Legislature(2015 - 2016)SENATE FINANCE 532

04/14/2016 05:00 PM FINANCE

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Audio Topic
05:34:08 PM Start
05:35:01 PM SB130
06:56:14 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 130 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
<Pending Referral>
+ Department of Revenue TELECONFERENCED
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      April 14, 2016                                                                                            
                         5:34 p.m.                                                                                              
                                                                                                                                
5:34:08 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair MacKinnon called the Senate Finance Committee                                                                          
meeting to order at 5:34 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Peter Micciche, Vice-Chair                                                                                              
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Ken Alper, Director, Tax Division, Department of Revenue;                                                                       
Randall Hoffbeck, Commissioner, Department of Revenue;                                                                          
Senator Bert Stedman.                                                                                                           
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 130    TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                    
                                                                                                                                
          SB 130 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HB 247    TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                    
                                                                                                                                
          HB 247 was SCHEDULED but not HEARD.                                                                                   
                                                                                                                                
SENATE BILL NO. 130                                                                                                           
                                                                                                                                
     "An  Act relating  to  confidential information  status                                                                    
     and  public   record  status  of  information   in  the                                                                    
     possession of  the Department  of Revenue;  relating to                                                                    
     interest  applicable  to  delinquent tax;  relating  to                                                                    
     disclosure  of  oil  and   gas  production  tax  credit                                                                    
     information; relating  to refunds  for the  gas storage                                                                    
     facility tax credit, the  liquefied natural gas storage                                                                    
     facility  tax credit,  and the  qualified in-state  oil                                                                    
     refinery   infrastructure   expenditures  tax   credit;                                                                    
     relating to  the minimum  tax for  certain oil  and gas                                                                    
     production;  relating to  the  minimum tax  calculation                                                                    
     for  monthly  installment  payments of  estimated  tax;                                                                    
     relating  to interest  on monthly  installment payments                                                                    
     of  estimated  tax;  relating to  limitations  for  the                                                                    
     application  of tax  credits; relating  to oil  and gas                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures;     relating    to     limitations    for                                                                    
     nontransferable  oil  and  gas production  tax  credits                                                                    
     based on oil production  and the alternative tax credit                                                                    
     for oil  and gas  exploration; relating to  purchase of                                                                    
     tax  credit  certificates  from the  oil  and  gas  tax                                                                    
     credit fund; relating  to a minimum for  gross value at                                                                    
     the   point   of    production;   relating   to   lease                                                                    
     expenditures  and tax  credits for  municipal entities;                                                                    
     adding    a   definition    for   "qualified    capital                                                                    
     expenditure";  adding  a  definition  for  "outstanding                                                                    
     liability  to   the  state";  repealing  oil   and  gas                                                                    
     exploration    incentive    credits;   repealing    the                                                                    
     limitation on  the application  of credits  against tax                                                                    
     liability  for   lease  expenditures   incurred  before                                                                    
     January 1,  2011; repealing  provisions related  to the                                                                    
     monthly installment payments for  estimated tax for oil                                                                    
     and gas produced before January  1, 2014; repealing the                                                                    
     oil  and  gas  production   tax  credit  for  qualified                                                                    
     capital  expenditures  and certain  well  expenditures;                                                                    
     repealing   the    calculation   for    certain   lease                                                                    
     expenditures applicable before  January 1, 2011; making                                                                    
     conforming amendments;  and providing for  an effective                                                                    
     date."                                                                                                                     
                                                                                                                                
5:35:01 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
noted the  two documents, "Oil  and Gas Tax Credit  Reform -                                                                    
CSSB 130(RES)"  (copy on file), and  "Sectional Analysis, CS                                                                    
SB 130(RES)\H:  Oil and Gas  Tax Credit Reform  Bill, April,                                                                    
13, 2016".                                                                                                                      
He turned to  Slide 3 of the presentation, "Oil  and Gas Tax                                                                    
Credit Reform - CSSB 130(RES) ":                                                                                                
                                                                                                                                
     FY 2007 thru 2015, $7.4 Billion in Credits                                                                               
     North Slope                                                                                                              
             o $4.3 billion credits against tax liability                                                                       
                  ƒMajor producers; mostly 20% capital                                                                         
                    credit in ACES and per-taxable-barrel                                                                       
                    credit in SB21                                                                                              
             o $2.1 billion refunded credits                                                                                    
                  ƒNew producers and explorers developing                                                                      
                    new fields                                                                                                  
     Non-North Slope (Cook Inlet & Middle Earth)                                                                              
             o $100 million credits against tax liability                                                                       
                  ƒAnother $500 to $800 million Cook Inlet                                                                     
                    tax reductions                                                                                              
                  ƒ(through 2013) due to the tax cap still                                                                     
                    tied to ELF                                                                                                 
             o $900 million refunded credits (most since                                                                        
               2013)                                                                                                            
                                                                                                                                
Mr.  Alper turned  to Slide  four,  which detailed  historic                                                                    
credits  compared to  revenue  during the  period  of FY  07                                                                    
through FY 15:                                                                                                                  
                                                                                                                                
      Total Petroleum Revenue FY 2007 thru 2015                                                                               
     North Slope                                                                                                              
     Production Tax - $32.8 billion                                                                                             
     Royalties (unrestricted) - $15.0 billion                                                                                   
     Other GF Revenue - $4.7 billion                                                                                            
     Restricted Revenue - $8.7 billion                                                                                        
     Total - $61.1 billion                                                                                                      
                                                                                                                                
     Non-North Slope (Cook Inlet & Middle Earth)                                                                              
     Production Tax - <$0.1 billion                                                                                             
     Royalties (unrestricted) - $0.5 billion                                                                                    
     Other GF Revenue - $0.3 billion                                                                                            
     Restricted Revenue - $0.2 billion                                                                                        
     Total - $1.0 billion                                                                                                       
                                                                                                                                
5:37:14 PM                                                                                                                    
                                                                                                                                
Mr. Alper noted  that the $2.1 billion had  been refunded to                                                                    
producers  in the  form of  tax  credits; additionally,  the                                                                    
$4.3 billion  received by  the major  producers had  been in                                                                    
addition to the $61.1 billion  as reflected on the slide. He                                                                    
highlighted that the  production tax in Cook  Inlet had been                                                                    
di minims over the 9 fiscal years.                                                                                              
                                                                                                                                
5:38:07 PM                                                                                                                    
                                                                                                                                
Mr.  Alper showed  Slide 5,  "Historic  Credits compared  to                                                                    
Revenue", which  offered a data  set between 2007  and 2015.                                                                    
He  related  that  the  Cook  Inlet  numbers  had  increased                                                                    
dramatically after  the passage  of the Cook  Inlet Recovery                                                                    
Act, with the biggest numbers occurring  in FY 14 and FY 15,                                                                    
and continuing into FY 16.                                                                                                      
                                                                                                                                
5:38:45 PM                                                                                                                    
                                                                                                                                
Mr. Alper  discussed Slide 6,  "Historic and  Forecasted O&G                                                                    
Revenue and  Tax Credits."  He noted  that the  slide showed                                                                    
the FY 15, FY 16, and  FY 17 data set for total unrestricted                                                                    
petroleum  revenue.  The  left  side of  the  slide  offered                                                                    
historical  and forecasted  numbers  for petroleum  revenues                                                                    
before and net of returnable  credits. The right side of the                                                                    
slide included unrestricted  petroleum revenue after credits                                                                    
used against  tax liability and  a blue line  indicating net                                                                    
operating loss  credits (NOL) end-of-year balance.  He noted                                                                    
that   as  revenue   had  declined   the  system   had  been                                                                    
overwhelmed  by  credits, which  meant  that  the state  was                                                                    
paying a lot  out in credits without the  revenue to support                                                                    
the  payments.   He  added   that  the   forecasted  revenue                                                                    
reflected weak  general fund numbers.  He said that  the NOL                                                                    
credits worked as a sort  of bank account for companies; the                                                                    
state would have to pay back  the credits as prices went up.                                                                    
He stated  that although the  price of oil was  projected to                                                                    
rise  within  the  next  five years,  the  state  would  not                                                                    
experience any  boost in production tax  revenue because the                                                                    
state would be buying down those NOL credits.                                                                                   
                                                                                                                                
5:40:49 PM                                                                                                                    
                                                                                                                                
Senator Bishop asked whether the  reigning in of spending by                                                                    
companies would affect future NOLs.                                                                                             
                                                                                                                                
Mr. Alper  replied that the  numbers were tied to  the price                                                                    
of oil. He said that  anything that companies did to ratchet                                                                    
back  capital spending  would lower  their break-even  point                                                                    
and eliminate the NOLs.                                                                                                         
                                                                                                                                
5:42:34 PM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche probed the cause  of the net negative in                                                                    
only FY 17 reflected on the slide.                                                                                              
                                                                                                                                
Mr.  Alper  responded that  the  reason  was threefold:  one                                                                    
reason was  the price,  another was the  work that  had been                                                                    
done in anticipation of  the sunsetting exploration credits,                                                                    
and the third was the  $200 million that had carried forward                                                                    
from FY 16.                                                                                                                     
                                                                                                                                
5:43:47 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Micciche requested  Slide number  6, minus  Cook                                                                    
Inlet, or North Slope only.                                                                                                     
                                                                                                                                
Mr. Alper replied that the  information would be provided to                                                                    
the committee.                                                                                                                  
                                                                                                                                
5:44:08 PM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  asked for the current  average price per                                                                    
barrel of oil for 2016.                                                                                                         
                                                                                                                                
Mr. Alper clarified that she  was requesting numbers for the                                                                    
current fiscal year.                                                                                                            
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
believed that  the price was  approximately $41 or  $42, for                                                                    
the fiscal year.                                                                                                                
                                                                                                                                
Co-Chair  MacKinnon  thought  the  number  provided  context                                                                    
since past averages had been in the $70s and $90s.                                                                              
                                                                                                                                
5:45:06 PM                                                                                                                    
                                                                                                                                
Mr. Alper specified  that if the reflected price  at the end                                                                    
of 2016 was $42, and  the department's official forecast was                                                                    
$39/bbl, the  $3 represented  approximately $80  million. He                                                                    
added  that  General  Fund revenue  fluctuated  $25  to  $30                                                                    
million for every  dollar increase in the price  of oil over                                                                    
the course of the year.                                                                                                         
                                                                                                                                
5:45:31 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  looked  at Slide  7,  "Historic  and  Forecasted                                                                    
Production Tax  and Credits," which  mirrored Slide  6, only                                                                    
restricted  to the  production tax.  The  numbers below  the                                                                    
line of less than production tax revenue had been negative                                                                      
since FY 15.                                                                                                                    
                                                                                                                                
5:46:17 PM                                                                                                                    
                                                                                                                                
Mr. Alper discussed Slide 8, "Status of Credit Fund Demand                                                                      
for FY16-17,"                                                                                                                   
                                                                                                                                
     • FY16 Appropriation Capped at $500 million                                                                              
          • $473 million paid out to date                                                                                       
          • About $200 million North Slope, $273 million                                                                        
          non-North                                                                                                             
          Slope                                                                                                                 
          • $27 million left in fund with $4 million in-                                                                        
          process claims                                                                                                        
     • Current DOR Work Pool $675 million                                                                                     
          • $10 million in older NOL credits                                                                                    
          • $22 million in older exploration credits                                                                            
          • $552 million in 2015 NOL, QCE, WLE credits                                                                          
         • $60 million in 2015 exploration credits                                                                              
          • $31 million additional 2015 NOL, QCE, WLE                                                                           
          expected via amended returns                                                                                          
                                                                                                                                
5:48:29 PM                                                                                                                    
                                                                                                                                
Mr. Alper looked at Slide 9, "Status of Credit Fund Demand                                                                      
for FY16-17", which further detailed the numbers from Slide                                                                     
8.                                                                                                                              
                                                                                                                                
5:49:11 PM                                                                                                                    
                                                                                                                                
Mr. Alper moved to Slide 10, "Status of Credit Fund Demand                                                                      
for FY16-17":                                                                                                                   
                                                                                                                                
     Status of Credit Fund / Demand for FY16-17                                                                               
     •All the "in hand" applications, if eligible, result                                                                       
     in a known demand for FY2017 of $652 million                                                                             
     •This is very current information, based on the CY15                                                                       
     tax "true-up" which was due on Thursday 3/31                                                                               
     •Expected credit applications during CY2016, which                                                                         
     could also be paid in FY17:                                                                                                
     •Another $40 million in quarterly requests for QCE and                                                                     
     WLE outside the North Slope                                                                                                
     •Another $60 million in "last minute" exploration                                                                          
     claims                                                                                                                     
     •About $20 million in LNG storage and refinery claims                                                                      
     •Total,  matching "final"  Spring  2016 forecast,  $775                                                                    
    million-slight reduction from $825 million "prelim"                                                                         
                                                                                                                                
5:50:46 PM                                                                                                                    
                                                                                                                                
Mr. Alper  spoke to Slide  11, "Potential  NOL Carry-Forward                                                                    
Liability":                                                                                                                     
                                                                                                                                
     Growing Carried Forward NOL's: A New Problem                                                                             
     • Since  the beginning (2007) all  companies except the                                                                    
     three major  producers have been  able to  receive cash                                                                    
     for  their   tax  credits.  Majors  must   "carry  them                                                                    
     forward"                                                                                                                   
     •Companies producing less than 50,000 bbl /day                                                                             
     •Hilcorp crossed over this threshold in 2015                                                                               
     • One  or more of the  majors had an operating  loss in                                                                    
     2015.                                                                                                                      
     That becomes  an NOL  credit that  can be  used against                                                                    
     taxes starting  this January (to reduce  payments below                                                                    
     the minimum tax, as far as zero)                                                                                           
     •This  only partly  offsets minimum  tax payments  this                                                                    
     calendar year.  We still have some  positive production                                                                    
     tax income.                                                                                                                
     •  With the  Spring Revenue  Forecast, we  now see  all                                                                    
     three  majors  with much  larger  losses  in 2016,  and                                                                    
     possibly for years beyond                                                                                                  
                                                                                                                                
5:54:16 PM                                                                                                                    
                                                                                                                                
Mr. Alper  turned to slide 12,  "Potential NOL Carry-Forward                                                                    
Liability,"  which  reflected the  Oil  and  Gas Tax  Credit                                                                    
Fund:  Budgeted vs.  Actual vs.  Statutory  Tax Credit  Fund                                                                    
Transfer Cap  (Beginning with the  first budget  cycle after                                                                    
the passage of ACES in November 2007.)                                                                                          
                                                                                                                                
5:56:43 PM                                                                                                                    
                                                                                                                                
Mr.  Alper pointed  out that  at  the current  rate, it  was                                                                    
forecasted  that  the state  would  build  an obligation  to                                                                    
industry of  $2.8 billion by FY  25. He noted that  the non-                                                                    
cashable carried-forward  liability would  be zeroed  out by                                                                    
FY 24.  He shared that  the last column reflected  the total                                                                    
state  credit obligation.  He said  that the  price forecast                                                                    
listed the e price of oil in FY  18 at $43/bbl, and FY 21 at                                                                    
$60/bbl,  which  reflected a  dramatic  jump  that would  be                                                                    
assumed to have an impact  on the state's finances, but that                                                                    
the revenue was only projected  to raise from $16 million to                                                                    
$33  million. He  said this  was because  the industry  went                                                                    
from having  a $750 million  balance to only a  $265 million                                                                    
balance;  there   had  been  a   half  million   dollars  in                                                                    
production  tax liability  that  the state  did not  receive                                                                    
because it  had been  used to offset  the NOL  carry forward                                                                    
from prior years.                                                                                                               
                                                                                                                                
5:59:09 PM                                                                                                                    
                                                                                                                                
Senator Bishop probed the stackability of the NOLs.                                                                             
                                                                                                                                
Mr. Alper  offered an anecdotal scenario  involving NOLs. He                                                                    
said that if  companies were earning the  NOL credits faster                                                                    
than they used them, they would continue to stack up.                                                                           
                                                                                                                                
6:00:54 PM                                                                                                                    
                                                                                                                                
Senator Bishop referred  to the numbers in red  on Slide 12.                                                                    
He understood that  the fiscal outlook could  improve if the                                                                    
price of oil rebounded above $85/bbl.                                                                                           
                                                                                                                                
Mr. Alper  though that  $80/bbl was a  good price  point and                                                                    
would make a big difference in the budget.                                                                                      
                                                                                                                                
6:02:04 PM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon wondered  how  much of  a net  operating                                                                    
loss  could  be  expected, using  the  department's  current                                                                    
projections, if producers were laying down rigs.                                                                                
                                                                                                                                
Mr. Alper responded  that the laying down of rigs  by BP had                                                                    
already been  built into  the forecast.  He said  that there                                                                    
was a reduction  of lease expenditures attached  to that, as                                                                    
well as a  reduction of wells being drilled  and a reduction                                                                    
in future  production. He stated  that further  reduction of                                                                    
work would  be captured in  the next forecast.  He contended                                                                    
that  if current  prices maintained  for another  year there                                                                    
would be a continued slowdown.                                                                                                  
                                                                                                                                
Co-Chair  MacKinnon requested  that the  department run  new                                                                    
numbers  with the  most  current  projections that  included                                                                    
rigs that had recently been shut down.                                                                                          
                                                                                                                                
Mr. Alper replied  that he would provide  the committee with                                                                    
the information.                                                                                                                
                                                                                                                                
6:03:52 PM                                                                                                                    
Co-Chair MacKinnon noted Senator Stedman in the committee                                                                       
room.                                                                                                                           
                                                                                                                                
6:04:07 PM                                                                                                                    
                                                                                                                                
Mr. Alper discussed Slide 13, "Potential Revenue Loss from                                                                      
Reduced Credits":                                                                                                               
                                                                                                                                
       · CSSB130 (RES) does impact project economics                                                                            
        · As part of a broader structural reform to                                                                             
          Alaska's finances,  the state will be  in a better                                                                    
          position to  meet the  credit obligations  it does                                                                    
          have  and provide  a  more  stable fiscal  climate                                                                    
          overall.                                                                                                              
        · DOR cannot predict specific projects that may be                                                                      
          accelerated or  deferred as a  result of  CSSB 130                                                                    
          (RES) or other fiscal reforms                                                                                         
        · Testimony by others has compared the impact of SB                                                                     
          130  to  total  royalty revenue  received  by  the                                                                    
          state                                                                                                                 
        · The following table shows how those two amounts                                                                       
          compare under the Spring 2016 revenue forecast                                                                        
        · By the final year of the fiscal note, the                                                                             
          midpoint  impact   of  CSSB   130(RES)  represents                                                                    
          approximately   14%   of   anticipated   petroleum                                                                    
          revenue                                                                                                               
                                                                                                                                
6:05:42 PM                                                                                                                    
                                                                                                                                
Mr. Alper looked at Slide 14, "Potential Revenue Loss from                                                                      
Reduced Credits":                                                                                                               
                                                                                                                                
     Production would have  to drop by an  additional 9% for                                                                    
     the cost  to the  state from  lost royalties  to exceed                                                                    
     the  benefit of  the  bill. In  2022,  this would  mean                                                                    
     about 35k bbl / day                                                                                                        
          • This  assumes that  the "lost"  production would                                                                    
          pay  taxes  and  royalties  at the  same  rate  as                                                                    
          average  production;  more   likely  the  marginal                                                                    
          projects would pay less                                                                                               
          • Also,  much of the  fiscal impact of  CSSB130 is                                                                    
          specific to                                                                                                           
          Cook   Inlet,   where   revenue  per   barrel   is                                                                    
          substantially less                                                                                                    
                                                                                                                                
He noted that the slide  contained a table that included the                                                                    
estimated  fiscal  impact  from  the  current  bill  version                                                                    
versus the spring 2016 total petroleum revenue forecast.                                                                        
                                                                                                                                
6:06:52 PM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche  summarized the numbers on  Slides 3 and                                                                    
4. He  asserted that the  fiscal picture on the  North Slope                                                                    
was very different than that of Cook Inlet.                                                                                     
                                                                                                                                
6:07:58 PM                                                                                                                    
                                                                                                                                
Mr.  Alper agreed.  He thought  that Cook  Inlet was  likely                                                                    
unsustainable, and that companies  would react negatively to                                                                    
the unsustainability of the area.                                                                                               
                                                                                                                                
6:08:32 PM                                                                                                                    
                                                                                                                                
Co-Chair   MacKinnon  had   heard   the  commissioner   make                                                                    
statements  about the  success in  Cook Inlet.  She asserted                                                                    
that the Cook Inlet was  energizing 60 percent of the state.                                                                    
She wondered if there was  any data to support the assertion                                                                    
that activity in Cook Inlet was unsustainable.                                                                                  
                                                                                                                                
Mr. Alper explained that a  fiscally constrained state could                                                                    
not maintain the activity indefinitely.                                                                                         
                                                                                                                                
6:09:56 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  interjected that  cycling  contracts                                                                    
were  being negotiated  and  discussions  were underway  for                                                                    
contracts out to  2023, and beyond. He said that  he had not                                                                    
heard  urgent   discussion  as  to  whether   gas  would  be                                                                    
available when  it was  time to put  it under  contract, but                                                                    
that some of it was yet to be under contract.                                                                                   
                                                                                                                                
6:10:48 PM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  agreed that the  state did not  have the                                                                    
cash  flow to  support  the existing  tax  credits, but  was                                                                    
concerned that  the overall region  in 10 or 15  years would                                                                    
need to import gas.                                                                                                             
                                                                                                                                
Commissioner Hoffbeck said that  normal practice was to have                                                                    
a 10  year supply or  less on the  books because it  did not                                                                    
make sense for a company to  go out and develop a field that                                                                    
could  not  be  monetized  for 10  years.  He  thought  that                                                                    
uncertainty would always be part of the equation.                                                                               
                                                                                                                                
6:12:09 PM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon understood that  companies liked to carry                                                                    
large  reserves  on  their  books  because  it  helped  with                                                                    
financing.                                                                                                                      
                                                                                                                                
Commissioner Hoffbeck  replied that that was  true. He added                                                                    
that companies could delineate the  field, and know what the                                                                    
reserves  were, without  actually developing  and delivering                                                                    
product.                                                                                                                        
                                                                                                                                
6:12:34 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Micciche   lamented  that  striking   a  balance                                                                    
between credits and supply would be challenging.                                                                                
                                                                                                                                
6:13:22 PM                                                                                                                    
                                                                                                                                
Mr. Alper  turned to Slide 15,  and stated that he  would be                                                                    
discussing the "greatest hits" pertaining to the subject.                                                                       
                                                                                                                                
6:14:11 PM                                                                                                                    
                                                                                                                                
Mr. Alper turned to Slide 16, "Credit Cost in Perspective":                                                                     
                                                                                                                                
     Of the $3 billion in state-refunded credits through                                                                      
     the end of FY15:                                                                                                         
     • $1.45 billion went to six North Slope projects that                                                                      
     now have production                                                                                                      
     • $650 million went to 13 North Slope projects that do                                                                   
     not have any production. Some of these are abandoned,                                                                    
     and some are in process                                                                                                    
     • $450 million went to six non-North Slope projects                                                                        
     that have production                                                                                                     
     • $450 million went to eight non-North Slope projects                                                                      
     that do not have any production                                                                                          
                                                                                                                                
6:15:14 PM                                                                                                                    
                                                                                                                                
Mr. Alper looked at Slide 17, "Credit Cost in Perspective":                                                                     
                                                                                                                                
     North Slope Refundable Credits                                                                                           
     Of the $1.45 billion that was spent between FY07-                                                                          
     FY15 supporting six producing projects:                                                                                    
     • Total production through end of FY15 is 38.5 million                                                                     
     barrels                                                                                                                    
     • Total credits = $37.30 / barrel                                                                                          
          • This number will decrease over time due to                                                                          
          additional production from these fields                                                                               
     • Lease expenditures for these projects, through                                                                           
     FY15, were $4.94 billion                                                                                                   
          • Credit support was 29% of lease expenditures                                                                        
                                                                                                                                
6:15:51 PM                                                                                                                    
                                                                                                                                
Mr. Alper reviewed Slide 18, "Credit Cost in Perspective":                                                                      
                                                                                                                                
     Cook Inlet Refundable Credits                                                                                            
     Of the $450 million that was spent between FY07-                                                                           
     FY15 supporting six producing projects:                                                                                    
     • Total production through end of FY15 is 55.9 million                                                                     
     BOE (much of this was gas)                                                                                                 
    • Total credits = $7.80 / BOE or about $1.30 / mcf                                                                          
          • This number will decrease over time due to                                                                          
          additional production from these fields                                                                               
     • Lease expenditures for these projects, through                                                                           
     FY15, were $1.09 billion                                                                                                   
          • Credit support was 40% of lease expenditures                                                                        
                                                                                                                                
6:16:56 PM                                                                                                                    
                                                                                                                                
Mr. Alper spoke to Slide 19, "Credit Cost in Perspective,"                                                                      
which was a continuation of Slide 18:                                                                                           
                                                                                                                                
     Cook Inlet Tax Caps                                                                                                      
     •Estimated value to industry $550-$850 over the years                                                                      
     2007-2013                                                                                                                  
     •Total Production Estimate                                                                                                 
          •Gas: ~ 250 million cubic feet / day for seven                                                                        
         years = 640 BCF of gas or 106 million BOE                                                                              
          •Oil: ~ 10,000 barrels / day for seven years = 26                                                                     
          million BOE                                                                                                           
          •Total Production = 132 million BOE                                                                                   
     •Using midpoint $700 million estimate, value of caps =                                                                     
     $5.30 / barrel or $0.88 / mcf                                                                                              
     •Sum of Credits + Tax Caps: $2.18 / mcf                                                                                    
                                                                                                                                
6:18:05 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
6:19:13 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Mr.  Alper stated  that the  previous slides  were the  best                                                                    
available  information  that  the department  could  provide                                                                    
within the bounds of confidentiality.                                                                                           
                                                                                                                                
Mr.  Alper showed  Slide 21,  "Key  Provisions and  Decision                                                                    
Points":                                                                                                                        
                                                                                                                                
Preventing  certain  credits  from being  used  against  the                                                                  
minimum tax, or "floor"                                                                                                       
This is really three different issues / policy questions                                                                      
All of these only pertain to the North Slope:                                                                                   
                                                                                                                                
1)  Net  Operating  Loss  for  producers  not  eligible  for                                                                  
refundable  credits (should  major producers  be able  to go                                                                  
below the floor?)                                                                                                               
2) Per-Barrel Credits  for GVR "New" Oil (should  the tax on                                                                  
production  from  new  fields  be allowed  to  go  to  zero?                                                                    
Relation to GVR "graduation?")                                                                                                  
3) Small  Producer /  Exploration Credits  (should everyone,                                                                    
not just major producers, pay a minimum tax?)                                                                                   
                                                                                                                                
6:21:22 PM                                                                                                                    
                                                                                                                                
Mr.  Alper looked  at  Slide 22,  "Key  Bill Provisions  and                                                                    
Decision Points":                                                                                                               
                                                                                                                                
     Repurchase Limits                                                                                                        
     Historic Notes on large annual credits:                                                                                  
     Over the 2007-2016 history of the tax credit program:                                                                      
                                                                                                                                
        · There has only been one instance of a company who                                                                   
          ever received > $200 million in a single year                                                                       
        · Five times ever when one company received between                                                                   
          $100 - $200 million in one year                                                                                     
        · 11 times ever when one company received between                                                                     
          $50 - $100 million in one year                                                                                      
                                                                                                                                
6:22:56 PM                                                                                                                    
                                                                                                                                
Mr.  Alper looked  at  Slide 23,  "Key  Bill Provisions  and                                                                    
Decision Points":                                                                                                               
                                                                                                                                
     To-date cost of Sunsetting Credits                                                                                       
     Exploration Credits (various) 2007-sunset                                                                                
     • North Slope Refunded: $270 million                                                                                       
     • North Slope Against Liability: $190 million                                                                              
     • Non-North Slope Refunded: $160 million                                                                                   
     • Non-North Slope Against Liability: $0                                                                                    
                                                                                                                              
     Small Producer Credits 2007-2016                                                                                         
     • North Slope Against Liability: $340 million                                                                              
     • Non-North Slope Against Liability: $60 million                                                                           
     • (these cannot be refunded)                                                                                               
     Total: slightly over $1 billion                                                                                          
                                                                                                                                
Mr. Alper offered to cut the presentation short in order to                                                                     
make time for the sectional analysis.                                                                                           
                                                                                                                                
Co-Chair MacKinnon responded that he could take the next 35                                                                     
minutes to finish the presentation; the sectional analysis                                                                      
could be heard on another day.                                                                                                  
                                                                                                                                
6:24:58 PM                                                                                                                    
                                                                                                                                
Mr. Alper turned to Slide 25, "Overview of Tax and Credit                                                                       
Calculations":                                                                                                                  
                                                                                                                                
     How the Production Tax Works at $100 oil                                                                                 
     Tax on a single barrel of taxable North Slope oil. We                                                                      
     currently have about 160 million taxable barrels/year                                                                      
          Market Price $100                                                                                                     
          Transport Cost $10                                                                                                  
          Gross Value $90                                                                                                       
          Lease Expenditures $35                                                                                              
          Production Tax Value $55                                                                                              
          Tax @ 35% $19.25                                                                                                      
          Per-Barrel Credit $6.00                                                                                             
          Net Payment $13.25                                                                                                    
          Minimum Tax Gross x 4% $3.60                                                                                          
          Higher Of (Actual Tax) $13.25                                                                                     
          Approx. Annual Revenue $2.1 billion                                                                                 
                                                                                                                                
Mr. Alper noted that the modeled calculation was what the                                                                       
Legislature had envisioned when SB 21 was enacted.                                                                              
                                                                                                                                
6:27:16 PM                                                                                                                    
                                                                                                                                
Mr. Alper moved to Slide 26, "Overview of Tax and Credit                                                                        
Calculations":                                                                                                                  
                                                                                                                                
     At $70 Oil, the "minimum tax" takes over                                                                                 
     Market Price $70                                                                                                           
     Transport Cost $10                                                                                                       
     Gross Value $60                                                                                                            
     Lease Expenditures $35                                                                                                   
     Production Tax Value $25                                                                                                   
     Tax @ 35% $8.75                                                                                                            
     Per-Barrel Credit $8.00                                                                                                  
     Net Payment $0.75                                                                                                          
     Minimum Tax Gross x 4% $2.40                                                                                               
     Higher Of (Actual Tax) $2.40                                                                                           
     Approx. Annual Revenue $380 million                                                                                      
                                                                                                                                
6:28:31 PM                                                                                                                    
                                                                                                                                
Mr. Alper moved to Slide 27, "Overview of Tax and Credit                                                                        
Calculations":                                                                                                                  
                                                                                                                                
     At $40 Oil, producers have operating losses                                                                              
     Market Price $40                                                                                                           
     Transport Cost $10                                                                                                       
     Gross Value $30                                                                                                            
     Lease Expenditures $35                                                                                                   
     Production Tax Value ($5)                                                                                                  
     Approx. Operating Loss $800 million                                                                                        
     Tax @ 35% ($1.75)                                                                                                          
     Per-Barrel Credit $8.00                                                                                                  
     Net Payment ($9.75)                                                                                                        
     Minimum Tax Gross x 4% $1.20                                                                                               
     Higher Of (Actual Tax) $1.20                                                                                           
     Approx. Annual Revenue $190 million                                                                                      
     Carried Forward Loss Credit 35% $280 million                                                                             
                                                                                                                                
6:30:02 PM                                                                                                                    
                                                                                                                                
Mr. Alper moved to Slide 28, "Overview of Tax and Credit                                                                        
Calculations":                                                                                                                  
                                                                                                                                
$40 for second year means Operating Loss credits can be                                                                       
used to reduce payments below the minimum tax                                                                                 
                                                                                                                                
                              Year 1         Year 2                                                                         
     Market Price             $40            $40                                                                                
     Transport Cost           $10            $10                                                                              
     Gross Value              $30            $30                                                                                
     Lease Expenditures       $35            $35                                                                              
     Production Tax Value     ($5)           ($5)                                                                               
     Approx. Operating Loss   $800 million  $800 million                                                                      
     Tax @ 35%                ($1.75)       ($1.75)                                                                             
     Per-Barrel Credit        $8.00          $8.00                                                                            
     Net Payment              ($9.75)        ($9.75)                                                                            
     Minimum Tax Gross x 4%  $1.20           $1.20                                                                              
     Higher Of (Actual Tax)  $1.20           $1.20                                                                          
     Approx. Annual Revenue  $190 million  $190 million                                                                       
     Less Carried-Forward Loss Credit        ($190 million)                                                                   
     Actual Tax Payment       $190 million  $0                                                                                
     Carried-Forward Loss Credit 35% $280 million $370                                                                        
     million                                                                                                                  
                                                                                                                                
6:31:10 PM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  asked how  much of  a percentage  of the                                                                    
operating losses could be attributed to personnel.                                                                              
                                                                                                                                
Mr. Alper responded that he did not know.                                                                                       
                                                                                                                                
Co-Chair   MacKinnon   requested   that   he   provide   the                                                                    
information to the committee at  a later date. She felt that                                                                    
the job  losses were  not reflected in  the slides  and were                                                                    
one of the  largest cost drives to the  state. She requested                                                                    
details concerning  the drivers inside of  the net operating                                                                    
cost for  companies, and how  the department  had determined                                                                    
the static numbers included in the presentation.                                                                                
                                                                                                                                
Mr. Alper pointed  out to the committee  that the department                                                                    
had used $45 - $46/bbl as  a working average cost, and noted                                                                    
that there had  been a 10 percent increase  in company costs                                                                    
within the  last year. He  said that those  efficiencies and                                                                    
reductions involved people who  would have been building and                                                                    
doing things,  and whatever it  was that they were  going to                                                                    
build the equipment and materials  associated with that work                                                                    
had also fallen off the expense profile.                                                                                        
                                                                                                                                
6:33:08 PM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  requested   any  information  that  the                                                                    
administration could provide concerning  the cost set into a                                                                    
non-static plan.                                                                                                                
                                                                                                                                
Mr.  Alper   agreed  to  provide  the   information  to  the                                                                    
committee.                                                                                                                      
                                                                                                                                
6:33:40 PM                                                                                                                    
                                                                                                                                
Mr.  Alper looked  at Slide  30,  "Introduction to  Scenario                                                                    
Analysis":                                                                                                                      
        · The Tax Division has developed a new model,                                                                           
          looking at project life cycles                                                                                        
        · Cash flow over the 30-40 year life of a project,                                                                      
          for the state's production tax and credits, all                                                                       
          state revenue, the producer's cash flow, and                                                                          
          discounted (NPV)                                                                                                      
        · Scenarios Analyzed at $40, $60, $80, and Fall                                                                         
          Forecast oil price                                                                                                    
        · Status quo modeled vs. Governor's original bill                                                                       
        · Full modeling runs can be provided as a separate                                                                      
          document                                                                                                              
                                                                                                                                
Mr. Alper  noted that there  were longer  presentations that                                                                    
included different  runs of  how the  model worked.  He said                                                                    
that  the  scenario  had  been   developed  in  response  to                                                                    
questions from individual legislators.                                                                                          
                                                                                                                                
Mr.  Alper  spoke to  Slide  31,  "Introduction to  Scenario                                                                    
Analysis":                                                                                                                      
                                                                                                                                
          Fields Analyzed:                                                                                                    
          North Slope Oil Scenarios                                                                                             
          • 50 million barrel                                                                                                   
          • 750 million barrel (12.5% Royalty / 20% GVR)                                                                        
          • 750 million barrel (16.67% Royalty / 30% GVR)                                                                       
          • 750 million barrel (50% Private Royalty)                                                                            
          Cook Inlet Oil Scenarios                                                                                              
          • 50 million barrel (tax caps sunset)                                                                                 
          • 50 million barrel (tax caps extended)                                                                               
          Gas Scenarios                                                                                                         
          • 670 bcf Cook Inlet Gas (tax cap sunset and                                                                          
          extended)                                                                                                             
          • 670 bcf Middle Earth Gas                                                                                            
                                                                                                                                
6:38:22 PM                                                                                                                    
                                                                                                                                
Mr. Alper spoke to Slide  32, "Sample of Scenario Analysis,"                                                                    
which  showed numbers  for the  smaller field  on the  North                                                                    
Slope at $60/bbl. He noted  that the upper left corner chart                                                                    
reflected  solely the  production  tax and  the credits.  He                                                                    
spoke to  the graph  in the upper  right hand  corner, which                                                                    
reflected the  annual state  net gains  and losses,  with 20                                                                    
percent  GVR,  at  $60  and  price.  The  lower  left  chart                                                                    
illustrated  the   total  producer   cash  flows   from  the                                                                    
company's  point of  view, and  the lower  right listed  the                                                                    
life cycle  totals for  the field. He  pointed out  that the                                                                    
top  four  lines  showed the  production  tax  numbers,  the                                                                    
middle four reflected the all-state  revenue, and the bottom                                                                    
four lines showed the producer credits.                                                                                         
                                                                                                                                
6:42:44 PM                                                                                                                    
                                                                                                                                
Mr.  Alper discussed  Slides 33  through  37, which  offered                                                                    
scenario  analysis  on North  Slope  and  Cook Inlet  fields                                                                    
using various tax structures and varying per barrel prices.                                                                     
                                                                                                                                
6:48:01 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
6:48:24 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Mr. Alper pointed out that  by pushing the credit spend into                                                                    
future years the state was  paying the credits over a longer                                                                    
period  of time;  for  some  of those  years  the state  was                                                                    
getting   revenue   from  royalties   while   simultaneously                                                                    
receiving the credits, which reduces the credit spend.                                                                          
                                                                                                                                
6:49:02 PM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  asked whether  a  $25  million cap  per                                                                    
organization  that was  driving multiple  partners together,                                                                    
and could  create a  diversity of  revenue, might  also slow                                                                    
progress.                                                                                                                       
                                                                                                                                
Mr.  Alper  stated that  the  department  had presumed  that                                                                    
entities would partner up on  projects. He said that the $25                                                                    
million number had been pulled  from history, when the state                                                                    
had first ventured into the credit repurchasing business.                                                                       
                                                                                                                                
6:50:25 PM                                                                                                                    
                                                                                                                                
Mr. Alper spoke to Slide  37, "Sample of Scenario Analysis,"                                                                    
and noted that the  slides reflecte3d little difference than                                                                    
the North Slope except that there was no production tax.                                                                        
                                                                                                                                
6:51:43 PM                                                                                                                    
                                                                                                                                
Mr. Alper  looked at Slide  38, which reflected  the numbers                                                                    
after  the implementation  of  SB 130.  He  stated that  the                                                                    
department could come up with  hundreds of similar scenarios                                                                    
to examine.                                                                                                                     
                                                                                                                                
6:52:41 PM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon appreciated the testifiers' ability to                                                                       
articulate the administration's position.                                                                                       
                                                                                                                                
SB 130 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
Co-Chair MacKinnon discussed the schedule for the following                                                                     
day.                                                                                                                            
                                                                                                                                
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."                                                                                                                     
                                                                                                                                
HB 247 was SCHEDULED but not HEARD.                                                                                             
                                                                                                                                
ADJOURNMENT                                                                                                                   
6:56:14 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 6:56 p.m.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
SB 130 DOR Additional Info for SFIN 4-14-16 final.pdf SFIN 4/14/2016 5:00:00 PM
SB 130
SB 130 Sectional CSSB130(RES) Oil Credit Bill 4-14-16 final.pdf SFIN 4/14/2016 5:00:00 PM
SB 130