there are very large  credits in                                                               
the early  years of  the development phase,  peaking out  at just                                                               
over $800  million of  state cash liability  to that  producer in                                                               
about the fifth year of the project, which is peak construction.                                                                
                                                                                                                                
2:00:38 PM                                                                                                                    
                                                                                                                                
MR. ALPER discussed  slide 32, "North Slope  Life Cycle Modeling,                                                               
750 mmbo  HB247, $40 /  bbl," the  first of four  modeling slides                                                               
for a 750  MMbo field under the  changes proposed by HB  247.  He                                                               
said this is  a very dramatic change, with  two things happening.                                                               
One  is  the  state  is  only paying  out  $25  million  a  year.                                                               
Comparing slide 32 with slide 28,  he noted that under the status                                                               
quo for this same scenario  the production tax credits cashed was                                                               
just less  than $3  billion.   However, under  HB 247,  the state                                                               
would  only spend  $134  million, a  tremendous  decrease in  the                                                               
state's credit  liability.  The  reason for this decrease  is the                                                               
proposed cap of  $25 million per company per year.   Under HB 247                                                               
the  state  would  have  something  of  a  positive  because  the                                                               
producer would be  paying an actual minimum tax at  the rate of 5                                                               
percent during  the life  cycle of the  project.   The producer's                                                               
cash flow  at $40 is worse  under the proposed changes  of HB 247                                                               
[negative  $3.744  billion] than  under  the  status quo  [$1.768                                                               
billion].  Therefore,  Mr. Alper said, he would  rather have this                                                               
conversation around  the oil prices of  $60 and $80 where  such a                                                               
project would  be more likely  to happen than  at a price  of $40                                                               
where the  math is almost  ludicrous - it is  technically correct                                                               
but such a project isn't going to happen.                                                                                       
                                                                                                                                
2:02:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON noted  he is  undecided on  HB 247  and                                                               
said he thinks  he just heard Mr. Alper, in  effect, make the oil                                                               
industry's argument.  He further  asked whether the life cycle is                                                               
30 years or 40 years.                                                                                                           
                                                                                                                                
MR. ALPER responded  it is a 40-year  life cycle.  He  said he is                                                               
uncomfortable with the  scenario of a price of $40  because it is                                                               
so  implausible for  all of  this to  happen at  a price  of $40.                                                               
About $2  billion in value  is shifted  from the producer  to the                                                               
state in  this modeling over  the 40  years.  The  all-in present                                                               
value to the  state under the status quo on  slide 28 is negative                                                               
$1 billion, while  under the proposed changes of HB  247 on slide                                                               
32  it is  about positive  $1 billion,  which is  the $2  billion                                                               
shift.    He urged  that  this  conversation  be  had at  a  more                                                               
reasonable oil price and therefore turned to a price of $60.                                                                    
                                                                                                                                
2:03:10 PM                                                                                                                    
                                                                                                                                
MR. ALPER  drew attention  to slide 33,  "North Slope  Life Cycle                                                               
Modeling, 750  mmbo HB247, $60  / bbl,"  and said that  under the                                                               
proposed changes of HB 247  the state's credit liability would be                                                               
capped at  $25 million for the  producer.  He pointed  out that a                                                               
project like  this is unlikely to  have only one partner  and the                                                               
way the bill is written the  cap would be $25 million per company                                                               
per year.   So, if there  were four companies involved  in such a                                                               
project, the allowable amount of  credits would be quadrupled and                                                               
that would dramatically  change a lot of these numbers.   But the                                                               
modeling had to start somewhere and  so DOR started with the bill                                                               
and the  modeling as DOR  literally interprets  it.  He  said DOR                                                               
would be happy to look at  split fields to come up with different                                                               
scenarios if the  committee wishes.  Continuing,  Mr. Alper noted                                                               
that  the state's  cash flow  in the  before/status quo  scenario                                                               
depicted on slide 29 was close to  $3 billion out the door.  Part                                                               
of the reason the administration  is before the committee is that                                                               
the state does  not have $3 billion, the state  does not have the                                                               
ability to  participate in  a new oil  field development  with $3                                                               
billion  in  cash.     So,  the  administration   is  looking  at                                                               
mechanisms  to limit  that and  the  changes proposed  in HB  247                                                               
would greatly  limit that amount  of cashed credits to  only $116                                                               
million in a one partner, $25 million modeling.                                                                                 
                                                                                                                                
2:04:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  understood Mr. Alper to  be saying that                                                               
when  looking  at a  large,  new,  Alpine-sized development,  the                                                               
unaffordability of these credits  becomes extremely magnified and                                                               
under  existing statutes  creates some  real risks  of insolvency                                                               
because the state does not have $3 billion.                                                                                     
                                                                                                                                
MR.  ALPER answered  he  would  say that  the  State of  Alaska's                                                               
credit  regime was  designed to  try to  get new  players on  the                                                               
North Slope, generally  presumed to be smaller.   But, if someone                                                               
finds something  that is big,  the law is  silent on the  size of                                                               
the field.   He recalled that a  year ago he and  Mr. Stickel sat                                                               
before  the committee  and discussed  theoretical long-term  cash                                                               
flows for the Arctic National  Wildlife Refuge (ANWR).  The chair                                                               
had asked  DOR to  look at  what would happen  if the  refuge was                                                               
developed and 20  different fields were layered on  and there was                                                               
a great  river of  money and a  great river of  oil in  the later                                                               
years.  However,  DOR saw billions of dollars  in negative credit                                                               
cash  flow in  the  early years  of it  because  people would  be                                                               
spending $5-$6  billion a year to  get the refuge developed.   If                                                               
it were  to fall into  the literal interpretation of  the state's                                                               
current law, it would be unaffordable  for the state in the short                                                               
term  and the  state would  have to  find a  way to  afford that.                                                               
That is  part of why  the administration is before  the committee                                                               
now -  to recognize that these  projects are very much  wanted to                                                               
happen, but  as the law is  currently written the state  does not                                                               
have the  money to afford  the obligations  that it has  taken on                                                               
for these larger projects.                                                                                                      
                                                                                                                                
2:06:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON posed a scenario  in which Mr. Alper owns an                                                               
oil company and is thinking  about doing business in Alaska under                                                               
the terms  proposed in HB  247.  He  asked where Mr.  Alper would                                                               
seriously start thinking about price.                                                                                           
                                                                                                                                
MR. ALPER replied  he does not have  an oil company and  so it is                                                               
hard  to  imagine.    He  related that  he  found  Mr.  Armstrong                                                               
refreshing in  a lot of  ways when  he was before  the committee,                                                               
but  Mr. Armstrong  is bullish  and thinks  the price  of oil  is                                                               
going to be  high and is prepared to make  very large investments                                                               
and borrow  a lot of money.   However, Mr. Alper  continued, some                                                               
of his anxiety is  that the state cannot be as  bullish as is Mr.                                                               
Armstrong,  the state  has obligations  to its  citizens that  it                                                               
cannot be  on the hook  for a 35  percent partner based  upon Mr.                                                               
Armstrong's  optimism.   If he  were  a very  wealthy person  and                                                               
investing in  oil projects in  Alaska, he would probably  want to                                                               
know that prices are going to be in the range of $80 or better.                                                                 
                                                                                                                                
REPRESENTATIVE  OLSON  remarked that  $80  is  the range  he  was                                                               
thinking of as well.                                                                                                            
                                                                                                                                
2:07:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  commented that changes to  HB 247 probably                                                               
have to be sensitive to $40, $50,  and $60 over 40 years, not the                                                               
reverse.   In a nutshell, the  biggest reserve in the  world, the                                                               
Saudi's, does  not want to  become irrelevant.  Therefore,  it is                                                               
important to  concentrate on tweaks  to HB  247 that are  down in                                                               
the price ranges of $40 and $50.   As was just said by Mr. Alper,                                                               
the state  cannot afford to  play with the  big boys; a  far more                                                               
conservative approach to this must be taken.                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON understood  Mr. Alper's  point to  be that                                                               
regardless  of whether  the  price  is $40,  $60,  or $80,  under                                                               
current law the  state does not have the money  to invest in this                                                               
size field because  that investment would be $3  billion over the                                                               
next seven  years.   He inquired whether  Mr. Alper's  message is                                                               
that even if  the expected price is $80, the  state does not have                                                               
the  $3 billion  to put  into  the field  as cash  credits to  go                                                               
forward with the project under the current statute.                                                                             
                                                                                                                                
MR. ALPER responded  yes, and he would go further  to say that at                                                               
a price of  $80, although the fields might pencil  out better, it                                                               
is  not like  the state's  budget woes  are solved.   The  budget                                                               
presented by the  governor this year balances at an  oil price of                                                               
about $103.  The administration  is expecting additional cuts and                                                               
revenue measures  and the  like, and  if something  structural is                                                               
done with  how the state treats  its savings that number  will be                                                               
able to  be dropped  dramatically.   The state  is far  away from                                                               
seeing  the kind  of  surpluses  that will  enable  the state  to                                                               
afford these  multi-hundred million  dollar per  year investments                                                               
in a single new project.                                                                                                        
                                                                                                                                
2:10:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  observed that slide  32 includes the  cap of                                                               
$25 million on the production  tax credits cashed, while on slide                                                               
28 the credits  cashed reach almost $600 million in  the third or                                                               
fourth year and  then go above $800 million.   Given that the gap                                                               
between  these  two  examples  is so  great,  she  asked  whether                                                               
anything in between was looked at  during the drafting of HB 247.                                                               
She also asked how $25 million was selected as the right limit.                                                                 
                                                                                                                                
MR.  ALPER answered  that the  modeling done  earlier by  DOR was                                                               
based  on smaller  fields.   As  seen in  this presentation,  the                                                               
impact was far less dramatic when  the credits in play were a lot                                                               
smaller, the $25 million limit.   The department didn't model the                                                               
very large  fields until  embarking on  this project  right here.                                                               
The number of $25 million comes  from historic statute.  When the                                                               
state first got  into the business of paying cash  for credits in                                                               
2006 with the  passage of the PPT bill, there  was a specific $25                                                               
million per  company per  year cap  on repurchases.   It  was not                                                               
initially intended to be an  open-ended benefit.  Credits in most                                                               
places  in the  world are  not cashable,  credits in  places that                                                               
offer  them  are generally  used  against  taxes.   Other  Alaska                                                               
statutes  offer  credits that  can  be  used against  taxes,  the                                                               
Education Tax Credit being an  example.  Alaska's credits for oil                                                               
and gas  development are unique  that way.   The state  is paying                                                               
cash  into the  industry,  the state  is  becoming indirectly  an                                                               
investor.  So, $25 million was  an historic number and was chosen                                                               
for HB 247 because it had  legislative history.  One could easily                                                               
say that that  could be inflation-proofed.   However, that number                                                               
was only a  limit for real for 15 months  - between the effective                                                               
date  of  PPT  and  the  effective date  of  Alaska's  Clear  and                                                               
Equitable Share (ACES) [House Bill  2001, passed in 2007, Twenty-                                                               
Fifth Alaska State Legislature], which eliminated the cap.                                                                      
                                                                                                                                
2:13:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  recalled that  Mr. Alper was  around during                                                               
consideration of the PPT.                                                                                                       
                                                                                                                                
MR.  ALPER  replied  yes,  at   that  time  he  was  working  for                                                               
Representative Eric Croft.                                                                                                      
                                                                                                                                
REPRESENTATIVE OLSON recalled that a  round table was held toward                                                               
the end of  PPT hearings, to which the three  major producers and                                                               
a number of  the explorers were invited and asked  questions.  He                                                               
recounted that the  companies were asked how far  forward do they                                                               
look  for  the  development  of assets  and  reserves  that  they                                                               
already have.   Only one  company answered the question  and that                                                               
company's answer  was in excess  of 60 years.   He asked  how the                                                               
state can compete with that.                                                                                                    
                                                                                                                                
MR.  ALPER responded  he does  not know  the state  would compete                                                               
with that;  the state  is not  really competing  with that.   The                                                               
state  has a  co-dependent,  or a  co-mingled, relationship  with                                                               
industry.   The state is a  sovereign, it owns things,  it runs a                                                               
state, it  has a school system  and they are an  oil company that                                                               
is trying  to plan its strategy  to develop a field  and then the                                                               
next field with  the cash flow from  the first one.   The two are                                                               
very different  business models.   It is  easier to be  a passive                                                               
sovereign, it is  easier to let them come to  Alaska and let them                                                               
do their  investments and  then pay the  taxes when  they produce                                                               
something.   A conscious  choice was  made 10  years ago  for the                                                               
state to  participate with  cash.  That  changed everything.   It                                                               
has caused  a lot of positives  for the state, especially  in the                                                               
years  where  prices  were  high and  the  state  had  tremendous                                                               
surpluses and  was able to  save large  amounts of money.   Today                                                               
the state is experiencing the  flip side of that, with tremendous                                                               
negatives and liabilities to the state  being seen.  In some ways                                                               
they are the mirror  image of each other.  On  the other hand, if                                                               
these kinds  of lower  prices are being  expected for  years into                                                               
the future, the state needs to contemplate how to react to it.                                                                  
                                                                                                                                
REPRESENTATIVE  OLSON remarked  that industry  has one  advantage                                                               
that the  state does  not and  that is time.   Industry  can wait                                                               
until it feels it  has a chance to make a profit,  which is not a                                                               
dirty word because industry is not  nonprofits.  If the state has                                                               
to do something  now it can only  do it a few years  out and that                                                               
gives industry  a distinct advantage  in how things are  done and                                                               
he is thinking the state is seeing that again right now.                                                                        
                                                                                                                                
2:15:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON, regarding  the proposed  $25 million  cap                                                               
per company,  inquired whether  there are  any sideboards  on the                                                               
percentage of ownership.  He posed  a scenario in which a company                                                               
has six 1  percent partners and inquired whether  each partner as                                                               
well as the main company would  get the $25 million cap under the                                                               
current language of HB 274.                                                                                                     
                                                                                                                                
MR. ALPER  said the easy answer  is yes, with the  caveat that it                                                               
is not tied to  the project.  It is tied  to the company's entire                                                               
North  Slope  operations;  every  taxpayer  can  get  up  to  $25                                                               
million.  Things  have been done in both  statute and regulation.                                                               
For example,  the Small Producer  Credit has a  per-company fixed                                                               
dollar  cap.    Because  of conversations  like  this  the  final                                                               
version  of the  language was  written so  that a  company cannot                                                               
artificially split  itself in  two to  try to  double dip  on the                                                               
Small Producer  Credit.   [The department]  would try  to provide                                                               
some  sort   of  protections  whereas  a   legitimate  number  of                                                               
companies if  they were truly  partners would be able  to benefit                                                               
from something, but there wouldn't  be any intentional workaround                                                               
to try to increase a company's ability to claim credits.                                                                        
                                                                                                                                
2:17:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON said he has  some concern if what is trying                                                               
to be done in  HB 247 is to lower the state's  liability so it is                                                               
not hundreds of  millions of dollars per year for  seven years as                                                               
this  model of  a larger  field goes.   He  posited that  without                                                               
sideboards  in  statute  the state's  exposure  to  paying  large                                                               
upfront cash  credits into a  project would  not be limited.   He                                                               
requested  that  consideration be  given  to  that limitation  in                                                               
order to make  it a real limitation and not  something that could                                                               
be gone around and that this be brought back to the committee.                                                                  
                                                                                                                                
MR. ALPER  replied two  things happen.   He  posed a  scenario in                                                               
which there are  four partners and they are  getting $100 million                                                               
a year.   Not  only does it  change the cash  flow model  and the                                                               
state is out  four times as much money, but  also seen especially                                                               
at lower prices is the sunset  of the credits themselves after 10                                                               
years.  What was seen in  the low price, large field modeling was                                                               
expiring credits  where people  were not  actually able  to enjoy                                                               
the full benefit  of their credits because after  five years they                                                               
were literally  falling off the table.   If that was  bumped to a                                                               
larger  number with  multiple partners,  both  of those  problems                                                               
would go  away for the producers.   On the other  hand, the state                                                               
would  be  paying four  times  as  much  money  per year  in  the                                                               
upfront.                                                                                                                        
                                                                                                                                
2:19:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted  that this is being  talked about and                                                               
thought  about as  a project,  but the  credit limitation  is per                                                               
company.    He  asked  whether   there  is  anything  that  keeps                                                               
additional  companies  from coming  into  the  project later  and                                                               
having that same $25 million  and therefore extending the credits                                                               
out for longer than 10 years.                                                                                                   
                                                                                                                                
MR.  ALPER  responded he  hadn't  contemplated  a technical  name                                                               
change,  but the  credit itself  is a  certificate.   The company                                                               
earns the credit in year one.   If, for example, a company earned                                                               
$500 million but  is only able to  use $25 million a  year of it,                                                               
if  the company  doesn't ever  have  any tax  liability after  10                                                               
years  the company  is going  to lose  a certain  portion of  it.                                                               
Even if  the tax credit certificate  is transferred or sold  or a                                                               
company changes name,  the certificate is what  would be expired.                                                               
Typically  after a  few years  the expectation  is that  there is                                                               
going to be tax liability and  the company will be using the bulk                                                               
of that certificate  not to get $25 million a  year but to offset                                                               
a  tax bill.   If  the prices  are high  enough the  tax bill  is                                                               
enough to  use it up more  quickly.  When talking  about bringing                                                               
new partners into a project it  is important to remember that the                                                               
current refund language  in this proposed new $25  million cap is                                                               
in Alaska Statute  (AS) 43.55.028, which is about  the tax credit                                                               
fund.     It  is  about   the  spending  of  money   to  purchase                                                               
certificates and  not anywhere in  the language that  talks about                                                               
how a company earns  a certificate.  It is very  much tied to the                                                               
taxpayer, it is tied to per company  of limit and that is why the                                                               
legislature's  consultant, Mr.  Janak  Mayer,  testified that  it                                                               
would be likely that companies might  get nothing.  Mr. Mayer was                                                               
building a scenario that said the  developer of a new field might                                                               
already  be  doing  something in  Alaska  and  therefore  already                                                               
getting   its  full   $25  million   from  another   project  and                                                               
contemplating the possibility  that even in the  smaller fields a                                                               
company might  not get cash.   The  department did not  model the                                                               
smaller fields with  that set of assumptions,  the smaller fields                                                               
were modeled with  the assumption that a company  would enjoy the                                                               
full $25 million.                                                                                                               
                                                                                                                                
2:21:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON presumed  that  when  Mr. Alper  stated                                                               
Alaska has great  benefits from its credit systems  that he meant                                                               
Alaska is  either optimistic  that more  production will  come on                                                               
line  or that  the industry's  argument  is correct  that it  has                                                               
stemmed  the decline,  particularly  over the  last three  years;                                                               
that the decline  curve would be worse had it  not been for these                                                               
credits.  He  said he is playing a mystery  game where he doesn't                                                               
know what the world would look like without the credits.                                                                        
                                                                                                                                
MR.  ALPER answered,  "Neither do  we, we  can't know  what would                                                               
have happened."   He explained  that when  he said the  state has                                                               
benefitted, he primarily meant the  state benefitted from the net                                                               
profits tax regime that brought in  very high rates and very high                                                               
revenues at high prices.  The  credits in many ways were a built-                                                               
in offset to  that, the flip side  of it.  When  ELF replaced PPT                                                               
there was a crossover.  At  low prices the state makes more money                                                               
in a gross  tax; at high prices  the state makes more  money in a                                                               
net  tax.   North  Dakota does  much better  than  Alaska at  low                                                               
prices, whereas  Norway does better  than Alaska at  high prices.                                                               
North Dakota is not getting as much  as it could because it has a                                                               
flat gross  tax.  On  the other hand,  at these low  prices North                                                               
Dakota  is doing  very  well because  it is  getting  at least  a                                                               
limited  amount of  revenue  with the  caveat  being that  people                                                               
aren't drilling  wells anymore because their  type of development                                                               
isn't profitable at prices of $30 or $40.                                                                                       
                                                                                                                                
2:23:11 PM                                                                                                                    
                                                                                                                                
MR. ALPER resumed  his presentation, turning to  slide 34, "North                                                               
Slope  Life Cycle  Modeling, 750  mmbo HB  247, $80  / bbl."   He                                                               
commented that this is the  more ambitious price, but as recently                                                               
as three years ago  it would have been the low side.   At a price                                                               
of $80 a barrel under the  proposed changes of HB 247 the state's                                                               
cash  flow out  would be  only  $109 million,  whereas under  the                                                               
status quo  (slide 31) it is  $2.8 billion in credit  spend.  The                                                               
expected value of  the state's production tax  under the proposed                                                               
changes would be $1.7 billion,  as compared to about $900 million                                                               
under the status quo.  The  overall state take under HB 247 would                                                               
be $4.4 billion,  while under the status quo it  is $3.5 billion.                                                               
The amount that would be removed  from the producer's side of the                                                               
ledger  to the  state's is  far  less than  it was  at the  lower                                                               
prices  - [under  HB 247  the  producer cash  net present  value]                                                               
would be  $1.4 billion,  while under  the status  quo it  is $2.2                                                               
billion,  a migration  of  about $800  million  in present  value                                                               
through the tax credit reform contemplated in the bill.                                                                         
                                                                                                                                
MR. ALPER displayed  slide 35, "North Slope  Life Cycle Modeling,                                                               
750 mmbo HB  247, Fall 2015 FC Prices," and  said it again splits                                                               
the difference.   Similar amounts  of increase in state  value of                                                               
about $900  million and  a similar decrease  in company  value of                                                               
about $900 million, and there  would be the tremendous changes to                                                               
the state's  cash flow between  the big  credit cost and  the $25                                                               
million a year cap.                                                                                                             
                                                                                                                                
2:24:53 PM                                                                                                                    
                                                                                                                                
MR.  ALPER explained  that  slides 36-39  in  many ways  parallel                                                               
slides 32-35,  only now  what is being  contemplated is  that the                                                               
developer/producer in question would be  a large international or                                                               
domestic company with  $10 billion in revenue.  [Under  HB 247] a                                                               
company with  $10 billion  in global revenue  would no  longer be                                                               
able to get  cash from the state, meaning the  company would have                                                               
to  use  all  of  its   credits  and  hold  them  against  future                                                               
liability.  Therefore,  on slides 36-39, the upper  left graph no                                                               
longer has  any red bars below  the line because the  state isn't                                                               
paying any  credits at all.   The presumption is that  a producer                                                               
of this  size has  enough money  on its  balance sheet  to simply                                                               
build the project  and pay the taxes and accept  the credits when                                                               
it  is done,  much like  Alpine, Kuparuk,  and every  other older                                                               
large legacy field  in Alaska that was built  without any credits                                                               
or state  cash participation on the  frontend.  So, that  is what                                                               
the modeling here is contemplating as well.                                                                                     
                                                                                                                                
MR. ALPER addressed  slide 36, "North Slope  Life Cycle Modeling,                                                               
750 mmbo  HB 247,  $40/bbl, Co.  w/ > $10  billion revenue."   He                                                               
noted that at  an oil price of $40 the  state would have positive                                                               
value because it  has no years with negatives; there  would be no                                                               
less-than-zeroes  dragging down  a  present value.   The  state's                                                               
total  production  taxes received  would  be  just less  than  $1                                                               
billion and the  discounted value of that would  be $337 million.                                                               
The total  state take  would be $3.86  billion with  a discounted                                                               
cash flow  of $1.3 billion.   The producer would have  a big loss                                                               
of $3.8 billion, but under the  status quo that number was a very                                                               
large negative as well.  No  one is going to make this investment                                                               
[at a price of $40].                                                                                                            
                                                                                                                                
2:26:49 PM                                                                                                                    
                                                                                                                                
MR. ALPER  moved to slide  37, "North Slope Life  Cycle Modeling,                                                               
750 mmbo  HB 247,  $60/bbl, Co.  w/ >  $10 billion  revenue," and                                                               
said that the  models for the proposed zero  credits barely moved                                                               
the needle as compared to the  models for the proposed cap of $25                                                               
million.   The numbers at stake  here are so large  that whatever                                                               
value the  state is taking from  these companies was done  by the                                                               
time of  cutting it down to  the proposed $25 million  and taking                                                               
that last  $25 million and reducing  the state's cash flow  to $0                                                               
was a fairly insignificant change.   For example, comparing slide                                                               
37 to slide 33 the cash  flow to the producer [under the proposed                                                               
cap  of  $25  million]  would be  a  non-economic  negative  $870                                                               
million, [while  for a company  with over $10 billion  in revenue                                                               
it would  be negative  $974 million],  a relatively  small change                                                               
compared  to the  quite  dramatic change  that  went from  paying                                                               
open-ended tax credits to paying only $25 million a year.                                                                       
                                                                                                                                
MR. ALPER displayed  slide 38, "North Slope  Life Cycle Modeling,                                                               
750 mmbo  HB 247,  $80/bbl, Co.  w/ >  $10 billion  revenue," and                                                               
noted that the field at a  price of $80 would be quite profitable                                                               
to  the  producer at  $1.3  billion  even  with all  the  changes                                                               
contemplated in  the bill.  Pointing  to the spike in  the graphs                                                               
that would  happen to the  state in  about year 11,  he explained                                                               
that the spike  is the 10-year sunset of some  of the earlier tax                                                               
credits  that  are   rolled  forward  and  used   to  offset  tax                                                               
liability.   When these  credits suddenly go  away a  much larger                                                               
production tax  starts to  be paid  beginning in  year 11  or 13.                                                               
Some  of the  earlier tax  credits have  been overwhelmed  by the                                                               
ability  to  use  them  against tax  liability  because  the  tax                                                               
liability only goes so high.                                                                                                    
                                                                                                                                
2:29:12 PM                                                                                                                    
                                                                                                                                
MR. ALPER brought attention to  slide 39, "North Slope Life Cycle                                                               
Modeling, 750  mmbo HB  247, Fall  2015 FC  price, >  $10 billion                                                               
rev."   He said the fall  forecast price is somewhere  in between                                                               
$60  and  $80,   is  mildly  profitable  for   the  producer  and                                                               
reasonably profitable  for the  state, and  has no  negative cash                                                               
flow to the state at the frontend of the project.                                                                               
                                                                                                                                
REPRESENTATIVE SEATON  inquired how  this project would  play out                                                               
if there were  six companies, one them a company  with revenue of                                                               
over $10 billion.                                                                                                               
                                                                                                                                
MR. ALPER  replied by  assuming that each  of the  partners would                                                               
own one-sixth of the project  and spending one-sixth of the money                                                               
up front.   Five of the  companies would be eligible  for the $25                                                               
million  a year,  so the  state would  be paying  out about  $125                                                               
million in  total.  The sixth  company [with over $10  billion in                                                               
revenue] would  be a smaller  version of the modeling  [on slides                                                               
36-39].  The $10 billion [revenue]  cap is not tied to the amount                                                               
of oil  the company produces, it  is tied to the  overall size of                                                               
the company.  He said he  would like to model some scenarios that                                                               
look at  multiple partners, and  his guess is that  the economics                                                               
and  impact of  the  bill would  split  the difference  somewhere                                                               
between the  status quo and the  HB 247 slides.   He advised that                                                               
as HB  247 evolves, it  is important  to create some  language to                                                               
ensure that  any doubling up  is authentic and not  an artificial                                                               
workaround  trying  to  maximize  the  credit  value,  but  being                                                               
several  different   legitimate  companies  that  happen   to  be                                                               
partners in a North Slope project.                                                                                              
                                                                                                                                
2:31:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  referred to slides  22 and 23 and  asked how                                                               
DOR evaluated the  status quo versus HB 247 in  regard to the $25                                                               
million cap  and the potential  for companies to stretch  out the                                                               
activity  to  keep spending  around  the  cap versus  accelerated                                                               
activity that would happen with more generous credits.                                                                          
                                                                                                                                
MR. ALPER  responded that  Mr. Mayer  did a  good job  of talking                                                               
about that  scenario when  he was discussing  a Cook  Inlet field                                                               
that was  market constrained.   Mr. Mayer said that  if companies                                                               
have to  spend all of this  money, but cannot produce  enough gas                                                               
to pay  for it  because they  cannot find a  place to  sell their                                                               
gas,  that is  where their  economics were  the most  challenged.                                                               
But, if  they could sell all  the gas they produce  and drill all                                                               
the wells they  wanted, then the companies were  fine without tax                                                               
credits.  Mr.  Alper said he thinks the same  thing happens here.                                                               
The company is  concerned about the time value of  its money.  If                                                               
the company stretched out the project  for 10 years so as to stay                                                               
within  the tax  credit  cap artificially,  the  company is  also                                                               
delaying the  payback that  it will  get for  selling oil  by the                                                               
number of  years and the  company has  its own discount  rates to                                                               
worry about.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR inquired  whether DOR  could see  a scenario                                                               
where there would be behavior  adjustments for one to three years                                                               
rather than ten years as a way to stretch it out.                                                                               
                                                                                                                                
MR. STICKEL answered that this  was discussed internally when DOR                                                               
was doing  the modeling.   Certainly, if  there is a  $25 million                                                               
limit on  refunded credits, companies  would be expected  to take                                                               
that  into  account  when  planning how  to  make  their  capital                                                               
expenditures.  For purposes of  today's modeling, DOR has assumed                                                               
the same  spend profile on all  of the different scenarios.   So,                                                               
DOR is not assuming that the  companies are making any changes to                                                               
the timing of their spending.                                                                                                   
                                                                                                                                
2:34:02 PM                                                                                                                    
                                                                                                                                
MR.  ALPER showed  slide 4,  "Field  Life Cycle  Modeling:   Cook                                                               
Inlet," and stated that he  has concluded the North Slope portion                                                               
of modeling and will now switch to the Cook Inlet modeling.                                                                     
                                                                                                                                
The committee took an at-ease from 2:34 p.m. to 2:44 p.m.                                                                       
                                                                                                                                
2:44:40 PM                                                                                                                    
                                                                                                                                
MR. ALPER began  the next portion of his  presentation with slide                                                               
41, Cook  Inlet Life Cycle  Modeling Assumptions."   He explained                                                               
that the same  structure of modeling was used for  the Cook Inlet                                                               
as  was  used  for the  North  Slope.    A  giant field  was  not                                                               
envisioned  for Cook  Inlet, he  said, so  the modeling  was only                                                               
done for a field size of 50  MMbo in place.  He further explained                                                               
that in the Cook Inlet a  new producer would be eligible for cash                                                               
refunds.   [The modeling also  applies for an  incumbent producer                                                               
not eligible  for cash  refunds that can  apply credits  to other                                                               
North Slope fields.]   Modeling was for the  four price scenarios                                                               
of $40,  $60, $80,  and fall 2015  forecasted price  [held static                                                               
though  life of  field  and  in real  uninflated  dollars].   The                                                               
modeling  compares  the status  quo  tax  system to  the  changes                                                               
proposed in  HB 247.   Mr. Alper pointed  out that under  HB 247:                                                               
the minimum  tax does  not apply  in Cook Inlet  because it  is a                                                               
North  Slope  only law,  AS  43.55.011(f);  the $25  million  per                                                               
company per year  limit is included; the repeal  of the Qualified                                                               
Capital Expenditure Credit and the  Well Lease Expenditure Credit                                                               
is included;  and the 10-year  limit on the carry-forward  of Net                                                               
Operating Loss (NOL) Credits is included.                                                                                       
                                                                                                                                
MR. ALPER further  pointed out that it is unknown  what the taxes                                                               
are going to  look like for the Cook Inlet  beginning in the year                                                               
2022.   Under current  law is a  tax cap that  has been  in place                                                               
since the PPT  bill in 2006, which severely limits  the amount of                                                               
production tax  that can  be paid  on both  oil and  gas produced                                                               
throughout Cook Inlet,  whether old or new fields.   This tax cap                                                               
sunsets  in 2022.   He  recounted that  in the  first hearing  he                                                               
discussed the underlying tax regime  being very high and a little                                                               
bit unstable.  The modeling here  for Cook Inlet was done for two                                                               
tax regimes:  one where  the caps would continue indefinitely and                                                               
keep  production taxes  at effectively  $0 for  forever; and  one                                                               
where the tax caps go away  completely, which is a 35 percent tax                                                               
without  any  Per-Barrel  Credit  or  any  new  oil  Gross  Value                                                               
Reduction  (GVR)  benefit.   So,  he  explained, the  status  quo                                                               
modeling is for both too high and  too low a tax regime.  At some                                                               
point, he noted,  the Alaska State Legislature will  need to come                                                               
up with a future tax regime for Cook Inlet after the year 2022                                                                  
                                                                                                                                
MR. ALPER  drew attention to an  error on slide 41  in the fourth                                                               
major bullet,  first sub-bullet, which  states there is a  GVR in                                                               
Cook Inlet.  He said that is incorrect  - there is no GVR in Cook                                                               
Inlet.    The GVR  is  a  benefit from  Senate  Bill  21 that  is                                                               
specific to the North Slope.                                                                                                    
                                                                                                                                
2:47:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON asked whether  the modeling uses a price                                                               
per  barrel equivalent  given there  are only  16,000 barrels  of                                                               
oil,  which in  the world  of oil  is a  very small  amount.   He                                                               
recalled  that  the  idea  behind  not  taxing  the  oil  was  to                                                               
incentivize gas production.                                                                                                     
                                                                                                                                
MR. ALPER replied that  to be fair to the Cook  Inlet it did once                                                               
produce 200,000 barrels of oil a  day.  The reason for such small                                                               
numbers now  is that  no new oil  fields have come  on in  a long                                                               
time.   The recent  increases in  production have  primarily been                                                               
from workovers to improve the operation of mature oil fields.                                                                   
                                                                                                                                
2:48:35 PM                                                                                                                    
                                                                                                                                
MR. ALPER  discussed slide  42, "Cook  Inlet Life  Cycle Modeling                                                               
Assumptions, 50 mmbo field assumptions."   He noted that the peak                                                               
oil production  modeled was  for 17,000 barrels  a day,  which is                                                               
what would  be expected  from a  field of 50  Mmbo.   The closest                                                               
analog to this is BlueCrest  Energy, Inc.'s, Cosmopolitan Unit in                                                               
the Homer area.   Development drilling is about to  begin in that                                                               
unit  and will  begin  in the  oil field  first  because that  is                                                               
BlueCrest's first  priority.  BlueCrest  has said it is  going to                                                               
have a similar dollar and number  profile to what is presented on                                                               
slide 42,  which is  peaking out at  15,000-17,000 barrels  a day                                                               
and capital expenditures  of $12 a barrel.   Mr. Alper elaborated                                                               
that the capital costs are a bit  lower in the Cook Inlet than on                                                               
the North Slope primarily because  the logistics are easier.  The                                                               
tax caps were  put in place to incentivize gas,  but in many ways                                                               
they were  there as  a hold harmless.   In 2005  the tax  rate in                                                               
Cook Inlet  really was zero -  the ELF multipliers had  eroded to                                                               
the point  where all the  then-existing oil fields in  Cook Inlet                                                               
were  paying  a   production  tax  of  zero;   all  existing  gas                                                               
production  in Cook  Inlet was  paying around  $.17 per  thousand                                                               
cubic  feet [Mcf],  it  varied from  field to  field.   "So,"  he                                                               
continued, "what  the ELF caps did  was codify and lock  in place                                                               
for 15 years  that which already was at the  moment of transition                                                               
to  PPT and  hold them  harmless from  what was  primarily a  tax                                                               
increase on the North Slope."                                                                                                   
                                                                                                                                
2:50:07 PM                                                                                                                    
                                                                                                                                
MR. ALPER turned to slide  [43], "Cook Inlet Life Cycle Modeling,                                                               
50  mmbo  Status  Quo,  2022  Tax  Caps  expire,  $40/bbl."    He                                                               
explained that  because the tax  caps would expire [in  2022] the                                                               
state would get a production tax  and it would be reasonably high                                                               
at 35  percent of production  tax value/net value.   Referring to                                                               
the upper  left graph, he  said that at a  price of $40  there is                                                               
not a  lot of net  value, so the state  would pay out  about $350                                                               
million  in  tax  credits  to  get the  field  in  this  scenario                                                               
produced.  A  total of $172 million in production  taxes would be                                                               
generated over  the life of the  field, with a cash  flow on just                                                               
the  net production  tax of  about  negative $177  million.   The                                                               
discounted value,  or net  present value, to  the state  would be                                                               
negative $192  million.  Referring  to the upper right  graph for                                                               
total  state take,  he noted  that even  with a  royalty of  12.5                                                               
percent [and  property and corporate  income tax] in  addition to                                                               
the production tax there would  still be a negative present value                                                               
to the state  [negative $59].  There would be  positive cash flow                                                               
for  many years  and $99  million more  would be  coming in  than                                                               
going  out, but  because of  the time  value of  money the  state                                                               
would lose  $59 million in value.   Referring to the  lower right                                                               
graph,  Mr. Alper  said that  under the  status quo  the producer                                                               
would get a large amount of  tax credits in the early years, with                                                               
$90  million  or  more  a  year   for  a  couple  years  of  peak                                                               
construction.   Once  the producer  begins selling  oil it  would                                                               
have a  positive cash  flow and the  producer's cash  net present                                                               
value would  be $3 million.   He pointed  out that $3  million is                                                               
within the  rounding error and  so this  would be a  breakeven or                                                               
worse field for  the producer and therefore not  likely to happen                                                               
at a price of $40.                                                                                                              
                                                                                                                                
2:52:11 PM                                                                                                                    
                                                                                                                                
MR. ALPER reviewed slide 44,  "Cook Inlet Life Cycle Modeling, 50                                                               
mmbo Status Quo,  2022 Tax Caps expire, $60/bbl."   He noted that                                                               
this scenario  is the  same field of  50 MMbo but  at a  price of                                                               
$60, and with  the expectation that the tax caps  would expire so                                                               
that production  tax would begin to  be paid in 2022.   The state                                                               
would  pay out  $337 million  in production  tax credits  against                                                               
$465  million  in   production  tax  paid,  so   a  positive  net                                                               
production tax of  $128 million but with the time  value of money                                                               
it turns  into a  negative $50  million.   However, the  state is                                                               
positive on total  take.  There is enough money  from the state's                                                               
royalties to  make up for the  loss of money from  the production                                                               
tax.  The net state gain  is $579 million with a discounted value                                                               
of  $167  million at  the  6.15  percent  discounted rate.    The                                                               
producer, even though  paying a 35 percent tax rate,  would see a                                                               
positive net  present value  of over $200  million over  the life                                                               
cycle of this field in Cook Inlet.                                                                                              
                                                                                                                                
MR. ALPER  addressed slide 45,  "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo Status  Quo, 2022 Tax Caps expire, $80/bbl."   He said it                                                               
is again the  same field with the same assumptions  but at an oil                                                               
price of  $80.   In this  scenario the  state makes  enough money                                                               
from the  production tax to more  than make up for  the negatives                                                               
of the  credits.  The  positive cash flow  to the state  from the                                                               
production  tax is  $92 million.    Adding in  the royalties  the                                                               
state  would have  almost  $400  million in  value.   The  actual                                                               
positive  cash flow  to  the  state would  be  about $1  billion,                                                               
meaning the  state spent $300  million and received  $1.3 billion                                                               
back, but  some of  that comes  many years  later.   The producer                                                               
would see a  positive cash flow of over $150  million in the peak                                                               
year  and  a  decline  with  the  decline  of  the  field.    The                                                               
producer's  total cash  flow would  be $915  million, which  is a                                                               
discounted cash flow of just less than $400 million.                                                                            
                                                                                                                                
2:54:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON, regarding slide  45, understood that in                                                               
2022 the Qualified Capital Expenditure  (QCE) Credit and the Well                                                               
Lease Expenditure  (WLE) Credit  are gone.   He  inquired whether                                                               
this would be  a laissez faire do-what-you-will  economy or would                                                               
the state be incentivizing.                                                                                                     
                                                                                                                                
MR. ALPER  responded no, this  is the  status quo scenario.   The                                                               
QCE Credit  and the WLE  Credit do  not have sunsets  in existing                                                               
statute.   Thus, the relatively  high credit spend for  the state                                                               
(red bars  in the  upper left  graph) are the  QCE, WLE,  and Net                                                               
Operating Loss credits.   The tax caps will expire  in the status                                                               
quo/do-nothing scenario, so slide 45 is the do-nothing scenario.                                                                
                                                                                                                                
2:55:34 PM                                                                                                                    
                                                                                                                                
MR. ALPER moved to slide 46,  "Cook Inlet Life Cycle Modeling, 50                                                               
mmbo Status Quo,  2022 Tax Caps expire, Fall 2015  FC Price."  He                                                               
said the forecast price is a  number somewhere in between $60 and                                                               
$80.  The production tax credits  to help develop the field would                                                               
be [$335]  million.  To  put that [$335] million  in perspective,                                                               
he noted that the assumption for  this 50 MMbo field is a capital                                                               
expenditure of  $12 [per  barrel], so  the total  company capital                                                               
spend  is about  $600 million  to build  this field.   Thus,  the                                                               
company is  spending $600 million  and getting back  $335 million                                                               
[in credits],  which is a  bit more  than half, and  that roughly                                                               
lines up  with the  expectation that there  is an  operating loss                                                               
credit  and  a  drilling  credit  that  are  generally  stackable                                                               
against each  other.  Today the  state is paying in  the range of                                                               
50-60 percent  on new field  construction in Cook Inlet,  so that                                                               
is assumed to continue with the sunset of the tax caps.                                                                         
                                                                                                                                
MR. ALPER  addressed slide 47,  "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo Status Quo, Tax Caps  extended, $40/bbl."  He pointed out                                                               
that this slide is the same as slide  43 in that it is the status                                                               
quo, but on  slide 43 the producer is paying  tax because the tax                                                               
cap expires.   In  the scenario  on slide  47 the  production tax                                                               
received by the  state is $0 because  it is an oil  field and the                                                               
production tax  rate for the Cook  Inlet tax caps is  zero.  That                                                               
number is not  offset by credits, it  is a flat zero.   Thus, the                                                               
state  pays  $357  million  in  credits and  that  is  the  total                                                               
negative  cash  flow, there  is  no  positive  cash flow  on  the                                                               
production tax  side.   For total state  take, however,  there is                                                               
the  royalty,  but  the royalty  doesn't  adequately  offset  the                                                               
negative  cash flow  for the  credits at  a price  of $40  so the                                                               
state  would  lose $137  million.    Regarding the  producer,  he                                                               
specified  that  this  is  one scenario  where  the  producer  is                                                               
actually profitable  at an  oil price of  $40 simply  because the                                                               
producer is  enjoying the  high credits on  the upfront  side and                                                               
then not paying any production taxes  over the life of the field.                                                               
Thus, the producer's discounted cash flow is $54 million.                                                                       
                                                                                                                                
2:57:59 PM                                                                                                                    
                                                                                                                                
MR. ALPER  turned to slide  48, "Cook Inlet Life  Cycle Modeling,                                                               
50 mmbo  Status Quo, Tax Caps  extended, $60/bbl."  He  said this                                                               
slide is  comparable to slide 44  except slide 48 is  without the                                                               
production tax.   The credits are the same,  roughly $100 million                                                               
a year at peak.   Even with the royalty coming in,  at a price of                                                               
$60 the  state is  still in a  negative cash  flow/negative value                                                               
situation  [negative  $37  million],  while the  producer  has  a                                                               
positive discounted cash flow of $335 million.                                                                                  
                                                                                                                                
MR. ALPER  showed slide 49,  "Cook Inlet Life Cycle  Modeling, 50                                                               
mmbo Status Quo,  Tax Caps extended, $80/bbl,"  relating that per                                                               
the tax  caps the production  tax is zero.   The credit  spend is                                                               
offset by primarily  the royalty revenue, so total  state take is                                                               
$63  million in  discounted cash  flow.   The  producer sees  the                                                               
great bulk of  the value here with a $612  million benefit versus                                                               
the $63 million received by the  state.  Mr. Alper clarified that                                                               
DOR doesn't  consider these to  be realistic scenarios.   He said                                                               
he doesn't think  it is likely that the decision  will be made to                                                               
extend  the  production  tax   caps  forward  indefinitely  while                                                               
keeping the credit  system intact as it is, but  the modeling had                                                               
to  start somewhere.   The  department is  looking at  reality as                                                               
coming in somewhere between slide 49 and slide 45.                                                                              
                                                                                                                                
2:59:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON asked why Mr.  Alper does not foresee an                                                               
extension of the tax caps in 2022.                                                                                              
                                                                                                                                
MR.  ALPER answered  that  he  has no  particular  reason; it  is                                                               
because the state  held producers harmless for 15  years with the                                                               
changes on the  North Slope.  He said he  doesn't know where that                                                               
number came  from, why the decision  was made for 2022.   But, as                                                               
seen  on these  slides, having  a  production tax  of zero  while                                                               
still paying large credits doesn't  work very well for the state.                                                               
It might  get certain work done,  but part of the  whole argument                                                               
for having  a robust tax  credit system  that might in  some ways                                                               
wipe out the state's production tax  revenue is that at least the                                                               
state  gets  the  royalty,  a  fully  legitimate  and  reasonable                                                               
argument to make.   But, if the royalty doesn't  even make up for                                                               
the  amount of  the  production tax,  it seems  that  there is  a                                                               
little inherent  instability in the  system.  That  was mentioned                                                               
by Mr. Mayer - industry sees a big unknown looming in 2022.                                                                     
                                                                                                                                
REPRESENTATIVE  JOSEPHSON inquired  why the  administration would                                                               
not have entertained  reform of the tax structure  in Cook Inlet,                                                               
given the administration  did not intend to amend  Senate Bill 21                                                               
and this is not a Senate Bill 21 item.                                                                                          
                                                                                                                                
MR. ALPER  replied it  is not imminent.   Realistically,  the tax                                                               
reform  in Cook  Inlet has  to happen  between now  and the  2021                                                               
legislative session.   There are  more pressing  concerns related                                                               
to the cash  flow of the tax  credit regime; that is  what HB 247                                                               
was written  to do.   The  administration did  internally discuss                                                               
ways  to do  it  and the  most straight  forward  way, which  was                                                               
actually modeled  by Mr.  Mayer, is  to take  Senate Bill  21 and                                                               
extend  it statewide.    That  is as  plausible  and realistic  a                                                               
scenario as any other and  DOR could bring the committee modeling                                                               
to that  effect.   The choice  was made to  leave the  Cook Inlet                                                               
taxes in  place cleanly and not  mess with that in  the five-year                                                               
gap between now and their expected  sunset, but it could be done.                                                               
It is a  whole different set of things to  propose and deserves a                                                               
robust  process to  even  think  about what  the  Cook Inlet  tax                                                               
should be in the future.                                                                                                        
                                                                                                                                
3:01:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON asked whether  the committee will be getting                                                               
the Cook Inlet gas modeling tonight.                                                                                            
                                                                                                                                
MR.  ALPER responded  that DOR  did not  model a  gas field  from                                                               
scratch from  Cook Inlet for  this presentation.   It gets  a lot                                                               
more  complicated  because of  cost  issues.   He  requested  Ms.                                                               
Cherie Nienhuis to speak to why  the department was unable in the                                                               
short term to come up with Cook Inlet gas field modeling.                                                                       
                                                                                                                                
CHERIE NIENHUIS, Commercial Analyst,  Tax Division, Department of                                                               
Revenue (DOR),  answered that modeling  could be done.   However,                                                               
part of the  issue is the same thing that  Mr. Mayer talked about                                                               
in that  the situation in  Cook Inlet  for gas is  constrained by                                                               
the  market  and part  of  the  difficulty  in modeling  that  is                                                               
knowing exactly how much gas can  be produced over a lifetime and                                                               
what some  of the  costs are for  that gas.   She said  she would                                                               
assume that  depending on where the  gas is located could  make a                                                               
very large difference in terms of  what the cost is to bring that                                                               
gas to market.   It is not that DOR cannot do  it, DOR could try,                                                               
but some of those difficulties  presented themselves when DOR was                                                               
first doing this modeling.                                                                                                      
                                                                                                                                
REPRESENTATIVE OLSON  inquired whether that is  something that is                                                               
needed for making an educated decision on HB 247.                                                                               
                                                                                                                                
MR. ALPER  replied that  Mr. Mayer's scenarios  of one,  two, and                                                               
three were  very compelling to  him, and  what he took  from them                                                               
was that  the gas price in  Cook Inlet is somewhat  regulated and                                                               
relatively high compared  to the oil price right now.   Under the                                                               
expected  prices  under  normal circumstances  a  development  is                                                               
profitable today.  Where the  producer's constraint comes from is                                                               
the inability to  sell it because it is not  a liquid market like                                                               
oil.   For oil, no matter  how much oil is  produced someone will                                                               
be  found to  buy it.    Gas is  stranded within  the Cook  Inlet                                                               
Basin.   The  assumption to  be made  is whether  a producer  can                                                               
drill all the wells that are needed  to develop this field.  If a                                                               
$400 million  platform must  be built and  then the  developer is                                                               
not able to drill the few wells  a year that it will take to make                                                               
the  gas come  at a  worthy pace  to justify  spending that  $400                                                               
million, then  it is going to  be a very difficult  project.  The                                                               
educated guess is whether there is  going to be a market for Cook                                                               
Inlet gas.   If an investment  is made to develop  that much gas,                                                               
there is  the second-order question  of whether there is  a place                                                               
to sell it and that is  a question that DOR cannot easily answer,                                                               
although there  is other legislation  in this building  trying to                                                               
answer that.                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  requested that  there be follow-up  on this                                                               
at the committee's hearing tonight.                                                                                             
                                                                                                                                
[Mr.  Alper continued  his presentation  at the  committee's 6:00                                                               
p.m. meeting on this same day.]                                                                                                 
                                                                                                                                
[HB 247 was held over.]                                                                                                         
                                                                                                                                
3:05:20 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 3:05 p.m.                                                                 

Document Name Date/Time Subjects
HSE RES HB247 DOR Fiscal Details and Scenario Modeling (Part 2a) 2-26-16.pdf HRES 2/27/2016 10:00:00 AM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 ver A.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Sectional Analysis.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - DOR-TAX-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB247 Fiscal Note - FUNDCAP-OIL & GAS TAX CREDIT FUND-2-1-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Oil Credit Bill - Key Features 2-2-16.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf HRES 2/3/2016 1:00:00 PM
HRES 2/5/2016 1:00:00 PM
HRES 2/10/2016 1:00:00 PM
HRES 2/12/2016 1:00:00 PM
HRES 2/22/2016 1:00:00 PM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247
HSE RES Dept. of Revenue - Tax Division glossary of terms HB 247 sectional.docx HRES 3/7/2016 1:00:00 PM
HB 247