Legislature(2017 - 2018)HOUSE FINANCE 519

03/22/2017 09:00 AM FINANCE

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09:07:33 AM Start
09:08:11 AM HB111
10:30:16 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued from 3/21/17 at 1:30 PM --
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 111                                                                                                            
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     and providing for an effective date."                                                                                      
9:08:11 AM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
relayed  he  had spent  much  of  the previous  day  walking                                                                    
through the  history and background  of oil tax  credits. He                                                                    
had just  started walking through  the bill sections  of the                                                                    
presentation titled:  "DOR Presentation - HB  111 Background                                                                    
and Bill  Analysis" when the  meeting concluded.  He briefly                                                                    
paged through  some of  the sections  that had  already been                                                                    
covered;  the interest  rate section,  the transparency  and                                                                    
executive session sections, and  the section on minimum tax.                                                                    
The  committee had  stopped at  the issue  of hardening  the                                                                    
floor when  time ran out.  He referred  to slides 37  and 38                                                                    
regarding issues with a minimum  tax. He had offered that if                                                                    
the state  were to implement  a minimum floor  the near-term                                                                    
impact would equate to about $20 million.                                                                                       
Mr.  Alper turned  to  slide  39 to  look  at the  different                                                                    
issues  of hardening  the floor.  Hardening the  floor meant                                                                    
ensuring  that   the  minimum  tax  was   collected  in  all                                                                    
circumstances. There were  several separate policy decisions                                                                    
that needed  to be made.  If the committee wanted  to harden                                                                    
the  floor in  some instances  and  not others  it would  be                                                                    
possible to parse out certain items from others.                                                                                
Mr. Alper  continued that  there was  an issue  of producers                                                                    
not being  eligible for refundable  credits. He  was talking                                                                    
mostly about  the major  producers (companies  that produced                                                                    
more than 50,000 barrels per  day). They were unable to earn                                                                    
cash for their  credits under current law  and were required                                                                    
to  carry  them  forward.  The question  was  whether  there                                                                    
should  be clear  direction that  the  carry forward  credit                                                                    
could  not be  used to  reduce the  minimum tax  payment. It                                                                    
would mean that the company would  have to hold it and carry                                                                    
it forward for an additional year  or two until the price of                                                                    
oil  recovered  sufficiently  and  they  reached  above  the                                                                    
minimum tax level.                                                                                                              
Mr. Alper  continued to  discuss a  second issue  related to                                                                    
hardening  the   floor.  The   small  producer   credit  was                                                                    
sunsetting  but  there  were still  a  number  of  companies                                                                    
earning it.  Upon reaching the  minimum tax, he  wondered if                                                                    
the smaller  companies should  be able to  reduce it  by the                                                                    
credit  of  up  to  $12  million.  The  regulatory  language                                                                    
allowed them,  under certain circumstances, to  reduce their                                                                    
payments to zero.                                                                                                               
Mr.  Alper explained  that the  third issue  related to  new                                                                    
oil.  The  per barrel  credit  earned  on  new oil  was  not                                                                    
specifically hardened to the floor  presently. The $5 credit                                                                    
could be used to reduce  payments to zero on new production.                                                                    
Generally speaking,  the cross over  point above a  zero tax                                                                    
was in the $70 range. He  suggested that to harden the floor                                                                    
for  new oil  would mean  that the  production during  years                                                                    
that companies earned the Gross  Value Reduction (GVR) would                                                                    
also pay  the minimum tax.  There was a unique  structure in                                                                    
the  bill that  had not  previously been  seen in  other oil                                                                    
bills that  would create a reduced  minimum tax specifically                                                                    
for GVR eligible oil. He  would discuss this item in another                                                                    
Mr.  Alper drilled  deeper  into the  minimum  tax floor  on                                                                    
slide 40.  The slide addressed  the major producers.  It was                                                                    
clear  in statute  that  major producers  were  not able  to                                                                    
receive  cash. Tax  credits were  carried  forward. The  net                                                                    
operating  losses  (NOL)s  for  the  explorers  were  simply                                                                    
allowable  expenditures.   In  other   words,  all   of  the                                                                    
explorers'  spending  became  their operating  loss  because                                                                    
they did not have any  offsetting revenue. The net operating                                                                    
loss for  the producer was when  spending exceeded revenues.                                                                    
The legal  term that  the state's  auditors used  was excess                                                                    
lease expenditures,  generally referred  to as  an operating                                                                    
loss or an NOL. An excess  lease expenditure could be due to                                                                    
a company  doing more  drilling and  just starting  up their                                                                    
production   without   a    significant   amount   of   oil.                                                                    
Alternatively,  companies could  be functional,  but if  the                                                                    
price of oil  were to go far below expected  and their costs                                                                    
were  greater  than  revenues,  they  could  incur  a  loss.                                                                    
Regardless, the state  paid a credit based on  a fraction of                                                                    
their operating loss. He clarified  that at least one of the                                                                    
major producers  claimed an operating loss  in calendar year                                                                    
2015. He  could show  members where  in the  Revenue Sources                                                                    
book implications showed  up. It meant that  the company was                                                                    
able  to  claim certain  loss  credits  against their  taxes                                                                    
beginning in 2016. He noted that it could be seen in the                                                                        
2-page table  in the Revenue  Sources Book. It  showed where                                                                    
the  023-B  credits claimed  against  taxes  by North  Slope                                                                    
companies. That added  up to $107 million  between the three                                                                    
years, FY  17, FY  18, and  FY 19.  They were  carry forward                                                                    
NOLs. There  was no  other 023B credit  being earned  on the                                                                    
North Slope that would be used  to offset taxes by the major                                                                    
9:14:05 AM                                                                                                                    
Mr. Alper moved to slide  41 which talked about the language                                                                    
in the  bill that would  partially harden the floor  for new                                                                    
oil (GVR  eligible oil). He  noted the three columns  on the                                                                    
slide. He explained that he set  the table at $49 per barrel                                                                    
because the  bill had a minimum  tax change at $50  - he did                                                                    
not want  the data distorted.  He wanted to show  the status                                                                    
quo  tax versus  what was  being  proposed in  the bill.  He                                                                    
relayed  that  at  $49  oil   in  2018  with  average  costs                                                                    
including  transportation costs  and lease  expenditures the                                                                    
production tax value of legacy  oil equaled $5.59 (Net Value                                                                    
After GVR). He noted that there  was no GVR with legacy oil.                                                                    
A tax  of 35 percent was  applied and equaled $1.96  and the                                                                    
per barrel credit of $8  wiped the base production tax after                                                                    
credits to zero. He recapped  that under the traditional tax                                                                    
calculation  at $49  oil legacy  fields paid  zero. However,                                                                    
that was the  point at which the minimum tax  would kick in.                                                                    
Returning to  the wellhead value  of $39.32 multiplied  by 4                                                                    
percent would equal $1.57 per taxable barrel.                                                                                   
Mr. Alper continued  to slide 42 which addressed  a new part                                                                    
of  the bill,  although it  was something  members had  seen                                                                    
before.  The  issue  of  migrating  credits  was  originally                                                                    
proposed by the  governor in the original version  of HB 247                                                                    
[Legislation  passed in  2016 -  Short Title:  Tax; Credits;                                                                    
Interest; Refunds;  Oil and Gas]. The  producers referred to                                                                    
the issue of migrating credits  as the "true-up problem." He                                                                    
explained  that  the per  taxable  barrel  was earned  on  a                                                                    
month-by-month basis.  In statute  it stated that,  based on                                                                    
the average gross value of the  oil in a specific month, the                                                                    
credit earned per  taxable barrel was $8, $7, or  $6 down to                                                                    
zero depending on  the gross value. It also  stated that the                                                                    
credit could not be used  below the minimum tax. Inevitably,                                                                    
in a low-priced  month, some of the per  barrel credit could                                                                    
be lost. The credit could  not be cashed or carried forward;                                                                    
it was  a use-it or  lose-it credit. If a  company's average                                                                    
gross value was so low that  it could not use the entire $8,                                                                    
the credit would essentially be  lost. He continued that the                                                                    
minimum  tax at  the annual  tax calculation  was an  annual                                                                    
minimum tax. A company could  use certain per barrel credits                                                                    
that were earned in a  low-priced month to offset taxes from                                                                    
a high-priced  month where the  company was still  paying at                                                                    
above the minimum  tax. He indicated that  the following few                                                                    
graphs would illustrate his point.                                                                                              
Co-Chair Foster  relayed that Representative  Guttenberg had                                                                    
joined the  table and Representative  Geran Tarr was  in the                                                                    
Vice-Chair Gara  had a question  about slide 41.  He thought                                                                    
Mr. Alper  had suggested some  change to a  possible minimum                                                                    
tax for GVR  oil in the new bill. He  had missed Mr. Alper's                                                                    
comments. He  asked for  a recap.  Mr. Alper  explained that                                                                    
previous legislation  that hardened  the floor equated  to 4                                                                    
percent  of  the  gross  value   being  paid.  It  basically                                                                    
eliminated  any  benefit  for  GVR-eligible  oil  because  4                                                                    
percent of the  gross was 4 percent of the  gross whether it                                                                    
was old  oil or new oil.  He furthered that HB  111 took the                                                                    
gross  value upon  which the  4  percent or  5 percent  were                                                                    
calculated  and adjusted  the gross  by  the GVR.  Companies                                                                    
could take  the 20  percent benefit off  of the  gross value                                                                    
and then take the 4  percent calculation. He described it as                                                                    
the minimum tax for GVR oil:  4 percent of 80 percent of the                                                                    
gross, a 3.2 percent gross tax.                                                                                                 
9:20:09 AM                                                                                                                    
Mr. Alper advanced  to slide 43 which he  thought provided a                                                                    
good  visual depiction  based on  actual  data for  calendar                                                                    
year 2014.  He highlighted the grey  line at the top  of the                                                                    
chart representing  the price of  oil by month with  a scale                                                                    
on the right-hand side. In  January, February, and March the                                                                    
price was in the low $100  range. In June, the price went up                                                                    
slightly,  in  July  the  price  of  oil  began  to  rapidly                                                                    
decline, and by December the  price of oil reached just over                                                                    
$50.  The bar  represented the  actual revenue  collected by                                                                    
the state per  the monthly estimated tax  calculation by the                                                                    
various  producers.  He  noted   that  the  top  yellow  bar                                                                    
represented the  total calculated tax  of 35 percent  of the                                                                    
production  tax  value.  The   green  bar  showed  what  was                                                                    
actually paid  to the state.  He clarified that the  size of                                                                    
the  yellow  was   the  per  barrel  credit   -  the  amount                                                                    
subtracted  from  the  tax calculation  before  the  payment                                                                    
itself. The red  bar represented the minimum tax  if it came                                                                    
into play.  He commented  that that  everything was  more or                                                                    
less normal by  the time July came around  when prices began                                                                    
to decline  but remained comfortably above  the minimum tax.                                                                    
In  October, the  yellow  bar was  very  large. By  October,                                                                    
producers were  earning the  entire $8  credit. At  the same                                                                    
time the  price of oil  was about $75 per  barrel. Companies                                                                    
were able  to claim the $8  credit. He pointed to  the green                                                                    
sliver in  October which indicated that  the amount received                                                                    
was  only slightly  above what  the minimum  tax calculation                                                                    
would have been.  If the price per barrel  went down another                                                                    
$1 or $2  the minimum tax would have kicked  in. He reported                                                                    
that  in November  the  yellow  bar was  not  quite $8  high                                                                    
because of the  little black dotted area on  top. The dotted                                                                    
black  area  represented  the  difference  between  the  per                                                                    
barrel credits  that were  used and  the per  barrel credits                                                                    
that were earned. Producers were able  to earn $8 and use $7                                                                    
per barrel  in November.  In December,  the price  failed to                                                                    
the  point where  companies might  have earned  $8 but  were                                                                    
only able  to use $2.  The dotted line  made up the  rest of                                                                    
the per barrel credit that  was essentially foregone for the                                                                    
months  of November  and  December. As  far  as the  monthly                                                                    
estimated payment went it looked like slide 43.                                                                                 
Mr. Alper  turned to slide  44. He highlighted that  the two                                                                    
dotted  lines in  November and  December were  more or  less                                                                    
used  to offset  several taxes  from earlier  months in  the                                                                    
year.  They were  shown being  connected to  January on  the                                                                    
chart.  In  other  words,  the  difference  between  the  12                                                                    
monthly  estimated taxes  and the  end of  year true-up  was                                                                    
that  the state  ended  up paying  $112  million in  refunds                                                                    
based upon  the ability to  use the  full $8 from  the later                                                                    
months  against months  in the  year that  had a  higher tax                                                                    
liability. Conceptually,  the issue was that  the per barrel                                                                    
credits were  being used  in a month  other than  which they                                                                    
were earned.  He explained  that the  language in  Section 7                                                                    
and 8 in HB 111 tried  to define that the credits could only                                                                    
be used  to offset taxes  accruing in the month  the credits                                                                    
were earned. However,  unused credits could not  be moved to                                                                    
offset taxes from another month.  The language was technical                                                                    
and  had   been  worked  on   by  the  department   and  the                                                                    
legislature's legal department. He  was not certain that the                                                                    
technical language did  exactly what it was  supposed to do.                                                                    
He  suggested  that  if  it  was  the  committee's  will  to                                                                    
maintain  the section,  he wanted  the legal  teams to  work                                                                    
together to ensure the use of correct language.                                                                                 
9:24:37 AM                                                                                                                    
Representative Wilson  asked how  difficult it would  be for                                                                    
the companies  and the department  to go back and  make sure                                                                    
both  parties agreed  on  what credits  were  in a  specific                                                                    
month. She  asked how the  change would be  implemented. Mr.                                                                    
Alper thought it would be  fairly easy to implement with the                                                                    
department's  existing   software.  It   was  a   matter  of                                                                    
programing  changes to  how different  things were  treated.                                                                    
The  per  barrel  credit  was   earned  by  the  month.  The                                                                    
department knew  the gross value  and the production  to the                                                                    
number  of taxable  barrels. The  department knew  the lease                                                                    
expenditures which  were averaged out  over the year  with a                                                                    
one-twelfth formula.  It was  not like  the money  a company                                                                    
spent  in  January  got  deducted   in  January.  It  was  a                                                                    
company's  annual expenses  which  was in  existing law.  He                                                                    
surmised that  calculating the taxes  owed in a  month based                                                                    
on  the  numbers  was  not  difficult.  The  state  was  not                                                                    
returning to  a monthly tax  calculation similar to  the way                                                                    
Alaska's Clear and  Equitable Share (ACES) was,  which was a                                                                    
true  monthly tax.  It  was  a matter  of  changing how  the                                                                    
credits were applied.                                                                                                           
Mr.  Alper  turned  to  slide  45.  He  explained  that  the                                                                    
language stated that the amount  paid due in the month could                                                                    
not  be different  than the  amount  that was  due based  on                                                                    
another section  of the  bill. He  thought the  language was                                                                    
complicated. However,  he did not  believe it would  be that                                                                    
complicated to  make the  change.oweve,Commissioner Hoffbeck                                                                    
He  clarified that  the information  on the  slide was  only                                                                    
relevant in  a year where there  was substantial volatility.                                                                    
In a  normal year there  was no  value to the  forecast, but                                                                    
rather  an  indeterminant  revenue   item.  The  reason  was                                                                    
because  the  department  did not  forecast  volatility.  He                                                                    
provided an  example. In order  for the section to  have any                                                                    
use or value some months of the  year had to result in a tax                                                                    
collection below the minimum tax  cross over and some months                                                                    
where they  were above  the minimum  cross over.  He relayed                                                                    
that  2014 was  an  example, which  lead  to a  circumstance                                                                    
where the department's  forecasts were off due  to having to                                                                    
pay  large  refunds.  The department  began  looking  for  a                                                                    
statutory  fix and  developed the  current  language in  the                                                                    
Representative Wilson  asked if he  knew how the  bill would                                                                    
affect  through-put.   Mr.  Alper   could  not   answer  the                                                                    
question. There  were several decisions that  a company made                                                                    
about  investments and  production.  He was  unaware of  how                                                                    
substantial  of an  impact the  bill would  have. He  argued                                                                    
that the $112 million was  a relatively mild example. One of                                                                    
the  advantages of  having a  monthly tax  structure was  to                                                                    
benefit from  a price  spike. He  provided an  example where                                                                    
the state would have $50 per  barrel oil for an entire year.                                                                    
However,  in  the  summer  if   a  war  broke  out  and  oil                                                                    
transportation was  disrupted, the price of  oil might spike                                                                    
to  $150 per  barrel  for 3  months and  return  to $50.  He                                                                    
suggested  that in  the  example, with  a  monthly tax,  the                                                                    
state  would  benefit.  The  state would  be  getting  a  35                                                                    
percent tax for  3 months. For the other 9  months, when the                                                                    
price  of oil  was  at  $50 per  barrel,  there  would be  a                                                                    
significant  amount  of  unused  $8 per  barrel  credit.  At                                                                    
annual true-up  the state would  be receiving the  4 percent                                                                    
minimum  tax   during  the  spike  years.   He  estimated  a                                                                    
potential loss of foregone revenue of about $300 million.                                                                       
Representative  Wilson  asked  if the  department  consulted                                                                    
with  the oil  companies  about the  legislation. Mr.  Alper                                                                    
relayed that the  division heard from tax payers  all of the                                                                    
time. He  noted talking  to them about  mundane information.                                                                    
He suggested that  what was being discussed  was a technical                                                                    
concern originating from the Tax  Division. The division had                                                                    
brought  the issue  to the  attention of  the bill  sponsors                                                                    
from previous legislation.                                                                                                      
9:30:28 AM                                                                                                                    
Representative  Guttenberg  commented   that  the  issue  of                                                                    
migrating credits  was a policy  call. He asked  about other                                                                    
unintended consequences  based on the modeling.  He asked if                                                                    
the department  had looked at  the potential  scenarios. Mr.                                                                    
Alper  indicated   that  it   was  the   largest  unforeseen                                                                    
consequence  the   department  was  digesting  from   SB  21                                                                    
[Legislation  passed in  2013  - Short  Title:  Oil and  Gas                                                                    
Production Tax].  The other issue  was resolved with  a bill                                                                    
that  passed  the  prior  year.   It  had  to  do  with  the                                                                    
interaction  of  the  gross value  reduction  with  the  net                                                                    
operating loss.  Essentially, if a company  lost $20 million                                                                    
but also earned a GVR  which was subtracted, the state could                                                                    
be paying a credit based on  a $50 million to a company that                                                                    
only lost $20  million. The credit would  become 100 percent                                                                    
of  their  loss. It  happened  a  couple  of times  and  was                                                                    
corrected in the  bill that passed in the  previous year. He                                                                    
continued that  there were  regulatory issues  regarding the                                                                    
sequencing of credits that the  department was continuing to                                                                    
work  through. He  admitted there  was still  some statutory                                                                    
fixes  were   needed,  but   the  committee   was  currently                                                                    
addressing the main issue.                                                                                                      
Representative  Guttenberg  asked,  in   a  case  where  the                                                                    
calculation  was more  that 100  percent, if  the state  had                                                                    
ever paid a company more than  100 percent of their costs or                                                                    
losses.  Mr. Alper  answered  that the  state  had paid  tax                                                                    
credits equal to or in excess  of 100 percent of a company's                                                                    
loss  on  a  couple  of  occasions.  The  state  had  issued                                                                    
certificates that were paid based  on prior law. He asserted                                                                    
that it would not be happening  in the future because of the                                                                    
correction  made in  HB 247  [Legislation passed  in 2016  -                                                                    
Short Title: Tax; Credits; Interest; Refunds; Oil and Gas].                                                                     
Vice-Chair Gara considered the  proposed changes as minimal.                                                                    
He asked  about a  press release  that provided  a statement                                                                    
from Repsol.  The press release indicated  the company would                                                                    
be  coming  to Alaska  and  investing  three-quarters of  $1                                                                    
billion  on leases  and development  and would  move forward                                                                    
with projects  that the state  deemed economic.  The company                                                                    
did  so without  asking for  any tax  relief under  Alaska's                                                                    
Clear and  Equitable Share  (ACES), a  stiff tax  system. He                                                                    
asked  Mr.  Alper  if  he recalled  the  press  release.  He                                                                    
elaborated that the press release  mentioned the geology and                                                                    
stability  in  Alaska which  made  the  state an  attractive                                                                    
place  to do  business. He  asked if  geology and  a state's                                                                    
stability  were important  factors  in  deciding whether  to                                                                    
invest. Mr.  Alper recalled the  press releases but  did not                                                                    
remember their  precise timing.  He thought  it was  a large                                                                    
open  debate. He  agreed  that Alaska  had  great rocks  and                                                                    
people preferred a friendly tax  regime. He did not know how                                                                    
the  decision-making worked,  but  he  believed the  initial                                                                    
commitment from  Repsol to come  to Alaska was prior  to the                                                                    
passage of SB 21.                                                                                                               
Co-Chair Seaton  asked about the migrating  credit issue. He                                                                    
asked  if the  issue had  been addressed  in HB  247 in  the                                                                    
prior year.  Mr. Alper responded affirmatively.  He reported                                                                    
that the  version of HB  247 that passed the  House included                                                                    
language that would have resolved the issue.                                                                                    
Co-Chair Seaton  asked if the  language in the bill  was the                                                                    
same.  Mr.  Alper relayed  that  the  language was  slightly                                                                    
different. There  was a technical  problem with  the version                                                                    
that came out of the House.  He believed the language in the                                                                    
finance  committee's  version  was better.  He  thought  the                                                                    
current language in  the bill was closer to what  was in the                                                                    
governor's original  bill. He suggested the  language was in                                                                    
a couple of places. It was in  the use of credits and in the                                                                    
definition  of the  monthly estimated  payments section.  He                                                                    
did  not want  to  comment definitively  that  the bill  did                                                                    
exactly what it was intended to do.                                                                                             
9:36:20 AM                                                                                                                    
Representative  Pruitt appreciated  Mr. Alper's  example. He                                                                    
thought there  were two challenges  with the $50  price; the                                                                    
dearth  of  supply and  the  oversupply  in the  market.  He                                                                    
surmised  that if  a war  broke out,  the oversupply  in the                                                                    
market, while there might be  a spike in price, would temper                                                                    
growth. He thought  the likelihood of a  short timeframe was                                                                    
low, a  longer timeframe  might be possible  with a  war. He                                                                    
thought 2014  was the most  extreme example he  would expect                                                                    
to  see  at  a  drop  of  $50  or  $60.  He  wondered  about                                                                    
volatility in a normal year in the $50 to $70 range.                                                                            
Mr. Alper responded that if  volatility stayed in the $50 to                                                                    
$70 range, the state would  not see a substantial impact. If                                                                    
$75 was the crossover for  the average tax payer between the                                                                    
minimum tax  and the gross tax  and there were a  few months                                                                    
with the price in the $65 range  and a few months at the $85                                                                    
range,  the  state  would  see   something  less  than  $112                                                                    
million. It depended  on how extreme the  difference was. It                                                                    
had to do  with how much per barrel credit  was unusable. In                                                                    
the  low-price months,  it  depended on  how  far below  the                                                                    
cross over  a company got  before it  lost or was  unable to                                                                    
use a large portion of  its per barrel credits. He suggested                                                                    
that at the crossover at $75  a company was using exactly $8                                                                    
of its  per barrel  credits. At  $74 they  might be  using a                                                                    
little over $7.  At $50 or less companies  would start using                                                                    
zero, where 35  percent of their net without  any per barrel                                                                    
credit  started  equaling  4  percent  of  their  gross.  It                                                                    
happened right around $5 above  their break-even point - $46                                                                    
or  $47 per  barrel. How  close companies  got and  how high                                                                    
above  the  minimum tax  would  determine  the size  of  the                                                                    
number.  It  would be  less  than  $50  million in  the  $20                                                                    
Representative  Pruitt asked  about the  change made  in the                                                                    
House Resources Committee to the  sliding scale. He wondered                                                                    
if  the change  had an  impact on  what was  presently being                                                                    
discussed.  Mr. Alper  replied that  it was  an annual  tax.                                                                    
Under current law, the calculation  of the per barrel credit                                                                    
was a  monthly determination.  He explained that  the change                                                                    
made  to  the  per  barrel credit  in  the  House  Resources                                                                    
Committee changed  the numbers.  It was done  differently in                                                                    
the original  bill versus the committee  substitute. Both of                                                                    
them were  changes to the  amount. He reviewed  the changes.                                                                    
In the  current version all  of the brackets were  moved $20                                                                    
to the  left. The  $8 credit happened  below $60  per barrel                                                                    
rather  than below  $80. The  $7 credit  happened below  $70                                                                    
instead of  $90. It  changed the  places at  which companies                                                                    
earned different values. However, it  did not change the way                                                                    
the credits  were used  except for  the migrating  issue. It                                                                    
did  not make  the tax  more monthly  except with  migrating                                                                    
9:41:14 AM                                                                                                                    
Representative  Pruitt wondered  if it  was a  migration. He                                                                    
asked if  it was  still an annual  tax. Mr.  Alper responded                                                                    
that it was  still an annual tax. The  particular credit was                                                                    
earned monthly  and was used  monthly for  the determination                                                                    
of estimated  tax. To  the extent the  state was  turning it                                                                    
into  a monthly  calculation, it  was hardening  the monthly                                                                    
estimated tax. The amount of  per barrel credit used for the                                                                    
total of  the 12 monthly  taxes could  not be more  than the                                                                    
per barrel  credit used  in the  actual original  12 monthly                                                                    
taxes.  In other  words, a  company could  not use  more per                                                                    
barrel credit  annually than  they would  have been  able to                                                                    
use in their monthly estimated tax.                                                                                             
Mr. Alper advanced to slide  46. He relayed that the largest                                                                    
change   in  the   legislation  was   that  the   state  was                                                                    
eliminating  direct  state  cash  support  for  North  Slope                                                                    
activities. It was a dramatic  shift from what the state had                                                                    
done  for  the  previous  10 years.  He  explained  that  in                                                                    
Section  9, in  the  NOL statute  describing  how a  company                                                                    
earned  an  operating  loss credit,  it  eliminated  the  35                                                                    
percent  operating loss  credit earned  on the  North Slope.                                                                    
Sections 9  [11] and 11  [18] talked about how  credits were                                                                    
cashable, transferable, and saleable  to other companies. It                                                                    
carved out the  North Slope NOL from  the definitions around                                                                    
who  could do  various thing  with the  credits earned.  The                                                                    
North Slope  benefit and the benefit,  itself, was elsewhere                                                                    
in the bill,  which he would be explaining.  Since the North                                                                    
Slope  benefit would  no longer  be  a credit,  it would  no                                                                    
longer be  transferable and had  to be held by  the company.                                                                    
There was still  a structure for cashable  credits. The cash                                                                    
fund would still  exist, and other things  would be eligible                                                                    
for cash,  just not as many  of them. He relayed  that the 4                                                                    
items  that would  be eligible  for cash  was listed  on the                                                                    
Remaining credits eligible for repurchase:                                                                                      
   1. Qualified  Capital   Expenditure    and   Well   Lease                                                                    
     Expenditure credits (only in Middle Earth after 2017)                                                                      
 2. Exploration credits (only in Middle Earth after 2016)                                                                       
   3. LNG Storage and Refinery Infrastructure credits                                                                           
     (corporate income tax credits that aren't earned by                                                                        
     oil producers)                                                                                                             
   4. (new dry hole credit added in Sec. 17)                                                                                    
Representative  Wilson  asked  how   long  the  LNG  storage                                                                    
credits would  remain. She wondered  if they had a  cap. Mr.                                                                    
Alper was aware that it was  capped at $15 million, the same                                                                    
as the Cook  Inlet Natural Gas Storage  Alaska, LLC (CINGSA)                                                                    
credit. He  did not know  whether it had a  specific subset.                                                                    
The  state kept  anticipating  the cap  would  occur in  the                                                                    
following year but kept rolling it for a year at a time.                                                                        
9:46:20 AM                                                                                                                    
Representative  Wilson remembered  the  LNG storage  credits                                                                    
but could not  recall whether there was a  sunset. Mr. Alper                                                                    
confirmed he would get an answer for her.                                                                                       
Vice-Chair Gara  wondered about the  refinery credit  from a                                                                    
few years  prior. He mentioned  there was a  little innocent                                                                    
royalty  sales contract  and  all of  a  sudden, a  refinery                                                                    
credit  was  added  to  it.  The  company  that  wanted  the                                                                    
refinery credit  was Tesoro.  They had  stated they  did not                                                                    
need the refinery credit, but  other companies wanted it. It                                                                    
ended up passing  and 3 companies qualified for  it, 2 owned                                                                    
by  Arctic  Slope  Regional  Corporation  (ASRC)  and  1  by                                                                    
Tesoro. He  suggested that the  state was not privy  to some                                                                    
of  the credits  due to  confidentiality. Some  credits were                                                                    
deducted  from company  profits and  some were  cashable for                                                                    
companies that did  not have profits. He asked  if Mr. Alper                                                                    
could  share  how  much  has   been  deducted  from  company                                                                    
profits. He  asked if the amount  was up to $10  million per                                                                    
Mr. Alper  answered that there  was no way to  aggregate the                                                                    
information   because    there   were   less    than   three                                                                    
transactions.  He  was aware  the  state  had not  paid  any                                                                    
credits simply because  of the timing. There was  no cash in                                                                    
the fund  presently. The first  applications would  not have                                                                    
arrived  until  the  prior  fall.  The  credit  took  effect                                                                    
January 2015  and the bill had  passed in 2014. He  spoke of                                                                    
an  inherent  delay.  There  was  at least  1  claim  for  a                                                                    
refundable credit.  However, the state  was not able  to pay                                                                    
it because of limited funds.                                                                                                    
Vice-Chair  Gara  was  trying  to get  as  much  information                                                                    
without  infringing  on  confidentiality. He  asked  if  the                                                                    
legislature  could  know  how  much  had  been  deducted  by                                                                    
refineries that  made a  profit. He  continued to  ask about                                                                    
the applications that had been  made for a certain amount of                                                                    
money  for   cash  credits  and  about   the  amounts  being                                                                    
requested. Mr.  Alper did not believe  the information could                                                                    
be provided  because of  the limited  number of  payers. The                                                                    
department would parse together whatever was possible.                                                                          
Representative Wilson  responded that  Tesoro had  not taken                                                                    
any of  the credits. She  had verified the  information with                                                                    
Tesoro. She  also mentioned  that Petro  Star had  not taken                                                                    
any  cashable  credits but  had  applied  for their  asphalt                                                                    
project and another project. They  were the only 2 companies                                                                    
eligible with Flint Hills turning into a tank farm.                                                                             
Vice-Chair  Gara commented  that  companies  might not  have                                                                    
received  any cash  credits,  but he  still  wanted to  know                                                                    
whether they had deducted a  certain amount from profits. He                                                                    
continued  his  line of  questioning.  He  wondered about  a                                                                    
potential cost  to the state of  $30 million per year  for 5                                                                    
years  totaling $150  million. Mr.  Alper  responded in  the                                                                    
affirmative. He  clarified that 1  year had gone by  and one                                                                    
of the  companies had taken  themselves out of  the running,                                                                    
which would reduce the maximum  footprint of the tax. He was                                                                    
aware of the Petro Star  asphalt issue. He could not specify                                                                    
how much they did or did not  claim in a tax credit for that                                                                    
specific project. He had just  been handed some information.                                                                    
He relayed that  work had to be done before  January 1, 2020                                                                    
in  relation to  the LNG  storage credit.  The credit  would                                                                    
equal $15 million  or 50 percent of  the activity, whichever                                                                    
is lower.                                                                                                                       
9:50:32 AM                                                                                                                    
Representative Pruitt  referred to the Middle  Earth credits                                                                    
sun  setting  in 2022.  He  asked  for  an estimate  of  the                                                                    
cashable  credits.  Mr.  Alper  answered  that  the  credits                                                                    
against liability were forecasted  at zero because there was                                                                    
no forecasted production.  No one had any  revenue to offset                                                                    
for  Middle  Earth.  The  hope   was  for  someone  to  find                                                                    
commercial quantity  oil or gas  that they would be  able to                                                                    
produce and  sell for a  profit or,  in some cases,  used in                                                                    
local  utilities. The  amount the  department estimated  was                                                                    
about  $20 million.  In  the  department's forecast,  Middle                                                                    
Earth and Cook  Inlet were merged because there  were so few                                                                    
transactions  that  the   department  could  not  separately                                                                    
report  due  to tax  payer  confidentiality.  He reported  a                                                                    
hearing in the Fall of  2015. The Senate Resources chair had                                                                    
conducted a  series of outreach  meetings on tax  credits in                                                                    
the  previous interim,  one of  which  covered Middle  Earth                                                                    
credits. At  that particular hearing Mr.  Alper, in response                                                                    
to a  question, indicated he  could not be  specific because                                                                    
of  confidentiality agreements.  However,  a gentleman  from                                                                    
Doyon stood  up and  answered that  the credits  were mostly                                                                    
Doyon's. Doyon had received about  $60 million in state cash                                                                    
credit support over several years.                                                                                              
Representative  Pruitt  listed   the  credits  eligible  for                                                                    
repurchase that would continue to  exist with the passage of                                                                    
the bill. He  mentioned $20 million, the LNG  storage at $15                                                                    
million, and the  refinery credit. He was  unclear about the                                                                    
number  of  years remaining  for  the  refinery credit.  Mr.                                                                    
Alper responded that the credit  would be used through 2022.                                                                    
Representative Pruitt asked if it  was $10 million per year.                                                                    
Mr. Alper responded,  "Yes." Representative Pruitt indicated                                                                    
that the state was creating a  new dry hole. Mr. Alper added                                                                    
that,  barring anything  unusual with  the dry  hole credit,                                                                    
the  total credit  spend  would be  less  than $50  million.                                                                    
Representative Pruitt  asked if Mr. Alper  meant $50 million                                                                    
per year. Mr. Alper responded affirmatively.                                                                                    
9:53:38 AM                                                                                                                    
Mr.  Alper  continued to  slide  47.  He addressed  the  per                                                                    
barrel credit. The current credit  was a sliding scale of $8                                                                    
per barrel with  the well head or gross value  below $80; $7                                                                    
below $90;  $6 below $100; and  going to a zero  credit when                                                                    
the  well head  value exceeded  $150. It  was subtracted  as                                                                    
part of the standard calculation for  the net tax for SB 21.                                                                    
The  amendment would  change  the section  of  the bill.  It                                                                    
would keep the same stepdown  language but changed the steps                                                                    
to where $8 would be below  $60; $7 below $70; $6 below $80;                                                                    
and shifting  most of the  tiers to a lower  threshold point                                                                    
by $20  with a larger  step at the  end at the  higher price                                                                    
point. He suggested that it  was important to recognize that                                                                    
it was rare companies received  the whole $8 benefit because                                                                    
of the  interaction of the  minimum tax. In  practice, there                                                                    
was  fairly little  of  the  credit that  could  be used  at                                                                    
prices below  about $70. The  real change was  the effective                                                                    
subtraction  once  companies  were  above  the  minimum  tax                                                                    
cutoff.  He indicated  that it  was  a reduction  of $2  per                                                                    
barrel  in credit  benefit. Once  the price  of oil  reached                                                                    
above  $80,  $90,  and  $100  it amounted  to  about  a  tax                                                                    
increase of  about $300 million.  It was $2 per  barrel that                                                                    
would not be  subtracted from tax by the  typical tax payer.                                                                    
The impact at lower prices would be fairly modest.                                                                              
Mr. Alper continued  that as far as the language,  it was an                                                                    
awkward  structure   that  the   credit  jumped   in  dollar                                                                    
increments. He supposed  that if a company  made $109.99 and                                                                    
went to  $110 in  gross value,  they would  be losing  $1 in                                                                    
value when they gained a penny  in oil price. He opined that                                                                    
it would be nice if the  formula was smoother. He thought it                                                                    
could  be done  with a  statutory straight-line  formula and                                                                    
create the  same net affect.  However, it was an  issue that                                                                    
had not  been resolved  during the  SB 21  deliberation. The                                                                    
bill also  created a $3 drop  at $110, dropping it  to zero,                                                                    
instead of a $1 change, with  a one penny increase in price,                                                                    
it became a $3 change. He  indicated that the graph on slide                                                                    
48 illustrated his point.                                                                                                       
Representative  Guttenberg asked  Mr. Alper  to explain  the                                                                    
rationale  for the  $8 credit.  Mr. Alper  discussed the  $8                                                                    
credit compared  to the  $5 credit and  to the  zero credit.                                                                    
First, he  would go  through the  legislative history  of SB
21.  As  originally  proposed  by  the  previous  governor's                                                                    
administration, there  was a 25  percent flat tax.  The idea                                                                    
behind the  flat tax  was to create  a progressive  curve in                                                                    
which the effective tax was  higher at high prices and lower                                                                    
at low prices.  The Senate proposed a 35 percent  tax with a                                                                    
$5 per  barrel credit.  At expected prices  of $100  or $110                                                                    
per barrel, the  tax was revenue neutral with  a little more                                                                    
money  at high  prices  and  a little  less  at low  prices.                                                                    
Incentivizing production  was only  a talking point.  He did                                                                    
not  know   whether  the  per  barrel   credit  specifically                                                                    
incentivized  production,  as  most   of  the  barrels  were                                                                    
already in production. He continued  that going from $5 to a                                                                    
sliding curve was  a late amendment that was  offered in the                                                                    
House Resources  Committee. The intent  was to  add slightly                                                                    
more  progressivity. In  exchange, there  would be  a larger                                                                    
benefit at  the low end.  The $6, $7,  and $8 found  its way                                                                    
into  the formula  that  created  a much  lower  tax at  oil                                                                    
prices below  $100 or $90  per barrel. Originally, it  was a                                                                    
correction to  the progressivity calculation. He  was unsure                                                                    
of the rational behind moving  the per barrel credit from $5                                                                    
to $8.                                                                                                                          
9:58:35 AM                                                                                                                    
Mr. Alper  moved to  the graph  on slide  48. The  blue line                                                                    
showed  existing law.  He explained  that  the Alaska  North                                                                    
Slope (ANS) price was roughly  $10 higher than the well head                                                                    
price.  The  graph showed  the  usable  rate of  per  barrel                                                                    
credits  at different  prices. He  reviewed  the chart  from                                                                    
right to left. At $160 per  barrel the usable rate was zero.                                                                    
At $150  per barrel it was  $1, and the ladder  continued to                                                                    
step upwards. At around $90  per barrel a company earned the                                                                    
full $8 credit.  He continued that at $70,  when the minimum                                                                    
tax  got   in  the   way,  the  use   of  the   credit  fell                                                                    
dramatically, and companies were not  able to use it. He had                                                                    
mentioned this  drop when he discussed  the migrating credit                                                                    
earlier in the meeting. Companies  lost the ability to claim                                                                    
the entire  $8 as prices got  lower. The ability to  use the                                                                    
per barrel credit fell to zero at around $50 per barrel.                                                                        
Mr.  Alper  continued  that the  amendments  in  Section  14                                                                    
replaced  the  blue  line  with  the  dotted  red  line.  He                                                                    
explained that  everything was  $20 over  or $2  less. There                                                                    
was still  the issue of  not being  able to use  the credits                                                                    
below $70.  The real  impact was in  the range  between $80-                                                                    
110.  He highlighted  that  at  a gross  value  of $110  the                                                                    
credit  dropped from  $3 to  zero. The  assumption was  made                                                                    
that  above $110  per barrel  companies did  not need  a per                                                                    
barrel incentive  and the  35 percent  tax was  adequate for                                                                    
the  state. He  noted a  very large  drop of  $3 per  barrel                                                                    
which  equated to  approximately  $450 million  at $120  per                                                                    
barrel price point.                                                                                                             
Representative  Grenn   asked  Mr.   Alper  to   place  some                                                                    
sideboards on  the word smoother.  Mr. Alper  responded that                                                                    
the formula  in statute currently  stated that if  the gross                                                                    
value was  more than $80  and less than  $90 it was  "X." If                                                                    
the gross value was more than  $90 and less than $100 it was                                                                    
"Y."  He suggested  that  a formula  could  be created  that                                                                    
would result in a straight  diagonal line that would reflect                                                                    
the same curve.  He noted an amendment offered  on the House                                                                    
Floor by Representative  Tarr during the debate of  SB 21 in                                                                    
2013 that did the same thing.                                                                                                   
Vice-Chair Gara  thought the change  really did not  go into                                                                    
effect at  $65 to $70  per barrel. Mr. Alper  responded that                                                                    
once prices  got low and  the per barrel  credit essentially                                                                    
became unusable  because of the  minimum tax getting  in the                                                                    
way,  changes to  the number  did not  matter that  much. An                                                                    
affect could not be seen  until getting over the minimum tax                                                                    
crossover in the $70 range.                                                                                                     
Vice-Chair  Gara asked  if the  same was  true with  the new                                                                    
bill. Mr.  Alper responded affirmatively. Although  it was a                                                                    
different per  barrel credit, the minimum  tax crossover was                                                                    
the same. The slight gap between  the red and the blue lines                                                                    
on  the left  side  of  the chart  reflected  the 5  percent                                                                    
versus 4  percent minimum tax change.  Vice-Chair Gara asked                                                                    
when the department was forecasting  $70 per barrel oil. Mr.                                                                    
Alper thought  it was about  4 or  5 years into  the future.                                                                    
Co-Chair Seaton interjected that  the Senate's version of SB
21  had  a  flat  $5  per barrel  credit.  It  was  seen  as                                                                    
progressive because  the $5 flat  credit was a  much smaller                                                                    
portion of the price as the  price per barrel climbed to the                                                                    
range  of $160-$200.  It was  supposed to  be a  progressive                                                                    
element but did  not have much of an effect  until the price                                                                    
increased to  much higher levels.  It started  stepping down                                                                    
from $5 in  dollar increments. He pointed to  the blue line.                                                                    
He   noted  the   last-minute   change   in  the   committee                                                                    
substitute. No one  knew where the stair step  above $5 came                                                                    
from.  The change  above $5  was  very late  in coming.  Mr.                                                                    
Alper thanked Co-Chair Seaton  for the information. Co-Chair                                                                    
Seaton  continued to  provide  some history  on  SB 21.  Mr.                                                                    
Alper appreciated the information.                                                                                              
10:04:46 AM                                                                                                                   
Mr. Alper  moved to  slide 49. He  explained that  the slide                                                                    
showed the change  to the minimum tax and the  change to the                                                                    
per barrel credit in total  state revenue. The flatter lines                                                                    
represented the  minimum tax curve.  The steeper  lines were                                                                    
the net  tax curve which dropped  to zero. The tax  that the                                                                    
state  paid  was  the  crossover   between  the  two  lines.                                                                    
Currently, Alaska's revenue  could be seen as  the blue line                                                                    
meeting the dark  blue line. At $50 or $55  revenue would be                                                                    
well below $500  million. At $75 per  barrel revenue steeply                                                                    
increased to where  the state was making $2  billion to $2.5                                                                    
billion. The  change to the  minimum tax was the  shift from                                                                    
the blue  line to the  red [orange]  line. The shift  in the                                                                    
per barrel  credit was the  shift in  the dark blue  line to                                                                    
the yellow  line. The  state would be  paying the  orange to                                                                    
yellow line which would be  reflected in the tax increase of                                                                    
about $50 million in the $50  to $75 range. There would be a                                                                    
larger tax increase above $75  represented by the gap in the                                                                    
two steeper lines on the chart.                                                                                                 
Mr. Alper turned  to slide 50 and addressed  Sections 15 and                                                                    
17 of  the legislation  regarding the  dry hole  credit. The                                                                    
language was new and entailed  that there was an exploration                                                                    
credit that  was cashable for companies  prepared to declare                                                                    
failure.  Companies would  report  the work  they had  done,                                                                    
declare  they  would  not  go  into  production,  pay  their                                                                    
vendors, and  return their  leases to  the state.  He agreed                                                                    
with the  chairman that  if companies  wanted to  give their                                                                    
data to the  state it would be helpful.  Companies would not                                                                    
be able to use the  related expenditures for another credit.                                                                    
He had  a couple of  technical concerns. First,  he conveyed                                                                    
that  as the  bill was  written the  benefit would  apply in                                                                    
Cook Inlet. However, all Cook  Inlet credits were eliminated                                                                    
by  the legislature  in the  prior year.  He just  wanted to                                                                    
make the committee aware of  the potential of adding another                                                                    
credit benefit  in Cook  Inlet. He  suggested that  it could                                                                    
also  be  carved  out  of  statutory  language.  His  second                                                                    
concern  was related  to  a company  getting  a fraction  of                                                                    
their lease  expenditures paid  back at  a discount  if they                                                                    
were prepared  to declare a  failure. It would be  linked to                                                                    
the idea of carried forward  lease expenditures. It would be                                                                    
a separate credit and tied  to the exploration language with                                                                    
a  different  set  of  criteria   and  rules  for  allowable                                                                    
expenditures. It  potentially created a double  dip problem.                                                                    
He provided an example of double dipping.                                                                                       
10:08:55 AM                                                                                                                   
Mr. Alper  moved to  slide 51 and  addressed cash  limits in                                                                    
Section 19 of the legislation.  The section talked about the                                                                    
ability to  earn cash from the  tax credit fund. It  used to                                                                    
not have restrictions other than  the 50,000 barrels per day                                                                    
number. In the  previous year, the legislature  added the 70                                                                    
million per  company per year  restriction with  the haircut                                                                    
provision on the second $35  million. He noted that the bill                                                                    
reduced that  from $70 million  to $35 million  and repealed                                                                    
the  section later  in the  bill  that provided  for the  25                                                                    
percent haircut on  the amount above $35  million. They were                                                                    
obviously linked with  each other. The per  company per year                                                                    
cash   limit  became   $35  million   and  created   a  flat                                                                    
ineligibility  for  cash  if  production  was  below  15,000                                                                    
rather than 50,000 barrels per  day. It was a provision from                                                                    
the House  version of  HB 247  that went  over to  the other                                                                    
body in  the prior  spring. He  relayed that  although those                                                                    
were the changes  in Section 19, there was  a broader issue.                                                                    
Much  of this  was more  or  less superfluous  to the  other                                                                    
changes made  in the  bill because the  state was  no longer                                                                    
offering cashable  net operating  loss credits on  the North                                                                    
Slope.  All of  the sections  that talked  about limits  and                                                                    
what companies could receive cash  would only apply to those                                                                    
few  cashable credits.  The amendments  to Section  19 would                                                                    
only be restricting  the issuing of cash  credits for Middle                                                                    
Earth  activities.  Currently,  no   one  was  claiming  $35                                                                    
million per year  or more. The amendment might  not have any                                                                    
material impact in the near future.                                                                                             
Co-Chair Seaton asked if the  restriction would not apply to                                                                    
the  currently issued  certificates if  companies wanted  to                                                                    
redeem them for cash. Mr.  Alper replied in the affirmative.                                                                    
The  limits did  not  apply to  things  existing before  the                                                                    
effective date.  Similarly, the $70  million in  current law                                                                    
did not  apply to  the $500  million in  certificates issued                                                                    
before January 1,  2017. He also noted that  the other limit                                                                    
with the resident  hire percentage for HB 247  did not apply                                                                    
to  the $500  million  of in-hand  certificates from  before                                                                    
January 1.                                                                                                                      
Representative  Pruitt had  a question  about the  change in                                                                    
cashable credits  from 50,000 to  15,000. He  wondered about                                                                    
the number of eligible credits  at 50,000 and at 15,000. Mr.                                                                    
Alper relayed  that the majority  of the companies  that had                                                                    
received cash  credits had zero  production which  would not                                                                    
change.  He  reported that  four  companies  were above  the                                                                    
50,000 taxable barrel level. He  was unsure of the number of                                                                    
companies  that   fell  within   the  range.   He  mentioned                                                                    
companies such  as Eni  and Caelus that  were in  the range.                                                                    
There were also  companies such as Anadarko  and Chevron who                                                                    
had junior minority  interests in some of  the larger legacy                                                                    
fields. They could  fall into the range. He did  not know if                                                                    
any of the companies were  above or below 15,000 barrels per                                                                    
day. He thought, for the most part, they were below 15,000.                                                                     
10:13:08 AM                                                                                                                   
Representative Wilson  mentioned having a lot  of discussion                                                                    
regarding the  range between 15,000  and 50,000. It  was her                                                                    
understanding  only  one  company  would  be  affected.  She                                                                    
expressed  her   concern  about  targeting   one  particular                                                                    
Mr. Alper spoke on slide 52.  He relayed that there had only                                                                    
been one  company that had  received more than  $200 million                                                                    
cash  credits   in  a   single  year.   There  had   been  5                                                                    
circumstances where a company  received between $100 million                                                                    
and  $200  million in  a  year,  and  11 instances  where  a                                                                    
company received  between 450 million  and $100  million. He                                                                    
highlighted  a current  issue  which was  that  of the  $500                                                                    
million pending  and awaiting cash,  there were  3 different                                                                    
companies with more than $100  million worth of certificates                                                                    
in hand. They were not limited  per the new $70 million cap.                                                                    
Should there  be a large  appropriation in the  current year                                                                    
to pay  off the  old balance, those  companies would  not be                                                                    
restricted,  and the  state would  be able  to pay  the $100                                                                    
million or more to those three entities.                                                                                        
Mr. Alper continued  to slide 53 to explain  the gross value                                                                    
at the point of production not  being able to go below zero.                                                                    
He relayed that  the gross value was the  market price minus                                                                    
transportation costs.  Generally, transportation  costs were                                                                    
not supposed  to exceed the value  of the oil. If  they did,                                                                    
the  negative  value  could  migrate   into  the  other  tax                                                                    
calculation  and  be used  to  offset  taxable profits  from                                                                    
other production from the producer.  It had been possible in                                                                    
early 2016 when  the price of oil dropped to  $30 per barrel                                                                    
and   below.  He   relayed  that   the   average  price   of                                                                    
transportation was $10, but there  was a wide range of costs                                                                    
depending on  the specific circumstances of  the location of                                                                    
the oil and where it was going.  If oil were to go below $20                                                                    
per barrel, it could impact more properties.                                                                                    
Mr.  Alper advanced  to slide  54 that  showed the  chart of                                                                    
tariffs for  the major North  Slope units. He noted  the box                                                                    
around Point Thomson. Point Thomson  was a new and expensive                                                                    
project  with  low   production  presently.  The  regulatory                                                                    
tariff  on  the Point  Thomson  pipeline,  which spanned  22                                                                    
miles from its production site  to the nearest connection to                                                                    
infrastructure,  was $17.56.  Point  Thomson's total  tariff                                                                    
was $26.54  to get  product to  Valdez in  addition to  a $3                                                                    
marine transport  cost. He relayed  that it cost  nearly $30                                                                    
to get Point Thomson oil to  market. If the price of oil was                                                                    
below $30, the production would  have a negative gross value                                                                    
that  could  find its  way  into  the tax  calculation.  The                                                                    
change made  in Section 23  of the bill would  indicate that                                                                    
for  tax purposes,  it would  be considered  zero. Companies                                                                    
would  not be  able to  use a  negative number  specifically                                                                    
from the  gross value  calculation to  be used  elsewhere in                                                                    
the tax calculation.                                                                                                            
Mr. Alper turned to slide 55 regarding carry forwards:                                                                          
     This is the major change to how losses are treated on                                                                      
    the North Slope, and incorporates advice from LB&A                                                                          
     consultant Ruggiero                                                                                                        
     • Current law- company earns a credit based on a                                                                           
     percentage of a loss                                                                                                       
     Losses become a 35% credit, eligible for cash                                                                              
     • HB111, 50% of lease expenditures carry forward                                                                           
     to a future year to offset taxes                                                                                           
          · Since carry-forward balances can offset taxes,                                                                      
             this is equivalent to a 17.5% NOL rate (50% of                                                                     
          · Adds an "uplift" (Sec. 26) where carry-forward                                                                      
             balances can earn interest for seven years                                                                         
Mr.  Alper  indicated that  Section  25  housed the  largest                                                                    
change. He indicated  that the section outlined  how to take                                                                    
something  that was  previously a  loss and  turn it  into a                                                                    
carry forward. Under current law,  a company earned a credit                                                                    
based on  a percentage of  their loss, a 35  percent credit.                                                                    
The  credit  was  tied  in  many  ways  to  the  35  percent                                                                    
statutory tax calculation.  The way the bill  changed it was                                                                    
to take 50  percent of the loss  (excess lease expenditures)                                                                    
and carry them into the  following year. Presuming there was                                                                    
production and value in the  following year, it would offset                                                                    
the following  year's value. The  equivalent would be  as if                                                                    
it were a 17.5 percent NOL  credit rate. The reason for that                                                                    
was because  if a company  lost $1 and carried  forward $.50                                                                    
and  offset a  35 percent  tax  with it,  the company  would                                                                    
receive 50 percent of 35 percent  of a tax benefit, or a NOL                                                                    
rate  of  17.5  percent.  An   amount  would  get  added  to                                                                    
compensate  for  time  and uplift.  Essentially,  the  state                                                                    
would  be  paying  interest on  carry  forward  losses.  The                                                                    
uplift would be such that for  up to 7 years a company could                                                                    
earn interest  on their loss  from their initial  year until                                                                    
they were able to use it  in the future. If the company were                                                                    
to  wait more  than 7  years to  use it,  there would  be no                                                                    
specific sunset on the value.  However, the state would stop                                                                    
paying interest.                                                                                                                
Mr.  Alper  advanced to  slide  56  which showed  the  carry                                                                    
forward  calculation. He  reviewed  an  example. He  relayed                                                                    
that  the  following  section  of  the  bill  addressed  the                                                                    
Mr. Alper  turned to  slide 57. The  slide talked  about why                                                                    
the 35 percent NOL rate might  be slightly off. It had to do                                                                    
with  amendments  to SB  21.  He  elaborated that  when  the                                                                    
change was made  from a 25 percent tax with  zero credits to                                                                    
a 35 percent tax with a  per barrel credit, it was perceived                                                                    
to be revenue  neutral. The chart showed the  revenue from a                                                                    
single barrel  of oil under SB  21 in its original  form and                                                                    
as it was  amended. A barrel of oil priced  at $100 with $40                                                                    
in costs,  net $60  of taxable  net. At  the 25  percent tax                                                                    
rate, the tax equaled $15. At  a tax rate of 35 percent with                                                                    
a $6 per barrel credit it  would also equal $15. The revenue                                                                    
was  the  same  as  far  as the  state  was  concerned.  The                                                                    
question  was, when  the  amendment was  made,  did the  NOL                                                                    
credit rate get increased from  25 percent to 35 percent. He                                                                    
thought  it was  a reasonable  question. He  noted that  the                                                                    
House version  of HB 247 reduced  the NOL credit rate  to 25                                                                    
percent over several following years.                                                                                           
Vice-Chair Gara  asked Mr. Alper  to return to slide  56. It                                                                    
was easier for him to  understand the effective tax rate and                                                                    
how much  the state was  giving away in per  barrel credits.                                                                    
The per barrel  credit had always been confusing  to him. In                                                                    
looking at slide  56, it appeared that even  with the change                                                                    
in the  bill, at expected  prices, the deduction rate  was a                                                                    
higher percentage  than the  tax rate a  company paid.  In a                                                                    
world where  most people received  a deduction equal  to the                                                                    
tax rate, not  higher, they would still be  allowed a higher                                                                    
deduction rate  percentage than  a company  paid as  its tax                                                                    
rate. He wondered if was understanding the slide correctly.                                                                     
Mr. Alper  would rather  wait until he  reached slide  58 to                                                                    
respond. The  slide graphically showed effective  tax rates.                                                                    
He commented that the attempt to  reduce the NOL rate was an                                                                    
attempt  to  make  the  credit   rate  about  equal  to  the                                                                    
effective tax rate. Whereas, at  35 percent it was currently                                                                    
higher at all price points than the effective tax rate.                                                                         
10:22:17 AM                                                                                                                   
Mr. Alper  continued speaking to  slide 57. He  relayed that                                                                    
the   slide   showed   the  side-by-side   calculation.   He                                                                    
highlighted the NOL credit rate  in yellow. He asked why the                                                                    
credit rate  increased when the  effective taxes  stayed the                                                                    
Mr.  Alper turned  to slide  58 to  answer his  question. He                                                                    
reported that  the solid blue  line reflected  the effective                                                                    
tax rate of Alaska's Clear  and Equitable Share (ACES) - the                                                                    
tax plus  the progressivity  minus the  capital credit  at a                                                                    
2018 spending  rate. He highlighted the  steep progressivity                                                                    
with ACES which  yielded a very high effective  net tax rate                                                                    
at higher  prices. The net  operating loss rate,  the credit                                                                    
earned  by  North  Slope  companies  losing  money,  was  25                                                                    
percent represented  by the dotted  blue line on  the chart.                                                                    
There was a  point at higher prices which  the effective tax                                                                    
rate was  above the credit  rate, and  there was a  point at                                                                    
lower prices  below about $85  which the effective  tax rate                                                                    
was below the NOL rate. It was somewhere in the middle.                                                                         
Mr.  Alper  continued  that  the  red  solid  line  was  the                                                                    
effective  tax rate  under SB  21. It  was the  number Vice-                                                                    
Chair  Gara had  referred to.  The effective  tax rate  as a                                                                    
percentage  of profits  went  down and  tailed  up again  at                                                                    
lower prices  because of  the hard  floor in  SB 21.  Once a                                                                    
company went below the minimum  tax and companies were still                                                                    
paying 4  percent, the 4  percent could become a  very large                                                                    
percentage of their profits. The  minimum tax was the upward                                                                    
tail of the red line on  the chart. Mr. Alper continued that                                                                    
the dotted  red line was the  NOL rate for SB  21, which was                                                                    
above the  effective tax rate  on the entire graph.  The red                                                                    
line was not reached until  oil reached $160 per barrel. The                                                                    
thought was  that a lower  number should be  the appropriate                                                                    
NOL credit rate. He highlighted  the green line representing                                                                    
the effective NOL rate of  the committee substitute from the                                                                    
House Resources  Committee - the 17.5  percent reflecting 50                                                                    
percent  not  uplifted of  a  company's  carry forwards.  He                                                                    
noted the  dark green  line which represented  the effective                                                                    
tax rate for HB 111. He pointed  to the shift to the left of                                                                    
the per barrel credit on  the slightly higher minimum tax on                                                                    
the left side  to the tail. The effective tax  rate would be                                                                    
below the  NOL rate between  $60 and  $80 and above  the NOL                                                                    
rate at higher and lower prices.                                                                                                
Mr. Alper moved to slide 59.  He did not see much difference                                                                    
between a  NOL credit  or a  carry forward.  By making  it a                                                                    
carry  forward,  it automatically  became  non-transferable.                                                                    
The  bill was  written to  create carry  forwards which  was                                                                    
more  comparable  to  what   other  jurisdictions  did  that                                                                    
allowed  companies to  reclaim  their costs  once they  went                                                                    
into production.                                                                                                                
Mr. Alper scrolled to slide  60. He noted some concerns with                                                                    
Section 25.  The way  the 50  percent provision  was written                                                                    
might  further reduce  the amount  another 50  percent every                                                                    
year. For  instance, if  a company had  $100 million  in the                                                                    
current  year and  $50  million in  the  following year,  it                                                                    
might  become $25  million  in year  3.  The language  might                                                                    
require a  technical fix. The  carry forwards  also appeared                                                                    
to be  available statewide. It  went back to the  Cook Inlet                                                                    
question  whether it  was the  committee's intent  to expand                                                                    
the benefit  and recapture for  tax purposes to  Cook Inlet.                                                                    
There was a  question of how to apply carry  forwards when a                                                                    
minimum tax was  in place. For example, if a  company had $1                                                                    
billion  in  carry forwards  and  came  into production  and                                                                    
began earning $200  million per year, the  question would be                                                                    
whether they  would offset the  entire $200 million  to zero                                                                    
for  5 years  and still  pay the  minimum tax.  He suggested                                                                    
other ways  to handle  the minimum tax  as well.  He thought                                                                    
the issue  needed clarification in  the bill. He  noted that                                                                    
the department  had done  modeling in  one way  whereas, Mr.                                                                    
Ruggerio had modeled  it another way. There also  might be a                                                                    
need for  conforming language regarding  limiting deductions                                                                    
for calendar years.                                                                                                             
10:28:45 AM                                                                                                                   
Mr.  Alper  discussed  slide 61.  He  relayed  that  another                                                                    
possible  concern  was  that the  carry  forwards  were  not                                                                    
supposed   to  be   usable  until   the  company   got  into                                                                    
production. It was  possible that a company  could invest $2                                                                    
billion  into  a  project  then  decide  it  was  no  longer                                                                    
workable. The  company could then  sell their  entire Alaska                                                                    
subsidiary  to a  major producer  at a  great discount.  The                                                                    
company would  be buying $2  billion worth of  carry forward                                                                    
lease expenditures which could then  be used to offset their                                                                    
production  tax  value  from Prudhoe  Bay  and  Kuparuk.  He                                                                    
thought some sort of ring  fencing mechanism might be needed                                                                    
to make  sure the  carry forward  expenditures were  tied to                                                                    
the project or property rather than other values.                                                                               
HB  111  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair  Seaton indicated  that the  meeting would  have to                                                                    
stop due to the House  Floor session beginning. He indicated                                                                    
that  the committee  would pick  up with  Section 26  of the                                                                    
bill at 1:30 pm and would be hearing industry testimony.                                                                        

Document Name Date/Time Subjects
HB 111 3.22.17 Rep. Gara Repsol Press Release Updated.pdf HFIN 3/22/2017 9:00:00 AM
HB 111
HB 111 DOR Response Letter to House Finance Committee - 4.7.17.pdf HFIN 3/22/2017 9:00:00 AM
HB 111