Legislature(2015 - 2016)BELTZ 105 (TSBldg)

04/12/2016 09:00 AM RESOURCES

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Audio Topic
09:00:34 AM Start
09:00:46 AM SB130
05:32:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Location & Time --
+= SB 130 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Moved CSSB 130(RES) Out of Committee
-- Public Testimony --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         April 12, 2016                                                                                         
                           9:00 a.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator Mia Costello, Vice Chair                                                                                                
Senator John Coghill                                                                                                            
Senator Bert Stedman                                                                                                            
Senator Peter Micciche                                                                                                          
Senator Bill Stoltze                                                                                                            
Senator Bill Wielechowski                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 130                                                                                                             
"An Act  relating to confidential  information status  and public                                                               
record status  of certificates  from the oil  and gas  tax credit                                                               
fund; relating  to a  minimum for gross  value at  information in                                                               
the  possession  of  the  Department   of  Revenue;  relating  to                                                               
interest the point of production;  relating to lease expenditures                                                               
and  tax  credits for  municipal  applicable  to delinquent  tax;                                                               
relating  to disclosure  of  oil and  gas  production tax  credit                                                               
entities;   adding   a    definition   for   "qualified   capital                                                               
expenditure"; adding  a definition  for information;  relating to                                                               
refunds for  the gas storage  facility tax credit,  the liquefied                                                               
"outstanding  liability  to the  state";  repealing  oil and  gas                                                               
exploration incentive  credits; natural gas storage  facility tax                                                               
credit,  and the  qualified in-state  oil refinery  repealing the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease infrastructure  expenditures tax  credit; relating  to                                                               
the minimum tax for certain  oil and expenditures incurred before                                                               
January  1,  2011;  repealing  provisions   related  to  the  gas                                                               
production; relating  to the minimum tax  calculation for monthly                                                               
installment monthly  installment payments  for estimated  tax for                                                               
oil and gas  produced before payments of  estimated tax; relating                                                               
to interest on  monthly installment payments of  January 1, 2014;                                                               
repealing the  oil and  gas production  tax credit  for qualified                                                               
capital   estimated  tax;   relating  to   limitations  for   the                                                               
application of tax credits; relating  to oil and expenditures and                                                               
certain well expenditures; repealing  the calculation for certain                                                               
lease  gas   production  tax  credits  for   certain  losses  and                                                               
expenditures;   relating   to    limitations   for   expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and nontransferable oil  and gas production tax  credits based on                                                               
oil  production  and  the  providing   for  an  effective  date."                                                               
alternative tax credit  for oil and gas  exploration; relating to                                                               
purchase of tax credit                                                                                                          
                                                                                                                                
     - MOVED  CSSB 130(RES) OUT OF COMMITTEE                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 130                                                                                                                  
SHORT TITLE: TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                 
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/19/16       (S)       READ THE FIRST TIME - REFERRALS                                                                        
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04/04/16       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
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04/09/16       (S)       MINUTE(RES)                                                                                            
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04/11/16       (S)       Heard & Held                                                                                           
04/11/16       (S)       MINUTE(RES)                                                                                            
04/12/16       (S)       RES AT 9:00 AM BELTZ 105 (TSBldg)                                                                      
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
KARA MORIARTY, President and CEO                                                                                                
Alaska Oil and Gas Conservation Association (AOGCC)                                                                             
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Shared four policy questions in evaluating                                                               
the sixth tax change in CSSB 130 to the industry in 11 years.                                                                   
                                                                                                                                
REBECCA LOGAN, General Manager                                                                                                  
Alaska Support Industry Alliance                                                                                                
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Opposed SB 130.                                                                                          
                                                                                                                                
SCOTT DAVIS                                                                                                                     
Alaska Support Industry Alliance                                                                                                
Kenai, Alaska                                                                                                                   
POSITION STATEMENT:  Warned against any further tax burden on                                                                 
the industry relative to SB 130.                                                                                                
                                                                                                                                
KATI CAPOZZI, Communications and Project Manager                                                                                
Resource Development Council (RDC)                                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Opposed CSSB 130(RES).                                                                                   
                                                                                                                                
DOUGLAS SMITH, CEO                                                                                                              
Little Red Services                                                                                                             
Houston, Texas                                                                                                                  
POSITION STATEMENT:  Related how his company was laying off                                                                   
employees and idling equipment.                                                                                                 
                                                                                                                                
BOB HAJDUKOVICH, CEO                                                                                                            
Raven Alaska                                                                                                                    
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Related the impact to his company when                                                                   
Caelus Energy stopped work on the North Slope.                                                                                  
                                                                                                                                
JANAK MAYER, Chairman & Chief Technologist                                                                                      
enalytica                                                                                                                       
Legislative Consultant                                                                                                          
Washington, D.C.                                                                                                                
POSITION STATEMENT:  Provided an impact analysis for CSSB 130                                                                 
dividing his "high-level" summary into the North Slope versus                                                                   
Cook Inlet and other parts of the state.                                                                                        
                                                                                                                                
CORRI FEIGE, Director                                                                                                           
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Provided  her  general observations  about                                                             
impacts to  activity levels related to  CSSB 130, as well  as how                                                               
it affects data capture for the NDR.                                                                                            
                                                                                                                                
RANDALL HOFFBECK, Commissioner                                                                                                  
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Apologized for  not being able to  stay and                                                             
offered Mr. Alper to comment on the various versions of SB 130.                                                                 
                                                                                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:  Provided  a  comparison  of  the  different                                                             
versions of SB 130.                                                                                                             
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                              
9:00:34 AM                                                                                                                  
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting  to order at 9:00  a.m. Present at the  call to                                                               
order were Senators Costello, Coghill, and Chair Giessel.                                                                       
                                                                                                                                
           SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
9:00:46 AM                                                                                                                    
CHAIR GIESSEL  announced consideration  of SB  130. She  said the                                                               
purpose of  the meeting today is  to take public comment  on CSSB                                                               
130(RES), [version 29-GS2609\W], that  was introduced last night.                                                               
She thanked the administration,  Department of Revenue (DOR), and                                                               
Tax Division  Director Alper,  for taking the  data from  all the                                                               
permutations  of the  tax credit  rebate bills  and putting  them                                                               
into a  single chart.  This CS  is a  departure from  an approach                                                               
that has been taken before.                                                                                                     
                                                                                                                                
9:02:24 AM                                                                                                                    
SENATOR STEDMAN joined the meeting.                                                                                             
                                                                                                                                
9:02:33 AM                                                                                                                    
KARA   MORIARTY,  President   and   CEO,  Alaska   Oil  and   Gas                                                               
Conservation  Association (AOGCC),  Anchorage,  Alaska, said  she                                                               
would share four policy questions  as they evaluate the sixth tax                                                               
change in  11 years in  the new CS.  She does have  the unanimous                                                               
consent of  her diverse group  of members to offer  these initial                                                               
thoughts,  and from  their view,  none  of the  questions have  a                                                               
positive answer.                                                                                                                
                                                                                                                                
Will  this increase  production? Frankly  the answer  is no,  Ms.                                                               
Moriarty  said.  This  is  a significant  threat  to  Cook  Inlet                                                               
production. Dramatically  and adversely  changing the  tax system                                                               
in the Cook Inlet as proposed  in the CS will decrease production                                                               
of oil  and gas  in the  Inlet. For the  North Slope,  there will                                                               
also be a  negative impact, especially on  smaller fields. Alaska                                                               
needs every  company to  be successful,  because the  state needs                                                               
increased production  from every field  and region. This  CS will                                                               
not add more production.                                                                                                        
                                                                                                                                
Will this  make Alaska  more competitive?  Many of  the proposals                                                               
that  were  included  in  the   Governor's  bill  remain  in  the                                                               
Committee Substitute  and make it  very difficult to  attract new                                                               
investment and companies to Alaska, Ms. Moriarty stated.                                                                        
                                                                                                                                
9:04:47 AM                                                                                                                    
Will it provide  predictability? The only thing that  seems to be                                                               
predictable,  even  with   this  CS,  is  that   the  state  will                                                               
constantly  change  tax policies  regardless  of  oil price,  and                                                               
regardless  of  the  economic  condition  of  the  industry.  Ms.                                                               
Moriarty stated that  we hear that everyone has  to pay something                                                               
to  solve the  state's fiscal  crisis. We  would ask,  what other                                                               
industry is  being asked to  pay, or in  our case, pay  more when                                                               
the  state  has  clearly  demonstrated that  industry  is  losing                                                               
money?                                                                                                                          
                                                                                                                                
How will this CS affect  Alaska families, businesses and jobs? If                                                               
you passed this CS in its  current form, Ms. Moriarty said, there                                                               
would be less investment by  companies, which will result in less                                                               
production  and job  loss.  She  added that  they  had heard  the                                                               
passionate  pleas from  Alaskans who  have already  suffered from                                                               
the  current economic  situation  on  Saturday. Alaska  families,                                                               
businesses and  jobs will continue  to be affected in  a negative                                                               
way.  How will  this CS  affect Alaska  families, businesses  and                                                               
jobs?                                                                                                                           
                                                                                                                                
Lastly, will  this CS provide  stability? Ms. Moriarty  said they                                                               
recognize that many  of legislators are looking for  ways to fill                                                               
the  state's budget  gap  and  see increasing  taxes  on the  oil                                                               
industry as part  of the solution to create  a stable environment                                                               
for Alaska.  But her job  is to tell  them how the  industry will                                                               
react to those  changing policies. Again, she needs  more time to                                                               
evaluate  the  CS, but  for  now  it is  bad  for  Alaska. It  is                                                               
destined to  make the  economic situation  for the  industry even                                                               
worse, and when the industry suffers, the state suffers too.                                                                    
                                                                                                                                
9:06:22 AM                                                                                                                    
SENATOR  COSTELLO thanked  her for  providing  her testimony  and                                                               
asked if  the plan  is to  do a full  review of  the CS  and then                                                               
submit comments in writing.                                                                                                     
                                                                                                                                
MS.  MORIARTY  answered  yes,  and  they  will  be  listening  to                                                               
testimony  from the  legislative consultant  and department  this                                                               
afternoon.                                                                                                                      
                                                                                                                                
9:06:57 AM                                                                                                                    
SENATOR STEDMAN  asked if  they opposed a  zero severance  tax in                                                               
Cook Inlet going forward.                                                                                                       
                                                                                                                                
MS. MORIARTY  answered that Cook  Inlet doesn't pay  a production                                                               
tax now,  and they  knew the  state would  be evaluating  that in                                                               
2022, but they do receive tax  credits to help with the high-cost                                                               
environment  and  to encourage  investment.  If  the credits  are                                                               
removed without paying a production tax,  that in effect is a tax                                                               
increase. It changes the companies'  economics whether there is a                                                               
no production tax or not.                                                                                                       
                                                                                                                                
SENATOR STEDMAN said  he would clarify the question  since the CS                                                               
is   still  being   digested.  Everyone   wants   a  stable   tax                                                               
environment.  After  the credits are phased out in  2019 he asked                                                               
if AOGA has a position on the zero severance tax structure.                                                                     
                                                                                                                                
MS. MORIARTY  replied that this  would take effect on  January 1,                                                               
2018, so the  companies have about 18 months  before the dramatic                                                               
step down  in the  credits in  2017 and  then they  completely go                                                               
away. Especially  in this price  environment, that will  not lead                                                               
to  any increased  investment,  and drilling  will  be cut  back.                                                               
Hopefully the  legislature's consultant will  look at a  range of                                                               
prices,  because   that  is  really   key  in   this  discussion.                                                               
Incentivizing  investment was  the  whole point  of the  credits,                                                               
because  the  Cook Inlet  Basin  has  always been  a  challenging                                                               
economic environment.                                                                                                           
                                                                                                                                
MS.  MORIARTY  said  she  talked  with both  of  her  Cook  Inlet                                                               
companies  this morning  and  under this  proposal  even with  no                                                               
production  tax  if prices  stay  the  same  there will  be  less                                                               
capital expenditures.                                                                                                           
                                                                                                                                
9:09:54 AM                                                                                                                    
SENATOR STEDMAN said no one knows  what the price will be in FY18                                                               
or FY25,  and maybe the policy  set today will last  only through                                                               
the next winter  or the winter of 2030. It  depends on how stable                                                               
the component  parts are. If the  bill is passed and  enacted, in                                                               
2025 Cook  Inlet wouldn't have  a production tax. He  didn't know                                                               
what the price would  be, but it could be $80.  He hoped this was                                                               
an opportunity  to have  that conversation  with her  members and                                                               
maybe get more feedback, because not  having a severance tax is a                                                               
huge policy change for the state.                                                                                               
                                                                                                                                
MS.  MORIARTY  responded  that  there   has  been  little  to  no                                                               
production tax in  Cook Inlet even during the ELF  regime, and it                                                               
was  designed that  way because  the Cook  Inlet fields  are much                                                               
smaller and the  platforms don't produce as much,  but it doesn't                                                               
mean the  state wasn't  benefiting. The  state has  actually been                                                               
collecting more  money from Cook  Inlet royalties even  without a                                                               
production tax. So  now, they are now focused on  how to increase                                                               
production whether there is a production tax or not.                                                                            
                                                                                                                                
9:12:14 AM                                                                                                                    
REBECCA   LOGAN,  General   Manager,   Alaska  Support   Industry                                                               
Alliance,  Anchorage,  Alaska,  said the  Alliance  started  this                                                               
legislative  session with  two  legislative priorities:  increase                                                               
production and  pass a sustainable  budget. She  was disappointed                                                               
to be  here today recognizing  that neither of those  things will                                                               
happen.  She opposed  SB  130.  She knew  when  the $4.6  billion                                                               
budget came out on March 15 they  would get to a point where they                                                               
would have  to come to the  oil industry, because they  didn't do                                                               
their job on the budget.                                                                                                        
                                                                                                                                
Their  position  on this  bill  has  always  been to  oppose  any                                                               
changes to the  current tax structure. During the  last weeks her                                                               
members  have very  passionately  talked about  the thousands  of                                                               
people they  have laid  off. However, they  didn't know  how many                                                               
workers the state had laid off and thought it was maybe 75.                                                                     
                                                                                                                                
9:13:55 AM                                                                                                                    
SENATOR  STEDMAN  commented  that  it  could  be  argued  in  any                                                               
legislative session that  they hadn't done their  job; it depends                                                               
on which side  of the political aisle you are  on or the argument                                                               
at the time, or if you are  rural, or urban, or whatever. But the                                                               
legislature is made up of a  cross section of 60 different people                                                               
from  across   the  state  with   different  backgrounds.     His                                                               
impression  is that  very few  members and  staff members  in the                                                               
building recognized  that 4  percent floor was  not a  hard floor                                                               
and  that  credits would  swing  into  it.  However, all  of  the                                                               
professional  folks in  the industry  understood that.  Also, the                                                               
members were rather surprised at  the impact of NOL loss stacking                                                               
and how it works in conjunction  with the floor. And industry has                                                               
yet to  come forward  with a  discussion on  that. But  it hasn't                                                               
been until the last  couple of weeks that a lot  of people in the                                                               
building even  realized that  such an  issue existed.  He guessed                                                               
that one of  the pitfalls of rushing any  tax legislation through                                                               
is a  lack of understanding  of different price  environments the                                                               
state would  be facing and  it leads to  substantial instability.                                                               
He personally  thought that was  the root  of the issue  they are                                                               
facing.                                                                                                                         
                                                                                                                                
MS. LOGAN said legislators are  elected to make policy calls, and                                                               
being given  the information  whether it  was surprising  or not,                                                               
they are  now in a situation  of low oil prices.  Everyone in the                                                               
this building  wants to increase  production, so the  policy call                                                               
they face  with the current  tax structure is  what to do  at low                                                               
oil prices to not damage the  industry. The question is, "Are you                                                               
going to put more taxes on an industry that is hemorrhaging?"                                                                   
                                                                                                                                
SCOTT DAVIS,  Alaska Support  Industry Alliance,  business owner,                                                               
Kenai, Alaska,  said the Cook  Inlet Recovery Act  has positively                                                               
impacted his  community over  the last 10  years. They  went from                                                               
brown outs  and not enough  gas and shutting down  the fertilizer                                                               
and LNG  plants to talking  about reopening Agrium  and exporting                                                               
LNG.  In the  last two  years, they  have watched  just from  the                                                               
price of  oil the  decrease in activity  in their  community that                                                               
has negatively  impacted all businesses there,  including his. He                                                               
warned against putting any further tax burden on the industry.                                                                  
                                                                                                                                
He said oil and gas production  started on the Kenai Peninsula in                                                               
the 50s,  so they are  well used to  these market ups  and downs.                                                               
They  also heard  about the  positive effect  of a  favorable tax                                                               
structure  in   listening  to   the  Kenai/Soldotna   Chamber  of                                                               
Commerce. Enstar  now has a  contract to  have enough gas  to get                                                               
through the  next few  years, but  it's still  in the  ground. It                                                               
still needs investment to be produced.                                                                                          
                                                                                                                                
9:19:12 AM                                                                                                                    
KATI  CAPOZZI,  Communications   and  Project  Manager,  Resource                                                               
Development  Council  (RDC),   Anchorage,  Alaska,  opposed  CSSB                                                               
130(RES).  She   said  RDC  is  a   statewide  trade  association                                                               
comprised of  individuals and companies  from Alaska's  oil, gas,                                                               
mining,  forest productions,  fisheries  and tourism  industries.                                                               
They  believe  the  best  approach  to  expand  the  economy  and                                                               
generate  new revenues  for the  state  is to  produce more  oil,                                                               
attract  more   tourists,  harvest  more  fish,   and  mine  more                                                               
minerals.                                                                                                                       
                                                                                                                                
She said regarding CSSB 130,  raising taxes on companies that are                                                               
reporting record  losses and are in  a negative cash flow  is not                                                               
sound fiscal  policy. It  will not  increase production  down the                                                               
TAPS, nor  encourage development of  new mines; it  won't attract                                                               
more  tourists, and  it  won't boost  investment  in the  fishing                                                               
industry.                                                                                                                       
                                                                                                                                
Higher taxes in this low  price commodity environment will likely                                                               
deter investment  that means  lower state  revenues and  a weaker                                                               
private sector over the long  run. Changing the tax structure now                                                               
will make a bad situation worse.                                                                                                
                                                                                                                                
MS.  CAPOZZI  said  there  is good  news:  several  news  outlets                                                               
recently announced  an increase in year-over-year  oil production                                                               
during  the  past  12  months.  This is  the  first  increase  in                                                               
throughput since  2002, which  is more proof  of the  current tax                                                               
regime working.  Next year's production  needs to be  even higher                                                               
than   this  year's.   The  current   tax   policy  brought   new                                                               
exploration,  jobs  and continued  investment  to  the state  and                                                               
stabilized North  Slope production  and somewhat  shielded Alaska                                                               
from massive cutbacks that have occurred elsewhere.                                                                             
                                                                                                                                
She said  this bill moves  Alaska in  the wrong direction.  It is                                                               
the  sixth major  tax change  in 11  years. RDC  members are  not                                                               
asking  for a  tax decrease  during  this time  of low  commodity                                                               
prices, but they  do request that as the  state considers changes                                                               
to tax policy, it does no harm to its largest industry.                                                                         
                                                                                                                                
9:22:08 AM                                                                                                                    
SENATOR STEDMAN  said it might be  beneficial to have DOR  do the                                                               
analysis to see  if there has been an increase  in oil production                                                               
and if  it helps deal  with the "minimum  tax trap" the  state is                                                               
in. When he  has done that analysis, he found  it doesn't help at                                                               
all. It puts  more production down the pipe, but  it doesn't help                                                               
the broader issue that the state is facing financially.                                                                         
                                                                                                                                
9:23:37 AM                                                                                                                    
CHAIR  GIESSEL said  she would  be  happy to  pose that  question                                                               
although she was puzzled by  it, since less production means more                                                               
engineering issues to solve.                                                                                                    
                                                                                                                                
SENATOR  STEDMAN  clarified  that   he  is  not  suggesting  that                                                               
declining  production benefits  the  pipe, but  from the  state's                                                               
financial perspective  what the  financial implication  is within                                                               
the  tax  system of  moving  barrels  of production  up.  Clearly                                                               
having  additional   production  is   better  than   no  marginal                                                               
increase, but  they need  to understand  the sensitivity  the tax                                                               
structure is built around. He  wouldn't expect to see any benefit                                                               
from an increase in production from purely a tax position.                                                                      
                                                                                                                                
CHAIR  GIESSEL  rephrased  the  question:  if  we  see  increased                                                               
production of 50,000 barrels a  day, what are the implications to                                                               
the state at different prices: at $60 and $80.                                                                                  
                                                                                                                                
SENATOR STEDMAN  said he  was thinking more  of this  price range                                                               
and looking at the trigger on the minimum tax.                                                                                  
                                                                                                                                
CHAIR GIESSEL said that her goal is a longer term vision.                                                                       
                                                                                                                                
DOUGLAS  SMITH, CEO,  Little Red  Services, Houston,  Texas, said                                                               
they had  laid off 35 employees  for almost $4 million  in annual                                                               
payroll  and they  have idled  a number  of pieces  of equipment.                                                               
This  is the  trend in  the  overall industry  and the  Anchorage                                                               
community hadn't seen  the full impact of the  economics yet. You                                                               
can't  pull this  much  payroll  out of  the  state  and not  see                                                               
significant  trickle-down  economic  impacts.  Taking  additional                                                               
taxes by  hardening the  floor or other  proposed changes  to the                                                               
industry will cause an impact.                                                                                                  
                                                                                                                                
The longer  term implications  are that  once equipment  is idled                                                               
and employees  are laid off, capacity  is lost and as  oil prices                                                               
recover, there  will be  a significant delay  in response  to the                                                               
changing market  conditions. He urged  them to be  thoughtful and                                                               
to think long term. See what can  be done to get through the next                                                               
12 - 24 months  and see if prices do recover and  get out of this                                                               
bind without  making any significant  changes to the  current tax                                                               
policy. If  the new producers  who made investments based  on the                                                               
20  percent reduction  at the  wellhead are  now limited  to five                                                               
years,  those long  term investment  plans are  no longer  valid.                                                               
They  can control  tax and  regulatory policies,  but they  can't                                                               
control the price of the  commodity. Changing tax policy could be                                                               
seen as a negative to any kind of approach to a gas project.                                                                    
                                                                                                                                
9:32:08 AM                                                                                                                    
BOB HAJDUKOVICH,  CEO, Ravn Alaska, Anchorage,  Alaska, said they                                                               
had  $1 million  worth of  fly-in work  to support  Caelus Energy                                                               
operations and  were recently impacted  when Caelus  stopped work                                                               
on the  North Slope. They really  need that stable tax  policy to                                                               
be able to move forward.                                                                                                        
                                                                                                                                
They also  take a  global view that  businesses like  theirs that                                                               
serve over  100 communities  throughout the  state with  their 75                                                               
aircraft are benefited by the  exploration and development phases                                                               
of industry while the state  clearly benefits from volume flowing                                                               
through  the  pipe.  Anything  the  state  can  do  to  keep  the                                                               
exploration and development going is critical now.                                                                              
                                                                                                                                
CHAIR  GIESSEL,  finding  no   further  comments,  closed  public                                                               
testimony on SB 130 and recessed the meeting until 3:30.                                                                        
                                                                                                                                
9:35:25 AM                                                                                                                    
Recessed from 9:35 a.m. to 3:30 p.m.                                                                                            
                                                                                                                                
3:30:35 PM                                                                                                                    
CHAIR GIESSEL called the Senate  Resources Committee meeting back                                                               
to order  at 3:30  p.m. Senators  Costello, Coghill,  Stedman and                                                               
Chair Giessel  were present. Senators Wielechowski,  Micciche and                                                               
Stoltze arrived  shortly after.  The Chair  invited Mr.  Mayer to                                                               
provide an analysis of the Committee Substitute (CS) for SB 130.                                                                
                                                                                                                                
JANAK   MAYER,   Chairman   &  Chief   Technologist,   enalytica,                                                               
Legislative Consultant,  Washington, D.C., said he  would conduct                                                               
an  impact  analysis  for  CSSB  130  dividing  the  "high-level"                                                               
summary into  the North Slope  versus Cook Inlet and  other parts                                                               
of the state.                                                                                                                   
                                                                                                                                
3:35:06 PM                                                                                                                    
He said  for the North Slope,  the CS continues the  NOL credits'                                                               
ability to reduce  taxes below the 4 percent floor  (slide 2) and                                                               
changes the  tax assessment to  an annual basis (rather  than the                                                               
approach taken  by the original  bill to move  part of that  to a                                                               
monthly basis).                                                                                                                 
                                                                                                                                
For  "new oil,"  the ability  of  NOL $5/bbl  and small  producer                                                               
credits to reduce  taxes below the 4 percent gross  floor and the                                                               
annual  basis of  tax assessment  continue. However,  key changes                                                               
are  made: removal  of the  impact of  the Gross  Value Reduction                                                               
(GVR) in  calculating the  NOL to ensure  35 percent  support for                                                               
North Slope spending. At the  moment, interaction of these things                                                               
can  create  substantially  more  than  35  percent  support  for                                                               
spending on  the North  Slope in  certain circumstances.  It also                                                               
proposes an $85 million per  company cap on refundable credits to                                                               
protect the state  from the major liability that  could come from                                                               
major new developments.  It also proposes a  five-year time limit                                                               
on the GVR, which enalytica has concerns about.                                                                                 
                                                                                                                                
3:37:21 PM                                                                                                                    
The Cook Inlet provisions reduce  all Cook Inlet credits starting                                                               
January  1, 2017  (slide  3): the  well  lease expenditure  (WLE)                                                               
credit to 20 percent, qualified  capital expenditure (QCE) credit                                                               
to 10  percent, and  the net  operating loss  (NOL) credit  to 15                                                               
percent.  And  then from  January  1,  2018 onward,  sunsets  all                                                               
credits and exempts Cook Inlet from production tax.                                                                             
                                                                                                                                
The Middle  Earth provisions  grandfather existing  .025 frontier                                                               
basin credits  until 2022 and  phases down  the WLE, QCE  and NOL                                                               
credits, but doesn't eliminate them.                                                                                            
                                                                                                                                
General provisions  that apply to  both the North Slope  and Cook                                                               
Inlet:                                                                                                                          
- 7  percent quarterly compounded  interest on  delinquent taxes,                                                               
but only for three years                                                                                                        
- Tighter  language for  existing liabilities  to state  from oil                                                               
and gas production withheld from refundable tax credits                                                                         
- Alaska hire is linked to credit refund priority, not amount                                                                   
- Surety bond ($250K) to protect local creditors                                                                                
                                                                                                                                
3:38:23 PM                                                                                                                    
There is a big difference between  Cook Inlet and the North Slope                                                               
credits  (slide   4)  Mr.  Mayer   explained.  The   majority  of                                                               
refundable  credits go  to Cook  Inlet  producers. However,  Cook                                                               
Inlet production generates limited  direct revenue for the state.                                                               
The credits on  the North Slope are more limited,  but also are a                                                               
far smaller fraction of total value generated.                                                                                  
                                                                                                                                
3:39:25 PM                                                                                                                    
The CS maintains  the status quo in terms of  not changing either                                                               
the  minimum  tax  rate  or  to further  harden  the  floor  (the                                                               
original bill  said the NOL could  not be used to  further reduce                                                               
tax liability  below the  4 percent  gross floor).  The effective                                                               
tax rate  under ACES  could fall to  zero, he  explained, because                                                               
capital  credits  were applied  after  the  gross floor.  SB  21,                                                               
instead, had a similarly progressive  tax rate, although slightly                                                               
lower, the difference being that  just below 10 percent effective                                                               
tax  rate legacy  production would  shift over  from the  net tax                                                               
system to the gross tax system, which is highly regressive.                                                                     
                                                                                                                                
3:42:02 PM                                                                                                                    
At ease for technical teleconference difficulties.                                                                              
                                                                                                                                
3:45:00 PM                                                                                                                    
CHAIR GIESSEL called the meeting back to order at 3:45 p.m.                                                                     
                                                                                                                                
3:46:14 PM                                                                                                                    
MR.  MAYER  said the  biggest  change  for legacy  (North  Slope)                                                               
production was proposed in the  original bill and is the question                                                               
of hardening of  the floor and a gentle raising  of it (slide 5).                                                               
One  credit, the  NOL, for  legacy production  can take  one down                                                               
below the 4 percent gross floor.  The CS maintains the status quo                                                               
in allowing the incumbent legacy  producer's tax rate to go below                                                               
the 4 percent gross floor.                                                                                                      
                                                                                                                                
MR. MAYER  proceeded to  walk through  the rationale  in thinking                                                               
about the tradeoffs and why  from a policy perspective this might                                                               
be a sensible call to make.  He talked before about the effective                                                               
tax rates under  previous fiscal regimes - under SB  21 and under                                                               
the proposed  bill. The  left chart  showed a  highly progressive                                                               
tax system  under ACES where  the tax  rate could also  come down                                                               
substantially below what  was thought of as the base  tax rate of                                                               
25 percent, and as prices come  down the effective tax rate keeps                                                               
coming  down to  zero.  The  reason that  happens  is 20  percent                                                               
capital credits  under ACES that  act as a  progressive component                                                               
in the system, thus reducing that tax rate down further.                                                                        
                                                                                                                                
Initially there was  also a 4 percent gross floor  under the ACES                                                               
system,  but in  reality  that 20  percent  capital credit  could                                                               
bring one below  that floor, because it was  calculated after the                                                               
net minimum calculation was done.  The impact was that while that                                                               
4  percent  gross floor  existed  under  statute, in  reality  it                                                               
wasn't binding. The choice made  under SB 21 was to substantially                                                               
harden that by saying the  dollar-per-barrel credit couldn't take                                                               
one down  below that  4 percent  gross floor.  So, what  one sees                                                               
from the  chart is that  production tax under  SB 21 or  CSSB 130                                                               
essentially  maintains the  status  quo. But  a sharp  inflection                                                               
point happens  where the tax  switches over  from the net  to the                                                               
gross tax  and then  suddenly the tax  rate rises  very steadily.                                                               
That happens  because gross  tax is highly  regressive and  so as                                                               
prices continue  to fall,  the gross tax  takes up  steadily more                                                               
and more  of the  net value,  until it  takes up  all of  the net                                                               
value  at around  $50, because  there  is very  little net  value                                                               
remaining.                                                                                                                      
                                                                                                                                
So, in order to think about  what happens below those prices, one                                                               
needs  a  different  way  of  looking  at  the  data,  Mr.  Mayer                                                               
explained. That is  on the chart on the  right-hand side. Instead                                                               
of  an effective  production tax  rate,  it simply  looks at  the                                                               
actual amount of  tax paid per taxable barrel  produced. One sees                                                               
the red  line of SB 21/CSSB  130 again falling sharply  until the                                                               
point  of just  below $80/barrel  where  the switch  from net  to                                                               
gross tax  happens with  a sudden inflection  at which  point the                                                               
production  tax per  taxable  barrel falls  at  a much  shallower                                                               
rate. Then in  the mid-$40s is where, because there  is no longer                                                               
any profit and in fact companies  are actually taking a loss, the                                                               
eligible flat NOL  credit brings the tax paid  per taxable barrel                                                               
down further and down to zero.                                                                                                  
                                                                                                                                
Obviously a key change that would  have been made by the original                                                               
bill is both  the raising of the floor but  also the hardening of                                                               
it, meaning the  NOL credit can't be taken to  reduce against the                                                               
floor.  In thinking  about the  tradeoffs here,  Mr. Mayer  said,                                                               
there are a few things that  are important to think about. One is                                                               
that, by definition, in an  environment where a major producer is                                                               
eligible for  a NOL tax credit,  it is a company  that is already                                                               
making  a cash  loss. The  question is  a substantial  one as  to                                                               
whether it  is desirable  in those  circumstances to  continue to                                                               
levy an infinite  tax rate against that  producer versus allowing                                                               
the tax  steadily to  fall away, bearing  in mind  that companies                                                               
are still paying  large amounts in royalty, and  paying well over                                                               
100 percent government take on their overall production.                                                                        
                                                                                                                                
3:52:29 PM                                                                                                                    
Secondly, and a bigger point even  beyond the raising of taxes in                                                               
the most difficult  environment, it's not clear  that the benefit                                                               
of that  hardening is worth  the cost in  terms of impact  to the                                                               
companies' potential  future investments, when you  consider that                                                               
really this  is about needing  state revenue from the  future for                                                               
the present  rather than actually increasing  total revenue. That                                                               
is to say  if a company is accruing a  net operating loss credit,                                                               
simply  saying  that that  credit  cannot  be taken  against  the                                                               
floor, means that credit is  accrued and its value continues over                                                               
time. In other words that just  means that the credit the company                                                               
needs to  take as  a deduction is  against future  revenue rather                                                               
than taking it  at the moment against their  current revenue. For                                                               
the state  it means taking  a little bit  more in revenue  at the                                                               
moment  but correspondingly  be  taking less  in  revenue in  the                                                               
future. Those are the real questions to ask about that dynamic.                                                                 
                                                                                                                                
This also means that as prices  rise, those credits still need to                                                               
be paid out. That creates  an environment where prices have risen                                                               
substantially, but  state revenue hasn't accordingly,  because it                                                               
is  now effectively  paying back  that revenue  it took  from the                                                               
future to  the present, because all  the credits built up  in the                                                               
system. The  question is about whether  the cost of that  kind of                                                               
move is actually worth the benefits.                                                                                            
                                                                                                                                
3:54:53 PM                                                                                                                    
SENATOR MICCICHE  said that  hardening the  floor seems  like the                                                               
best  decision  for  the  state  at  this  time  and  it  is  not                                                               
intuitive,  and asked  if  companies have  the  ability to  apply                                                               
their tax liability right now or later.                                                                                         
                                                                                                                                
MR.  MAYER  answered  that ultimately  those  deductions  can  be                                                               
carried forward  under Alaska's system.  In that sense all  the 4                                                               
percent gross  floor does is to  say you have these  expenses and                                                               
you  can no  longer deduct  them this  year against  your income,                                                               
because that would  take you below the floor. By  doing that, the                                                               
state is simply pushing those expenses into future years.                                                                       
                                                                                                                                
3:58:19 PM                                                                                                                    
He  said one  of the  other changes  proposed under  the original                                                               
bill, though  not adopted in  the CS,  is the question  of annual                                                               
versus monthly tax calculations.  Director Alper has talked about                                                               
this  as "migrating  credits," but  enalytica thinks  it is  much                                                               
clearer   to  think   about  this   as   annual  versus   monthly                                                               
calculations and  slide 6  shows how  that works.  Keeping annual                                                               
calculation  avoids  a  tax  hike. He  explained  how  the  gross                                                               
minimum  tax  may   apply  to  some  months,   while  the  annual                                                               
calculation  remains  net  profit-based.  In  his  2014  example,                                                               
enforcing a monthly gross minimum  would have netted the state an                                                               
additional $100 million.                                                                                                        
                                                                                                                                
4:00:33 PM                                                                                                                    
MR.  MAYER said  some  key  things in  the  bill are  substantial                                                               
changes  and  need addressing;  other  changes  seem to  be  more                                                               
"salami slice"  revenue-raising tactics  that from  an investor's                                                               
perspective, are actually quite  chilling, because it's not clear                                                               
where  the incremental  raises  stop  and how  there  can be  any                                                               
certainty that this really is a solid and unchanging tax system.                                                                
                                                                                                                                
4:01:08 PM                                                                                                                    
CHAIR  GIESSEL  explained for  clarity,  that  he articulated  on                                                               
slide 5  that the CS does  not harden the floor.  It maintains SB                                                               
21.  And he  just said  on slide  6 that  the CS  does not  go to                                                               
monthly  tax  calculations  and   maintains  the  present  annual                                                               
calculation.                                                                                                                    
                                                                                                                                
MR. MAYER said that was correct.                                                                                                
                                                                                                                                
4:01:47 PM                                                                                                                    
He said slide  7 looks at how the changes  impact new North Slope                                                               
development.  To do  that they  looked at  a reasonably  accurate                                                               
model  of  sample  North Slope  investment  (not  any  particular                                                               
investment):  cumulative CAPEX  and  DRILEX of  $1.3 billion  and                                                               
average annual OPEX  of $15 billion to produce a  total of around                                                               
20 million  barrels of oil  at a  peak production rate  of 20,000                                                               
barrels a day drilled over eight  years. This process builds up a                                                               
realistic cash flow of recent investments.                                                                                      
                                                                                                                                
MR.  MAYER explained  the first  thing was  timing of  cash flows                                                               
that include:  CAPEX, drilling costs, OPEX,  and government take.                                                               
For the  first couple of years  in the project the  impact of the                                                               
credits is  negative. One  sees three years  of initial  up front                                                               
capital spending  of close to  $100 million on drilling  pads and                                                               
pipelines facilities before drilling  actually begins and several                                                               
years  of ongoing  drilling long  after  production has  actually                                                               
started.  This   means  because  there  is   substantial  ongoing                                                               
spending  through those  years you  can see  the government  take                                                               
gets  substantially   bigger  after  seven  or   eight  years  of                                                               
production once  drilling finally stops.  That is where  the bulk                                                               
of  government take,  but through  the net  profit tax,  actually                                                               
occurs. Taxes up until that  point where sustained drilling is no                                                               
longer  happening are  relatively  a much  smaller  piece of  the                                                               
picture. That  timing of cash  flows is crucial  in understanding                                                               
one of the  changes in the CS, which is  the question of limiting                                                               
the timing application of the GVR. Leading to slide 8.                                                                          
                                                                                                                                
4:04:53 PM                                                                                                                    
He explained  that the CS  places a  five-year time limit  on the                                                               
GVR (slide 8), and  that can have a major impact  on the value of                                                               
a project such  as this one or any North  Slope projects that are                                                               
the status quo  of this model (20 percent GVR).  The X axis looks                                                               
at  different  possible  lengths  in  years of  a  limit  on  the                                                               
currently non-time  limited GVR. The  Y axis looks at  percent of                                                               
the  current  value of  the  project  measured  in terms  of  net                                                               
present value  (NPV) over  time of  all the  cash flows  and what                                                               
percent would  be taken  away by  placing some  sort of  limit in                                                               
years on the  GVR. One sees quite intuitively that  as the length                                                               
of that limit  increases, the amount of value that  is taken away                                                               
by  having that  limit decreases.  So,  in all  these cases,  for                                                               
instance, by the  time a 15-year limit on the  GVR is reached, it                                                               
has very  little impact on  overall project economics.  One could                                                               
do that  very easily and not  be saying to current  producers who                                                               
have  made sanctioned  decisions based  on GVR  economics that  a                                                               
major substantive change is being made.                                                                                         
                                                                                                                                
As the  limit in time periods  in years get shorter,  that impact                                                               
on the  net present value of  a project gets much  greater and is                                                               
greatest  at  low   prices,  because  a  project   like  this  is                                                               
essentially  marginal  at $50/barrel  oil.  So,  if one  were  to                                                               
eliminate the  GVR that  is the  same as saying  there is  a zero                                                               
year limit on  the GVR, that actually wipes out  all the value of                                                               
the project  at that  price. Assuming the  $50 level  applies for                                                               
the entire lifespan of this  project, a five-year limit wipes out                                                               
more than  half of  the total  value of  that project.  At higher                                                               
prices,  the impact  is less,  but it  is still  substantial. For                                                               
instance, at $100/barrel they are  still talking about 20 percent                                                               
of  the net  present value  taken off  a project  by a  five-year                                                               
limit.  Whereas  a 10-year  or  greater  limit has  much  reduced                                                               
impact on the project. The key  reason why it's so great at those                                                               
short time  limits versus the  later ones is because  the project                                                               
has  substantial drilling  costs  in the  first  five years  (and                                                               
isn't paying  production tax),  and that 5  to 10-year  window is                                                               
actually where a lot of  the production tax liability occurs, and                                                               
therefore,  where a  lot of  the value  to the  company in  a GVR                                                               
exists. So,  Mr. Mayer cautioned  against a short  limit, because                                                               
it would  have "quite disruptive  impacts" in terms of  the value                                                               
of  these projects  to  investors that  have  already made  these                                                               
decisions.                                                                                                                      
                                                                                                                                
4:08:39 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if he  had the  NPV for a  project at                                                               
these various prices.                                                                                                           
                                                                                                                                
MR.  MAYER  answered  that  he  could go  back  to  some  of  his                                                               
calculations  and  get those  for  him.  At $60/barrel  for  this                                                               
project under the  status quo they are talking  about $50 million                                                               
net present  value (NPV)  going up  to over  $1 billion  north of                                                               
$135/barrel.                                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI asked if he used an NPV of $10.                                                                            
                                                                                                                                
MR. MAYER answered yes.                                                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI  asked if he  had those numbers  broken down                                                               
at $60, $70, $80, $90, and  $100/barrel and if the NPV was before                                                               
the GVR or for the total project value.                                                                                         
                                                                                                                                
MR. MAYER answered this has been  a status quo project assuming a                                                               
20  percent  GVR.  So,  just  over $55  at  $60/barrel,  $184  at                                                               
$70/barrel,  $310 at  $80/barrel, $556  at $100/barrel,  and just                                                               
under $800 at $120/barrel.                                                                                                      
                                                                                                                                
4:11:05 PM                                                                                                                    
Slide 9  graphed hardening the floor  for new oil subject  to the                                                               
GVR.  Mr. Mayer  wanted  to  show total  government  take over  a                                                               
project life-cycle, both  for status quo and under  the CS versus                                                               
under the  original bill. The  different components  are royalty,                                                               
oil tax, production  tax, and state and  federal corporate income                                                               
tax.  In almost  all  cases  except when  one  gets  to very  low                                                               
prices,  those  add  up  to  the  black  dashed  line,  which  is                                                               
government take,  and that is  below the sum  of the bars  at low                                                               
oil prices. The  production tax is effectively  negative at those                                                               
prices. If one assumes that oil  prices for the entire life cycle                                                               
of  this project  were  $40,  $50, or  $60/barrel,  that means  a                                                               
certain  amount  is being  paid  upfront  either though  the  tax                                                               
system or through  reimbursed NOL credits and at  the tail-end of                                                               
this  project,  revenues  occur through  profit-based  production                                                               
tax. At  the lowest prices, the  value of the credits  is greater                                                               
than  the value  of  the taxes.  Once one  reaches  above $60  or                                                               
$70/barrel  world,   the  value   of  the  subsequent   taxes  is                                                               
substantially  greater than  the value  of the  credits and  gets                                                               
greater as prices rise.                                                                                                         
                                                                                                                                
But even though production taxes  are effectively negative to the                                                               
state below $50/barrel, Mr. Mayer  said, one has to remember that                                                               
the  impact of  the other  components of  this fiscal  regime, in                                                               
particular the  substantial and regressive royalty,  is such that                                                               
one  can see  the design  of  the status  quo system  is to  give                                                               
overall  government  take for  new  projects  between 60  and  55                                                               
percent neutral over a very broad  price range. But at the lowest                                                               
prices that government  take still starts to rise and  gets up to                                                               
just  under 100  percent at  $40/barrel and  gets even  higher at                                                               
lower prices. That simply is the effect of the royalty.                                                                         
                                                                                                                                
So, hardening the floor in terms  of what can be deducted against                                                               
those credits  reduces (in  the world of  the original  bill) the                                                               
stakes to a  negative production tax position. In  those cases it                                                               
also means you  are simply getting to that  regressive portion of                                                               
the  curve driven  by  the  royalty sooner  and  harder; it's  no                                                               
longer  quite as  flat and  neutral across  the broader  range of                                                               
prices  as  might  otherwise  be  the  case.  So,  at  $40/barrel                                                               
government takes goes to 130-140 percent.                                                                                       
                                                                                                                                
For  new  production the  aim  was  to  have an  overall  neutral                                                               
regime, taking  into account  the effect  both of  the production                                                               
tax  and the  royalty, and  all  these components  across a  wide                                                               
range  of prices.  Understand that  in terms  of not  making that                                                               
change, one  is simply saying  this is still a  regressive system                                                               
and  government take  still gets  up  to 100  percent at  current                                                               
prices, and "we just don't want to take that even further."                                                                     
                                                                                                                                
4:14:55 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if any  other states have an even more                                                               
regressive tax structure at current prices.                                                                                     
                                                                                                                                
MR. MAYER  answered there are  many; the vast majority  of states                                                               
in the  U.S. are a gross  tax system. In that  sense, places like                                                               
North Dakota do  not look like they  were investment environments                                                               
at current  prices in many  regards.   There is also  a balancing                                                               
act  to be  performed.  Alaska is  unique in  the  U.S., in  this                                                               
context,  in having  a net  profits  system. It's  a system  that                                                               
could   potentially   be   neutral  or   progressive   and   take                                                               
substantially  more of  the value  at higher  prices. One  can be                                                               
better protected  on the down  side through the  royalty, through                                                               
parts of  the gross minimum  tax, than one  might be with  a pure                                                               
net profits tax.  And one can take more through  a net profit tax                                                               
than  one would  through  a regressive  system  of royalties  and                                                               
gross severance  taxes, but you can't  try to do both:  be Norway                                                               
and North Dakota.                                                                                                               
                                                                                                                                
4:16:25 PM                                                                                                                    
Slide 10  deals with what,  for the administration, is  a genuine                                                               
issue  that the  CS  addresses,  as the  original  bill did,  the                                                               
question of  the ability of  an NOL  credit to actually  be worth                                                               
more  than  35  percent  of   an  actual  loss,  because  of  its                                                               
interaction with  the GVR. The  table on  slide 10 shows  how the                                                               
calculations work.  The core  thing to realize  is that  under SB                                                               
21,  the  status quo,  what  would  otherwise  be $6  dollars  in                                                               
production tax  value is assessed  as negative $6/barrel,  and at                                                               
$40/barrel  it is  a loss  of  twice as  big as  that. Mr.  Mayer                                                               
explained that the  reason it is twice as big  is "the fiction of                                                               
reduced  revenue  that is  created  to  allow  a lower  tax  rate                                                               
without ring-fencing costs."                                                                                                    
                                                                                                                                
MR.  MAYER  explained  that  because  the  statute  has  the  NOL                                                               
calculated on  that inflated loss  instead of the 35  percent net                                                               
credit against an actual NOL,  his example has 70 percent support                                                               
for  government  spending.  The difference  comes  when  the  NOL                                                               
credit is calculated  including the effect of the GVR  or not and                                                               
this  comes  particularly  prominent   at  low  oil  prices.  The                                                               
difference can be  up to $10 million for his  example project, in                                                               
particular,  between the  years  8  and 10  when  the project  is                                                               
actually  making  a  profit. The  difference  between  those  two                                                               
things is  credits are being paid  out - the project  is actually                                                               
in positive cash  flow status - but once the  GVR is assessed, it                                                               
appears as  though it's making a  loss. So, the effect  of the CS                                                               
is to  say this doesn't seem  like what was intended  under SB 21                                                               
and addresses that.                                                                                                             
                                                                                                                                
CHAIR GIESSEL  said she  thought she  saw a  typographical error.                                                               
Looking at the chart  of numbers on the left hand  side he has SB                                                               
21 GVR and the next column says HB 247.                                                                                         
                                                                                                                                
MR. MAYER apologized  for the error and said those  should be the                                                               
original SB 130 as well as CSSB 130.                                                                                            
                                                                                                                                
He continued that  slide 11 concerned the refund  limits. The key                                                               
thing to  understand is that  any sort of  binding refund-ability                                                               
limit  tighter  than  the  amounts   actually  being  claimed  by                                                               
companies has an  impact in terms of the amount  of capital those                                                               
companies need  to build a  project and  on rates of  return they                                                               
receive.  The chart  on the  left looks  at cumulative  cash flow                                                               
over time for a $1.3 billion  project, but it probably only takes                                                               
$300-$400  million to  build. This  is  due to  a combination  of                                                               
things: one being that many  of drilling costs are incurred after                                                               
the start  of production. So,  all that  the project needs  is to                                                               
get to  a point where the  cumulative cash flow is  at its lowest                                                               
level  and  from  that  point  forward,  this  project  is  self-                                                               
sustaining.  So, the  difference  between the  two  lines in  the                                                               
graph was the question  of how much of the NOL  tax credit can be                                                               
refunded.  To the  extent that  it is  paid out  by the  treasury                                                               
means  that  substantially  less  capital is  required  by  these                                                               
companies to build a project.                                                                                                   
                                                                                                                                
So, if  a company goes  into a project  like this looking  at the                                                               
letter of law as it stands now  thinking it can be built for $350                                                               
million,  the original  bill has  a $25  million limit,  assuming                                                               
this project is  being built by a company with  no other projects                                                               
claiming an  NOL credit,  that probably  increases the  amount of                                                               
capital required to somewhere over $400 million.                                                                                
                                                                                                                                
4:22:01 PM                                                                                                                    
Several companies  one can  think of now  have other  projects in                                                               
their  portfolios that  are also  in NOL  territory still.  For a                                                               
company  like that  the impact  could be  in many  cases actually                                                               
close  to $500-550  million of  total capital  required to  build                                                               
this project.  So, the key  here is  the impact on  projects that                                                               
have already been  sanctioned and are currently  under way, where                                                               
if one were to place a  strict limit particularly as the original                                                               
bill  did, in  the  middle  of this  year,  they are  essentially                                                               
saying to  these companies  you thought  you needed  $350 million                                                               
and you now need  50 percent more than that, and  also by the way                                                               
your internal  rate of return  (IRR) has gone  substantially down                                                               
(chart  on the  right of  slide 11).  They have  to tell  that to                                                               
their financiers, and that will not be an easy conversation.                                                                    
                                                                                                                                
On  the other  hand, Mr.  Mayer explained,  protecting the  state                                                               
against  potential credit  outlays  is a  valid  action. And  the                                                               
question remains what a near  Kuparuk-sized new development could                                                               
look like  and that could  mean more  than $2 billion  in credits                                                               
over the three  or four years of development before  the start of                                                               
production.  It still is a hard argument to ask for more money.                                                                 
                                                                                                                                
4:24:29 PM                                                                                                                    
MR. MAYER  said the  question is  if $85  million could  work for                                                               
companies  that have  already started  their projects  or whether                                                               
that starts  to seriously challenge their  current capital plans.                                                               
If it  does, the question  becomes is the difference  between $85                                                               
million and of  $100 million worth the impact  of that investment                                                               
or not. It makes a lot of sense  as a limit in terms of trying to                                                               
protect  the  state  against  the  environment  where  there  are                                                               
multiple  hundreds of  millions of  dollars  a year  to a  single                                                               
company  for a  major new  development on  the scale  that hasn't                                                               
been seen recently.                                                                                                             
                                                                                                                                
4:25:02 PM                                                                                                                    
Slide 12 considered  Cook Inlet changes and  their impacts. There                                                               
are currently  three credits  in Cook Inlet:  the 25  percent NOL                                                               
credit for  carried-forward annual  loss, stackable  with either,                                                               
the  20  percent  QCE  credit for  all  qualified  capital  lease                                                               
expenditures,  or  the 40  percent  WLE  credit for  well-related                                                               
capital lease expenditures.                                                                                                     
                                                                                                                                
MR. MAYER  said the  25 percent  NOL credits  for Cook  Inlet are                                                               
very  different than  the  operating loss  credits  on the  North                                                               
Slope, because  there is no  corresponding production tax  on oil                                                               
and only  a very small  production tax on  gas in Cook  Inlet. In                                                               
addition, that can be stacked  with either a 20 percent qualified                                                               
capital spending  credit or suspending  well-related, intangible,                                                               
drilling costs  up to 40 percent  credit, and if one  is eligible                                                               
for the NOL credit with minimal to no taxes.                                                                                    
                                                                                                                                
Under the  CS those numbers would  be roughly halved down  to 15,                                                               
10,  and 20  percent respectively  in 2017  and sunset  from 2018                                                               
onwards and there  would be no production tax in  Cook Inlet from                                                               
2018 onwards.  There would be  a shift to a  low government-take,                                                               
free market  approach that says we're  not going to look  to this                                                               
as a source of  tax revenue and it is not the  place for the very                                                               
substantial subsidies that have occurred so far.                                                                                
                                                                                                                                
4:27:00 PM                                                                                                                    
MR.  MAYER  said   the  high  level  impacts   of  those  things,                                                               
particularly  for  ongoing  drilling  in mature  fields  and  new                                                               
projects where very substantial  additional demand over and above                                                               
what exists in Cook Inlet at  the moment, could still work in the                                                               
Cook  Inlet with  no credits  at  all. The  one crucial  question                                                               
where no taxes  can be seen as  an attractive regime is  if it is                                                               
generally seen by  players in the market as durable.  So far, one                                                               
of the  key rolls of  the credits, particularly in  recent years,                                                               
is  to say  people  don't really  know what  the  future of  this                                                               
regime looks like  from 2017, and from 2018  onwards things start                                                               
to look  blurry, but at least  there are credits. So  the payback                                                               
times are  very short. For a  regime with no credits  but also no                                                               
taxes that can be a very good regime,  but it needs to be seen as                                                               
lasting for  the next decade and  well beyond. If that  isn't the                                                               
case, the  conclusions around attractiveness  start to  look very                                                               
different.                                                                                                                      
                                                                                                                                
4:27:48 PM                                                                                                                    
SENATOR STEDMAN  said the "free  market approach" was "kind  of a                                                               
twist,"  because  a  free  market   lacks  a  lot  of  government                                                               
intervention and  he didn't see  how a zero tax  definition could                                                               
be a free market approach.                                                                                                      
                                                                                                                                
MR.  MAYER responded,  "All of  these things  are relative."  The                                                               
current  approach in  Cook  Inlet  is one  of  very strong  state                                                               
intervention through a high level of subsidy of investment.                                                                     
                                                                                                                                
In terms of achieving the state's  aims there, there are a number                                                               
of tools  it can  use. One  is the fiscal  lever which  the state                                                               
leans most heavily  on at the moment; another is  the question of                                                               
prices which  are high  and fairly regulated  at the  moment, and                                                               
the third is  the question of effective market  regulation to try                                                               
to  create   a  more  competitive   market  (probably   the  most                                                               
neglected).                                                                                                                     
                                                                                                                                
The approach of the CS says  from 2018 onwards the consent decree                                                               
goes away,  no major  spending, no major  subsidy, but  also this                                                               
isn't going to  be a major source of tax  revenue. In that sense,                                                               
it's a  fiscal system that  looks not  unlike large parts  of the                                                               
federal offshore, which also has  a low fixed royalty which doles                                                               
revenues to the  state that are seen as  highly attractive fiscal                                                               
regimes,  because they  have a  low level  of overall  government                                                               
take.                                                                                                                           
                                                                                                                                
4:30:25 PM                                                                                                                    
SENATOR WIELECHOWSKI said  Cook Inlet had low taxes  for years at                                                               
very low  prices of  $1 to  $3 and very  little subsidies,  and a                                                               
huge amount  of gas, but in  the late 90s the  situation changed.                                                               
Then the  state started doing more  subsidies in the form  of tax                                                               
credits while  the tax remained  at zero.  He asked if  Mr. Mayer                                                               
had every  done an  analysis to figure  out what  really impacted                                                               
Cook  Inlet: the  prices,  which  are among  the  highest in  the                                                               
country, or the subsidies?                                                                                                      
                                                                                                                                
MR.  MAYER  answered  enalytica   had  looked  at  the  available                                                               
historical data  last week and  presented more  detailed versions                                                               
of  that   to  other  committees,  but   broadly  speaking,  they                                                               
concluded a  lot of  things were  happening at  the same  time in                                                               
Cook Inlet over  the last 5 to  10 years. On one  hand, there was                                                               
the  natural  evolution of  the  basis;  one or  two  established                                                               
players focused  on the area back  in the day and  now after many                                                               
years of steady decline, no longer  a material basin for them and                                                               
for whom an exit at some  point was going to be natural. Relative                                                               
to the Lower 48  there were some of the lowest  gas prices in the                                                               
country at the  time when the Henry Hub was  at an all-time high,                                                               
very different than  at the moment. He thought  the natural cycle                                                               
of  both  bringing  in  new companies  that  were  interested  in                                                               
rejuvenating the  basin combined  with a  move to  higher pricing                                                               
was always  going to have some  substantial effect. And a  lot of                                                               
the effect they have seen has to do with those two things.                                                                      
                                                                                                                                
Now clearly at  the time there was a great  deal of concern about                                                               
where the situation was headed  and throwing credits into the mix                                                               
substantially  accelerated  that  transition.  It  made  it  much                                                               
easier to bring in the  companies that eventually came to achieve                                                               
a lot of that turnaround. It  is very difficult to pick apart how                                                               
much of that was  due to the credits and how much  was due to the                                                               
fundamental changes  going on in  the basin. One has  to conclude                                                               
it's about  all these things  in combination, and when  one looks                                                               
purely at the  economics for things like ongoing  drilling in the                                                               
mature  fields, it's  hard  to see  that,  particularly at  these                                                               
prices in  Cook Inlet,  that it  is not  a desirable  activity to                                                               
continue even without credits.                                                                                                  
                                                                                                                                
4:34:26 PM                                                                                                                    
MR. MAYER  said slide 13  presented three models  of hypothetical                                                               
projects based on  assumptions around real things  they have seen                                                               
in  the  last couple  of  years  in  the  Cook Inlet.  The  first                                                               
scenario  was   a  market  constrained  one:   a  completely  new                                                               
development - though  not additional drilling in  mature fields -                                                               
but  for the  sorts of  things seen  recently like  new resources                                                               
trying to be brought to market  with old gas projects. The reason                                                               
they are looking  particularly at gas projects is  that they want                                                               
to  understand what  is  involved in  achieving  security of  gas                                                               
supply in Cook Inlet  on an ongoing basis if the  idea is to have                                                               
that degree of support                                                                                                          
                                                                                                                                
He said the big challenge for a  project like this is to say this                                                               
is really  a project  that is  sized to produce  much more  gas -                                                               
over 100 mmcf/day  - and so one is spending  hundreds of millions                                                               
of dollars on  facilities, pipeline, platforms, and  all the rest                                                               
(and one has seen these sorts of  amounts of cash to produce in a                                                               
facility with that sort of capacity  in at least one place in the                                                               
Cook Inlet).   But in facing a  fundamentally constrained market,                                                               
that  means there  is  only  a very  small  wedge of  incremental                                                               
demand that can be supplied, and  the economics of a project like                                                               
that  look  enormously  challenged.   And  they  look  enormously                                                               
challenged even with  the very generous 45 to  65 percent support                                                               
credits that have  existed in the Cook Inlet so  far. The project                                                               
in this model  drills only a handful of wells  over the course of                                                               
a  decade  starting  off  producing about  18  mmcf/day  of  gas,                                                               
getting  up to  maybe  40  mmcf/day well  into  the next  decade.                                                               
Having made that big upfront  investment makes the economics very                                                               
strained.                                                                                                                       
                                                                                                                                
4:36:40 PM                                                                                                                    
MR. MAYER explained  that the status quo for a  project like this                                                               
in Cook  Inlet on slide 14  means that because of  the big amount                                                               
of  cash the  state is  providing, if  they look  at net  present                                                               
values across  a wide  range of  prices from  $5 to  $10/mcf, the                                                               
state is net  negative in all of those  environments. The company                                                               
is maybe just  positive sort of above $7/mcf and  there are rates                                                               
of return (ROR) that might be  just bearable, but don't look very                                                               
attractive,  and  one sees  the  lowest  of government  takes  of                                                               
anywhere in the world in around the 40 percent range.                                                                           
                                                                                                                                
Under SB  130 in its  original form that change  is substantially                                                               
where there  is only the  25 percent NOL  credit and none  of the                                                               
qualified  capital or  well lease  expenditure credits.  There is                                                               
substantially  higher  government  take, a  situation  where  the                                                               
state  may be  net negative,  but at  least at  higher prices  is                                                               
possibly net positive. So, the  overall risk equation between the                                                               
company and the  state seems a little better  balanced, though of                                                               
course, the project  is that much further challenged  in terms of                                                               
ROR and whether it is actually  a favorable project to produce at                                                               
these prices.                                                                                                                   
                                                                                                                                
MR. MAYER  explained that  the cost assumptions  he is  using are                                                               
based on  projects they  have seen recently  in the  area, though                                                               
undertaken  at a  time when  worldwide competition  for resources                                                               
meant the costs  were very high, and those costs  are coming down                                                               
to a  point that  it might  be feasible to  start to  think about                                                               
undertaking  a project  like this  in  a way  that these  figures                                                               
don't accurately  capture. What  they see at  the moment  is that                                                               
under the  cost structure  that has  existed until  now, projects                                                               
like this  are very  challenged even with  the credits.  What the                                                               
credits  meant was  that the  state  was in  a strongly  negative                                                               
position and  they made something  like this maybe  just bearable                                                               
to do.                                                                                                                          
                                                                                                                                
4:38:51 PM                                                                                                                    
Slide  15   showed  the   results  if   instead  there   were  an                                                               
unconstrained  demand  environment,  a very  different  situation                                                               
from  what  exists in  Cook  Inlet  today,  but  one that  has  a                                                               
substantial  export  customer,  for instance,  or  another  major                                                               
source of demand that doesn't  exist at the moment. The economics                                                               
of  a   project  like  this   would  look  very   different,  and                                                               
fundamentally   it's  this   rather  than   anything  else   that                                                               
determines  whether a  project like  this can  really work.  This                                                               
project  has   exactly  the   same  initial   facilities  capital                                                               
investment,  but  an optimal  drilling  program  that instead  of                                                               
drilling  just four  wells over  the course  of a  decade, drills                                                               
around three  wells a year for  the first three years  and then a                                                               
lower  level  of  drilling  every  year  after  to  maintain  the                                                               
plateau.  In the  case of  around 140  mmcf/day of  gas the  cash                                                               
flows look  much more like what  one might expect from  this sort                                                               
of gas project and much healthier economics as a result.                                                                        
                                                                                                                                
The graph  on slide 16  represented a  status quo company,  an SB                                                               
130 NOL  only company and a  CSSB 130 no credits  company. In the                                                               
first company,  the federal government  and the state are  all in                                                               
positive territory,  although the state  is by far the  worse off                                                               
of the  three, because of the  very low level of  government take                                                               
(50 percent) and  quite attractive ROR. The  relative position of                                                               
the state under  SB 130 or the CS improves  substantially and the                                                               
position of the company deteriorates  substantially, but in terms                                                               
of internal ROR  even in an environment with no  credits it seems                                                               
possible, particularly  if one  could reduce  some of  the costs,                                                               
that projects  like this could go  ahead if they just  had access                                                               
to  the end  gas market  that  they need.  Constrained demand  is                                                               
overwhelmingly the  problem for a  project like this and  not the                                                               
credits,  particularly if  some of  the producers  that might  be                                                               
capable of  additional projects like  this at the moment  can get                                                               
their existing  investments to a point  of self-sustainability on                                                               
a cash flow front.                                                                                                              
                                                                                                                                
4:41:06 PM                                                                                                                    
MR.  MAYER  said  slide  17  looks at  the  question  of  ongoing                                                               
drilling in mature fields assuming  similar drilling costs to the                                                               
first  constrained example  and similarly  drilling for  the four                                                               
wells  over  the   period  of  a  decade.  There   is  less  well                                                               
productivity,  because they  are drilling  in mature  fields, but                                                               
looking  at what  the  cash  flow economics  look  like. The  big                                                               
difference here  is that no  big facilities  need to be  built to                                                               
enable the work to occur.                                                                                                       
                                                                                                                                
4:41:37 PM                                                                                                                    
Slide 18 has two columns, because  the original SB 130 and the CS                                                               
fundamentally look  the same:  under the  original bill  the only                                                               
credit  was  the  NOL  credit  and  companies  that  have  mature                                                               
existing fields producing are by  and large not eligible for that                                                               
and  so the  impact  looks the  same on  them  as the  governor's                                                               
original  bill  did.   One  sees  very  high   internal  ROR  for                                                               
investments in  mature fields  under the status  quo with  a high                                                               
level of state  support. If one thought this was  a stable regime                                                               
that would continue well into  the future, with no production tax                                                               
and  no credits,  it  still  looks very  attractive  in terms  of                                                               
undertaking this work on an  ongoing basis provided one genuinely                                                               
believes that  it is a stable  regime that isn't going  to change                                                               
in the future.                                                                                                                  
                                                                                                                                
MR. MAYER said that concluded his analysis.                                                                                     
                                                                                                                                
4:42:49 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  him to put together a  chart that has                                                               
the  investment metrics:  government take  and internal  investor                                                               
ROR, for the GVR.                                                                                                               
                                                                                                                                
MR. MAYER replied that he would.                                                                                                
                                                                                                                                
4:43:29 PM                                                                                                                    
CORRI FEIGE,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural Resources  (DNR), Anchorage, Alaska, said  she would make                                                               
some general  observations about  impacts to activity  levels she                                                               
could perceive through the CS as  well as look at data capture to                                                               
the NDR. She said  the CS takes a step forward  in trying to find                                                               
a reasonable balance  between the state outlay  against trying to                                                               
maintain  a  healthy  investment   climate,  which  will  support                                                               
continued exploration and development activities in the state.                                                                  
                                                                                                                                
MS. FEIGE  said that DNR deals  with this type of  legislation in                                                               
two ways:  first and most  directly is  through the data  that is                                                               
captured  by   DNR  through  the  existing   credit  program  and                                                               
exploration  incentive  credits,  and secondly  would  be  simply                                                               
through  activity  level  and  the  pace at  which  oil  and  gas                                                               
exploration and  development work is  taking place in  the state.                                                               
To look  first at credit  data with the  roll back and  the phase                                                               
out of  all of  the -  especially in Cook  Inlet -  credits (NOL,                                                               
QCE, WLE) and the coinciding  sunset of the exploration incentive                                                               
credits, would  roll up into a  net impact to DNR  of just simply                                                               
not having as much data available that would go public.                                                                         
                                                                                                                                
She said  she had spoken  at length previously about  the seismic                                                               
data  and some  of the  expanded downhole  data sets  that become                                                               
available for  public distribution through some  of the incentive                                                               
credit  programs. All  of  that being  said,  the division  would                                                               
still be able to capture all  the data it needs to continue doing                                                               
its  job.  Well  data would  be  able  to  be  made public  in  a                                                               
continuing fashion as  it is done now through the  Alaska Oil and                                                               
Gas Conservation Commission (AOGCC).                                                                                            
                                                                                                                                
4:47:01 PM                                                                                                                    
On the topic  of activity levels around the state,  she said Cook                                                               
Inlet with  the phase  out of  the credits  and reduction  of the                                                               
other credits to zero and the  removal of all production taxes is                                                               
an interesting  thing to contemplate.  She agreed  with enalytica                                                               
that in the  long term a significant downturn would  not be seen,                                                               
but in  the near  term, especially with  those projects  that are                                                               
currently  in  active  drilling and  development  phases  -  most                                                               
notably  BlueCrest at  the  Cosmo development  and  Furie at  the                                                               
Kitchen Lights Unit - they would  see a time period over the next                                                               
couple of years where those  companies work very diligently to do                                                               
as much  as they  can while  the other  Cook Inlet  credits still                                                               
exist.  Then  there  would  be  a  retooling  period  with  their                                                               
financing. Those  kinds of changes  clearly would be  material to                                                               
their  financing  moving forward.  Both  of  those companies  are                                                               
working now at  securing their finance for the next  two to three                                                               
of their  activities. She  would expect to  hear from  them about                                                               
amendments to  the pace of  that activity through their  plans of                                                               
operation and development for those specific units.                                                                             
                                                                                                                                
Over  the long  haul, Ms.  Feige said,  that zero  production tax                                                               
really does try to balance Cook  Inlet against the North Slope in                                                               
terms  of  state outlay  and  recognizes  that  Cook Inlet  is  a                                                               
different market. It is the source  of energy for the majority of                                                               
the population in Alaska.                                                                                                       
                                                                                                                                
Looking at other  areas of the state - Middle  Earth, for example                                                               
- with the  reduction in support level that the  CS provides, she                                                               
would  expect to  see  a slowdown  in  activity levels.  Although                                                               
exploration success in  the activities they will see  in the next                                                               
year could  be a  game changer.  With that  comes the  ability to                                                               
find capital and  find additional partners. She  didn't think the                                                               
slowdown would be catastrophic.                                                                                                 
                                                                                                                                
4:50:12 PM                                                                                                                    
She said  she was glad  enalytica took  the time to  walk through                                                               
the  phase out  of the  GVR over  five years,  because DNR  would                                                               
"absolutely  concur" that  the five  years even  out to  10 years                                                               
would be  too short. Fifteen would  have nearly no impact  to the                                                               
value of the  project, and that is important  especially in terms                                                               
of keeping ongoing  very large developments coming  down the pipe                                                               
on the North Slope moving ahead.                                                                                                
                                                                                                                                
4:50:59 PM                                                                                                                    
MS.  FEIGE said  DNR has  concerns with  the type  of bonding  in                                                               
section 44 of  the new CS being  placed in a bill  like this. DNR                                                               
bonds regularly  for impacts from activities  that are associated                                                               
with the  oil and gas  exploration and development work,  but for                                                               
the state to  step in and tie  up capital in what may  or may not                                                               
be an  accurate number  at the  $250,000, raises  some questions.                                                               
They wonder about  the mechanics of how that  program might work.                                                               
In  some  discussions  around  the   table  and  with  bankruptcy                                                               
attorneys the take  away was there were  probably better vehicles                                                               
through  workman   liens  and  other   means  that   small  party                                                               
contractors could protect themselves  more effectively. The state                                                               
could  build  stronger  protections through  expanding  statutory                                                               
liens  rather than  through a  bond program  associated with  tax                                                               
credit refunds.                                                                                                                 
                                                                                                                                
SENATOR WIELECHOWSKI  asked if DNR supports  removal of hardening                                                               
the floor.                                                                                                                      
                                                                                                                                
MS.  FEIGE replied  they didn't  discuss that  specifically; they                                                               
paid more attention  to what DNR's interaction with  this type of                                                               
legislation  is.  They  very  much applaud  the  balance  the  CS                                                               
attempts to take.                                                                                                               
                                                                                                                                
SENATOR  WIELECHOWSKI   asked  if  she  speaks   for  the  Walker                                                               
administration and if DNR supports the CS as it stands.                                                                         
                                                                                                                                
MS.  FEIGE  answered  that  she   can  only  speak  for  herself,                                                               
personally, and not  Commissioner Rutherford and she  felt the CS                                                               
is taking a step in the right direction.                                                                                        
                                                                                                                                
4:54:20 PM                                                                                                                    
SENATOR  MICCICHE asked  if the  change  is from  people who  are                                                               
borrowing on a guarantee of state  credit to folks that require a                                                               
lot more access  to capital or other sources of  security and how                                                               
the removal of credits wouldn't  result in a downturn during that                                                               
vulnerable stage of exploration and development.                                                                                
                                                                                                                                
MS. FEIGE  replied that  she anticipates  a retooling  period and                                                               
that as the credits phase  themselves to zero, they will probably                                                               
see a flurry  of activities while they still exist.  In that two-                                                               
year period  they would see  a lot  of activity on  the financing                                                               
front, knowing  that as they  move forward  there will be  a zero                                                               
tax  regime on  the backside.  She  sees a  slowdown in  activity                                                               
while  the  retooling takes  place,  and  that would  impact  the                                                               
smaller  companies  more  and  those  that  have  less  depth  of                                                               
capital, but she  also thought that smaller  companies would join                                                               
forces to pool capital on good looking prospects.                                                                               
                                                                                                                                
4:57:21 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if she expected the  amount the state                                                               
has to pay  out in credits in  the next few years  to increase in                                                               
Cook Inlet.                                                                                                                     
                                                                                                                                
MS. FEIGE answered if companies  are actively drilling, it stands                                                               
to reason  that they will do  as much in the  two remaining years                                                               
as they  possibly could.  However, with the  levels at  which the                                                               
credits  are stepping  down, essentially  being  halved over  the                                                               
next couple of  years, the net outcome given  what is drill-ready                                                               
today, in Cook Inlet would be about  a draw, if not a little less                                                               
in their projection.                                                                                                            
                                                                                                                                
4:58:23 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  if  she supported  removal  of  the                                                               
confidentiality provisions.                                                                                                     
                                                                                                                                
MS.   FEIGE  replied   that  DNR   does  not   deal  with   those                                                               
confidentiality provisions and she has no position on that.                                                                     
                                                                                                                                
4:58:59 PM                                                                                                                    
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
Anchorage,  Alaska, said  he had  to get  to another  meeting and                                                               
that  Mr. Alper  would provide  a  comparison of  the tax  credit                                                               
bills.                                                                                                                          
                                                                                                                                
KEN ALPER,  Director, Tax Division* Department  of Revenue (DOR),                                                               
Anchorage, Alaska,  said he had  a side-by-side comparison  and a                                                               
granular fiscal  note table with different  line item components.                                                               
He also would  provide the current version of  the companion bill                                                               
that is in the  other body. Mr. Alper said he  saw this bill last                                                               
night and today  he embarked upon a modeling exercise  to come up                                                               
with fiscal note  numbers. Frankly, he expected the  totals to be                                                               
larger than what  was in the bottom line number.  The FY18 impact                                                               
is about $55 million and perhaps $80 million in FY19.                                                                           
                                                                                                                                
MR. ALPER  said it was an  effort to keep the  four bill versions                                                               
straight and  in many ways  the most straight  forward comparison                                                               
is the House  Resources CS that had two major  changes to current                                                               
law:  the ramp  down to  a lesser  extent of  the Cook  Inlet tax                                                               
credits as  well as  resolving the GVR  net operating  loss (NOL)                                                               
interaction that Mr. Mayer talked about on the North Slope.                                                                     
                                                                                                                                
Going forward from that point the  Senate Resources CS has a more                                                               
aggressive  Cook  Inlet  credit  reduction  with  the  taxes  and                                                               
credits all going  to zero in 2018. Then "the  graduation" of the                                                               
new oil  to become old  oil after  five years of  production. The                                                               
fiscal note  (line 6)  has it showing  up as  incremental revenue                                                               
beginning  in  FY21  when  the  first  of  the  fields  that  are                                                               
currently enjoying the  GVR on the North Slope will  start to pay                                                               
taxes effectively  at the  full rate.  Compared to  the Resources                                                               
version that  has the stepped  down Cook Inlet credits,  the full                                                               
removal of  Cook Inlet  credits doesn't actually  show up  in the                                                               
fiscal note until  FY20. It seems counterintuitive,  but there is                                                               
a  natural  time  lag  between company  spending  and  the  state                                                               
spending.                                                                                                                       
                                                                                                                                
He explained that the repeal of  all these credits that are based                                                               
effectively on  companies spending money or  showing an operating                                                               
loss in calendar year 2018 doesn't  really get applied for to the                                                               
state until that company files its  2018 taxes for which the true                                                               
up payment is  due in late March  of 2019. By the  time his staff                                                               
reviews those  applications -  it is about  120 day  turnaround -                                                               
and issues  credit certificates it  would be July 2019.  They get                                                               
refunded within  several weeks  of that point.  Once they  are in                                                               
July 2019, it's really an FY20  expenditure for the great bulk of                                                               
the credits  that might be  earned by spending money  in calendar                                                               
year 2018.                                                                                                                      
                                                                                                                                
Unfortunately, Mr.  Alper said, the side-by-side  document on the                                                               
screen was provided  based on an earlier version of  the bill. He                                                               
used the metric  on the bottom for the fiscal  impact in FY19 and                                                               
FY18  whereas the  CS really  kicks  in in  FY20. So  there is  a                                                               
dramatically larger  impact in the  FY 20/21 columns  compared to                                                               
the House Resources version.                                                                                                    
                                                                                                                                
5:04:29 PM                                                                                                                    
Starting  from there  the  main changes  from  the House  Finance                                                               
version is the  hardened floor. They did the  2 percent hardening                                                               
of the floor against many  credits including the NOL. That change                                                               
alone is worth about $100  million in incremental revenue that is                                                               
to a certain  extent just a delay. When you  increase the minimum                                                               
tax payments  without allowing the  NOLs to be used  against them                                                               
means  you are  increasing the  NOL carry  forward, which  aren't                                                               
being reduced by offsetting a  tax. Instead they carry forward to                                                               
a future year where they will be offsetting a tax.                                                                              
                                                                                                                                
MR. ALPER  explained that the idea  of a carried forward  NOL for                                                               
nonrefundable  NOLs  from major  producers  is  a relatively  new                                                               
phenomenon. It  was not part of  their prior analysis and  it was                                                               
not seen in material amounts  until they had already produced the                                                               
spring revenue forecast  in the later part of  March, about three                                                               
weeks ago. It is a new thing  and they are endeavoring to keep it                                                               
as  a tracked  number on  all the  comparison analysis  with this                                                               
bill,  because every  one of  them in  addition to  affecting the                                                               
state's revenue  is also affecting  the state's  future liability                                                               
for the carry forward credits. It is an important metric.                                                                       
                                                                                                                                
MR. ALPER  also adjusted a  statement by  Mr. Mayer when  he said                                                               
that the  hardening of the floor  moves all of that  liability to                                                               
the future; he would say it moves  most of it to the future. Some                                                               
of the  incremental revenue  from hardening  the minimum  tax was                                                               
related to  the new  oil that  currently gets  the GVR,  and that                                                               
$5/barrel credit  can be used  to reduce taxes below  the minimum                                                               
tax to  zero. Bringing  that oil  under the  minimum tax  is true                                                               
revenue and not  deferred revenue through future  NOLs. These are                                                               
the  great bulk  of the  dollar containing  provisions of  the CS                                                               
before them.                                                                                                                    
                                                                                                                                
5:06:48 PM                                                                                                                    
Some of  the secondary  provisions that are  important are  the 7                                                               
percent  interest  rate for  three  years  and then  no  interest                                                               
beyond that. He has watched that  language evolve as the bill has                                                               
been in various  committees and he appreciates  the concern about                                                               
audit delays  which the department  is working on  correcting. By                                                               
next year it  should be better. He also understood  the desire to                                                               
ramp down  interest in  some way,  and that  makes sense  after a                                                               
fixed  period  of time.  The  House  Finance version  reverts  to                                                               
simple interest after a number  of years and this version reverts                                                               
to no interest.                                                                                                                 
                                                                                                                                
He wanted  to clarify that  there might  be a concern  because of                                                               
the way  the effective dates work.  Right now there are  very low                                                               
interest rates. There is a 3  percent rate in current statute and                                                               
as this bill kicks in, there  is some concern that that 3 percent                                                               
interest  will drop  down to  zero on  the three-year  old audits                                                               
immediately  and  there  won't  be   any  period  of  the  higher                                                               
interest.  However,  that  could   be  fixed  through  transition                                                               
language.                                                                                                                       
                                                                                                                                
5:08:20 PM                                                                                                                    
He  raised  another  question regarding  inconsistencies  in  the                                                               
presentation and  what he saw  in the  actual bill and  the draft                                                               
version  of the  side-by-side the  chair  put on  the table  last                                                               
night.  The extension  of the  Middle  Earth exploration  credits                                                               
references  the year  2022  and that  is the  year  in which  the                                                               
Middle  Earth traditional  exploration  credit  has already  been                                                               
extended  to  through  prior legislative  action.  Whereas  those                                                               
credits are sunsetting  in the rest of the state:  Cook Inlet and                                                               
the North  Slope this July. What  is in the physical  language of                                                               
the bill is an extension of  the frontier basin super credit, the                                                               
80 percent credit,  and that is not a long  term extension. It is                                                               
a very limited  extension of a well that is  in progress that has                                                               
been  spudded by  July 1  of  this year.    The way  the bill  is                                                               
written, section 25  says the rest of that well  can be completed                                                               
and  still enjoy  the full  80 percent  credit, but  there is  no                                                               
language extending  the frontier  basin-specific credits  to 2022                                                               
right now and he wanted to make sure that was the intent.                                                                       
                                                                                                                                
CHAIR GIESSEL  responded that  the intent was  there would  be no                                                               
new entrants into that tax credit.                                                                                              
                                                                                                                                
MR. ALPER said  it is a major  policy decision to go  to zero tax                                                               
long term  in Cook Inlet, and  the degree to which  industry will                                                               
treat that as a durable tax has  an impact on the degree to which                                                               
it's  going  to  be  valuable in  encouraging  and  incentivizing                                                               
behavior.                                                                                                                       
                                                                                                                                
He said  they should  be aware  that the  state has  revenue from                                                               
Cook Inlet built into its forecast.  It's not large, but it is an                                                               
increasing number. If the oil tax,  which is tied to the economic                                                               
limit factor  (ELF) is zero, but  the gas tax is  $.17 for around                                                               
100 bcf/year  with the utility  demand in Anchorage being  in the                                                               
80-90 bcf  range and some  small amount still exported,  that tax                                                               
represents  about  $17 million  in  revenue.  However, the  state                                                               
doesn't  get  that  much,  because most  of  that  production  is                                                               
currently eligible to receive the small producer credit.                                                                        
                                                                                                                                
MR. ALPER  said they should  be aware  that, because of  the slow                                                               
sunset of  the small producer credit  beginning in a year  or so,                                                               
Cook  Inlet gas  revenue will  be seen  under current  law, at  a                                                               
number  ramping  up  towards  about $17  million,  as  the  small                                                               
producer  credit  falls  away  and  then  finally,  in  2022,  he                                                               
estimates $100-125 million in oil  and gas production tax revenue                                                               
from Cook  Inlet. That number  is probably  unrealistically high,                                                               
because it  refers to the  underlying tax regime (the  35 percent                                                               
net tax  without any per barrel  or per mcf credits).  Were there                                                               
to  be  a  tax  system  that worked  its  way  through  a  future                                                               
legislature,  it would  probably come  in somewhere  between zero                                                               
and $125  million, but in analyzing  this bill long term,  he had                                                               
to take that $125 million off  the board in the distant out-years                                                               
because of the zero tax.                                                                                                        
                                                                                                                                
5:11:58 PM                                                                                                                    
Another possible  unforeseen circumstance tied to  the Cook Inlet                                                               
gas cap  is the  language in AS  43.55.011(o), the  so-called gas                                                               
used in state (GUIS) tax cap, which  is at the same rate. That is                                                               
being repealed along  with the Cook Inlet caps.  That will impact                                                               
certain gas  that is  sold commercially on  the North  Slope (gas                                                               
sold to  TAPS for pump  stations and  operations and gas  that is                                                               
used  within the  utility systems  in Barrow,  which has  utility                                                               
gas). The  gas that  is actually  used in field  is tax  free and                                                               
that is a  specific exemption in statute, not a  problem, but the                                                               
gas that  is sold will likely  have some sort of  tax impact that                                                               
he was  not able to model  in the time  allowed.  That is  in the                                                               
fiscal note indeterminate line.                                                                                                 
                                                                                                                                
MR.  ALPER said  the  North Slope  gas tax  system  is not  fully                                                               
developed. SB 21  was written around oil and the  35 percent rate                                                               
is the rate on everything that goes  to a 13 percent gross tax on                                                               
gas in  2022, a provision  in SB 138  (the AKLNG bill),  but they                                                               
might need to contemplate what the  treatment of that gas used in                                                               
state might be between now and 2022.                                                                                            
                                                                                                                                
5:13:28 PM                                                                                                                    
SENATOR  WIELECHOWSKI   asked  if  the  Governor   supports  this                                                               
version.                                                                                                                        
                                                                                                                                
MR.  ALPER said  he  wouldn't guess;  Governor Walker's  official                                                               
position is that he supports the  original version of the bill as                                                               
he introduced it.                                                                                                               
                                                                                                                                
CHAIR GIESSEL stated that at  5:30 yesterday she and other Senate                                                               
leadership met with the Governor and presented the bill to him.                                                                 
                                                                                                                                
5:14:49 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked if  it's  fair  to observe  that  by                                                               
removing the hardening  of the floor and the fact  that there are                                                               
no significant credits  being taken by the "big  three," that the                                                               
major  producers   on  the  North   Slope  are   "left  virtually                                                               
unscathed" by this version of the legislation.                                                                                  
                                                                                                                                
MR. ALPER responded that he tried  to break out the impact of the                                                               
bill  at various  segments in  previous presentations.  The major                                                               
producers  for the  most  part are  out of  Cook  Inlet now.  So,                                                               
obviously the Cook Inlet changes  are relatively insignificant to                                                               
them.   The North  Slope changes  are tied  primarily to  new oil                                                               
(the GVR and  the NOL issue) and  now the sunset of  the GVR. So,                                                               
it is  fair to say  that the  legacy producers and  the currently                                                               
producing major fields  are not substantially impacted  by any of                                                               
the changes in the bill as it stands in this CS.                                                                                
                                                                                                                                
5:15:51 PM                                                                                                                    
SENATOR STOLTZE asked  what Mr. Alper would  advise the governor:                                                               
this bill, HB 247 or no bill.                                                                                                   
                                                                                                                                
MR. ALPER replied  that he hadn't thought  that question through.                                                               
He knows the  Governor wants a bill and sees  the need for credit                                                               
reform. Either  of the  bills is an  improvement over  the status                                                               
quo, both in  the fact that it helps the  state's fiscal picture,                                                               
although to a far smaller  degree than he originally proposed, as                                                               
well as several of the technical  issues and concerns with how SB                                                               
21  was performing  due  to the  unforeseen  circumstance of  low                                                               
prices. Those have been surviving  in all the various versions of                                                               
the  bill  and  it  would  be  unfortunate  if  those  were  lost                                                               
outright, which would happen if there was no bill.                                                                              
                                                                                                                                
He said the biggest "X  factor" that has entered the conversation                                                               
since the bill  was introduced is the idea of  rolling forward of                                                               
the major producers' NOLs. The  department is still digesting the                                                               
meaning  of it  and is  not  comfortable knowing  about the  $677                                                               
million in future  liability when effectively the  state will not                                                               
be receiving  taxes, even after  the price  of oil goes  up. They                                                               
just don't know how to handle that at this point.                                                                               
                                                                                                                                
5:18:14 PM                                                                                                                    
SENATOR COSTELLO  said the fiscal  note says it does  not include                                                               
the  revenue impacts  from potential  changes in  investment, and                                                               
she was  curious if  that means that  the opportunity  costs have                                                               
not been considered in his presentation.                                                                                        
                                                                                                                                
MR.  ALPER  answered  to  a certain  extent  that  is  disclaimer                                                               
language, but  she is correct.  He is saying whatever  he thought                                                               
was going to  happen - this company was going  to spend this many                                                               
dollars  on  this project  -  and  that  being built  into  their                                                               
various forecasts, this  is how the bill  impacts their treatment                                                               
of  money related  to those  projects. If  someone decides  to do                                                               
something  that  they were  otherwise  not  going  to do  or  the                                                               
reverse, that is not captured in the analysis before them.                                                                      
                                                                                                                                
SENATOR COSTELLO  asked if he  anticipates being able  to capture                                                               
that.                                                                                                                           
                                                                                                                                
MR. ALPER  replied that  that economic  analysis is  beyond their                                                               
skills; companies might  choose to do different  things. Once the                                                               
bill reaches  its final  stage, every company  has to  go through                                                               
its own  internal analysis. Sometimes  those analyses  are driven                                                               
by straight up  and down economics and sometimes  there are other                                                               
factors that he couldn't forecast.                                                                                              
                                                                                                                                
5:20:10 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  if the  tax and  credit numbers  for                                                               
FY17/18 will change substantially with passage of this bill.                                                                    
                                                                                                                                
MR.  ALPER  answered because  the  bill  doesn't touch  upon  the                                                               
minimum tax issues, up until FY22  there is not a material amount                                                               
on the revenue  side. The small amounts of revenue  that are tied                                                               
to the minimum tax that is  reduced by operating losses nearly to                                                               
zero remains the story going forward.  Should the price of oil be                                                               
what is  in the  spring forecast,  the state  would not  get more                                                               
than $15-20 million  in production tax a year  for several years.                                                               
The credit  spend is going  to go  down primarily because  of the                                                               
Cook Inlet  reductions. While it's unfortunate  that $404 million                                                               
happened in  FY15, the state is  seeing both the ramping  down of                                                               
company behavior and a couple of companies leaving the inlet.                                                                   
                                                                                                                                
He explained that  the FY15 spend was really tied  to money spent                                                               
in  2013. To  a certain  extent they  are closing  the barn  door                                                               
after the  horse has  left. Should  companies do  the investments                                                               
they have  said they may  do - the  BlueCrest and Furies  in Cook                                                               
Inlet are the  most obvious ones - the status  quo analysis would                                                               
see a much larger credit number.  If someone spends an extra half                                                               
billion  dollars that's  going to  result in  a 50  percent state                                                               
credit  support,  that's  $250  million in  credits.  Until  that                                                               
sanction it doesn't  show up in their forecast.  The further they                                                               
get  into the  future the  status quo  looks smaller  even though                                                               
they know it is  really going to get bigger as  it gets closer to                                                               
the present.  So, there  is a tendency  to "low-ball"  the fiscal                                                               
impact of a bill like this.                                                                                                     
                                                                                                                                
5:23:07 PM                                                                                                                    
SENATOR WIELECHOWSKI said most of  the effective dates are set at                                                               
July 1,  2016, and  the testimony  the commissioner  gave several                                                               
meetings ago  was that there was  a concern that if  you kept the                                                               
credits going  until next January companies  would act rationally                                                               
and  go  out and  try  to  spend as  much  as  they can  to  take                                                               
advantage  of  the  credits.  He asked  if  that  effective  date                                                               
applies to Cook Inlet in the  original bill, because the bill now                                                               
is pushing  out the  credits until  2017, and  he said  they will                                                               
impact the  state through 2020.  He didn't  completely understand                                                               
that, but he also wanted to know  if he worries about a flurry of                                                               
activity in Cook  Inlet, although Director Feige  said she didn't                                                               
expect much impact on the tax  credits. He didn't see how that is                                                               
possible. He asked Mr. Alper his take on that situation.                                                                        
                                                                                                                                
MR. ALPER  replied that the  fiscal note for the  earlier version                                                               
had a  very large  savings in  FY17, in  part due  to the  July 1                                                               
effective date. When  they looked a little deeper  into that they                                                               
realized to  a certain  extent because  those large  numbers were                                                               
tied to the  $25 million repurchase cap that is  in the so-called                                                               
.028 fund,  it's not  about earning credits.  There was  a little                                                               
bit  of internal  confusion,  because  a lot  of  the very  large                                                               
credits that  have already been  earned in calendar year  15 were                                                               
falling off  the table by  not being paid  in FY17. It  was never                                                               
their intent to  not pay those. The Governor's  original bill had                                                               
a $900  million fund capitalization  fiscal note attached  to it.                                                               
It might  still be attached  to this bill.  The idea was  to make                                                               
sure there is  adequate money to spend before  obligation of what                                                               
is on the table  now. So, the intent of the  original bill was to                                                               
say we're not going to earn  credits and pay them based on having                                                               
been earned  after the effective  date. That is a  big difference                                                               
when it comes down to 2015,  which was a very large spending year                                                               
and is behind us now.                                                                                                           
                                                                                                                                
He believed what  Director Feige was saying  is that dramatically                                                               
reducing the credits  beginning in January 2017  won't drive that                                                               
much activity compared  to the 50 percent that  is being provided                                                               
now. It's almost  impossible for people to add  more work between                                                               
now and the  end of this calendar year, because  their work plans                                                               
are  already pinned  down.  There might  be a  little  bit of  an                                                               
increase next year, but the fiscal  impact of that at the reduced                                                               
25 percent  level of  total support  would be  less on  the state                                                               
than current law, which if we got  twice as much work at half the                                                               
credit level  would be a net  zero. No real impact  is felt until                                                               
the  2018 spend,  and  based on  earlier  testimony that  doesn't                                                               
actually affect the budget until 2020.                                                                                          
                                                                                                                                
5:26:46 PM                                                                                                                    
CHAIR GIESSEL thanked  Mr. Alper for his testimony  and noted her                                                               
office had received no amendments.                                                                                              
                                                                                                                                
SENATOR  COSTELLO moved  to report  CSSB 130  (RES), version  29-                                                               
GS2609\W,  from  committee  with individual  recommendations  and                                                               
attached  fiscal note.  There were  no objections  and it  was so                                                               
ordered.                                                                                                                        
                                                                                                                                
CHAIR GIESSEL said  oil and gas has changed the  State of Alaska.                                                               
Five  of the  committee members  out of  the seven  were actually                                                               
born  in Alaska  and know  the positive  impact the  oil and  gas                                                               
industry has had  on the state. These tax credits  are an example                                                               
of partnership;  they are  also a  way of  incentivizing activity                                                               
just like  going to a  store and having  a coupon for  a product.                                                               
Often using  those coupons  establishes faithful  loyal customers                                                               
who keep coming  back and buying the product: the  same idea with                                                               
the  state's  tax credits.  Their  goal  was to  establish  loyal                                                               
customers that  would continue  to work here,  and the  state has                                                               
reaped  tens of  billions of  dollars in  revenue that  has built                                                               
roads,  schools  and  all  kinds   of  infrastructure.  But  this                                                               
precipitous  drop  in oil  prices  is  devastating, not  just  to                                                               
companies but to the state,  too. Probably the most hurtful thing                                                               
is that  jobs are  being lost.  She said  it is  hard for  her to                                                               
offer a bill  like this knowing what it will  do to this resource                                                               
development.  Still she  is was  hopeful and  encouraged everyone                                                               
that there  is a future  here. The state has  "massive resources"                                                               
that have not yet been developed.  This will turn around and it's                                                               
important to have discipline, patience, and a long-term vision.                                                                 
                                                                                                                                
5:31:33 PM                                                                                                                    
SENATOR MICCICHE said  he appreciated the work the  chair and the                                                               
committee had  done on this  legislation and  he would see  it in                                                               
the Finance  Committee. If members  had concerns he  invited them                                                               
to feel free to discuss them with him.                                                                                          
                                                                                                                                
[CSSB 130(RES) was reported from committee.                                                                                     
                                                                                                                                
5:32:06 PM                                                                                                                    
CHAIR GIESSEL  adjourned the  Senate Resources  Committee meeting                                                               
at 5:35 p.m.                                                                                                                    

Document Name Date/Time Subjects
CSSB130-Testimony-AOGA-4-12-2016.pdf SRES 4/12/2016 9:00:00 AM
SB 130
CSSB130-enalytica Analysis to SRES-4-12-2016.pdf SRES 4/12/2016 9:00:00 AM
SB 130
CSHB247FIN-Fiscal Analysis-DOR-4-12-2016.pdf SRES 4/12/2016 9:00:00 AM
HB 247
CSSB130RES -Fiscal Analysis-DOR- 4-12-16.pdf SRES 4/12/2016 9:00:00 AM
SB 130
CSSB130-Updated Comparison Chart-DOR Tax Div-4-12-2016.pdf SRES 4/12/2016 9:00:00 AM
SB 130