SENATE BILL NO. 130 "An Act relating to confidential information status and public record status of information in the possession of the Department of Revenue; relating to interest applicable to delinquent tax; relating to disclosure of oil and gas production tax credit information; relating to refunds for the gas storage facility tax credit, the liquefied natural gas storage facility tax credit, and the qualified in-state oil refinery infrastructure expenditures tax credit; relating to the minimum tax for certain oil and gas production; relating to the minimum tax calculation for monthly installment payments of estimated tax; relating to interest on monthly installment payments of estimated tax; relating to limitations for the application of tax credits; relating to oil and gas production tax credits for certain losses and expenditures; relating to limitations for nontransferable oil and gas production tax credits based on oil production and the alternative tax credit for oil and gas exploration; relating to purchase of tax credit certificates from the oil and gas tax credit fund; relating to a minimum for gross value at the point of production; relating to lease expenditures and tax credits for municipal entities; adding a definition for "qualified capital expenditure"; adding a definition for "outstanding liability to the state"; repealing oil and gas exploration incentive credits; repealing the limitation on the application of credits against tax liability for lease expenditures incurred before January 1, 2011; repealing provisions related to the monthly installment payments for estimated tax for oil and gas produced before January 1, 2014; repealing the oil and gas production tax credit for qualified capital expenditures and certain well expenditures; repealing the calculation for certain lease expenditures applicable before January 1, 2011; making conforming amendments; and providing for an effective date." 3:38:00 PM JANAK MAYER, CHAIRMAN AND CHIEF TECHNOLOGIST, ENALYTICA, introduced himself. NIKOS TSAFOS, PRESIDENT AND CHIEF ANALYST, ENALYTICA (via teleconference), discussed the presentation titled "CS SB 130: Key Issues and Assessment" (copy on file), beginning with slide 25, "CI Overview and Changes: Activity": Activity has responded in recent years Exploration drilling in Cook Inlet has gone through several cycles since 1950s Recent exploration activity (post 2010) on par with previous exploration peaks Development drilling has been more stable over the years Recent growth placing three-year rolling average among highest in state's history Mr. Tsafos highlighted slide 26, "Cook Inlet Oil and Gas Production: Basic facts": Oil: Peak in 1970 at 226 mb/d; trough in 2009 at 7.5 mb/d; upturn post 2010 (+10.5 mb/d) Gross Gas: Peak in 1990 at 853 mmcf/d; big drops in 1994-1998 and 2005-2013; stable in 2014-15 Net Gas: Peak in 1996; 1990s plateau from blowdown at Swanson River; fall post 2005, then stable 3:43:42 PM Mr. Tsafos discussed slide 27, "CI Overview and Changes: Scorecard": the Cook inlet oil and gas market: A scorecard What has happened to oil and gas production and activity in the Cook Inlet in recent years? Oil production has risen from 7.5 mb/d in 2009 to almost 18 mb/d Gas production has stabilized after years of steadier decline How has the gas market adjusted in recent years? Cook Inlet has undergone major transition in supply, demand, prices, competition and expectations Some of these changes are typical in mature basins-others are unique to Cook Inlet What's the outlook and how sensitive is the outlook to changes in oil/gas fiscal system? DNR: 1,183 bcf in remaining 2P reserves; 1,600 bcf w/ Cosmopolitan and Kitchen Lights (ballpark) Continued drilling at old fields plus Cosmopolitan and Kitchen Lights: current market well supplied At current (gas) price levels, brownfield investment should be profitable under stricter fiscal regime Credits more important for developing new resources, especially with demand constraints Currently much uncertainty over future regime - setting a stable, sustainable system is paramount 3:55:10 PM Vice-Chair Micciche felt it would be nice to determine the potential demand based on all of the different factors. Mr. Tsafos responded that there were multiple strategies to attract investment. Co-Chair MacKinnon announced that there would be further meetings related to the oil and gas tax structure. Mr. Mayer continued to discuss slide 27. 4:04:48 PM Mr. Mayer looked at slide 28, "Project 1: Market constrained (assumptions)": Large upfront investment but constrained gas market Limited ability to sell gas: can only drill a well every few years Mr. Mayer discussed slide 29, "CI Overview and Changes: Project 1; Project 1, Market Constrained Results." He stated that the slide represented three separate scenarios: Status Quo; CS SB 130(RES), CS HB 247(FIN). 4:11:51 PM Senator Dunleavy wondered if there would be a decline in demand for credit without any changes. Mr. Mayer replied in the affirmative. Senator Dunleavy felt that idle rigs would decrease the credits. Mr. Mayer agreed. Senator Dunleavy remarked that the environment may not be attractive for a capital constrained company to move a rig to the North Slope in a small market. Mr. Mayer agreed. 4:15:14 PM AT EASE 4:15:37 PM RECONVENED 4:15:44 PM Mr. Mayer highlighted slide 30, "CI Overview and Changes: Project 2": Project 2: Market un-constrained (assumptions) Large upfront investment but un-constrained gas market Continued drilling lead to a plateau of 130 mmcf/d Scenario would require a step change in existing supply-demand dynamics in Cook Inlet Mr. Mayer addressed slide 31, "CI Overview and Changes: Project 2; Project 2: Un-constrained Results." Mr. Mayer highlighted slide 32, "CI Overview and Changes: Project 3": Project 3: Drilling in existing field (assumptions) Drilling expenditures at existing production-smaller upfront investment No market constrains assumed This is a point-forward analysis-it ignores sunk, entry or acquisition costs 4:18:05 PM Mr. Mayer discussed slide 33, "CI Overview and Changes: Project 3; Project 3: Drilling Existing Field Results." Vice-Chair Micciche looked at slide 31, which demonstrated that the elimination of the production tax had no effect. The only difference in the reduction of the internal rate of return and the increase in the revenue to the state was the level of the reduction of credits between the two bills. Mr. Mayer replied in the affirmative. Vice-Chair Micciche shared that he had further questions that he would address later. 4:22:51 PM Co-Chair MacKinnon stated that the purpose of the presentations were meant to set an examination of how the credits were utilized in the state. Mr. Mayer encouraged the committee to see that the credits in Cook Inlet were about incentivizing activities that were less affordable than in the past. The North Slope could remain, but the net operating loss credit was about timing of tax flows rather than the total amount. Senator Dunleavy remarked that the Cook Inlet dealt with mostly gas. He wondered if there could be increased oil production in Cook Inlet. Mr. Mayer replied that it depended on the oil price, rather than the credit environment. Senator Dunleavy shared that transportation and production costs were lower in Cook Inlet than the North Slope. He remarked that he would ask a similar question the following day. Mr. Mayer agreed. Co-Chair MacKinnon wondered whether the credit market would see Alaska in a more stable environment, should the state use the savings to have an annuity payment or a fixed draw. Mr. Mayer replied that it was always good to have assets to smooth the volatility that comes with depending on commodity prices. Co-Chair MacKinnon felt that it would be a positive step to change the current structure. Mr. Mayer agreed. SB 130 was HEARD and HELD in committee for further consideration. 4:28:21 PM AT EASE 4:32:30 PM RECONVENED