Legislature(2017 - 2018)BARNES 124

02/01/2017 06:00 PM House RESOURCES

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06:01:55 PM Start
06:02:33 PM Presentation(s): Update: Status of the Oil and Gas Tax Regime
08:02:38 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time Change --
+ Update: Status of the Oil & Gas Tax Regime in TELECONFERENCED
AK: HB 280 (2010), SB 21 (2013), HB 247 (2016)
Presentation by Pat Galvin, Chief Commercial
Officer, Great Bear Petroleum
Presentation by David Wilkins, President,
Hilcorp AK
Presentation by Benjamin Johnson, President/CEO,
BlueCrest Energy, LLC
Presentation: AK's Oil & Gas Taxation Status
Report - Continued from 1/30/17 - by Ken Alper,
Tax Div. Director, Dept. of Revenue
-- Testimony <Invitation Only> --
**Streamed live on AKL.tv**
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        February 1, 2017                                                                                        
                           6:01 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Andy Josephson, Co-Chair                                                                                         
Representative Geran Tarr, Co-Chair                                                                                             
Representative Dean Westlake, Vice Chair                                                                                        
Representative Harriet Drummond                                                                                                 
Representative Justin Parish                                                                                                    
Representative Chris Birch                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative George Rauscher                                                                                                  
Representative David Talerico                                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Chris Tuck (alternate)                                                                                           
COMMITTEE CALENDAR                                                                                                            
PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                                 
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
PAT GALVIN, Chief Commercial Officer/General Counsel                                                                            
Great Bear Petroleum                                                                                                            
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified during the hearing of the status                                                               
of the oil and tax regime in Alaska, and answered questions.                                                                    
DAVID WILKINS, Senior Vice President                                                                                            
Hilcorp Energy Company                                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified during the hearing of the status                                                               
of the oil and gas tax regime in Alaska, and answered questions.                                                                
BENJAMIN JOHNSON, President/CEO                                                                                                 
BlueCrest Energy, Inc.                                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Testified during  the hearing of  the status                                                            
of the oil and gas tax regime in Alaska, and answered questions.                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Continued a  PowerPoint presentation  begun                                                            
during  the  meeting of  1/30/17  entitled,  "Alaska Oil  and  Gas                                                              
Taxation - Status Report" dated 1/30/17, and answered questions.                                                                
ACTION NARRATIVE                                                                                                              
6:01:55 PM                                                                                                                    
CO-CHAIR   GERAN  TARR   called  the   House  Resources   Standing                                                            
Committee meeting  to order  at 6:01  p.m.  Representatives  Tarr,                                                              
Birch, Drummond,  Johnson, Parish,  Rauscher, Talerico,  Westlake,                                                              
and Josephson were present at the call to order.                                                                                
^PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                                
PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                             
6:02:33 PM                                                                                                                    
CO-CHAIR TARR announced  that the only order of  business would be                                                              
an update on the status of the state's oil and gas tax regime.                                                                  
6:03:01 PM                                                                                                                    
PAT GALVIN,  Chief Commercial Officer  and General  Counsel, Great                                                              
Bear Petroleum,  informed  the committee  Great Bear Petroleum  is                                                              
an  exploration company  on  the North  Slope  that holds  590,000                                                              
acres  of state  oil  and gas  leases  located  directly south  of                                                              
Prudhoe  Bay  and  Kuparuk  River  Unit fields,  but  not  in  the                                                              
Foothills.   Great  Bear has completed  five  years of 3D  seismic                                                              
acquisition  - covering its  approximately  1,000 square  miles of                                                              
leases  - and has  drilled three  wells, two  that targeted  shale                                                              
intervals; however,  due to economics, the company  has turned its                                                              
attention  to conventional  fields.  Great  Bear utilized  seismic                                                              
data  to identify  six  conventional oil  prospects  that will  be                                                              
explored with three  wells and that have the  potential to produce                                                              
billions  of  barrels of  oil.    Further,  Great Bear  has  spent                                                              
almost $250 million  in drilling and seismic acquisition,  and has                                                              
earned about  $140 million  in reimbursable  tax credits,  a large                                                              
portion  of  which  remain  unpaid  by  the  state.    Mr.  Galvin                                                              
provided a  brief personal background.   Turning to the  status of                                                              
Alaska's  oil and  gas tax  system, he  advised that  the oil  tax                                                              
system  is very  complicated because  it has  developed over  time                                                              
and  through a  number of  adjustments, and  cautioned that  under                                                              
these  circumstances  policymakers  may fail  to  see  all of  the                                                              
ramifications of their  actions.  It is very  important to develop                                                              
a set  of principles  or objectives  to follow  in order  to avoid                                                              
unintended  consequences.  One  of the  driving principles  of the                                                              
state's  oil and  gas policy  over the  past 20 years  has been  a                                                              
recognition of  the need for competition  on the North  Slope; new                                                              
companies  as explorers  and developers,  and  then as  producers,                                                              
create  a different  market with  more  activity and  competition.                                                              
He opined  the  aforementioned principle  ensures economic  equity                                                              
between  the incumbents  and  new  companies, so  that  investment                                                              
dollars  hold  the same  economic  value.   Mr.  Galvin  cautioned                                                              
against a  return to a tax  credit system that is  more beneficial                                                              
to an  incumbent.  Firstly,  the existing reimbursable  tax credit                                                              
system  ensures  that  new companies  receive  the  same  economic                                                              
value as  incumbents because  incumbents immediately  deduct their                                                              
expenses and  reduce their taxes,  and reimbursable  cash payments                                                              
are equivalent  to the value of  an incumbent's tax  savings; thus                                                              
if the state  fails to make payments, the investment  value shifts                                                              
back to the incumbent.   Secondly, net operating  loss credits are                                                              
part of  the tax system  that allow a  company with no  revenue to                                                              
deduct  expenditures  from zero  and  convert  them to  a  credit.                                                              
However,  a  current   producer  with  no  revenue   would  deduct                                                              
expenses and  generate net  operating losses.   He clarified  that                                                              
losses  are  not  credits  and  can  be  carried  forward  into  a                                                              
subsequent   year;  the   difference  between   credits  and   net                                                              
operating losses must be recognized and understood.                                                                             
6:14:14 PM                                                                                                                    
REPRESENTATIVE BIRCH  asked what other investments  have been made                                                              
by Great Bear Petroleum.                                                                                                        
MR. GALVIN  said the company's focus  is solely on Alaska  and the                                                              
North Slope;  Great Bear  was created by  investors to  pursue the                                                              
"Shell play"  in 2010.  Subsequently,  the company  partnered with                                                              
a new  managing partner,  and he  provided a  brief background  on                                                              
its new CEO.  All of Great Bear's employees live in Anchorage.                                                                  
REPRESENTATIVE  PARISH surmised  from  Mr.  Galvin's remarks  that                                                              
the  state's  current  tax  structure   puts  larger  firms  at  a                                                              
competitive advantage.                                                                                                          
MR.  GALVIN  clarified  that  he  is worried  that  the  state  is                                                              
"definitely moving in that direction."                                                                                          
REPRESENTATIVE  PARISH  observed  that  it is  imprudent  for  the                                                              
state  to  pay  statutorily  recommended  amounts  of  tax  credit                                                              
liabilities, given the state's financial difficulties.                                                                          
MR. GALVIN remarked:                                                                                                            
     ...  I was  there writing  the statute  that dealt  with                                                                   
     the reimbursable  fund, and that  is not intended  to be                                                                   
     a  statutorily recommended  amount.   That was  intended                                                                   
     to be  strictly a  mechanism to  establish the fund  and                                                                   
     to ensure that  there was a way in which  the fund would                                                                   
     automatically  receive a calculated  amount, but  it was                                                                   
     always  intended, and  was  from day  one  up until  ...                                                                   
     present,  fully funded  to  the expected  amount of  the                                                                   
     reimbursable  credits that  were supplied;  in fact,  it                                                                   
     was written into  the budget that it would  be funded at                                                                   
     whatever  was necessary  to cover the  credits up  until                                                                   
     the  governor vetoed  that  language a  year  ago.   The                                                                   
     legislature  has always funded  it completely,  and that                                                                   
     statute  was   never  intended  to  be  a   limit  or  a                                                                   
     recommended amount ....                                                                                                    
REPRESENTATIVE  PARISH posed the  analogy of  a person  who spends                                                              
$100 at a  market and receives a  coupon worth $60 off  their next                                                              
purchase.   The state has created  an unwise expectation  that its                                                              
coupon  will  be  immediately  repurchased,  which  is  unfair  to                                                              
industry.    He questioned  how  to  restructure the  current  tax                                                              
regime to  level the  playing field, because  now the  majors have                                                              
an unfair advantage.                                                                                                            
6:21:15 PM                                                                                                                    
MR. GALVIN  disagreed with  the foregoing  analogy.  For  example,                                                              
the  state has  advertised that  exploration  companies get  $0.60                                                              
back  for each  $1 spent,  and that  current  producers get  $0.60                                                              
off.  He described  the present situation, and said  the state has                                                              
"changed [its]  mind."  Mr.  Galvin could not  say how to  fix the                                                              
situation; the  question is  not whether the  state can  afford to                                                              
pay, but that  in order for all  to participate, the state  has to                                                              
treat  all  of   the  industry  the  same.     He  questioned  the                                                              
administration's "fix"  by having companies sell their  credits to                                                              
incumbents  who then  pay less,  because  the state  pays out  the                                                              
same  amount:   the fix  is an  attempt to  hide the  cost on  the                                                              
"revenue  side" for  political expediency.   Mr.  Galvin said  the                                                              
state should  not create  a profit  center for  one company  and a                                                              
disincentive for another, and urged for fairness.                                                                               
CO-CHAIR JOSEPHSON  acknowledged  there is -  or is an  appearance                                                              
of -  a "promise"  made by  the state  through the credit  regime.                                                              
He  surmised Mr.  Galvin's  concern  about a  tax  holiday in  the                                                              
initial years after  production begins, "is that  you couldn't get                                                              
to production."                                                                                                                 
MR. GALVIN  said that  exploration is  different from  development                                                              
and production  in that it holds  significant risk that  there may                                                              
be  no   return,  thus   a  company   cannot  borrow   against  an                                                              
exploration play.   In Alaska  there is  a long lead  time between                                                              
exploration  and  production,  so  the  expectation  is  that  the                                                              
return will  be much higher; in  fact, the cost of capital  for an                                                              
exploration  company is  that  a five-  to  ten-year wait  between                                                              
expenditure  and  "a certain  amount  of  cash" means  nothing  in                                                              
value.   For an exploration  company there  is a degrading  of the                                                              
economic value  of a payment  "way out in  the first few  years of                                                              
production ...."                                                                                                                
6:28:00 PM                                                                                                                    
CO-CHAIR  JOSEPHSON questioned  whether the  state and the  people                                                              
of the state are  entitled to a system that has  the Department of                                                              
Natural Resources  (DNR) evaluate the  financing and geology  of a                                                              
project, and  establish a priority  list based on merits,  but not                                                              
on the status of a company.                                                                                                     
MR.  GALVIN  opined  the  public  discussion  that  companies  are                                                              
making money  off of  the tax credit  program without  making good                                                              
economic  decisions is  a  fallacy.   Great  Bear's investors  may                                                              
invest  between   $15  million  and   $25  million  to   drill  an                                                              
exploration  well  in  Alaska; after  credits,  the  cost  remains                                                              
between $9  million and $15 million.   An identical well  in Texas                                                              
would cost  $2 million to $3 million.   With this amount  of money                                                              
at risk,  Great Bear does  not need DNR's  guidance.   He recalled                                                              
that when  the tax credit program  was established it  was debated                                                              
whether state  oversight was needed,  but Mr. Galvin's  experience                                                              
is that the industry is better equipped than DNR to assess risk.                                                                
6:31:59 PM                                                                                                                    
DAVID  WILKINS, Senior  Vice  President,  Hilcorp Energy  Company,                                                              
paraphrased  from   the  following  written   statement  [original                                                              
punctuation provided]:                                                                                                          
     Good evening  Co-Chairs Josephsen  and Tarr, My  name is                                                                   
     Dave  Wilkins  and I'm  the  Senior Vice  President  for                                                                   
     Hilcorp Alaska.  I appreciate  the opportunity  to speak                                                                   
     with the resources  committee today and to  take part in                                                                   
     a discussion  that is very  important to me  personally,                                                                   
     it's  important   to  my  company  and  to   our  State.                                                                   
     Hilcorp,  founded  in  1989,   is  one  of  the  largest                                                                   
     privately-held  oil  and  natural  gas  exploration  and                                                                   
     production    companies    in   the    United    States.                                                                   
     Headquartered in  Houston, TX, Hilcorp has  nearly 1,500                                                                   
     employees  in  multiple operating  areas  including  the                                                                   
     Gulf  Coast   of  Texas  and  Louisiana,   Wyoming,  the                                                                   
     Northeast  United States,  and Alaska's  Cook Inlet  and                                                                   
     North Slope.  Here in Alaska,  Hilcorp operates  in both                                                                   
     Cook Inlet and  on the North Slope. Just  over 500 full-                                                                   
     time  employees support  our  operations  in Alaska  and                                                                   
     I'm   proud  to  say   that  nearly   90%  are   Alaskan                                                                   
     residents.  I'm  also proud  to  say that  we've  worked                                                                   
     very hard  to build efficiencies  over the last  several                                                                   
     months. We were  successful in doing so, and  because of                                                                   
     that I'm  happy to report  Hilcorp has had  zero layoffs                                                                   
     during this  unpredicted drop in oil price.  The support                                                                   
     industry's  willingness  to help  us  weather the  storm                                                                   
     should  not go  unmentioned.  While they  have seen  job                                                                   
     losses   overall,   Hilcorp's  activity,   on   average,                                                                   
     employs   approximately    400   full-time    contractor                                                                   
     positions  and   hundreds  more  part   time  contractor                                                                   
     positions.  Again,   these  are  hard-working   Alaskans                                                                   
     helping  us develop  the  State's resources  safely  and                                                                   
     responsibly  and are  a major part  of Alaska's  overall                                                                   
     economy.  Hilcorp  operates approximately  53,000  gross                                                                   
     barrels  of oil per  day and 150  million cubic  feet of                                                                   
     gross  gas   sales  per   day  from  approximately   500                                                                   
     producing wells,  for a total net production  to Hilcorp                                                                   
     of approximately  57,000 barrels  of oil equivalent  per                                                                   
     day.  Keep in  mind  we did  not  come to  Alaska  until                                                                   
     2012,  so this  represents  a tremendous  investment  in                                                                   
     Alaska  in a very  short time  period. Before  I go  any                                                                   
     further, and  I realize you've  heard this from  earlier                                                                   
     testimony, but  it's worth saying again, from  our point                                                                   
     of view  the system  is working. I'm  proud to  say that                                                                   
     we  had  a role  in  last year's  historic  increase  in                                                                   
     North  Slope  production.  It's  quite  a  feat  for  an                                                                   
     operator  that's  only  been  on the  Slope  since  late                                                                   
     2014. It's  also important to  note that we  have worked                                                                   
     very hard and  invested hundreds of millions  of dollars                                                                   
     in  the  Cook Inlet  basin  as  well. Our  activity  has                                                                   
     increased  both  oil  and   gas  production-  increasing                                                                   
     revenues for  paid to the state and  providing long-term                                                                   
     energy  security for  Alaska's  largest population  hub.                                                                   
     SB21  was in  place when  Hilcorp made  the decision  to                                                                   
     expand our operations  in Alaska to the North  Slope. It                                                                   
     was  a significant  investment  at  a time  when  prices                                                                   
     were  significantly  higher than  they  are today.  It's                                                                   
     worth   mentioning  that   despite   the  economic   and                                                                   
     logistical challenges,  Hilcorp continues to  invest and                                                                   
     works  hard   to  move  the   needle  on  oil   and  gas                                                                   
     production.  We've  made  great progress  in  all  three                                                                   
     producing fields  we operate  on the Slope -  Northstar,                                                                   
     Milne  Point and Endicott.  We continue  to invest  time                                                                   
     and  money in the  Liberty Development.  It's a  project                                                                   
     that could add  an additional 70,000 barrels  a day down                                                                   
     the  pipeline. We  also recently  built  a new  drilling                                                                   
     rig for  those fields.  We call  it the Innovation  rig,                                                                   
     it's a  state of  the art rig  that is already  bringing                                                                   
     more   production  online   at  Milne   Point.  If   the                                                                   
     legislature  decides  to  change tax  policy  again,  we                                                                   
     will  evaluate the economic  impact  to our company  and                                                                   
     adjust our  spending accordingly..  We believe  that the                                                                   
     passage  of SB21  was a  good policy  decision, and  one                                                                   
     that  has yielded  the  results it  intended.  And as  I                                                                   
     watch  the  new  legislative  session  take  shape,  I'm                                                                   
     encouraged  to  hear  that  folks  are  recognizing  the                                                                   
     value  of  stability. Production  from  new  exploration                                                                   
     plays can  take several years  and hundreds  of millions                                                                   
     of  dollars to  bring  online; maintaining  and  growing                                                                   
     production    from   existing/aging   fields    requires                                                                   
     significant  and continual  investments. I  urge you  to                                                                   
     foster  stability let  good policy  continue to  benefit                                                                   
     the state  in the way  it was intended  and as  a result                                                                   
     we will  continue to  invest our  capital in Alaska.  We                                                                   
     want  to keep  Alaskans employed.  We want  to put  more                                                                   
     oil   in  the   pipeline,   and  so   I'll  close   with                                                                   
     this...Policy  matters, the  current system is  working.                                                                   
     Let's continue  to work  together, to provide  stability                                                                   
     not  only for  the  industry but  for  the State.  Thank                                                                   
6:38:55 PM                                                                                                                    
CO-CHAIR TARR inquired as to tax credits for which Hilcorp was                                                                  
eligible in Cook Inlet.                                                                                                         
MR. WILKINS  said Hilcorp  was eligible  for credits and  invested                                                              
its credits  into activity  in Cook  Inlet; five  years ago  there                                                              
was  concern  that  natural  gas   supplies  in  Cook  Inlet  were                                                              
depleted,  and   importing  natural  gas  may   become  necessary.                                                              
Because of [Alaska  oil and gas tax regime policies]  Hilcorp made                                                              
investments and  earned credits by  drilling over 50 wells  in the                                                              
Cook  Inlet basin,  which doubled  oil  production and  stabilized                                                              
the gas  market.   At this  time, Hilcorp  can no longer  exercise                                                              
cashable credits,  but he  opined that the  tax credit  policy was                                                              
successful for Alaska.                                                                                                          
CO-CHAIR  TARR, as  an aside, stated  that if  a company  produces                                                              
over 50,000  barrels of oil per  day it is eligible to  deduct net                                                              
operating  loss  against  tax  liability,  but  not  for  cashable                                                              
REPRESENTATIVE   RAUSCHER  asked  where   the  Hilcorp   rigs  are                                                              
MR.  WILKINS answered  on the  North Slope,  the Kenai  Peninsula,                                                              
and offshore on the King Salmon platform.                                                                                       
6:42:07 PM                                                                                                                    
BENJAMIN   JOHNSON,   President/CEO,    BlueCrest   Energy,   Inc.                                                              
(BlueCrest),   informed  the  committee   that  he   supports  the                                                              
previous testimony  by other members of the industry  and stressed                                                              
the importance  of fostering an  environment that  brings Alaska's                                                              
resources  to development  and  value to  its  residents.   Policy                                                              
matters  here, and  positive  changes to  the  state's tax  system                                                              
have stemmed the  natural decline of oil through  TAPS, fostered a                                                              
rebirth of  oil fields in Cook  Inlet, and ensured that  large new                                                              
fields  such  as BlueCrest  Cosmopolitan  are  under  development.                                                              
Further,  new large  oil  finds have  just  been announced,  which                                                              
will require  time and  a lot  of money  to reach production,  and                                                              
begin a  new era  of productivity  and wealth  for Alaska.   Also,                                                              
BlueCrest is  developing a smaller  field in Cook Inlet  which has                                                              
the  potential to  deliver  oil  and natural  gas  within a  short                                                              
period of time  and for years to  come.  In Cook  Inlet, BlueCrest                                                              
is utilizing  an extended  reach drilling  (ERD) rig  specifically                                                              
designed to  finish a new well  that should be in  production this                                                              
summer,  and a  second new  well may  be producing  by late  fall.                                                              
Mr. Johnson advised  that the foregoing activities  were commenced                                                              
based  on  the  belief  that  the  state  will  stand  behind  its                                                              
commitments  concerning  incentives  to  invest  in  Alaska.    He                                                              
acknowledged that  the incentive plan  may change, but  urged that                                                              
the  state  honor  its  commitments  for  the  amounts  that  have                                                              
already  been  earned.    Mr.  Johnson   provided  brief  personal                                                              
background  information.   Now, as a  manager representing  global                                                              
private investors,  he must  ensure the  highest returns  possible                                                              
from assets;  he restated that the  oil business is  a competition                                                              
for  investment  dollars and  the  money  follows the  promise  of                                                              
highest  return.   In  its  search for  investment  opportunities,                                                              
BlueCrest knew  that Alaska  has resources, but  its high  cost of                                                              
development  did   not  compete  with  the  Lower   48  until  the                                                              
incentives  offered by  the state  were sufficient  to offset  the                                                              
higher cost.   He stressed that BlueCrest would  not be developing                                                              
Cosmopolitan except  for its trust in the state  to follow through                                                              
on  its  promises.   At  the  time BlueCrest  was  evaluating  the                                                              
Cosmopolitan   project,   it   relied    on   the   "one-of-a-kind                                                              
opportunity" announced  by the state and based its  plan on that a                                                              
portion  of the investment  funds  would be covered  by the  state                                                              
tax credit.   BlueCrest  has successfully proved-up  Cosmopolitan,                                                              
completed a  production facility, and  built a large  drilling rig                                                              
which  is drilling  wells.   Furthermore,  BlueCrest has  invested                                                              
almost $400  million in a project  that will require  $500 million                                                              
to reach the point  of positive cash flow, and has  earned the tax                                                              
credits for the  remaining, which should have been  paid.  Without                                                              
confidence that the  tax credits will be paid as  due, in a timely                                                              
manner,  BlueCrest  may lack  the  ability to  continue  unimpeded                                                              
development;  the   results  to   the  state  are   tangible,  and                                                              
BlueCrest may  be forced to slow  or stop drilling new  wells that                                                              
will  provide  large  returns  to  the state.    He  recalled  his                                                              
previous  testimony that  the tax  credits are  a good  investment                                                              
for Alaska  and represent a return  of several hundred  percent on                                                              
the state's tax  credit investment.  In addition  to oil reserves,                                                              
BlueCrest  also has  a large  proven  gas field  offshore in  Cook                                                              
Inlet  that could  provide energy  security  to Southcentral,  but                                                              
has  stopped gas  well  drilling  due to  the  uncertainty of  the                                                              
future of  the tax  credit program.   Mr.  Johnson urged  that the                                                              
committee work with industry to wisely develop Alaska's wealth.                                                                 
6:51:21 PM                                                                                                                    
CO-CHAIR TARR inquired as to which credits benefit BlueCrest.                                                                   
MR.  JOHNSON   responded  that  BlueCrest  utilizes   credits  for                                                              
intangible   and  tangible   well  lease   expenditures  and   net                                                              
operating loss;  House Bill  247 cut the  earned credits  in half,                                                              
and after  calendar year  2017, there will  be no further  credits                                                              
available in Cook Inlet.                                                                                                        
REPRESENTATIVE BIRCH  asked for  the magnitude of  BlueCrest's tax                                                              
credit liability against its total investment in Cook Inlet.                                                                    
MR. JOHNSON  stated that BlueCrest  has invested $400  million and                                                              
has received  $26 million  in total tax  credit payments  to date.                                                              
By the end  of this year,  BlueCrest will have an  additional $100                                                              
million due,  which is  approximately 25-30  percent of  its total                                                              
REPRESENTATIVE BIRCH asked for the range of the ERD rig.                                                                        
MR.  JOHNSON said  30,000 feet  is reasonable;  the well  underway                                                              
will be 22,000 feet.                                                                                                            
REPRESENTATIVE  RAUSCHER questioned  how far  the rig could  reach                                                              
MR. JOHNSON explained  that the horizontal reach is  a function of                                                              
depth; for example,  the wells underway are about  three miles out                                                              
and about one and one-half miles deep.                                                                                          
REPRESENTATIVE  PARISH  inquired   as  to  BlueCrest's  experience                                                              
selling tax credit certificates.                                                                                                
MR.  JOHNSON answered  that BlueCrest  has  no experience  selling                                                              
tax credit certificates to a major company.                                                                                     
REPRESENTATIVE  PARISH asked  for  BlueCrest's  average return  on                                                              
equity, exclusive of Cook Inlet exploration.                                                                                    
MR. JOHNSON  advised that  BlueCrest is  entirely focused  on Cook                                                              
Inlet, and has no return on equity for investors so far.                                                                        
REPRESENTATIVE RAUSCHER  asked for the cost of drilling  a well in                                                              
Cook Inlet.                                                                                                                     
MR. JOHNSON  stated  that an offshore  well drilled  in 2013  cost                                                              
$45 million; the  ERD wells underway cost between  $40 million and                                                              
$45 million  each.  Compared to  wells in the Gulf of  Mexico, the                                                              
same well in Alaska is three times more expensive.                                                                              
6:59:04 PM                                                                                                                    
KEN  ALPER,   Director,  Tax  Division,  Department   of  Revenue,                                                              
continued  an   update  begun  during   the  meeting   of  1/30/17                                                              
entitled,  "Alaska Oil  and Gas  Taxation -  Status Report"  dated                                                              
1/30/17.    Mr. Alper  acknowledged  that  the industry  was  very                                                              
unhappy with  [Alaska's Clear  and Equitable  Share (ACES)  passed                                                              
in the 25th Alaska  State Legislature] tax system  because of high                                                              
marginal  rates,  especially  at  high prices,  and  the  windfall                                                              
profits tax; however,  industry strongly supported  Senate Bill 21                                                              
because  of   its  effects  at   different  price  points   and  a                                                              
perception  that   it  more  strongly   favors  investment.     He                                                              
explained  that  with  multi-year   developments  it  is  hard  to                                                              
determine  at  what  point  a  tax   change  impacts  a  decision,                                                              
investment,  or production.   Mr. Alper  opined large  investments                                                              
were driven  by high  prices and  the state's  generous system  of                                                              
cashable  credits  that was  financed  by state  surplus  revenue;                                                              
neither of  which were  tied to  the tax system  in place  at that                                                              
time.   The  ACES  tax system  incentivized  capital spending  and                                                              
Senate  Bill 21  [passed  in the  28th Alaska  State  Legislature]                                                              
incentivized  the production  of lower  cost oil  (slide 42).   He                                                              
provided  a   "looking  backwards"   graph  that  estimated   what                                                              
production  tax would  have been  under  the tax  regimes of  [the                                                              
Petroleum Production  Tax (PPT), passed  in the 24th  Alaska State                                                              
Legislature],  ACES,  and  Senate Bill  21  for  the years  FY  07                                                              
through  FY 18.   At  high prices  Senate Bill  21 generates  less                                                              
revenue,  although he  questioned  whether the  foregoing is  "the                                                              
essential  issue before  the legislature  right  now ...."  (slide                                                              
7:03:36 PM                                                                                                                    
REPRESENTATIVE  BIRCH  characterized tax  credits  not  as a  gift                                                              
but,  in a  manner  similar to  a  child care  tax  credit, as  an                                                              
offset  on one's  taxes.   He  asked whether  tax  credits are  an                                                              
integral part of what the government levies in its tax program.                                                                 
MR.  ALPER  explained  tax  credits   that  are  deducted  against                                                              
liability are an  integral part of the tax system  and are related                                                              
to the  tax rate  set by  legislation; however,  cash credits  are                                                              
unique to  Alaska and  no matter their  definition, they  are part                                                              
of  an  incentive  program  to encourage  desired  behavior.    He                                                              
advised at this  point, the cost benefit of the  incentive program                                                              
in  the future  must  be evaluated.   In  response  to an  earlier                                                              
question, he directed  attention to slide 43 and  pointed out that                                                              
in FY  16 and FY  17 projected revenue  from ACES is  zero because                                                              
the 20 percent capital  credit not bound by the  minimum tax floor                                                              
would have offset any taxes due from producers.                                                                                 
CO-CHAIR JOSEPHSON  referred to modeling for ACES  and Senate Bill                                                              
21 and  opined the legislature  "did not adequately  consider this                                                              
sort of marketplace ...."                                                                                                       
MR. ALPER recalled  the Senate Bill 21 model was  bound by an $80-                                                              
$120  per barrel  of oil  expected price  range.   The ACES  model                                                              
looked at the $40-$80  per barrel of oil price  range; however, in                                                              
2007, spending was  about $20 per barrel and now  it is $40, which                                                              
creates  a big  difference  when calculating  a  net profits  tax,                                                              
thus ACES did not consider very low prices either.  He said:                                                                    
      ...  the minimum  tax was  a stopgap,  something of  an                                                                   
     emergency  tax.  The  fact that  we've been  exclusively                                                                   
     living under  it for the last  three years and  ... it's                                                                   
     our primary  production tax for the  foreseeable future,                                                                   
     is probably outside the expectations of the bill.                                                                          
7:08:04 PM                                                                                                                    
REPRESENTATIVE  PARISH returned  attention  to slide  43 and  said                                                              
all  things being  equal, the  state  would be  about $10  billion                                                              
poorer if under the Senate Bill 21 tax regime since FY 07.                                                                      
MR. ALPER  pointed out that other  factors, such as  budgeting and                                                              
savings,   impact  the  estimated   revenue.     In  response   to                                                              
Representative Parish's repeated question, he said yes.                                                                         
REPRESENTATIVE TALERICO remarked:                                                                                               
     ...  we talk  about the  $10 billion,  that's under  the                                                                   
     assumption that  capital spending and investment  in all                                                                   
     of our  oil industry  would have  remained at the  level                                                                   
     it did, had  the tax regime stayed there  under ACES and                                                                   
     the   capital  was   not  actually   available  to   the                                                                   
     companies  to invest.   So  I think  an assumption  that                                                                   
     that would  actually be available  might, might  be kind                                                                   
     of tough for us to [arrive] at.                                                                                            
MR. ALPER  agreed.  In  response to Co-Chair  Tarr, he said  for a                                                              
period in  FY 08, oil  prices were over  $130 per barrel  thus the                                                              
state received  the ACES  greater-than-50-percent  tax rate  for a                                                              
period of  two months; further,  the progressive tax  rate changed                                                              
every month  based on  average profits,  which capitalized  on the                                                              
industry's windfall.                                                                                                            
REPRESENTATIVE  BIRCH   recalled  the  legislature   significantly                                                              
increased  the  amount  originally  proposed  by  former  Governor                                                              
Palin in ACES legislation.                                                                                                      
7:12:33 PM                                                                                                                    
MR. ALPER said yes,  and added that the tax base  rate of ACES was                                                              
25  percent, which  was an  increase  from PPT;  in addition,  the                                                              
slope of  progressivity as  profits go up  was increased  from 0.2                                                              
percent per  dollar to 0.4 percent  per dollar.  He  stressed that                                                              
the original  bill also provided for  a 10 percent minimum  tax on                                                              
certain  large legacy  fields, which  was removed  in response  to                                                              
industry objections,  thus the higher percent "was  a tradeoff for                                                              
the other."                                                                                                                     
REPRESENTATIVE BIRCH  observed that Senate Bill 21  incorporates a                                                              
floor of 4 percent.                                                                                                             
MR.  ALPER advised  the 4  percent floor  remains unchanged  since                                                              
PPT; however, the  degree to which certain credits  can offset the                                                              
minimum tax  have changed.   For example,  in ACES the  20 percent                                                              
capital  credit could  lower beneath  the floor,  but Senate  Bill                                                              
21,  with the  exception  of  certain  factors, holds  the  legacy                                                              
fields to 4 percent of the gross value of oil.                                                                                  
REPRESENTATIVE BIRCH  observed Senate Bill  21 is "saving  the day                                                              
for us here ... under the current price regime."                                                                                
MR. ALPER  questioned whether  Senate Bill  21 or ACES  adequately                                                              
determine state revenue in a very low-price environment.                                                                        
CO-CHAIR TARR discussed the three ways of "hardening the floor"                                                                 
included in Senate Bill 21.                                                                                                     
MR. ALPER  explained that  credits that  can be  used to  go below                                                              
the  minimum tax  would  be  any refundable  exploration  credits,                                                              
which  have now expired;  the small  producer  credit; the  $5 per                                                              
barrel credit for  new, gross value reduction (GVR)  eligible oil;                                                              
and any  net operating  loss (NOL)  credits.   He elaborated  that                                                              
although  the  exploration  credits,  other  than  for  [non-North                                                              
Slope, non-Cook Inlet  areas of the state known  as Middle Earth],                                                              
have  expired,  and  the small  producer  credit  eligibility  has                                                              
expired, those  that have qualified  can receive credits  for nine                                                              
consecutive  years.   Mr.  Alper then  presented  two graphs  that                                                              
compared ACES  and Senate Bill 21  in a range of oil  prices based                                                              
on  the Department  of Revenue  (DOR) fall  2016 forecast  models,                                                              
not  including  and  including   the  impact  of  repurchased  tax                                                              
credits (slides 44 and 45).                                                                                                     
CO-CHAIR TARR  referred to  the representation  of the  per barrel                                                              
credit on slides 44 and 45.                                                                                                     
7:19:44 PM                                                                                                                    
MR.  ALPER noted  different proposed  versions of  Senate Bill  21                                                              
called for a flat  $5 per barrel credit or one  based on a sliding                                                              
scale.   The sliding  scale found  in the  final version,  creates                                                              
"odd  marginal tax  impacts as  one gains  or loses  right at  the                                                              
margin ...  [thus] the oddity  of the stair  step."   He continued                                                              
to  "looming  problems" (slide  46).    One  issue is  not  enough                                                              
revenue now  and possibly in the  future.  The state's  net profit                                                              
system  is not  a pure  net profit  system  but is  a hybrid;  for                                                              
example,  income tax is  based on  profit and  royalty is  tied to                                                              
gross.  He  provided details on  how the production tax  system is                                                              
also  a  hybrid (slide  47).    He expressed  DOR's  concern  that                                                              
cashable  credits  of reasonable  amounts  that were  intended  to                                                              
support  small  exploration  companies  and  diversify  the  North                                                              
Slope,  are being earned  by large  discoveries  and will  lead to                                                              
huge  payments  the state  cannot  afford.   Furthermore,  if  the                                                              
credits are  not paid, the  situation is detrimental  to companies                                                              
that have made investments.                                                                                                     
MR.  ALPER, in  response  to  Co-Chair Josephson,  clarified  that                                                              
state revenue  from oil  and gas  and restricted and  unrestricted                                                              
funds in  FY 16 was  approximately $1.6  billion, and  is forecast                                                              
at $1.4 billion in FY 17.                                                                                                       
7:24:23 PM                                                                                                                    
CO-CHAIR  JOSEPHSON acknowledged  that the  state will recoup  its                                                              
investment over  the life of a  successful oil field,  however, he                                                              
questioned  why  the  industry  would not  see  that  the  current                                                              
outlay  for a  large  project is  not  possible,  even though  the                                                              
state may seek to do so.                                                                                                        
MR.  ALPER,  presuming that  Caelus'  model  is accurate  and  its                                                              
field  is successful,  said  a tax  credit  of $3.5  billion is  a                                                              
reasonable  contribution   from  the  state:     the  foundational                                                              
difference  is the  state  offsetting  Caelus' future  taxes  when                                                              
due,  versus writing  Caelus a  check  sometime in  the next  five                                                              
CO-CHAIR  JOSEPHSON referred  to other  testimony that  production                                                              
will not happen without state assistance now.                                                                                   
MR.  ALPER agreed  that if  the state  goes too  far reducing  tax                                                              
credits, it  will "tip that playing  field."  He pointed  out that                                                              
an existing  producer, such  as ConocoPhillips  Alaska, Inc.,  can                                                              
develop a  large, new find  under an economic structure  different                                                              
from that  of a  small explorer  because it  is already  producing                                                              
oil in  Alaska and  has profits.   This  is possible because,  for                                                              
tax  purposes, the  North  Slope  is a  single  entity, and  every                                                              
company  has a  unified  tax return  for all  of  its North  Slope                                                              
operations  thus spending money  on development  can be  offset by                                                              
credits  against  taxes  on  its   profit;  however,  Caelus,  for                                                              
example,  is in  a  different  situation, and  large  expenditures                                                              
could force  it to sell its assets  to a major producer,  which is                                                              
counter to the  legislature's and the administration's  efforts to                                                              
diversify the North Slope and create competition.                                                                               
REPRESENTATIVE  BIRCH  referred to  a  previous chart  [chart  not                                                              
identified]  which  indicated that  the  state receives  about  $1                                                              
billion  per  year when  oil  is  priced  at  $30 per  barrel;  he                                                              
concluded the state's interest is best served by producing oil.                                                                 
MR.  ALPER agreed  that  the intent  of Senate  Bill  21 was  that                                                              
total government  take should remain relatively the  same across a                                                              
range of oil prices.   However, a portion of the  state's share is                                                              
royalty, and  royalty is a fixed  number:  12.5 percent  of gross.                                                              
He gave an example  of gross at 30, and 12 percent  of that is $4,                                                              
and the net profit is $1, so that is a 400 percent tax.                                                                         
7:31:13 PM                                                                                                                    
REPRESENTATIVE  TALERICO expressed  his  understanding that  there                                                              
is a limit on  refundable credits per company, at  $70 million per                                                              
year, with the intent to allow the state to defer cash payments.                                                                
MR. ALPER said yes,  a provision of House Bill 247  set a limit of                                                              
$70 million  per company.   However,  if a  company has  partners,                                                              
the limit  is multiplied by the  number of its partners,  thus the                                                              
maximum remains unknown.                                                                                                        
CO-CHAIR JOSEPHSON  added that  the $70  million limit  is applied                                                              
per year and overages will accrue for a future liability.                                                                       
MR.  ALPER agreed  that  there is  no  cap on  the  amount of  tax                                                              
credits that  a company earns  in one year; hopefully,  production                                                              
will ensue quickly, followed by a tax liability.                                                                                
CO-CHAIR   TARR   questioned  whether   total   government   share                                                              
typically includes  the royalty  share, noting  that in  the Lower                                                              
48,  royalty  -   the  ownership  share  -  is   paid  to  private                                                              
MR. ALPER  explained that  DOR analyses  of total government  take                                                              
include royalty;  in fact,  in an  "apples to apples"  comparison,                                                              
one should look at the total non-producer share.                                                                                
CO-CHAIR  TARR questioned  whether  corporate income  tax paid  to                                                              
the state is deductible against federal corporate income tax.                                                                   
7:36:33 PM                                                                                                                    
MR. ALPER explained  that production tax is deductible  from state                                                              
corporate  income tax,  and  what remains  is  subject to  federal                                                              
income  tax;  net  loss  credits  on federal  income  tax  can  be                                                              
carried forward to  future years.  He returned  attention to slide                                                              
47, and  informed the  committee the  floor in  Senate Bill  21 is                                                              
permeable to  potential loss  credits, and  could reduce  taxes to                                                              
zero if  the price of  oil is at $40  per barrel.   "Hardening the                                                              
floor" refers  to making the minimum  tax "solid" so  that credits                                                              
can't be used,  but that raises  the equity issue.  He  opined the                                                              
minimum  tax is  broader than  originally intended;  in fact,  the                                                              
minimum tax  is in effect up to  $80 per barrel because  of higher                                                              
per barrel  spending and  the $8 per  barrel credit  which impacts                                                              
the minimum.  Also,  under the Senate Bill 21 system,  there is no                                                              
mechanism to  replenish the state's  savings if there is  a return                                                              
to high  oil prices.   Further, a net  profits tax system  is more                                                              
complex to administer (slide 47).                                                                                               
REPRESENTATIVE  PARISH  questioned  whether  a  gross  tax  system                                                              
would  level  the  playing  field  between  newcomers  and  larger                                                              
MR.  ALPER said  a pure  gross  system would.    He recalled  that                                                              
during  the construction  of Prudhoe  Bay, the  producers spent  a                                                              
lot  of money  without credits  and made  money once  the oil  was                                                              
flowing.     However,  a   gross  tax   does  not  encourage   the                                                              
development  of challenged  resource  fields, and  pays the  state                                                              
less when oil prices  are high.  He concluded that  a gross system                                                              
is  a  simple way  to  "fix  the  equity question."    In  further                                                              
response to  Representative Parish,  he suggested other  means are                                                              
to lower  the operating  loss credit,  or set  time limits  on the                                                              
MR. ALPER  returned  to the presentation  and  said in July  2016,                                                              
during a  special session to address  a fiscal plan,  the governor                                                              
introduced House  Bill/Senate Bill 5005 that eliminated  all North                                                              
Slope net operating loss credits (slide 48).                                                                                    
7:43:37 PM                                                                                                                    
REPRESENTATIVE RAUSCHER  asked whether the  aforementioned changes                                                              
were modeled.                                                                                                                   
7:43:44 PM                                                                                                                    
MR. ALPER stated  that a fiscal note was introduced  with the bill                                                              
and  initial modeling  was presented  at  its first  hearing.   In                                                              
further response  to Representative Rauscher, he  advised the bill                                                              
would have negatively  affected some projects, as  a company would                                                              
have had to make  back all of its investment  from future profits.                                                              
He  then described  "Fiscal  Note" modeling  DOR  will provide  to                                                              
explain the  line item  impacts of any  of the various  components                                                              
incorporated  in proposed  legislation  (slide 50).   He  provided                                                              
details  of "Life  Cycle" modeling  that will  reveal the  various                                                              
impacts  of proposed  legislation  to a  specific  project or  oil                                                              
field  (slide  51).   Lastly,  he  described "Long  term  scenario                                                              
modeling" which  revealed the  impacts of hypothetical  production                                                              
from  the Arctic  National Wildlife  Refuge  (ANWR) fields  (slide                                                              
REPRESENTATIVE   BIRCH   asked   whether   there  is   a   private                                                              
[land]owner component in ANWR.                                                                                                  
MR.  ALPER responded  ANWR is  considered  federal land,  however,                                                              
the  federal government  would  get 10  percent  royalty, and  the                                                              
state would  get 90 percent royalty  and production tax.   Turning                                                              
to  the  topic of  tax  audits,  he advised  that  production  tax                                                              
audits of oil  and gas companies are complex  tasks involving very                                                              
large companies.   Tax  audit assessments, like  the results  of a                                                              
legal  action,  are  Constitutional  Budget  Reserve  Fund  (CBRF)                                                              
revenue.   Currently, the  statute of  limitations for  production                                                              
tax audits  is six years,  and Tax Division  staff has  adapted to                                                              
regulations for  ACES, new software,  and increases in  tax credit                                                              
applications (slide  54).  The 2007  audit was not  released until                                                              
2014,  and the  total assessments  for 2007  were $387.3  million.                                                              
The 2008  audit was completed in  2015, and the  total assessments                                                              
were $264.4  million.   He explained that  Senate Bill  21 reduced                                                              
the  interest  rate  on assessments  from  11  percent  compounded                                                              
quarterly to 3 percent  or 3.5 percent simple interest.   In 2009,                                                              
the total  assessments were $132  million.  Most of  the foregoing                                                              
assessments  have  been paid,  settled,  or appealed  (slide  55).                                                              
Upcoming  audits for  2010 should  be done in  February 2017,  and                                                              
2011 audits  should be done  in spring,  2017.  Mr.  Alper pointed                                                              
out  that audits  for 2010-2013  are very  important because  they                                                              
cover years of high revenue and high progressivity (slide 56).                                                                  
7:56:15 PM                                                                                                                    
REPRESENTATIVE  PARISH questioned  whether from  2007 to  2009 the                                                              
state was underpaid in taxes in the amount of over $300 million.                                                                
MR.  ALPER acknowledged  the state  claimed  underpayment of  tax,                                                              
but   the   appeals   process   gleans   follow-up   and   missing                                                              
information;  by a  multi-stage process,  adjustments are  usually                                                              
made and agreement is found "somewhere in the middle."                                                                          
REPRESENTATIVE  BIRCH observed  that the  state has well  exceeded                                                              
former  Governor  Jay Hammond's  admonition  of  "one-third,  one-                                                              
third, one-third," and reached 40-50 percent.                                                                                   
MR. ALPER  offered to  provide further  information on  shared net                                                              
profits,  gross  value at  the  point  of production  of  wellhead                                                              
value, and the percentage  of market value.  He  agreed that total                                                              
government take at this time is in the "mid-60s."                                                                               
CO-CHAIR  JOSEPHSON  relayed  that  industry  does  not  have  the                                                              
resources to  pay 35 percent, not  including royalty, at  this oil                                                              
MR.  ALPER directed  attention to  slide 19  and said  in a  gross                                                              
system it is  easier to predict the percentage  of revenue because                                                              
the tax  stays nearly  the same.   These  are questions  of public                                                              
policy  and how  much  the legislature  is  willing  to accept  in                                                              
matters of  risk, liquidity, and  volatility from the oil  and gas                                                              
tax system.                                                                                                                     
REPRESENTATIVE TALERICO  pointed out  that a statement  related to                                                              
selling   credits  at  $0.70   on  the   dollar  was   erroneously                                                              
attributed to a previous testifier.                                                                                             
MR. ALPER clarified  that DOR is aware when credits  change hands,                                                              
but  is unaware  of their  value.   In 2006,  there was  anecdotal                                                              
information that PPT credits were selling in a 70 percent range.                                                                
REPRESENTATIVE  TALERICO  restated  that  the  previous  testifier                                                              
provided an example.                                                                                                            
8:02:38 PM                                                                                                                    
There being  no further business  before the committee,  the House                                                              
Resources Standing Committee meeting was adjourned at 8:02 p.m.                                                                 

Document Name Date/Time Subjects
DOR Present Oil Tax Status Report HRES 1-30-17 final ka.pdf HRES 2/1/2017 6:00:00 PM
HRES_Hilcorp_1 FEB 2017 FINAL.pdf HRES 2/1/2017 6:00:00 PM