Legislature(2017 - 2018)HOUSE FINANCE 519

03/22/2017 01:30 PM FINANCE

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01:35:37 PM Start
01:36:35 PM HB111
01:49:59 PM Industry Testimony
08:02:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Industry Testimony:
- Kara Moriarty, AK Oil & Gas Assoc. (AOGA)
- Dan Seckers, ExxonMobil
- Damien Bilbao, BP
- Scott Jepsen, VP External Affairs &
Transportation, ConocoPhillips
- Paul Rusch, VP Finance, ConocoPhillips
- Benjamin Johnson, Blue Crest (telephonic)
- Pat Galvin, Great Bear
- Pat Foley, SVP AK Relations, Caelus
- Jeff Hastings, Managing Member, Kuukip SAE &
CEO, SAExploration
+ 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."                                                                                      
1:36:35 PM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
continued addressing  a PowerPoint presentation  titled "New                                                                    
Sustainable  Alaska  Plan,  Pulling Together  to  Build  our                                                                    
Future; CSHB  111(RES)\N by  the House  Resources Committee,                                                                    
Oil and Gas Production Tax  and Credits: Background and Bill                                                                    
Analysis"  dated  March  21, 2017  (copy  on  file).  [Note:                                                                    
presentation also  heard on March  21, 2017 and  the morning                                                                    
of  March  22,  2017.]  He   addressed  Section  26  of  the                                                                    
legislation  on  slide  62.  The  section  involved  several                                                                    
components  of  the  legislation including  the  uplift  and                                                                    
Department of  Natural Resources (DNR) preapproval  area. He                                                                    
addressed the uplift portion. He  discussed a scenario where                                                                    
the  state  would not  buy  credits  and instead  the  lease                                                                    
expenditures would  roll forward in  some way into  a future                                                                    
year  against   future  taxes.  The  question   was  how  to                                                                    
compensate  the  taxpayer for  only  the  fact that  only  a                                                                    
fractional portion  of the  costs would  be allowed  to move                                                                    
forward and how  to compensate the company if  they were not                                                                    
going to  get value  for several years  (i.e. time  value of                                                                    
money). The  uplift section had  been added by  the previous                                                                    
committee to provide interest.                                                                                                  
Mr.  Alper  highlighted  a  scenario on  slide  62  where  a                                                                    
taxpayer had a loss of  $100 million and carried forward $50                                                                    
million  in  lease  expenditures,   the  amount  would  earn                                                                    
interest, which  was tied in  statute to 7 percent  plus the                                                                    
federal discount rate (currently  8.25 percent and scheduled                                                                    
to increase  to 8.5  percent due to  recent action  taken by                                                                    
the Federal Reserve Board). The  8.25 percent interest would                                                                    
be added  to the  $50 million  for up to  seven years  for a                                                                    
total  of  $87  million  (roughly the  equivalent  to  a  30                                                                    
percent   net   operating    loss   (NOL)).   The   scenario                                                                    
reintroduced  three  variables  that  could  be  built  into                                                                    
future debate,  amendments, or other:  1) the  carry forward                                                                    
percentage; 2) the  uplift interest rate; and  3) the number                                                                    
of years  the benefit  could accrue.  He explained  that the                                                                    
numbers  would change  dramatically with  any change  to the                                                                    
variables. He detailed  that with a full carry  forward at a                                                                    
higher interest  rate for  a longer  time period,  the state                                                                    
could  eventually be  giving double  or triple  the original                                                                    
value.  He  relayed that  the  7  percent plus  the  federal                                                                    
discount rate was  the same as the interest  rate in Section                                                                    
2  (the interest  rate on  delinquent taxes)  that the  bill                                                                    
currently amended  to limit to  three years.  He recommended                                                                    
linking the  concepts together directly by  tying the uplift                                                                    
rate  to the  interest rate  statute. He  suggested language                                                                    
reading  "the amount  in  43.05.225."  Consequently, if  one                                                                    
figure changed the other would automatically change.                                                                            
1:40:09 PM                                                                                                                    
Mr.  Alper continued  to address  slide  62. The  department                                                                    
needed  clarification  on   whether  the  seven-year  period                                                                    
accrued to  the taxpayer  for their first  lease expenditure                                                                    
carry  forward  only.  Alternatively,  he  questioned  if  a                                                                    
taxpayer have the  ability to carry forward a  loss from the                                                                    
second year for a seven-year  period as well. The department                                                                    
assumed it  was the  latter, but the  bill language  was not                                                                    
completely clear. He  turned to slide 63  and explained that                                                                    
the remainder of Section 26  related to preapproval of lease                                                                    
expenditures that would be carried forward.                                                                                     
Vice-Chair Gara  referred to slide 62  and acknowledged that                                                                    
under the current  bill version the credit was  less than it                                                                    
used to be. However, in  most tax systems companies were not                                                                    
paid  interest  if they  had  to  extend deductions  over  a                                                                    
number of  years or had  to roll their losses  forward under                                                                    
federal  tax for  many  years. He  surmised  an 8.5  percent                                                                    
interest payment  to a  company that  was already  getting a                                                                    
credit seemed like a profit on  top of a credit. He wondered                                                                    
why  the option  had  been chosen  versus  using the  common                                                                    
option of enabling  a company to roll  forward credits until                                                                    
it was able to deduct them.                                                                                                     
Mr. Alper  believed the question  would be best  answered by                                                                    
legislative  consultant Rich  Ruggiero who  had created  the                                                                    
concept  and  proposed  it  to   the  prior  committee.  His                                                                    
understanding  was that  the language  more or  less modeled                                                                    
some of  the language in production  sharing agreements with                                                                    
countries with a slightly different  tax system. He detailed                                                                    
the  idea was  a capital  recapture where  there was  no tax                                                                    
until a company made its  initial investment back. There was                                                                    
also the  government take  share of  the amount  beyond that                                                                    
amount.   He  explained   it  was   not  unusual   in  those                                                                    
circumstances  for  there  to  be   a  built  in  profit  or                                                                    
multiplier  on  top of  the  expenses  before the  sovereign                                                                    
began to receive  its share. He qualified  that his response                                                                    
was a bit of a guess,  but it was his understanding based on                                                                    
testimony by Mr. Ruggiero.                                                                                                      
1:42:51 PM                                                                                                                    
Vice-Chair  Gara stated  that in  prior tax  discussions the                                                                    
legislature  had always  been told  that production  sharing                                                                    
jurisdictions around the  world tended to have  a higher tax                                                                    
rate. He continued that Alaska had  a lower tax rate and the                                                                    
state  was also  giving  companies interest  on  top of  tax                                                                    
credits. He would need convincing  the state was not getting                                                                    
the worst  of all  worlds. He  recognized that  the proposed                                                                    
credit was smaller than the one under current law.                                                                              
Representative  Pruitt remarked  that many  times the  state                                                                    
compared itself to other countries.  However, Alaska was not                                                                    
a  sovereign -  there  was  still a  federal  aspect to  the                                                                    
issue. He believed failing to  include the federal component                                                                    
and comparing Alaska to a  sovereign could be detrimental to                                                                    
the conversation.                                                                                                               
Mr. Alper answered in the  affirmative - the federal tax was                                                                    
the last  link in the  chain. Whatever the companies  end up                                                                    
paying to  the State  of Alaska ended  up being  a deduction                                                                    
against  what they  paid to  the  federal government.  There                                                                    
were pros and  cons to the method. He explained  that as the                                                                    
state  increased  taxes,  the federal  government  ended  up                                                                    
receiving  less; therefore,  the net  effect on  the company                                                                    
was a  bit less  than simply  the extra  dollar paid  to the                                                                    
Representative Guttenberg  asked Mr. Alper to  expand on the                                                                    
issue related to the state impact.                                                                                              
Mr. Alper responded  with a scenario where  the state raised                                                                    
the  tax burden  on a  large corporation  by $1  million. He                                                                    
detailed that  the company's profit  would be reduced  by $1                                                                    
million  as  a result.  He  continued  that most  large  oil                                                                    
companies  paid  a  35  percent federal  income  tax  -  the                                                                    
state's tax  would mean  the company  would pay  the federal                                                                    
government $350,000  less and  would only  be out  of pocket                                                                    
Representative   Guttenberg  asked   if  there   were  other                                                                    
considerations  when  undertaking  the exercise.  Mr.  Alper                                                                    
answered  that within  the state  income tax  there was  the                                                                    
apportionment formula and the  interaction of Alaska's state                                                                    
tax with  other states' taxes.  For federal income  tax, the                                                                    
primary difference  was depreciation.  For tax  purposes the                                                                    
federal government treated  capital expenditures differently                                                                    
- they  were taken over a  number of years and  amortized or                                                                    
depreciated. Whereas,  Alaska's tax  system had  100 percent                                                                    
spending recapture in year one.                                                                                                 
1:46:05 PM                                                                                                                    
ED KING,  SPECIAL ASSISTANT TO THE  COMMISSIONER, DEPARTMENT                                                                    
OF NATURAL  RESOURCES, addressed  slide 63 related  to lease                                                                    
expenditures.  He noted  that two  provisions  added to  the                                                                    
bill in the prior committee  impacted DNR. The first was the                                                                    
preapproval  process   for  lease  expenditures.   Based  on                                                                    
testimony provided,  DNR better  understood the  intent. One                                                                    
of the  department's largest concerns  was the  broadness of                                                                    
the language,  which could  be interpreted  in a  variety of                                                                    
ways.  If  the  language   was  maintained,  the  department                                                                    
requested  clarity about  what  the  legislature wanted  the                                                                    
department to accomplish. Under  the current language it was                                                                    
possible that every line item  of each lease expenditure ($6                                                                    
billion  annually)  would have  to  be  preapproved by  DNR,                                                                    
which would be  an arduous and expensive  task. He furthered                                                                    
that  the department's  regulations  would  probably not  be                                                                    
written  in  that way  -  DNR  would probably  automatically                                                                    
preapprove  operating expenditures  and  similar items.  The                                                                    
department's  review process  would likely  be reserved  for                                                                    
larger projects.  He recalled  prior testimony  in reference                                                                    
to poor management or a project  the state would not want to                                                                    
participate in.  He suggested if there  was a classification                                                                    
of  lease  expenditures  the state  was  not  interested  in                                                                    
participating  in,   it  was   possible  to   enumerate  the                                                                    
classification  within existing  statute rather  than having                                                                    
the  department  go  through   a  preapproval  process.  The                                                                    
department appreciated the  deference and latitude; however,                                                                    
because  the  process involved  tax  law,  it provided  very                                                                    
difficult challenges for DNR to  overcome if it were to deny                                                                    
an  expenditure. Either  DNR or  the  Department of  Revenue                                                                    
(DOR) would  have to defend  in court that the  decision had                                                                    
not been arbitrary, which was DNR's largest concern.                                                                            
1:48:37 PM                                                                                                                    
Co-Chair Seaton  appreciated the testimony. He  did not want                                                                    
the broadness of  language to result in  the significant in-                                                                    
depth analysis  Mr. King referred  to. He  communicated that                                                                    
the  committee would  make sure  to take  the concerns  into                                                                    
1:49:09 PM                                                                                                                    
AT EASE                                                                                                                         
1:49:25 PM                                                                                                                    
Mr. Alper  noted the presentation contained  another four or                                                                    
five  slides  related  to  the fiscal  note  that  he  could                                                                    
address at a later date.                                                                                                        
^INDUSTRY TESTIMONY                                                                                                           
1:49:59 PM                                                                                                                    
KARA  MORIARTY,  PRESIDENT   AND  CHIEF  EXECUTIVE  OFFICER,                                                                    
ALASKA OIL  AND GAS  ASSOCIATION (AOGA),  introduced herself                                                                    
and  provided   a  PowerPoint  presentation   titled  "House                                                                    
Finance Committee CS for HB  111" dated March 22, 2017 (copy                                                                    
on   file).  She   detailed  that   AOGA  was   the  private                                                                    
professional trade association for  the oil and gas industry                                                                    
in  Alaska;  it represented  the  majority  of oil  and  gas                                                                    
companies  (represented  on  slide   2).  She  read  from  a                                                                    
prepared statement:                                                                                                             
     Collectively,  governments in  Alaska, local  and state                                                                    
     governments  combined, this  last  fiscal  year FY  16,                                                                    
     received  just over  $2.1 billion  in revenue  from the                                                                    
     oil  and   gas  industry.  This  presentation   and  my                                                                    
     testimony does  have unanimous  consent of  our diverse                                                                    
     As with any piece of  tax legislation that we've looked                                                                    
     at over the  last decade or so, we  often use different                                                                    
     guiding principles to weigh  the proposal against. This                                                                    
     bill is no different.                                                                                                      
Ms. Moriarty pointed to the  guiding principles AOGA used to                                                                    
measure    progress   including    production,   investment,                                                                    
competitiveness, revenue,  and "fair share" on  slide 3. The                                                                    
principles  had  been  used   by  AOGA  when  analyzing  the                                                                    
original  version  of  HB  111  and  the  current  committee                                                                    
substitute (CS).  She stated that the  first four principles                                                                    
were very objective, it was  clear and easy to weigh whether                                                                    
the  bill would  provide  increased production,  investment,                                                                    
competitiveness, and  revenue; however, fair share  was very                                                                    
     As  we examined  the  latest  committee substitute  for                                                                    
     House Bill  111, it  became clear  that because  of the                                                                    
     vast  number of  changes,  the  bill definitely  raises                                                                    
     taxes and  increases cost on  the industry. The  CS for                                                                    
     House Bill 111  will not add more oil  to the pipeline,                                                                    
     it will not  attract investment to Alaska,  and it will                                                                    
     put Alaska toward the bottom  of the competitive scale.                                                                    
     Throughout  my  testimony  today   I  plan  to  briefly                                                                    
     highlight  the policy  sections  of  concern. You  will                                                                    
     notice I  will point out  where the bill does  not make                                                                    
     any changes  or has  nothing to do  with what  many say                                                                    
     need to  be reformed  or continued  to be  reformed and                                                                    
     that's tax credits. There are  several sections of this                                                                    
     bill  that  have  absolutely nothing  to  do  with  tax                                                                    
     credits.  There are  several  sections  that were  just                                                                    
     changed last year.                                                                                                         
Ms. Moriarty turned to slide  5 and addressed the section on                                                                    
increasing   the   interest   rate   [Section   2   of   the                                                                    
     Increasing  the  interest  to  six  years  of  compound                                                                    
     interest  will  simply  increase  our  costs  of  doing                                                                    
     business and this is a  prime example of a section that                                                                    
     has nothing to do with tax credits.                                                                                        
1:53:49 PM                                                                                                                    
Ms. Moriarty addressed slide 6 on Sections 3 through 5 and                                                                      
20 through 22 of the bill related to confidentiality and                                                                        
     This  is another  section that  was  just changed  last                                                                    
     year. There  were additional  transparency requirements                                                                    
     that were part of House  Bill 247. There have been some                                                                    
     claims  that industry,  even  AOGA  in particular,  has                                                                    
     supported the  language in this current  version of the                                                                    
     CS. That is not accurate.  To be clear, AOGA did submit                                                                    
     some   potential   confidential   language   to   House                                                                    
     Resources  last   March.  We  have  gone   through  and                                                                    
     compared  what  we  submitted to  the  House  Resources                                                                    
     Committee last year with Amendment  45 that I think was                                                                    
     referenced on  Monday, as well  as the  language that's                                                                    
     currently in the bill and  they are not the same. There                                                                    
     is  some very  clear differences.  The current  version                                                                    
     paraphrases some  of the language that  we submitted to                                                                    
     House Resources  and that paraphrased language  as well                                                                    
     as language  that's omitted from  the version  in front                                                                    
     of   you   are    very   important   and   substantive.                                                                    
     Additionally, this version  includes language regarding                                                                    
     very broad authority for the  Department of Revenue and                                                                    
     it  gives  the  department unfretted  and  unsupervised                                                                    
     power  in a  variety of  ways to  request and  disclose                                                                    
     virtually   any  information   it  desires   in  either                                                                    
     executive  session  or  via  the  proposed  new  annual                                                                    
     report. For a variety of  reasons the industry does not                                                                    
     support what's currently in the bill.                                                                                      
Ms. Moriarty advanced to Section 6 regarding raising the                                                                        
minimum tax (slide 7):                                                                                                          
     Section  6  or  a  version  of Section  6  was  in  the                                                                    
     governor's original oil tax bill  last session in House                                                                    
     Bill 247.  Even though House  Bill 247 was touted  as a                                                                    
     tax credit  reform bill  as House Bill  111 is,  it had                                                                    
     many provisions  such as this  one that has  nothing to                                                                    
     do with  tax credits.  Raising the  minimum tax  is not                                                                    
     just  a  1  percent  increase. For  some  companies  it                                                                    
     represents  a   25  percent  increase  and   for  other                                                                    
     companies  it's an  infinite increase.  Your consultant                                                                    
     asked  industry  to be  very  specific  about how  they                                                                    
     would change their investment behavior  and my guess is                                                                    
     you're going  to hear  that directly  from some  of the                                                                    
     companies today.  Last session,  when we had  a similar                                                                    
     provision that  would raise the minimum  tax, there was                                                                    
     testimony that this 1 percent  increase could result in                                                                    
     the reduction  of a drilling  rig for up to  six months                                                                    
     on the North Slope. That is significant.                                                                                   
     House  Bill  111   will  impact  investment  decisions.                                                                    
     Companies won't keep investing money  the same way they                                                                    
     are today if these provisions are adopted.                                                                                 
1:56:48 PM                                                                                                                    
Ms. Moriarty turned to Sections 7, 10, 12, 13, and 16                                                                           
related to hardening the tax floor on slide 8:                                                                                  
     Not allowing credits  to be applied to  the minimum tax                                                                    
     floor is  a tax  increase. While  this one  is directly                                                                    
     related  to  credits,  this   proposal  changes  a  key                                                                    
     provision  of   the  purpose   of  credits.   For  some                                                                    
     companies using credits against  the minimum tax is the                                                                    
     only way  they continue to invest  money, especially in                                                                    
     a  low  price  environment.   Another  key  section  of                                                                    
     Section  7  is  this  issue of  migrating  credits.  If                                                                    
     you're looking  at making the tax  system less complex,                                                                    
     you  should eliminate  this part  of  the bill  because                                                                    
     this  proposal  actually  makes  the  tax  system  more                                                                    
     complex. It moves the tax to  more of a monthly tax and                                                                    
     this  section  would  require companies  to  accurately                                                                    
     submit estimates each  month versus doing a  true up at                                                                    
     the end  of the year. So,  you have to ask  yourself if                                                                    
     you were a business owner,  would you like to file your                                                                    
     taxes  on  an  accurate  estimate  every  month  versus                                                                    
     having an  annual true up  so you can utilize  the very                                                                    
     incentives that  attracted you to  invest in  the first                                                                    
     place. For us,  this is a tax increase  and changes the                                                                    
     key provision of the current tax system.                                                                                   
Ms. Moriarty addressed Sections 11 and 18 related to net                                                                        
operating loss (NOL) credits (slide 10):                                                                                        
     One part  of the  NOL credit, and  we'll get  into NOLs                                                                    
     later as  well, if  you no  longer allow  an NOL  for a                                                                    
     cash  payment  it's almost  a  double  whammy for  some                                                                    
     companies because the  NOL has been said  time and time                                                                    
     again  to be  a playing  field leveler,  especially for                                                                    
     small  companies  on  the  slope.  These  two  sections                                                                    
     really can impact small and newer companies to Alaska.                                                                     
1:58:58 PM                                                                                                                    
Ms. Moriarty turned to slide 11 related to the changes in                                                                       
the per-barrel credit.                                                                                                          
     Before I go into the  changes on the per-barrel credit,                                                                    
     I just  want to  go back  and talk  about how  these so                                                                    
    called credits, the per barrel credit, came about.                                                                          
     When  Senate Bill  21 was  originally  drafted the  tax                                                                    
     rate  was  25  percent.  After it  was  introduced  and                                                                    
     during some of the  modeling, the Department of Revenue                                                                    
     and the legislature recognized that  it was going to be                                                                    
     a very regressive tax and  the effective tax rate would                                                                    
     be dramatically  lower at lower  prices - and  they did                                                                    
     not want  that to  happen. So,  the department  and the                                                                    
     legislature  worked  together  to create  nothing  more                                                                    
     than a math  formula, which kept the tax  rate at about                                                                    
     the  same percentage  across a  wide  range of  prices.                                                                    
     That actually  added an  element of  progressivity back                                                                    
     into  the tax,  versus  what  was originally  proposed,                                                                    
     which was really a regressive  tax. By its very design,                                                                    
     it was never  the intent to have an  effective tax rate                                                                    
     of 35  percent. The tax  rate was 35 percent  with this                                                                    
     math  formula  to  incentivize  production  and  that's                                                                    
     exactly  what  it  did -  it  incentivized  investment.                                                                    
     You're  going to  hear  about  projects and  production                                                                    
     that came online after Senate Bill 21.                                                                                     
     This  math  formula  kept  the tax  rate  at  about  25                                                                    
     percent  over  a  range of  prices  and  that's  what's                                                                    
     referred  to   as  the  per  barrel   "credit"  because                                                                    
     changing  the   per  barrel  credit  now   changes  the                                                                    
     structure  of the  tax. It  would be  an immediate  tax                                                                    
     increase  on core  fields that  provide  a little  more                                                                    
     than  90 percent  of our  current production.  It's not                                                                    
     just us  as industry  who have  described it  that way.                                                                    
     You've  had legislative  consultants at  the time,  you                                                                    
     had  DOR officials  at the  time, DOR  officials today,                                                                    
     who recognize that the per  barrel credit is not really                                                                    
     a credit in  the true sense of what you  think of it as                                                                    
     a  credit.  Enalytica,  the  consultant  at  the  time,                                                                    
     described  the per  barrel credit  as  a misnomer.  The                                                                    
     current  Tax Division  Director, Mr.  Alper, previously                                                                    
     confirmed  that very  notion. Even  though  he was  not                                                                    
     part  of the  creation of  the math  formula, he  is on                                                                    
     record  as saying  this about  per barrel  tax credits.                                                                    
     This  is  from  a  joint  House  and  Senate  Resources                                                                    
     hearing down on the Kenai Peninsula in June of 2015:                                                                       
          "Some of them (credits)  are integral parts of the                                                                    
          tax  regime;  the  20 percent  capital  credit  in                                                                    
          ACES, the  per-barrel credit in  SB 21,  those are                                                                    
          very  much offsets  to what  would otherwise  be a                                                                    
          very high tax rate."                                                                                                  
     So  Director   Alper  recognizes  that  a   35  percent                                                                    
     effective tax rate is a very  high tax rate. He goes on                                                                    
     to say:                                                                                                                    
          "With SB  21 the  credit is an  offset to  the tax                                                                    
          and is  designed to create a  progressive element,                                                                    
          a little  bit lower  tax rate  at lower  prices, a                                                                    
          higher tax rate at higher  prices, so it's hard to                                                                    
          really consider  them a credit  in the  context of                                                                    
          an inducement  to doing work. It's  really what we                                                                    
          are calling an integral part of the system."                                                                          
     So,  just  know that  if  you  change this  per  barrel                                                                    
     credit, you are  making a fundamental change  to a very                                                                    
     integral  part of  the tax  system and  we would  argue                                                                    
     that  this "credit  reform" is  not really  targeted at                                                                    
     the credits  that I  think most  are referring  to when                                                                    
     they talk about credit reform.                                                                                             
2:02:54 PM                                                                                                                    
Ms. Moriarty addressed the proposed new dry hole credit on                                                                      
slide 13.                                                                                                                       
     So now we  have a new credit in this  CS and that's the                                                                    
     dry hole  credit. For us  the policy  objectives around                                                                    
     the  dry hole  credit  are a  bit  unclear. The  credit                                                                    
     would be limited  to companies that do  not produce oil                                                                    
     or  gas in  the calendar  year in  which the  credit is                                                                    
     earned,   which  frankly   would  severely   limit  the                                                                    
     eligibility.  So,  a   company  could  have  production                                                                    
     elsewhere in  the state but  if they produced  oil they                                                                    
     would  not be  eligible  and  it disregards  production                                                                    
     thresholds  already  in  place   for  the  purchase  of                                                                    
     The other  interesting thing to  us is that  the credit                                                                    
     can only  be taken if  the company gives up  the lease,                                                                    
     which feels  a little awkward  to us to us  because the                                                                    
     explorer  that  drilled the  dry  hole  would have  the                                                                    
     information gained  from that  drilling, they  would be                                                                    
     the most  likely to drill  another well on  that lease,                                                                    
     and would likely stand a  better chance of success than                                                                    
     a  different  company. My  guess  is  you'll hear  more                                                                    
     about that from some of the explorers today.                                                                               
     We  also think  that the  surrender of  a lease  to the                                                                    
     state  would  signal  a  lack  of  value  and  decrease                                                                    
     interest  in   the  lease   to  third   parties,  while                                                                    
     depriving  the  state  of  lease  rentals  prior  to  a                                                                    
     successful  lease  sale.  For  us,  this  seems  a  bit                                                                    
     counterintuitive and  again, the policy  objectives are                                                                    
     a bit unclear for us around this new proposed credit.                                                                      
2:04:32 PM                                                                                                                    
Ms. Moriarty addressed Section 19 on slide 14.                                                                                  
     Even though it  may seem moot now that the  NOL - if it                                                                    
     goes back  to the original  version, is reduced,  or is                                                                    
     converted to  a deduction -  this section brings  a lot                                                                    
     of uncertainty around how it  would apply, the language                                                                    
     is  not  very  clear  to  us, and  so  it  leaves  more                                                                    
     questions than answers for us.                                                                                             
Ms. Moriarty advanced to slide 15 and addressed Section 23                                                                      
related to the gross value at the point of production                                                                           
     The  gross  value  at  the   point  of  production,  we                                                                    
     testified to this  last year during House  Bill 247 and                                                                    
     the testimony is  the same. We believe  by changing the                                                                    
     structure of the tax, by  preventing the gross value at                                                                    
     the point of production  from going below zero, creates                                                                    
     uncertainty. This is another  section that doesn't have                                                                    
     anything to do with tax credits.                                                                                           
Ms. Moriarty moved to slide 16 and discussed the NOL                                                                            
     I think that in some  sense both inside the legislature                                                                    
     and  outside, there's  a  lot  of misinformation  about                                                                    
     what  an   NOL  is   and  what  it's   not.  Generally,                                                                    
     throughout  this whole  NOL conversation,  the NOL  has                                                                    
     generally matched the tax  rate throughout Alaska's net                                                                    
     tax  system.  This  provision  that's  currently  being                                                                    
     proposed  would  penalize  companies for  investing  in                                                                    
     Alaska,  while   they're  losing  money.   Reducing  or                                                                    
     changing  the NOL  from  a credit  to  a deduction  was                                                                    
     never  part  of  Governor Walker's  original  piece  of                                                                    
     legislation. In  fact, early on when  Governor Walker's                                                                    
     administration  testified  to   House  Bill  247,  they                                                                    
     recognized  that  the NOL  was  an  incredible part  of                                                                    
     leveling the  playing field for  companies and  so they                                                                    
    didn't believe the NOL should be changed back then.                                                                         
     The proposal before you converts  the NOL from a credit                                                                    
     to a deduction. As I  said, I've probably received more                                                                    
     questions about  what is an  NOL, what is it,  how does                                                                    
     it work?  I went  and looked  in a  business dictionary                                                                    
     and this is how they define the NOL:                                                                                       
          "A net operating loss is the amount by which net                                                                      
          expenses exceed revenue in an accounting period."                                                                     
     All  that  means is  an  NOL  is when  expenses  exceed                                                                    
     revenue. Something as business  owners, or even frankly                                                                    
     as  my  own  personal  finances, you  don't  want  your                                                                    
     expenses to  exceed your revenue.  When Senate  Bill 21                                                                    
     was written  they made the  NOL a credit. That  was the                                                                    
     decision that  was made  at the  time. This  bill would                                                                    
     change that and  it would make the NOL  a deduction. If                                                                    
     a company has expenses  that exceed revenue, they would                                                                    
     then  deduct  that expense  when  they  have revenue  -                                                                    
     pretty standard.                                                                                                           
Ms. Moriarty referred to an example related to NOL on slide                                                                     
     We put this example together  and I think it's a visual                                                                    
     illustration  that  shows   the  difference  between  a                                                                    
     company  who has  gross revenue  of $1,000.  Let's just                                                                    
     say  for simple  math  everybody has  gross revenue  of                                                                    
     $1,000  and  everybody has  the  same  tax rate  of  25                                                                    
     percent. But Company A doesn't  have any deductions and                                                                    
     so they  can't deduct  anything. You have  your taxable                                                                    
     income of $1,000,  your tax rate's 25  percent - simple                                                                    
     math $250 is the tax  bill. But Company B, same income,                                                                    
     you  have  $200  worth  of  deductions,  and  you  have                                                                    
     taxable income of  $800. Then you apply  the 25 percent                                                                    
     tax rate,  it gives you  a final  tax bill of  $200. It                                                                    
     changes your tax  bill by $50. It's why we  all want to                                                                    
     claim  our   mortgage  interest  as   homeowners.  Then                                                                    
     Company C,  let's say they  don't have  any deductions,                                                                    
     so  their taxable  income is  $1,000, then  the tax  is                                                                    
     applied at $250,  but they have a $200  credit. Now all                                                                    
     of a  sudden they can  deduct the credit after  the tax                                                                    
     is applied so they only have to pay a $50 tax.                                                                             
     So the  main difference between going  from a deduction                                                                    
     to  a credit  or vice  versa is  that the  deduction is                                                                    
     taken  before the  tax is  calculated and  a credit  is                                                                    
     taken  after   the  tax   is  calculated.   That's  the                                                                    
     difference that you're now considering.                                                                                    
2:09:27 PM                                                                                                                    
Ms. Moriarty addressed slide 18 and referred to testimony                                                                       
from Mr. Rich Ruggiero (legislative consultant):                                                                                
     Mr.  Ruggiero   from  Castle   Gap  Advisers   is  your                                                                    
     legislative  consultant  now and  when  he  was here  a                                                                    
     couple of  weeks ago he  advised that the  state should                                                                    
     change your NOL  from a credit to a  deduction. But the                                                                    
     bill's current  language does not reflect  his complete                                                                    
     recommendation, because companies  would not be allowed                                                                    
     to deduct  the full  value of their  loss and  of these                                                                    
     expenses  generated. And  the uplift  provision is  not                                                                    
     the way he recommended. So,  the current way the uplift                                                                    
     language  reads would  negatively impact  economics for                                                                    
     all companies in Alaska.                                                                                                   
Ms. Moriarty  moved to slide  19 and provided quotes  by Mr.                                                                    
Ruggiero from  a March 1 Senate  Resources Committee meeting                                                                    
related to  changing the  NOL from a  credit to  a deduction                                                                    
and including an uplift:                                                                                                        
     "Every  regime, everywhere  you go,  allows, especially                                                                    
     with  a  development  like   Smith  Bay,  everyone  who                                                                    
     develops gets to  deduct the cost of what  it took them                                                                    
     to get  that production from future  revenues from that                                                                    
     project. Every regime."                                                                                                    
     "To deny  that would really  move Alaska to  the bottom                                                                    
     of the competitive scale."                                                                                                 
Ms. Moriarty elaborated  that denying the full  value of the                                                                    
loss or  the expense would put  Alaska at the bottom  of the                                                                    
competitive scale. She read an additional quote by Mr.                                                                          
     "Various Countries have different  ways of dealing with                                                                    
     this. Where there's a long  lead time, between when the                                                                    
     money  is spent  and when  actual production  comes on,                                                                    
     they'll offer forms  of uplift which is  another way of                                                                    
     saying  interest as  it's carried  forward so  that way                                                                    
     time value loss  does not become a big  kicker to their                                                                    
Ms. Moriarty explained that under the current language it                                                                       
was a big kicker to the economics and did not reflect Mr.                                                                       
Ruggiero's recommendations to the legislature.                                                                                  
2:11:30 PM                                                                                                                    
Ms. Moriarty discussed Section 26 related to a new                                                                              
regulatory process created by the bill (slide 20):                                                                              
     We obviously have a lot  of concerns about this. When I                                                                    
     talk about Alaska when I'm  asked to speak at a variety                                                                    
     of  conferences or  give a  perspective on  what's good                                                                    
     and what's bad  in Alaska for the oil  and gas industry                                                                    
     and our  regulatory challenges have always  been on the                                                                    
     federal side -  I've always been able to  say the state                                                                    
     regulatory system  does a great  job in  providing some                                                                    
     of the  most stringent regulations on  the industry but                                                                    
     they regulate us  in a way where we know  the rules and                                                                    
     then we're allowed to do  the work and we move forward.                                                                    
     But  this section  would change  all  of that,  because                                                                    
     this preapproval  process as  has been  described would                                                                    
     require preapproval of any  expenditure before it could                                                                    
     qualify for  a potential net operating  loss deduction.                                                                    
     And if  you change  NOLs to a  deduction that's  a very                                                                    
     important part. We don't know  for the most part at the                                                                    
     time of the expenditure if you're  going to be in a net                                                                    
     operating loss  situation, so that's why  we do believe                                                                    
     that  unless  this language  is  tightened  up or  more                                                                    
     clearly defined,  the way  it's currently  written, you                                                                    
     would  have to  have  almost  every single  expenditure                                                                    
     preapproved.  And  then  there's a  lot  of  unanswered                                                                    
     questions because what would  happen if DNR says "Okay,                                                                    
     you  can build  that ice  road to  do your  exploration                                                                    
     work, to  get that drilling rig  out to any pad  in the                                                                    
     winter  time...yep   that's  preapproved,   that  would                                                                    
     qualify for a deduction." But  six to seven years later                                                                    
     on audit,  the Department  of Revenue says  "nope, that                                                                    
     doesn't  qualify."  So who  is  going  to win  in  that                                                                    
     scenario? We  can tell you that  the regulatory process                                                                    
     does not always make  statutes easier to understand. If                                                                    
     you  look at  our  current  statutes around  deductible                                                                    
     lease expenditures,  it's described  in about  three or                                                                    
     four  different  places in  statute,  there  is a  very                                                                    
     lengthy regulation process, and  even DOR right now has                                                                    
     different  definitions  of   what  qualifies  and  what                                                                    
     doesn't. This  would just add another  layer and causes                                                                    
     us great concern.                                                                                                          
2:14:04 PM                                                                                                                    
Ms. Moriarty addressed Section 27 on slide 21 that would                                                                        
repeal the statute that allowed tax credit certificates and                                                                     
proceeds to be assigned to third parties:                                                                                       
     This  is very  important for  some companies  and their                                                                    
     project  economics because  this  ability  to sign  tax                                                                    
     credit  certificates   and  proceeds   provides  really                                                                    
     valuable liquidity in early stage  projects and it does                                                                    
     improve project economics. It allows  the credits to be                                                                    
     used  as collateral  and as  a source  of repayment  of                                                                    
     project  costs  through  financing arrangements  or  in                                                                    
     joint  ventures. Frankly,  there's  no negative  fiscal                                                                    
     impact to the state  when those tax credit certificates                                                                    
     or proceeds are assigned to  a third party. But the way                                                                    
     this  repeal  would  work and  the  way  its  currently                                                                    
     written would  actually have a retroactive  impact. Why                                                                    
     do I say that? It's  because there are some parties who                                                                    
     have  already agreed  to  assign  credits generated  by                                                                    
     expenditures  happening right  now  in  2017, but  they                                                                    
     won't  be able  to  apply for  that credit  application                                                                    
     until  after   January  1,  2018.  This   change  would                                                                    
     significantly    impact    some   current    commercial                                                                    
2:15:32 PM                                                                                                                    
Ms. Moriarty addressed slide 22 titled "Would you invest in                                                                     
Alaska if tax policy changed 7 times in 12 years?":                                                                             
     It's  been stated  that  the oil  and  gas industry  is                                                                    
     constantly evolving so  why do we care  about oil taxes                                                                    
     changing.  Part  of  that  is  true,  the  industry  is                                                                    
     constantly  evolving.  I'm glad,  because  technologies                                                                    
     improve  and  techniques   improve  to  tap  additional                                                                    
     resources.  We are  able to  develop better  monitoring                                                                    
     systems  to take  care of  the environment,  but global                                                                    
     markets and prices  - you can't control  that and can't                                                                    
     predict them and  certainly there's always geopolitical                                                                    
     changes  that impact  the industry.  But  the one  area                                                                    
     that can  remain a constant  if the  government chooses                                                                    
     to is the  fiscal system. We just think there  is a lot                                                                    
     of misinformation  right now about how  these are being                                                                    
     characterized.  This would  be  the  seventh change  in                                                                    
     twelve years and  there have been some  who've said the                                                                    
     industry  has asked  for over  half  of these  changes.                                                                    
     That is  not true.  Of these seven,  the six  that have                                                                    
     taken  place  and  the  seventh  one  before  you,  the                                                                    
     industry has  supported two. We  only asked  for Senate                                                                    
     Bill 21. We didn't ask  for the Cook Inlet Recovery Act                                                                    
     in  2010.  If  those  statements  are  made,  it's  not                                                                    
     Alaska  has  a  lot  of potential,  the  Department  of                                                                    
     Revenue  will say  it, everyone  will say  it. We  have                                                                    
     great rocks  and we have  great geology. But  this bill                                                                    
     has  the potential  to lose  out on  long-term revenues                                                                    
     over  time  through  lost  royalties,  production  tax,                                                                    
     corporate income  tax, property tax, if  projects never                                                                    
     come online.  Or if production  decline goes back  to 4                                                                    
     to  6 to  8 percent  decline, you  could lose  out more                                                                    
     over time on  lost royalties alone than  you would make                                                                    
     up in the increases that the bill would put in place.                                                                      
     So  last  but  not  least, the  two  principles  around                                                                    
     revenue  and fair  share. Fair  share is  truly in  the                                                                    
     eyes of  the beholder. I'm  not going to tell  you what                                                                    
     the  state's  fair  share  should be.  Not  for  me  to                                                                    
     determine. What  this slide shows  you [slide  24] from                                                                    
     the Department  of Revenue - is  government share today                                                                    
     net of  credits. You  can see in  the orange,  which is                                                                    
     the top bar, that's the  state's share. The state takes                                                                    
     the  largest  portion  of the  share  at  every  single                                                                    
     price.  And when  the company  is underwater,  which is                                                                    
     the blue  section - you  can see when  we're underwater                                                                    
    under $45 - the state is still collecting revenue.                                                                          
2:18:27 PM                                                                                                                    
Ms. Moriarty advanced to slide 25 comparing Alaska with                                                                         
other locations:                                                                                                                
     It's  also been  stated that  we don't  really need  to                                                                    
     compare ourselves to other  fiscal regimes; however, if                                                                    
     you  look at  this chart,  the blue  line is  oil price                                                                    
     from January of  2001 to January of last  year. You can                                                                    
     see as  oil prices  go up, governments  do take  more -                                                                    
     that's  the   orange  box.  But  as   prices  go  down,                                                                    
     generally, and if  you look at January of  2016, of all                                                                    
     the  major oil  and  gas regions  (not every  country),                                                                    
     every  single  one  of  them in  January  of  2016  was                                                                    
     creating   fiscal   incentives   as   the   price   was                                                                    
Ms. Moriarty  summarized on slide  26 that gaining  a larger                                                                    
portion by  the state  would not close  the fiscal  gap. She                                                                    
sympathized with the desire for  a fiscal plan. However, the                                                                    
bill  raised taxes  at every  oil price  and at  significant                                                                    
rates when oil  prices were low. For example,  at oil prices                                                                    
of $20  per barrel, the  bill raised over $400  million more                                                                    
for the  state when the industry  was losing money in  a big                                                                    
way. She  underscored that the  bill would not put  more oil                                                                    
in the  pipeline. She  emphasized that  the state  could not                                                                    
expect companies to take on  the increased cost and continue                                                                    
to  invest money  in  Alaska. She  reasoned  the same  would                                                                    
apply  for any  business  the state  was  trying to  attract                                                                    
(e.g.  hospitals,  Native  corporations, auto  part  stores,                                                                    
fishing fleets,  restaurants, or hotels). She  detailed that                                                                    
the state could not expect  businesses to come to Alaska and                                                                    
then raise their taxes regardless  of how much money they're                                                                    
making and  expect them  to continue to  invest at  the same                                                                    
level. She hoped the committee  would reconsider some of the                                                                    
most concerning portions of the bill.                                                                                           
Co-Chair Foster  thanked Ms. Moriarty for  her presentation.                                                                    
He  provided  information  about the  afternoon  agenda.  He                                                                    
asked the committee  to hold its questions until  the end of                                                                    
each presentation.                                                                                                              
2:21:43 PM                                                                                                                    
Vice-Chair Gara  believed Ms.  Moriarty thought  the current                                                                    
tax  rate  was fair.  From  his  perspective a  fiscal  plan                                                                    
needed  to be  fair not  only to  the wealthy  but to  lower                                                                    
income  Alaskans as  well. He  stated that  for new  oil the                                                                    
production tax on profits was zero  and at $70 per barrel of                                                                    
new oil in  an average field on the North  Slope the tax was                                                                    
0.3 percent.  He asked if  Ms. Moriarty believed it  fair to                                                                    
the people of Alaska.                                                                                                           
Ms. Moriarty answered  it would be up to  the legislature to                                                                    
decide what was  fair. From AOGA's perspective,  the new oil                                                                    
provisions had been put in  place for a reason. She detailed                                                                    
that Alaska  had a very  high cost environment. She  had not                                                                    
spoken  about the  cost  per  barrel, but  many  of the  new                                                                    
fields were  expensive to bring online  and represented less                                                                    
than  10 percent  of current  production. Going  forward the                                                                    
majority  of  the production  would  continue  to come  from                                                                    
legacy   fields.  The   provisions  had   been  created   to                                                                    
incentivize  companies   to  come  to  Alaska   to  explore,                                                                    
develop, and  produce in  very high  cost, high  risk areas.                                                                    
She  reiterated it  was a  decision the  legislature had  to                                                                    
make,  but the  provisions  had attracted  new companies  to                                                                    
Alaska and had resulted in  increased production for some in                                                                    
the last several years.                                                                                                         
Vice-Chair Gara  discussed that the production  tax rate was                                                                    
4 percent for the larger  fields until about $73 per barrel,                                                                    
which he considered a problem.  He referenced slide 18 where                                                                    
Ms. Moriarty had expressed a  concern that a credit was only                                                                    
for half of the cost. He  explained that the credit was half                                                                    
the  cost because  the industry  was  receiving a  deduction                                                                    
that  was more  than  double  the actual  tax  rate paid  by                                                                    
companies.  He agreed  with  Ms.  Moriarty's statement  that                                                                    
there was really no 35 percent  tax rate. He stated that the                                                                    
real  tax rate  paid by  companies  were in  the low  double                                                                    
digits and  as low  as 7  percent. Currently  companies were                                                                    
allowed to  deduct 35  percent of  their costs.  He remarked                                                                    
that in other  jurisdictions the deduction rate  is the same                                                                    
as the tax  rate; however, in Alaska the  deduction rate was                                                                    
two  to three  times  the  actual tax  rate,  which was  the                                                                    
impetus for  the 50 percent  number. He asked if  it sounded                                                                    
fair. Alternatively,  he wondered if the  state should match                                                                    
the deduction rate with the actual tax rate.                                                                                    
Ms.  Moriarty  answered that  talking  only  about what  the                                                                    
industry  paid  in production  tax  did  not take  the  full                                                                    
picture  into account.  She explained  that only  looking at                                                                    
production tax could  give the false impression  that it was                                                                    
all the industry paid. She  detailed that at every oil price                                                                    
the industry  paid royalties, income tax,  and property tax.                                                                    
She  underscored it  was necessary  to look  at the  overall                                                                    
government take. She stressed that  the state was taking the                                                                    
largest share at  every oil price. She pointed  out that the                                                                    
legislature's  consultant [Rich  Ruggiero] had  communicated                                                                    
that if a credit was converted  to a deduction and the state                                                                    
did not allow a company to  deduct all of its expenses prior                                                                    
to  the  start   of  revenue  generation,  it   would  be  a                                                                    
disincentive  to   investment.  She  suggested   asking  the                                                                    
consultant about the reason for his recommendation.                                                                             
2:26:26 PM                                                                                                                    
Vice-Chair  Gara stated  "we just  have a  disagreement." He                                                                    
noted he  did not need  to follow up [with  the consultant].                                                                    
He  believed allowing  triple the  deduction rate  a company                                                                    
paid in taxes was very generous.                                                                                                
Representative  Ortiz referred  to Ms.  Moriarty's statement                                                                    
that  the changes  in  HB 111  would put  the  state at  the                                                                    
bottom of the competitive scale.  He asked where Alaska fell                                                                    
on the competitive scale at present.                                                                                            
Ms. Moriarty responded that her  statement that Alaska would                                                                    
be at the bottom of the  competitive scale had come from Mr.                                                                    
Ruggiero's  testimony about  what would  occur if  the state                                                                    
did not allow 100 percent  deduction of the costs. She noted                                                                    
that  the bill  did not  reflect that.  She stated  that Mr.                                                                    
Ruggiero may have a better  sense of where Alaska stacked up                                                                    
competitively. Based  on her  study of  various oil  and gas                                                                    
journals, blogs,  and other, there  were very few  regions -                                                                    
even  in  the  $40  to $50  range  -  currently  considering                                                                    
increasing  government take.  She believed  Alaska had  been                                                                    
competitive because companies had  continued to invest money                                                                    
at  low  oil prices,  production  had  increased, and  money                                                                    
continued to  be invested in  Alaska even as  some companies                                                                    
were contracting [investment]  elsewhere. She concluded that                                                                    
if cost was added, it would change the competitive nature.                                                                      
Representative  Ortiz asked  for  verification Ms.  Moriarty                                                                    
believed  the state  was  pretty  competitive under  current                                                                    
law. He asked  if that was what she meant  to imply with her                                                                    
previous answer.                                                                                                                
Ms.  Moriarty replied  that the  state's current  tax system                                                                    
had  been attracting  investment and  production to  Alaska;                                                                    
therefore, in  that sense  AOGA did  believe the  system was                                                                    
competitive. She believed there  was significant pressure to                                                                    
be  competitive.  She  referred to  substantial  talk  about                                                                    
where  the state's  effective  tax rate  was  in the  single                                                                    
digits. She explained that was  also when companies had been                                                                    
"bleeding cash" and were underwater.  The industry was still                                                                    
paying revenue  to the state  even though it was  not making                                                                    
any money  at low prices.  There was  a balance -  if prices                                                                    
were  to increase,  the industry  would retain  some of  the                                                                    
value on  the upside. The  industry would prefer to  see the                                                                    
current balance maintained.                                                                                                     
Representative Ortiz  referred to  the 35 percent  tax rate.                                                                    
He  noted Ms.  Moriarty had  pointed out  the industry  also                                                                    
paid other taxes  including on royalties. He  asked if there                                                                    
were  other  locations worldwide  with  the  other taxes  as                                                                    
well. He  surmised that Alaska  did not set itself  apart by                                                                    
having a royalty  tax. He asked there were  any taxes Alaska                                                                    
had  that other  jurisdictions  did not,  which resulted  in                                                                    
Alaska being less competitive.                                                                                                  
Ms.  Moriarty  answered that  it  was  very common  for  tax                                                                    
regimes  to  have  a  royalty   paid  to  the  landowner,  a                                                                    
production  tax, an  income  tax, and  a  property tax.  She                                                                    
stated  that  a couple  of  factors  made Alaska  that  were                                                                    
unique.  The state  was  a long  distance  from the  market,                                                                    
which made  transportation costs much  higher. Additionally,                                                                    
the operating  and capital costs were  higher. She expounded                                                                    
that because of  those factors, Alaska needed  to have large                                                                    
fields. She  furthered that there were  numerous shale plays                                                                    
on the North Slope that  had become necessary in the current                                                                    
price environment.  She detailed that the  cost of producing                                                                    
shale  had decreased.  She  explained  that when  discussing                                                                    
competition,  it  was  necessary   to  look  at  the  entire                                                                    
picture. She  specified that only looking  at production tax                                                                    
failed to  recognize all  of the  other things  the industry                                                                    
had to  contribute. She relayed  that increased  costs would                                                                    
only  increase the  cost  of doing  business.  Based on  her                                                                    
understanding,  there   were  very  few   regimes  currently                                                                    
looking  at increasing  costs  through  production taxes  or                                                                    
changing  net profit  share  leases.  Different regimes  had                                                                    
different  levers to  pull and  Alaska  was one  of the  few                                                                    
looking at changing taxes.                                                                                                      
2:32:19 PM                                                                                                                    
Representative Ortiz  asked if Alaska was  the only location                                                                    
paying out  cash credits. Ms.  Moriarty did not know  if any                                                                    
other location in  North America paid out  cash credits. She                                                                    
recommended  asking the  legislature's  consultant during  a                                                                    
meeting the following day.                                                                                                      
Co-Chair   Foster  provided   the  list   of  the   upcoming                                                                    
Representative  Pruitt   spoke  to  Section  7   related  to                                                                    
migrating credits - he referred  to Ms. Moriarty's testimony                                                                    
"accurately  submit estimates."  He surmised  that the  word                                                                    
estimate did not mean 100  percent accuracy. He asked if the                                                                    
monthly  accurate  estimate  was  done  elsewhere  in  other                                                                    
2:34:30 PM                                                                                                                    
Ms. Moriarty  recommended asking  Mr. Ruggiero  the question                                                                    
the following day.  She could follow up  after speaking with                                                                    
AOGA member companies.                                                                                                          
Representative Pruitt spoke  to the new dry  hole credit. He                                                                    
noted he had  asked about its genesis the  previous day, but                                                                    
he did not  fully understand where it had come  from and who                                                                    
supported it.  He referred to Ms.  Moriarty's testimony that                                                                    
the  new  credit  did  not  seem to  provide  value  to  the                                                                    
industry  or  the state.  He  added  that Ms.  Moriarty  had                                                                    
specified  that  the  opinion   was  approved  by  all  AOGA                                                                    
members.  He asked  for verification  that Ms.  Moriarty was                                                                    
speaking for  all AOGA  members by  indicating that  the new                                                                    
dry  hole  credit did  not  seem  to  provide value  to  the                                                                    
industry or the state.                                                                                                          
Ms.  Moriarty replied  in the  affirmative; none  of the  12                                                                    
companies  AOGA   represented  believed  the   credit  would                                                                    
provide value to the industry or state.                                                                                         
Representative Wilson  remarked that "we"  have continuously                                                                    
heard   that  oil   companies  would   have  increased   oil                                                                    
production  without  SB  21 [oil  and  gas  tax  legislation                                                                    
passed  in 2013].  She  asked if  Ms.  Moriarty agreed.  She                                                                    
wondered  how a  hard floor  of 4  or 5  percent impact  the                                                                    
volume of oil coming down the pipeline.                                                                                         
Ms.  Moriarty responded  that Alaska's  Clear and  Equitable                                                                    
Share  (ACES) had  penalized investment  and investment  had                                                                    
been stagnant  at that time.  She believed it would  be very                                                                    
difficult to  imagine that an  increase in  production would                                                                    
have occurred without SB 21.  The forecast had not predicted                                                                    
and increase and at present that forecast had been beaten.                                                                      
Representative  Wilson reiterated  her second  question. She                                                                    
explained that the previous year  there had been significant                                                                    
talk  about the  4 and  5  percent hard  floor not  actually                                                                    
representing  a  hard  floor.   She  stated  that  the  bill                                                                    
contained  both: a  4 percent  floor and  a 5  percent floor                                                                    
depending  on the  price  of  oil. She  asked  how it  would                                                                    
impact oil coming down the pipeline.                                                                                            
Ms. Moriarty answered that the  two sections - hardening the                                                                    
floor  and  increasing  the  minimum   tax  -  would  impact                                                                    
industry investment. She explained  that there would be less                                                                    
investment and less production if prices did not change.                                                                        
2:38:02 PM                                                                                                                    
Vice-Chair Gara listed fields  where investment had occurred                                                                    
prior to SB  21 including Point Thomson in  2015, CD5 before                                                                    
2012,  and  Moose's  Tooth  and  Bear  Tooth.  Additionally,                                                                    
Repsol  had  announced  investment of  $750  million  prior,                                                                    
expansion had been  going on in Kuparuk to  stem the decline                                                                    
for many  years. He asked  for an  example of a  field where                                                                    
investment had  not started prior  to the  implementation of                                                                    
SB 21. He pointed to Smith  Bay as a possibility, but he was                                                                    
not certain when the lease had first been purchased.                                                                            
Ms.   Moriarty   did   not  recall   the   slide   used   by                                                                    
ConocoPhillips in  a House Resources Committee  meeting, but                                                                    
the  slide  had  summarized investment  decisions  made  and                                                                    
projects  brought  online  after   SB  21  had  passed.  She                                                                    
referred to Caelus's Nuna field  as an example of investment                                                                    
after SB 21. She referred  to Hilcorp's Liberty field, which                                                                    
was  moving forward  and providing  70,000 barrels  per day.                                                                    
Some  of  Armstrong's  additional  investment  had  occurred                                                                    
after SB  21 and had  led to the company's  announcement two                                                                    
weeks earlier. She could absolutely  point to the fields and                                                                    
was happy to provide a report.                                                                                                  
2:39:47 PM                                                                                                                    
Vice-Chair Gara  stated the investment  on virtually  all of                                                                    
the fields mentioned  had started prior to SB 21  as did the                                                                    
lease  purchase. He  was certain  that  companies would  say                                                                    
they would have stopped investment if SB 21 had not passed.                                                                     
Ms.  Moriarty  offered  to   compile  a  report  summarizing                                                                    
investment decisions, fields, and  projects that came online                                                                    
after the passage of SB 21.                                                                                                     
Vice-Chair Gara stated "or the  investment started before SB
Ms.  Moriarty   replied  "absolutely."  She   stressed  that                                                                    
investment had occurred after SB  21 had passed that had not                                                                    
previously been  occurring. She  stated that  companies were                                                                    
happy to compile a report if desired.                                                                                           
Representative Thompson  remarked that  increased production                                                                    
had been seen  since the passage of SB 21.  He reasoned that                                                                    
there had  also been substantial investment  where the state                                                                    
had not yet seen the results  from SB 21. He believed making                                                                    
changes  [to   the  tax  structure]  at   present  would  be                                                                    
premature before the results were realized.                                                                                     
Ms. Moriarty  responded that  on some  discoveries companies                                                                    
still   needed   to   fully  delineate   what   was   there.                                                                    
Additionally,  some  projects  were still  in  a  permitting                                                                    
phase.  She  agreed  time  and  additional  exploration  and                                                                    
delineation  work were  still needed  to determine  what was                                                                    
there and when it could come online.                                                                                            
2:41:27 PM                                                                                                                    
Representative Grenn  spoke to Sections 3  through 5 related                                                                    
to  making taxpayer  information  public. He  asked how  the                                                                    
sections impacted each company.                                                                                                 
Ms. Moriarty answered that a  concern about the current bill                                                                    
language included  the broad authority  DOR could  have. For                                                                    
example, based on  the current language, it  was feasible to                                                                    
see where  DOR could ask a  company what it paid  all of its                                                                    
contractors.  There  was  concern about  disclosing  what  a                                                                    
company paid  contractor A for transportation,  contractor B                                                                    
for  hot  oil,  and  contractor  C  for  an  ice  road.  The                                                                    
businesses  were all  competitive and  AOGA did  not support                                                                    
the information being publicly disclosed.                                                                                       
Representative   Pruitt  asked   if  there   were  any   SEC                                                                    
[Securities  Exchange Commission]  or IRS  [Internal Revenue                                                                    
Service] issues  with some of  the proposed language  in the                                                                    
particular sections [Sections 3 and 5].                                                                                         
Ms.  Moriarty  replied  in   the  affirmative.  The  current                                                                    
language  would allow  disclosure of  some information  that                                                                    
was already protected through other federal regulations.                                                                        
There was a concern from a variety of aspects.                                                                                  
Co-Chair Foster indicated that Mr. Seckers would be                                                                             
testifying next.                                                                                                                
2:44:05 PM                                                                                                                    
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, thanked members for                                                                       
the opportunity to testify regarding ExxonMobil's concerns                                                                      
about the legislation. He read from prepared remarks:                                                                           
     While I am  pleased to be here to discuss  our views on                                                                    
     this CS,  I have to say  that I am disheartened  by the                                                                    
     fact that once  again I'm here to testify  on the state                                                                    
     trying  to  raise  taxes on  the  industry  again  even                                                                    
     though  we're  struggling  with  the  current  economic                                                                    
     downturn. An effort  not only to raise  taxes, but also                                                                    
     to change  the state's policy  for the seventh  time in                                                                    
     less than 13 years.                                                                                                        
     As you've heard  testimony already, such reexaminations                                                                    
     and frequent  changes serve  to undermine  the investor                                                                    
     confidence  in  Alaska,  Alaska's tax  policy,  and  to                                                                    
     weaken   Alaska's   overall  investment   climate   for                                                                    
     attracting  continued and  future investments.  For any                                                                    
     tax policy  to succeed  and to  meet the  state's long-                                                                    
     term objectives for revenue  and investment that policy                                                                    
     must be  competitive, stable, predictable,  and provide                                                                    
     confidence   to  taxpayers   and  investors   that  the                                                                    
     underlining  rules  of  the   game  won't  be  changed,                                                                    
     otherwise they  will adversely affect the  economics of                                                                    
     It's been  stated by  others that  part of  this effort                                                                    
     with this committee substitute is  to provide some sort                                                                    
     of  durability.   That  if   you  pass   the  committee                                                                    
     substitute, magically  this will provide  durability to                                                                    
     the  Alaska   oil  and   gas  system.   Durability  and                                                                    
     certainty were terms that had  been thrown around every                                                                    
     time there's  been efforts to  change taxes  in Alaska.                                                                    
     While  durability and  certainty are  important aspects                                                                    
     to  any sovereign's  tax  regime,  such durability  and                                                                    
     certainty  lose its  value if  it comes  at too  high a                                                                    
     cost. Make  no mistake, as you've  heard testimony even                                                                    
     by your director of tax,  committee substitute 111 is a                                                                    
     tax increase and it changes substantially the tax law.                                                                     
     Senate Bill 21  or MAPA the More  Alaska Production Act                                                                    
     is working  as intended.  It has  led to  more industry                                                                    
     investment  and more  importantly  an  increase to  oil                                                                    
     production  for   the  first  time  since   2002.  This                                                                    
     increased  investment and  production has  led to  more                                                                    
     jobs, more  revenues to  the state,  and has  been good                                                                    
     for the  Alaskan economy especially during  these times                                                                    
     of economic downturn.                                                                                                      
     Alaska  needs   to  remain  globally   competitive  for                                                                    
     critical capital  investments and raising taxes  on the                                                                    
     oil  and  gas  industry  at  a time  when  we  are  all                                                                    
     suffering,  as your  Department  of  Revenue has  shown                                                                    
     you,  that  will  not help  Alaskans  or  the  industry                                                                    
     weather  this economic  downturn,  it's  just going  to                                                                    
     make matters worse.                                                                                                        
     With  those  opening comments  let  me  delve into  the                                                                    
     committee substitute. First, let  me say for the record                                                                    
     that  we  do  support  testimony you  just  heard  from                                                                    
     Alaska  Oil   and  Gas  Association  that   this  is  a                                                                    
     troubling, troubling  bill. Many of the  provisions, as                                                                    
     you've  heard director  of tax  Mr. Alper  testify, are                                                                    
     carryovers from  House Bill  247. Unfortunately  all of                                                                    
     them  are bad.  We  are reminded  of  the testimony  by                                                                    
     legislative consultants last year,  and I invite you to                                                                    
     please  go  look at  it,  where  they said  that  these                                                                    
     provisions that  are in  the committee  substitute will                                                                    
     not  improve   Alaska's  overall   investment  climate.                                                                    
     Again, I ask  you to ask your consultant  that. It will                                                                    
     not lead to  more production, it will not  lead to more                                                                    
     jobs,  it will  not help  maintain or  grow production,                                                                    
     and it  will not  help the  Alaskan economy.  It's just                                                                    
     going to make matters worse.                                                                                               
     The  raise   in  the  minimum  tax.   As  you've  heard                                                                    
     testimony, this  is nothing but a  tax increase. That's                                                                    
     all this is.  It's nothing to do  with credits. Raising                                                                    
     taxes  when  companies  are hurting  is  not  wise  tax                                                                    
     policy.  It's a  regressive tax  increase and  it can't                                                                    
     help but  hurt the  industry and it's  not going  to be                                                                    
     good for jobs.                                                                                                             
     Hardening  of  the  minimum tax  floor.  The  committee                                                                    
     substitute would  also raise taxes under  Section 7, as                                                                    
     you  heard  Ms.  Moriarty  testify  to,  by  preventing                                                                    
     companies from  realizing the  true economics  in their                                                                    
     investments,  by preventing  them from  taking critical                                                                    
     tax credits  to offset  the minimum  tax as  is allowed                                                                    
     under current  law. This would represent  and immediate                                                                    
     and  significant   tax  increase  and   would  penalize                                                                    
     companies who've  made prior  year investments  and who                                                                    
     are making  current year  investments even  though they                                                                    
     may be losing  money, and would deny  them the economic                                                                    
     recovery that  they need at  the time they need  it the                                                                    
     most because  we're losing money.  In order  for Alaska                                                                    
     to  maximize   investment  it's  critical   to  provide                                                                    
     investors  the  opportunity  to  capture  the  economic                                                                    
     benefit  of  those  investments, especially  given  the                                                                    
     inherent downside risks  of long-term capital intensive                                                                    
     investments that you  have in the state.  You heard Ms.                                                                    
     Moriarty testify to that and  your consultant will tell                                                                    
     you that -  Alaska is one of the  most expensive places                                                                    
     to do  business. That's  not your  fault, it's  not our                                                                    
     fault,  it's  just a  fact.  You're  a long  ways  from                                                                    
     market  and you  are in  a very  harsh environment  and                                                                    
     very  environmentally sensitive  environment. That  all                                                                    
     adds  to costs;  it's costly  to bring  oil out  of the                                                                    
     ground here  in Alaska and  get it to market.  But this                                                                    
     provision  would  significantly and  negatively  impact                                                                    
     Alaska's  investment  climate,  make no  mistake  about                                                                    
     that.  If you  don't believe  me, ask  your consultant.                                                                    
     Ask  anybody if  you had  a tax  increase "what  do you                                                                    
     think that's going to do?"  It's amazing how people see                                                                    
     that oil  companies would act differently  than anybody                                                                    
     else.  You  have a  small  business,  maybe you  own  a                                                                    
     restaurant, your  costs are increased  - are  you going                                                                    
     to hire more  people? Are you going to  expand? Are you                                                                    
     going to do the  opposite? This provision will announce                                                                    
     to  the world  that  Alaska is  willing  to effect  the                                                                    
     economics  of past  and  essential current  investments                                                                    
     solely for short-term needs.                                                                                               
     Section 7 also has  this migrating credit provision and                                                                    
     you've heard conversations about  that. This is nothing                                                                    
     but  a tax  increase. That's  all this  is. And  why is                                                                    
     that? Let's examine  this in a little  more detail. The                                                                    
     tax you  have in front  of you  is an annual  tax, it's                                                                    
     not  a  monthly tax.  We  file  estimates every  month.                                                                    
     Estimates.  Look  it  up  in  the  dictionary  what  an                                                                    
     estimate  is. It's  a guess.  That's all  it is.  We're                                                                    
     guessing  what our  tax  will  be for  the  year, on  a                                                                    
     monthly basis. We are bound  by certain restrictions on                                                                    
     what we can claim as  deductions in any given month and                                                                    
     those  are  based  on estimates.  What  this  provision                                                                    
     would  say  is you  must  file  now, basically  perfect                                                                    
     estimates  or you  risk  losing  valuable tax  credits.                                                                    
     These tax  credits that  are going  to be  affected are                                                                    
     sliding scale credits and the  small producer credits -                                                                    
     you  can't carry  those forward.  You use  them or  you                                                                    
     lose them. So  what happens, you make  your estimate at                                                                    
     the  end of  the year  when  you file  your annual  tax                                                                    
     return -  again this is an  annual tax - if  you missed                                                                    
     your estimate it's going to  cost you money, it's going                                                                    
     to raise  your taxes. This  is a significant  change in                                                                    
     the law. You're  migrating to a monthly  tax when right                                                                    
     now  it's  an annual  tax.  But  more importantly,  how                                                                    
     could we  file our  returns accurate?  How can  we know                                                                    
     each month  what our  credits are going  to be  for the                                                                    
     year?  Because  you're  supposed to  tax  the  economic                                                                    
     activities of  a taxpayer on its  entire year activity.                                                                    
     Not  its   month,  it's  yearly  activity.   These  are                                                                    
     estimates, no  different than  a corporation  files its                                                                    
     monthly or its quarterly  estimates for its federal tax                                                                    
     return. There's  nothing in that  law that says  - well                                                                    
     if  you  miss that  estimate,  that's  a shame,  you're                                                                    
     going  to   get  tax  increase.  I've   not  seen  this                                                                    
     provision  elsewhere  -  and again  you  can  ask  your                                                                    
     consultant that -  and I've never heard  the concept of                                                                    
     filing  perfect estimates  or you  lose. And  this only                                                                    
     goes  one way,  the  state does  not  refund money,  we                                                                    
     would  have to  pay  higher taxes.  That  would be  the                                                                    
     policy of the state.                                                                                                       
     A  very  troubling provision  is  in  a number  of  the                                                                    
     sections  as to  reducing  the ability  to recover  net                                                                    
     operating  losses. There's  a lot  of misinformation  I                                                                    
     think  on  this,  or   misunderstanding.  I  think  Ms.                                                                    
     Moriarty  did an  excellent job  of trying  to explain.                                                                    
     The net operating  loss is nothing more  than when your                                                                    
     expenses exceed your revenues.  This isn't anything any                                                                    
     company is proud  of. People say - oh  you're getting a                                                                    
     subsidy because  the state's allowing you  to recover a                                                                    
     loss. I'm sorry,  from a tax perspective,  that I don't                                                                    
     understand. Nobody wants to be  in a loss. Nobody. Your                                                                    
     tax for the most part is  a net tax. It's a hybrid, but                                                                    
     it is based more on net  income than it is a gross tax.                                                                    
     What this provision  would then do is to say  - well if                                                                    
     you  invest  and  you  go  to a  loss,  thank  you  for                                                                    
     investing in the  state, we wanted you to  do that, but                                                                    
     you suffered. And you say -  well how can that be? It's                                                                    
     easy to explain  this as Mr. Alper did,  from a revenue                                                                    
     side.  You want  to  raise taxes  like  he does?  Well,                                                                    
     that's great. It's an easy  provision to describe. Take                                                                    
     away  half your  deductions. There's  a big  difference                                                                    
     between  a  statutory tax  rate  and  an effective  tax                                                                    
     rate.  There's  a  lot  of  talk  on  that  -  oh  your                                                                    
     effective tax rate  is much lower? Well, it  has to be.                                                                    
     This is a net system.  Effective tax rate is determined                                                                    
     after your  deduction of costs, after  your subtraction                                                                    
     of credits.  It has to  be lower.  You have a  high tax                                                                    
     rate of 35 percent, as  Mr. Alper has testified to you.                                                                    
     It's a high tax rate.  There's not another state in the                                                                    
     country that's  even close to 35  percent. Louisiana is                                                                    
     12.25  [percent]. You  guys are  almost three  times as                                                                    
     high. Theirs is  a gross tax that's true.  And yours is                                                                    
2:54:10 PM                                                                                                                    
Mr. Seckers  questioned what would happen.  He asked members                                                                    
to step  back and look  at it from a  practical perspective.                                                                    
He stated that  many of the committee  members were business                                                                    
owners.  He asked  them to  consider how  it would  work. He                                                                    
emphasized that  every December  or January  he would  get a                                                                    
call  from  our  senior  executives telling  him  they  were                                                                    
thinking about  doing an investment in  Alaska and wondering                                                                    
if it  would put  the company  in a loss.  He would  have to                                                                    
respond that he did not  know. The executives would then say                                                                    
they would lose  half their investment if so.  He agreed. He                                                                    
questioned   whether  committee   members   would  make   an                                                                    
investment  with that  type of  uncertainty.  He asked  what                                                                    
would  happen if  an investment  arose near  the end  of the                                                                    
year. He reasoned that if  the investment put the company at                                                                    
a loss it would lose half  of its deduction. He asked how it                                                                    
work  in partner  situations. He  provided a  scenario where                                                                    
Partner A wanted to spend  on a particular project, Partners                                                                    
B and  C wanted to spend  as well, but unfortunately  one or                                                                    
more  of  those partners  would  be  driven  to a  loss.  He                                                                    
questioned  whether the  investment would  move forward.  He                                                                    
thought it  was an interesting dynamic.  He underscored that                                                                    
the state  would suffer under  the scenario. He  stated that                                                                    
the investment may not go forward  and it would no longer be                                                                    
a timing  difference, but a  permanent difference.  He asked                                                                    
if it was the policy the  legislature wanted to have for the                                                                    
state.  He asked  if the  state's policy  would now  be that                                                                    
deductions would  be allowed for companies  that spend less,                                                                    
but companies  spending more would  be penalized.  He stated                                                                    
that an investment would lead  to royalty, property tax, and                                                                    
income  tax and  companies would  be penalized.  He believed                                                                    
the  policy appeared  to be  inconsistent with  the policies                                                                    
the  legislature  had been  trying  to  enact for  the  past                                                                    
decade or so  by encouraging investment by  spending more in                                                                    
the state.  He underscored  that the  proposal would  send a                                                                    
signal  to do  the exact  opposite. He  stressed that  every                                                                    
investment  would  be  under   greater  scrutiny  because  a                                                                    
company would lose if they experienced a loss.                                                                                  
Mr. Seckers  referred to  the 7  or 8  percent uplift  for a                                                                    
period  of  seven  years.  He   stated  the  uplift  may  be                                                                    
sufficient for  some small  companies (e.g.  explorers), but                                                                    
he  did  not  know.  He  asked  the  committee  to  consider                                                                    
companies that would not go  seven years. He stated that for                                                                    
a producer  that went negative  for a few months  and became                                                                    
profitable  again would  see an  immediate tax  increase. He                                                                    
was unaware of  any other regime that  employed that method.                                                                    
He  believed   the  legislature's  consultant   had  advised                                                                    
allowing  a loss  to go  forward  and that  allowing for  an                                                                    
uplift was  a policy call.  He emphasized that  the expenses                                                                    
were important and it would  create dysfunctional actions on                                                                    
the slope based on the  policy provision. He reiterated that                                                                    
the legislature  had to ask itself  if it was the  policy it                                                                    
wanted to instill in the  state. He restated that the policy                                                                    
would penalize  companies for spending more  and would allow                                                                    
deductions for companies spending less.                                                                                         
Mr.  Seckers  provided  a scenario  where  Company  A  spent                                                                    
$1,000 in a year  and was able to write off  the cost at its                                                                    
tax rate  of 35  percent. Whereas,  Company B  spent $1,000,                                                                    
had no  revenue in the  first year and turned  profitable in                                                                    
the second  year. Under  the provision  Company B  would not                                                                    
receive the ability to write  off the $1,000; it could write                                                                    
off  $500,  which  constituted a  tax  increase.  Every  tax                                                                    
regime he  knew applied  the tax at  the statutory  rate; it                                                                    
was the tax  rate applied to net profits.  The effective tax                                                                    
rate may  be different -  it had to  be under a  net system.                                                                    
Other  regimes applied  tax  at a  statutory  rate to  avoid                                                                    
"this kind of" inconsistency.                                                                                                   
2:57:56 PM                                                                                                                    
Mr. Seckers addressed the sliding scale tax credits:                                                                            
     This  again is  a very  troubling provision  because it                                                                    
     went to  the core  of the  tax structure.  This doesn't                                                                    
     have anything to  do with credit reform.  I know people                                                                    
     like to call  it that, but it doesn't.  And as Director                                                                    
     Alper has testified to, you  take these away, you alter                                                                    
     them, and  the 35 percent  is a  very high tax  rate. I                                                                    
     think those  were his exact  words, and he's  right. It                                                                    
     is.  This  is a  tax  increase  on the  legacy  fields,                                                                    
     that's all this is.                                                                                                        
     Another  provision is  Section  23 of  the bill,  which                                                                    
     talks  about   the  gross  revenue  at   the  point  of                                                                    
     production.  This does  not get  a lot  of airplay  for                                                                    
     some reason. It's a disguised  tax increase that's why.                                                                    
     Again,  it  changes  the  substance  of  the  law.  Ask                                                                    
     yourself  what this  would do.  Under Alaska's  current                                                                    
     structure we pay  tax not by field, by  segment. We pay                                                                    
     a tax for the entire  North Slope, Cook Inlet oil, Cook                                                                    
     Inlet gas,  and everything  in between -  Middle Earth.                                                                    
     We  file  consolidated  returns for  the  entire  North                                                                    
     Slope. So what  does that mean? A  company's got income                                                                    
     from one field, income from  another field, loss from a                                                                    
     field  -  they  consolidate  to  represent  the  entire                                                                    
     economic activities  of that entire segment.  What this                                                                    
     section would do is to say:                                                                                                
          No, no, we're  sorry, it's a shame,  we wanted you                                                                    
          to  invest in  the state,  but you  chose a  field                                                                    
          that is  so far  removed from  infrastructure that                                                                    
          your transportation  costs (which are  approved by                                                                    
          FERC) are  so great that  it may drive  your gross                                                                    
          value at the point  of production. And guess what?                                                                    
          We wanted  you to make that  investment, it's good                                                                    
          for property  tax, good for  income tax,  good for                                                                    
          royalties,  but  we're  going to  punish  you  for                                                                    
          production tax.                                                                                                       
     Is that the  policy of the state? That  you're going to                                                                    
     encourage  investment  only near  existing  facilities.                                                                    
     That  you want  to sit  there and  say we  want you  to                                                                    
     invest in  the state  but don't  go beyond  this region                                                                    
     because if you  do you're going to get  a tax increase.                                                                    
     That is  a tax  increase to  companies and  could drive                                                                    
     investments in a very distinct  way. This picks winners                                                                    
     and losers;  it looks  like you're  trying to  punish a                                                                    
     given field  or two. You  have to ask yourself  is that                                                                    
     really the policy the state is trying to come up with.                                                                     
     Disclosure of taxpayer information,  you've heard a lot                                                                    
     on  this  already.  I  can  tell  you  these  are  very                                                                    
     troubling  provisions.  This   would  in  effect  allow                                                                    
     disclosure  of  some  very  confidential  and  taxpayer                                                                    
     sensitive  information.   As  Ms.   Moriarty's  already                                                                    
     indicated  there  could  be contracts  going  to  other                                                                    
     companies they would be concerned  about. As much as we                                                                    
     welcome  BP and  Conoco and  others as  partners, we're                                                                    
     competitors.  Bottom line,  we're  all competitors.  We                                                                    
     are bound by federal law  what we can or cannot reveal.                                                                    
     There  also  may  be taxpayer  proprietary  information                                                                    
     that is a benefit over years  and years of work that is                                                                    
     beneficial to that company. Could  be trade secrets, it                                                                    
     could be ways of doing  things that are cheaper that we                                                                    
     have  to protect.  This language  as  written would  in                                                                    
     effect  allow almost  anything  to  be published.  This                                                                    
     would chill investment and cause  all kinds of concerns                                                                    
     with the industry as well  as how it relates to federal                                                                    
3:01:24 PM                                                                                                                    
Mr. Seckers addressed the preapproval requirement:                                                                              
     It's  hard  to  address  something  that  is  really  a                                                                    
     statement  in  statute that  says  -  oh we  want  this                                                                    
     preapproval  process. It's  hard  to  address that,  it                                                                    
     raises  a lot  of  questions. Really,  this  is a  very                                                                    
     troubling  provision. The  only way  to really  address                                                                    
     this is  by highlighting the  fact that it  just raises                                                                    
     all kinds of questions. As  Ms. Moriarty testified to -                                                                    
     does that mean the  Department of Natural Resources has                                                                    
     to do  an audit of our  costs line by line  before? How                                                                    
     long will that take? When will  I have to submit it by?                                                                    
     Can  somebody  else  look  at it?  Can  a  third  party                                                                    
     intervene? What  happens if  the Department  of Natural                                                                    
     Resources says  yes Exxon or  taxpayer this is  a valid                                                                    
     expense, if  you go to a  loss you can claim  this. Six                                                                    
     years later the Department of  Revenue says yeah but we                                                                    
     are reinterpreting  our reg [regulation] to  say no its                                                                    
     not. Who  wins? I  made that  investment based  on that                                                                    
     representation by your agency.  I've got another agency                                                                    
     saying that they're wrong. Who  wins? What's the appeal                                                                    
     process?  What happens  if  the  Department of  Natural                                                                    
     Resources denies something? Says  you can't spend that.                                                                    
     What's  my appeal  rights? If  you look  at the  fiscal                                                                    
     note  that was  advanced by  the Department  of Natural                                                                    
     Resources in House Resources they  said that they would                                                                    
     not have  their regulations up and  running until 2019.                                                                    
     This provision takes effect January  of next year. What                                                                    
     happens  for 2018?  How can  I invest,  I don't  have a                                                                    
     preapproval. The  regs don't  come out until  2019. Are                                                                    
     they going  to be retroactive  to January 1,  2018? How                                                                    
     would I know?  What happens if I've  made an investment                                                                    
     that the  Department of Natural Resources  in 2019 says                                                                    
     for 2018 sorry you shouldn't  have done that one. How's                                                                    
     that going  to work?  Where's the  investor confidence?                                                                    
     What's  going to  happen to  the projects  that are  in                                                                    
     limbo?  There  are so  many  questions  this raises.  I                                                                    
     implore you  to examine  this very  closely. I  know in                                                                    
     theory it  sounds fine. You've  got the  resource owner                                                                    
     providing  this preapproval,  we  don't  want to  waste                                                                    
     money.  Ask yourself,  is this  going to  be worth  the                                                                    
     cost to the state, worth  the cost to the industry, and                                                                    
     worth the  risk on investment  and jobs. I  don't know.                                                                    
     This is a very troubling, troubling provision.                                                                             
     ExxonMobil believes  that this committee  substitute as                                                                    
     currently   proposed   will  reduce   Alaska's   global                                                                    
     economic competitiveness. It's going  to raise taxes on                                                                    
     an activity  in the  state to  which the  companies are                                                                    
     currently struggling.  It's going to force  companies -                                                                    
     all  of us  - to  reexamine  long-term, near-term,  and                                                                    
     future  investment   decisions  and  we   believe  it's                                                                    
     inconsistent to what your policy  has been and hopes to                                                                    
     be  to  encourage investment  in  the  state. When  you                                                                    
     enacted  the PPT  and ACES  you did  so to  raise taxes                                                                    
     when  prices  were  rising.  As  Ms.  Moriarty's  chart                                                                    
     showed  you'd  be  one  of   the  only  regimes  that's                                                                    
     actually trying  to raise taxes  when prices  are going                                                                    
     the other  way. So  the signal to  the world  would be:                                                                    
     come to  Alaska, they'll raise  your taxes  when you're                                                                    
     making money and by the  way, if you're losing money or                                                                    
     struggling, don't  worry they'll raise your  taxes then                                                                    
     too. Is  that really the  policy you're trying  to come                                                                    
     up to?                                                                                                                     
     As  I've   mentioned  many  times,  Alaska   remains  a                                                                    
     critical    component    of   ExxonMobil's    worldwide                                                                    
     investment  portfolio and  we look  to be  here a  long                                                                    
     time.  We really  want  to  work to  try  to make  this                                                                    
     policy,  all these  policies work.  And  while we  will                                                                    
     continue to  pursue investment opportunities,  if bills                                                                    
     like  this are  passed and  our taxes  go up  that just                                                                    
     reduces  what we  can spend  in the  state and  all the                                                                    
     investment opportunities  now get a different  look and                                                                    
     are diminished.                                                                                                            
     So Mr.  Chairman and members  of the committee,  let me                                                                    
     conclude  by  reiterating   something  I've  also  said                                                                    
     before.  That Alaska  needs to  maintain a  competitive                                                                    
     and stable  fiscal regime that attracts  and encourages                                                                    
     critical  ongoing  future  investments,  especially  in                                                                    
     today's  lower  prices  and  that's  one  of  the  most                                                                    
     important things you  face. I get it, we all  get it, I                                                                    
     don't  envy your  task, you're  trying  to balance  the                                                                    
     budget  and  go forward,  and  I  understand that.  But                                                                    
     raising taxes on the industry  when they're all hurting                                                                    
     sends a  very chilling signal to  the investment world.                                                                    
     We believe the  evidence is clear that  MAPA is working                                                                    
     and  if left  alone,  will continue  to work,  increase                                                                    
     investment, and  provide more  oil in  the pipe.  So as                                                                    
     policy  makers you  need to  decide whether  increasing                                                                    
     taxes  on companies  that are  struggling today  - will                                                                    
     that be  a wise,  long-term fiscal policy  that's going                                                                    
     to lead to more jobs?  Will it lead to more investment?                                                                    
     Will it  lead to more  production? Will it be  good for                                                                    
     the Alaskan  economy? I believe  deep down we  all know                                                                    
     the answer to  those and the answer is no.  I thank you                                                                    
     for the opportunity  to be here today and  I'm happy to                                                                    
     address any questions that you may have.                                                                                   
3:06:28 PM                                                                                                                    
Representative  Thompson asked  for a  copy of  Mr. Seckers'                                                                    
remarks. Mr. Seckers replied in the affirmative.                                                                                
Vice-Chair  Gara  spoke to  Mr.  Seckers'  comment that  the                                                                    
state would  be raising  taxes solely for  short-term needs.                                                                    
He  countered that  he and  others wanted  to make  sure the                                                                    
state  was receiving  a fair  share in  order to  fund basic                                                                    
services and have a fair  share for all parties. He referred                                                                    
to  Mr.  Seckers'  point  that   the  legislature  would  be                                                                    
increasing  taxes when  [oil] prices  were low.  He believed                                                                    
Mr. Seckers  was aware  that in the  coming fiscal  year the                                                                    
state would be paying more  in tax credits to companies than                                                                    
it  would gain  back in  production taxes.  The goal  was to                                                                    
change  a  tax  system  that  in recent  years  and  in  the                                                                    
following year would  be paying out more than  it brought in                                                                    
with  production taxes.  It was  a different  system than  a                                                                    
country  with high  taxes that  would try  and raise  taxes,                                                                    
which would not make sense. He asked for comment.                                                                               
Mr.  Seckers  answered that  the  questions  were valid.  He                                                                    
could not  address cashable  credits; it  was a  policy call                                                                    
made by  the legislature. Exxon had  never received cashable                                                                    
credits and  hoped to never  receive them. He spoke  to fair                                                                    
share and believed the department  and Ms. Moriarty's slides                                                                    
indicated the state took in  more than the industry at every                                                                    
price range. He believed it  was concerning to only focus on                                                                    
the production  tax. Exxon paid  royalties, income  tax, and                                                                    
property tax.  It was  true that  in low  price environments                                                                    
perhaps the production tax did not  pay as much as the state                                                                    
wanted  it to,  but it  also  meant the  companies were  not                                                                    
earning as  much as  they may like  to. He  underscored that                                                                    
the companies  still paying  the other  taxes. He  stated it                                                                    
had led to  jobs, investment, and to  royalties. He believed                                                                    
the  legislature  needed to  decide  whether  it wanted  the                                                                    
investments  to  move forward.  He  believed  the share  the                                                                    
state  was receiving  was  pretty  fair notwithstanding  the                                                                    
lower production tax  the companies paid in  the lower price                                                                    
3:09:23 PM                                                                                                                    
Vice-Chair   Gara    remarked   that   there    were   other                                                                    
jurisdictions  currently with  much  higher  tax rates  than                                                                    
those in  Alaska. He observed  that Mr. Seckers  had claimed                                                                    
that the state  had the highest tax rate in  the world at 35                                                                    
percent.  He   surmised  that  Mr.  Seckers   realized  that                                                                    
companies  did  not pay  it;  that  it represented  a  price                                                                    
sensitive tax rate  and 35 percent was the tax  rate at $159                                                                    
per barrel, which  the world had never seen. At  the $60 per                                                                    
barrel range for new fields  the average production tax rate                                                                    
on  the North  Slope  was  zero percent  and  4 percent  for                                                                    
companies paying the minimum tax.  He asked for verification                                                                    
that Exxon  never paid 35  percent of its profits  at prices                                                                    
below $150 per barrel.                                                                                                          
Mr. Seckers  responded that it  was necessary  to understand                                                                    
the  difference   between  a  statutory  tax   rate  and  an                                                                    
effective tax  rate. He agreed  that the statutory  tax rate                                                                    
was  35 percent  just like  it was  for federal  income tax.                                                                    
Corporations did not pay a 35  percent tax because it was on                                                                    
net; it  had to be below  the 35 percent. He  continued that                                                                    
if  the  desire  was  a  statutory  rate  that  equaled  the                                                                    
effective  rate it  was necessary  to have  a gross  tax. By                                                                    
design  a net  tax could  not yield  what "you're  trying to                                                                    
imply."  He   reiterated  that   the  effective   tax  would                                                                    
absolutely be  lower; however, companies  paid the  tax. The                                                                    
calculation was based on 35 percent.                                                                                            
Mr. Seckers detailed  that if a company had  $100 of profit,                                                                    
the tax would be $35; it  may get reduced by credits, but it                                                                    
was calculated at  35 percent. He was not  certain there was                                                                    
a net  regime that would  pay the statutory rate  because of                                                                    
all of  the reductions.  Part of the  reason the  system had                                                                    
been put  in place was due  to Alaska's high 35  percent tax                                                                    
rate. He clarified that he  had never testified the rate was                                                                    
the  highest in  the world.  He corrected  that he  had been                                                                    
speaking  solely about  the  United  States. He  underscored                                                                    
that  the rate  was  the  highest in  the  U.S.  by far.  He                                                                    
explained there were other regimes  in the world with higher                                                                    
tax rates but their  structures were entirely different. For                                                                    
one,  those   regimes  allowed   cost  recovery,   not  cost                                                                    
deductions. Some  of the jurisdictions  specified that  if a                                                                    
company spent $100  it was allowed to recover  the full $100                                                                    
before  a  tax was  leveled.  Sometimes  a system  may  even                                                                    
provide an uplift on that  to provide for the costs incurred                                                                    
to get the  oil out of the ground and  then the system taxed                                                                    
at  a higher  rate.  It was  not the  system  in Alaska.  He                                                                    
cautioned it was important to  be careful when comparing the                                                                    
different systems. He  agreed the statutory tax  rate was 35                                                                    
percent, which was the rate  companies paid tax on. However,                                                                    
the effective tax rate was entirely different.                                                                                  
3:12:15 PM                                                                                                                    
Vice-Chair Gara countered  that if the federal  tax rate was                                                                    
35 percent a company obviously  received a deduction on that                                                                    
rate.  He stated  "this is  much different."  He underscored                                                                    
that the lower the price, the  lower the actual tax rate. He                                                                    
continued that  for new fields  at prices of $80  per barrel                                                                    
it was 7.9  percent on average. He detailed that  at $70 per                                                                    
barrel it was  0.3 percent on average and at  $60 per barrel                                                                    
it was zero  percent on average for new  fields. He stressed                                                                    
that  there  was  no  35  percent tax  rate;  it  was  price                                                                    
sensitive. He  stated that the  federal 35 percent  tax rate                                                                    
that was  really a  35 percent  tax rate  at all  prices and                                                                    
companies   deducted  from   that.  He   stressed  the   big                                                                    
difference between the two kinds of tax systems.                                                                                
Mr.  Seckers disagreed.  He stated  that the  statutory base                                                                    
tax rate in  Alaska was 35 percent. He  agreed the effective                                                                    
tax  rate after  the application  of deductions  and credits                                                                    
was much lower.  He also agreed that the  effective tax rate                                                                    
was a  function of the  sliding scale credits  impacting the                                                                    
rate;  however,  the  statutory  rate  was  35  percent.  He                                                                    
detailed  that if  he had  $1,000 profit,  his tax  would be                                                                    
$350.  Credits came  beyond that  yielding an  effective tax                                                                    
rate.  He  believed  Vice-Chair  Gara  was  misspeaking.  He                                                                    
continued it was  the same with the federal  tax return. His                                                                    
tax  rate  was  35  percent,  which  was  used  for  federal                                                                    
worldwide  taxable  income.  Yet   the  effective  rate  was                                                                    
different   after  applying   deductions  and   credits.  He                                                                    
reiterated  that  the  statutory   rate  in  Alaska  was  35                                                                    
percent. He agreed it was  adjusted by credits; however, the                                                                    
rate  taxed on  net income  or production  tax value  was 35                                                                    
Co-Chair  Foster   stated  they  would  have   to  agree  to                                                                    
Vice-Chair  Gara remarked  that the  credit Mr.  Seckers was                                                                    
speaking about was price related  and had nothing to do with                                                                    
Mr. Seckers relayed that the  company did not get the credit                                                                    
"just  because prices  are whatever."  It  was necessary  to                                                                    
produce  a barrel  of  oil in  order to  get  the credit.  A                                                                    
company would  get zero if  it did  not produce a  barrel of                                                                    
oil. He stressed  that a company did not  merely receive the                                                                    
credit based on price. He  explained the credit was based on                                                                    
gross  value  at  the  point   of  production,  but  it  was                                                                    
necessary  to  produce  the  oil in  order  to  receive  the                                                                    
credit. There were  costs the company had to  incur in order                                                                    
to  get the  credit or  reduction  to its  taxes. The  whole                                                                    
purpose of  the credit was  the more a company  produced the                                                                    
better  off  it  became,  which   was  good  for  the  state                                                                    
(increased   production,  income,   property,  and   royalty                                                                    
3:15:12 PM                                                                                                                    
Representative Pruitt  discussed that Exxon was  the largest                                                                    
publicly traded company but there  were other larger oil and                                                                    
gas  companies. He  asked  what percentage  of  oil and  gas                                                                    
development worldwide Exxon was responsible for.                                                                                
Mr. Seckers  recalled that ExxonMobil  produced less  than 4                                                                    
percent of the worldwide oil - it was in that range.                                                                            
Representative  Pruitt  asked  how  many  different  regimes                                                                    
ExxonMobil invested in.                                                                                                         
Mr.  Seckers replied  that the  company  invested in  pretty                                                                    
much every country  and state. He elaborated  that there may                                                                    
be some  locations without oil  and gas, but Exxon  may have                                                                    
retail,  a  refinery,  gas  stations,   or  other  in  those                                                                    
locations.  He  detailed that  when  the  company looked  at                                                                    
investments, they  looked worldwide.  He spoke  to questions                                                                    
related  to decisions  to invest  in Alaska  - he  mentioned                                                                    
increased  taxes  when  prices   went  up  or  down.  Alaska                                                                    
competed in Exxon's world worldwide.                                                                                            
Representative     Pruitt     believed     Alaskans     were                                                                    
"Alaskacentric."  He believed  Alaskans lived  in the  world                                                                    
that  existed  when the  pipeline  had  been turned  on  and                                                                    
failed to recognize it was now  in a global market. He asked                                                                    
what  percentage of  the company's  assets were  deployed in                                                                    
3:18:21 PM                                                                                                                    
Mr. Seckers did  not know. He knew  the company's investment                                                                    
in  Alaska was  "big," but  the  company was  also big.  The                                                                    
company spent billions  annually in Alaska. He  noted it was                                                                    
possible to  ask the  operators about  Exxon's share  of the                                                                    
total spend  in Prudhoe  Bay. He  thought the  Department of                                                                    
Revenue  may   have  the  information  from   the  company's                                                                    
corporate  tax  returns.  He  explained   that  one  of  the                                                                    
corporate tax return items was  property in the state versus                                                                    
property worldwide.                                                                                                             
Representative Ortiz believed that under  SB 21 the goal had                                                                    
been to establish  a hard [tax] floor. He asked  if that was                                                                    
Mr. Seckers  answered that  he did not  recall the  goal had                                                                    
been  that  specific, but  he  did  not  know for  sure.  He                                                                    
elaborated that  the bill had  eliminated sliding  scale tax                                                                    
credits.  He stated  that hardening  the  floor and  raising                                                                    
taxes was  a policy call  [for the legislature].  He relayed                                                                    
that  going for  the NOL  tax credit  to a  deduction served                                                                    
that  purpose because  deductions could  not go  against the                                                                    
minimum tax - only credits  could. He furthered that the NOL                                                                    
would no longer be a credit.  Most of the other credits were                                                                    
disappearing anyway;  the only one  left on the  North Slope                                                                    
would be the  per barrel credit. He did not  know whether it                                                                    
would  pierce the  floor,  but  he did  not  believe so.  He                                                                    
explained  that some  of it  was  already occurring  because                                                                    
credits were expiring;  the floor was being  hardened "as we                                                                    
speak." He reiterated  that going to an  NOL deduction would                                                                    
take away the largest credit that remained.                                                                                     
Representative  Ortiz asked  if  the  industry rejected  the                                                                    
idea there should be a minimum  tax paid by industry for the                                                                    
extraction of the state's resources  and a minimum share the                                                                    
state should have access to.                                                                                                    
Mr. Seckers  answered that  it was  difficult to  answer. He                                                                    
noted that  a gross  tax is  a regressive  tax; it  was paid                                                                    
whether  a company  made  a  profit or  not.  He provided  a                                                                    
scenario of  a business losing  money but having to  pay tax                                                                    
regardless.  He stated  it was  a  hard concept,  especially                                                                    
with the current system. He noted  it was a policy call. For                                                                    
most taxpayers  it was difficult  to pierce the floor  - the                                                                    
credits were  necessary. He  emphasized that  production tax                                                                    
was merely one  item paid by companies.  He underscored that                                                                    
the state  was not giving  the resource away; the  state may                                                                    
not be getting as much as  it liked, but that was a function                                                                    
of  price, which  oil companies  did not  control. Companies                                                                    
paid  a  royalty  (a  regressive   number),  income  tax  on                                                                    
worldwide operations,  and property tax. He  reiterated that                                                                    
hardening the  floor was a  policy call. He believed  it was                                                                    
necessary to ask what it  would do to current taxpayers with                                                                    
zero minimum tax  due to small production that had  to go to                                                                    
a  rate of  4 or  5 percent.  He advised  it was  prudent to                                                                    
think about how  the industry would react to  the change. He                                                                    
stated  the oil  industry would  not react  differently than                                                                    
any other business.                                                                                                             
3:23:56 PM                                                                                                                    
Representative  Kawasaki  referred   to  the  Point  Thomson                                                                    
lawsuit  settlement in  2010 or  2011. He  noted that  Point                                                                    
Thomson development began  pre-SB 21. He asked  if Exxon had                                                                    
new fields in Alaska since the passage of SB 21.                                                                                
Mr.  Seckers  answered  in the  negative.  The  company  was                                                                    
looking at all opportunities,  but it was currently focusing                                                                    
on its  existing assets. The  company was always  looking at                                                                    
other options.                                                                                                                  
Representative Kawasaki asked  for clarification on options.                                                                    
He  asked   for  verification   there  were  no   new  Exxon                                                                    
investments in pre-development.                                                                                                 
Mr.  Seckers believed  Representative Kawasaki  was correct,                                                                    
but he would  have to double check. He knew  the company was                                                                    
actively looking at all kinds  of options and opportunities.                                                                    
He  could not  say what  stage they  were in  - some  of the                                                                    
information was  proprietary. Alaska was an  important piece                                                                    
of the company's portfolio.                                                                                                     
Representative  Wilson   asked  if   Exxon  would   have  to                                                                    
reexamine projects  that may be  close to a decision  if the                                                                    
bill passed as currently written.                                                                                               
Mr.  Seckers replied  that anytime  taxes  increased in  any                                                                    
jurisdiction  it became  a factor.  He countered  the notion                                                                    
that Exxon  printed money; the  company had a  finite amount                                                                    
of  capital like  any other  company. He  detailed that  the                                                                    
company's   capital  was   apportioned  based   on  economic                                                                    
viability, performance,  and so  forth. Any time  taxes went                                                                    
up it reduced  the amount of capital  and future investments                                                                    
were  reconsidered. Tax  increases could  also lead  to lost                                                                    
jobs, lost production, and other.                                                                                               
3:27:01 PM                                                                                                                    
Representative  Pruitt  believed   the  question  about  new                                                                    
fields was the wrong question  to ask because only 3.5 years                                                                    
had  gone by  since the  passage of  SB 21.  He thought  the                                                                    
prudent question  was about  whether there  were investments                                                                    
Exxon had  made even in  current fields that had  come about                                                                    
because of SB 21.                                                                                                               
Mr.  Seckers  responded that  Exxon  was  always looking  at                                                                    
efficiencies  and  investments  in  current  activities.  He                                                                    
stated it  was a valid question  to ask operators of  BP and                                                                    
Kuparuk   because  they   directed  it   and  much   of  the                                                                    
investments went  there. The company  was always  looking to                                                                    
do more  and with the passage  of SB 21 many  things such as                                                                    
redesign,  workovers, and  so forth,  became more  economic.                                                                    
The  company believed  SB 21  was working  and was  good for                                                                    
Alaska's  economy. He  stated that  SB  21 had  led to  more                                                                    
production,  investment,   and  royalty.  He   believed  the                                                                    
committee  substitute   was  a  bad  idea   and  would  hurt                                                                    
contractors and others associated with the industry.                                                                            
3:28:48 PM                                                                                                                    
AT EASE                                                                                                                         
3:51:47 PM                                                                                                                    
Co-Chair Foster  recognized Representative Lora  Reinbold in                                                                    
the audience.                                                                                                                   
DAMIEN BILBAO,  VICE PRESIDENT  OF COMMERCIAL  VENTURES, BP,                                                                    
provided  a PowerPoint  presentation  titled "BP  Testimony:                                                                    
March 22,  2017, HB 111(N),  House Finance  Committee" (copy                                                                    
on  file). He  expressed intent  to focus  his testimony  on                                                                    
policy and how Alaska  competed for investment. He explained                                                                    
that when  the company  made internal decisions  about where                                                                    
to invest, there  was a limited amount  of global investment                                                                    
and every project and location  competed against each other.                                                                    
Some things  could be  controlled by  the company  (e.g. how                                                                    
efficiently  a project  could  be executed  and  the use  of                                                                    
technology in  progressing a project) and  many things could                                                                    
not  be  (e.g.  a  fiscal  system and  oil  price).  It  was                                                                    
important for  the company to  holistically think  about how                                                                    
the projects and locations stacked up against one another.                                                                      
Mr.  Bilbao  continued  that  as   BP  had  engaged  in  the                                                                    
discussion  in  support of  a  fiscal  conversation, it  had                                                                    
understood that the focus was  related to a specific problem                                                                    
having to  do with  tax credits; however,  it was  clear the                                                                    
bill was broader than tax  credits. The company encouraged a                                                                    
much more  targeted solution, which  he intended  to address                                                                    
throughout his testimony.                                                                                                       
Mr. Bilbao addressed slide 2  that showed two charts related                                                                    
to investment  trends by region (left  chart) and production                                                                    
trends  by  region  (right  chart).  He  detailed  that  the                                                                    
numbers on  the slide were  indexed (they began at  a common                                                                    
starting  point  and  moved relative  to  each  other),  not                                                                    
absolute.  He explained  that  when  comparing global  spend                                                                    
versus U.S.  Lower 48  versus Alaska,  on an  absolute basis                                                                    
the total  number of dollars would  not even be seen  on the                                                                    
same  graph.  However, if  the  numbers  were indexed  to  a                                                                    
common starting point, it was  possible to see how different                                                                    
locations  moved   relative  to  each  other   under  common                                                                    
circumstances on  oil price, fiscal  systems, and  other. He                                                                    
pointed  to  the left  chart  and  noted  the top  line  was                                                                    
capital investment in U.S. Lower  48 development, the middle                                                                    
light  blue line  represented  global  development, and  the                                                                    
bottom [gray]  line represented Alaska. The  chart indicated                                                                    
that in  the early  2000s Lower 48  investment had  begun to                                                                    
outpace Alaska  and global growth  investment. He  stated it                                                                    
had  been  pretty  remarkable  and had  begun  to  signal  a                                                                    
renaissance not  only in U.S.  oil and gas  exploration, but                                                                    
in terms  of global  oil and  gas geopolitics.  He continued                                                                    
that around  2008/2009 Lower 48 investments  spiked relative                                                                    
to global investment and Alaska.                                                                                                
Mr.  Bilbao focused  on more  recent years.  He pointed  out                                                                    
that since 2013  (circled in red on both  charts), while oil                                                                    
prices were beginning  to move down and  Lower 48 investment                                                                    
and global investment had begun  to decrease, investment had                                                                    
increased  in Alaska.  The  charts  demonstrated how  Alaska                                                                    
investment   compared  to   other  locations.   He  directed                                                                    
attention  to  the  right  graph,  which  showed  production                                                                    
trends  by  region.  He  noted  that  with  investment  went                                                                    
production: as  Lower 48 investment spiked,  production also                                                                    
spiked.  The  top  dark  blue   line  represented  Lower  48                                                                    
production, which  was twice its original  starting point on                                                                    
an index  basis. Global  production was  shown to  be slowly                                                                    
creeping up and [production  in] Alaska continued to decline                                                                    
until about 2014 and had  flattened out over the last couple                                                                    
of years  (circled in red on  the chart). He stated  that BP                                                                    
credited the  passage of SB  21 to the dramatic  increase in                                                                    
investment relative to  the rest of the world  and the Lower                                                                    
48. He reiterated  that while investment in the  rest of the                                                                    
world and the  Lower 48, it was increasing  in Alaska. There                                                                    
was one distinguishing  feature, which was the  shift in oil                                                                    
policy attracting investment to Alaska.                                                                                         
3:57:35 PM                                                                                                                    
Mr. Bilbao  turned to  slide 3  titled "Alaska  - How  do we                                                                    
Stack  up?" The  slide  pertained to  a conversation  around                                                                    
production in  Alaska relative  to the rest  of the  U.S. In                                                                    
the current  year Prudhoe Bay and  the Trans-Alaska Pipeline                                                                    
System  (TAPS)  would  celebrate  its  40th  anniversary  of                                                                    
production.  He   observed  that  the  events   were  pretty                                                                    
remarkable  given  the  timing   was  well  beyond  original                                                                    
expectations.  He   discussed  the  original   discovery  of                                                                    
Prudhoe Bay,  which initially projected the  production of 9                                                                    
billion barrels;  however, over 12 billion  barrels had been                                                                    
produced and BP  still believed there were  billions more to                                                                    
produce, which it was actively working to do.                                                                                   
Mr.  Bilbao pointed  to the  graphs on  slide 3  that showed                                                                    
production  on a  relative basis  between  Alaska and  other                                                                    
Lower 48 sources (i.e. onshore,  offshore, shale, tight oil,                                                                    
and other).  The left  graph provided  a reference  case for                                                                    
the  U.S. Energy  Information Administration  and the  right                                                                    
graph  showed  an  aggressive   growth  case.  Under  either                                                                    
scenario  tight oil  production in  the Lower  48 had  grown                                                                    
from  approximately  5  million   to  somewhere  between  10                                                                    
million and 17  million barrels of oil. The  amount of tight                                                                    
oil that  could come out of  the Lower 48 was  humongous. He                                                                    
noted  that the  resource  opportunity in  Alaska was  world                                                                    
class,  but  it was  necessary  to  keep  in mind  that  the                                                                    
resource opportunity in the Lower  48 was incredibly robust.                                                                    
The  graph  provided  a  sense  of  how  the  Department  of                                                                    
Energy's EIA  characterized the opportunity in  the Lower 48                                                                    
versus Alaska.                                                                                                                  
Mr.  Bilbao continued  to address  slide 3.  He communicated                                                                    
that in  the mid-1980s  Alaska had  been producing  about 25                                                                    
percent  of  total  U.S.  production.  Whereas,  at  present                                                                    
Alaska produced less than 5  percent of the U.S. production,                                                                    
which was  projected to continue to  decline. When comparing                                                                    
Alaska with locations  in the Lower 48,  there were numerous                                                                    
opportunities  Alaska was  competing  against. He  explained                                                                    
that  a   conversation  around  oil  fiscal   policy  was  a                                                                    
discussion  around how  competitive the  state would  be for                                                                    
the next dollar of investment.                                                                                                  
4:00:31 PM                                                                                                                    
Mr. Bilbao moved to slide  4 titled "Distribution one barrel                                                                    
in  Alaska."  He had  used  the  2016 Revenue  Sources  Book                                                                    
published by  the Department  of Revenue  and had  looked at                                                                    
total spend on  an aggregate level. The  slide reflected the                                                                    
"all  in" number,  which  provided a  good  indication of  a                                                                    
couple  of key  points.  The book  showed  an average  sales                                                                    
price of $43 per barrel  in 2016. Under the scenario, Alaska                                                                    
received revenue of about $7  per barrel between royalty and                                                                    
state  taxes.  The scenario  showed  that  the industry  had                                                                    
spent  $48 between  operating,  capital, and  transportation                                                                    
costs. If industry was spending  $48 to produce a barrel and                                                                    
was paying  government take of  $7, on average  the industry                                                                    
was   losing  around   $12  per   barrel  during   2016.  He                                                                    
underscored  it  was  a  high  cost  environment  for  doing                                                                    
business  and the  industry did  not fare  well in  2016. He                                                                    
elucidated  that BP  had lost  about $1  million per  day in                                                                    
Mr. Bilbao  turned to slide  5 titled  "Suggested Principles                                                                    
for Alaska Policy" related to HB  111. He shared that BP had                                                                    
testified  to the  House Resources  Committee  that any  oil                                                                    
fiscal policy  should be  measured against  a set  of common                                                                    
principles. The first principle BP  looked at to measure any                                                                    
oil  fiscal policy  in Alaska  is whether  it would  lead to                                                                    
more oil  down TAPS. For  the first  time in over  15 years,                                                                    
oil flow down the pipeline was  higher in 2016 than in 2015.                                                                    
In  January and  February of  2017, oil  flow down  TAPS was                                                                    
higher than the  same time the preceding  year. The increase                                                                    
was primarily from the legacy fields.                                                                                           
Mr. Bilbao addressed the second  principle on slide 5, which                                                                    
related to  extending the life  of legacy fields.  He stated                                                                    
that the legacy  fields were the string on  which the pearls                                                                    
were  strung.  The longer  the  string  of Prudhoe  Bay  and                                                                    
Kuparuk, the more  other fields would be added  to the pearl                                                                    
necklace. He noted  that 90 percent of  TAPS production came                                                                    
from legacy fields.  Third, BP believed it  was important to                                                                    
encourage  more independence  to  look for  oil  and gas  in                                                                    
Alaska.  He detailed  it  was  good for  the  state and  the                                                                    
industry's  midstream infrastructure.  Additionally, it  was                                                                    
beneficial for TAPS to see  increased oil flow (whether from                                                                    
legacy  fields or  not) and  BP believed  any fiscal  policy                                                                    
should encourage increased North  Slope exploration and more                                                                    
independence.  Lastly, it  was  important  to avoid  picking                                                                    
winners and losers. He expressed  intent to provide examples                                                                    
of where  HB 111 fell  short. The company believed  the bill                                                                    
failed on all four principles.                                                                                                  
Mr. Bilbao  stated that as a  broad tax increase at  all oil                                                                    
prices, BP  did not  believe the  bill would  encourage more                                                                    
oil down TAPS.  He furthered that because  the bill included                                                                    
a tax increase  and would raise costs, BP  believed it would                                                                    
shorten  the  life  of   legacy  fields.  Additionally,  the                                                                    
company did  not believe  the bill  would lead  to increased                                                                    
independence exploring  for oil and  gas on the  North Slope                                                                    
or  looking  to  actively  enter fields  on  the  slope.  He                                                                    
explained  that either  because of  a production  hurdle the                                                                    
bill  would  implement  or  how  things  were  meant  to  be                                                                    
submitted to DNR,  the bill may have a  bias towards certain                                                                    
players  versus others.  He stressed  it was  very important                                                                    
for any tax policy to be  agnostic to who the player may be.                                                                    
He continued  that the  tax policy  should set  a foundation                                                                    
for the  state ending up  in a  good place and  the industry                                                                    
being in a positive place to continue investment.                                                                               
4:05:56 PM                                                                                                                    
Mr.  Bilbao emphasized  that the  bill  was an  overextended                                                                    
response to what had initially  been a focused concern about                                                                    
cashable tax  credits. The company believed  there should be                                                                    
a way to  address the problem while  keeping companies whole                                                                    
on  cashable   tax  credits  and  continuing   to  encourage                                                                    
exploration on the  North Slope. He stated that  HB 111 went                                                                    
well beyond that  scope and stepped into areas  that had not                                                                    
been problems  identified early  on with  regards to  a base                                                                    
(SB 21)  system. He elaborated  that the current  system had                                                                    
led  to investment  and  production that  was  good for  the                                                                    
state and that had been targeted when SB 21 had passed.                                                                         
Mr. Bilbao advanced  to slide 6 and provided  examples of BP                                                                    
concerns with HB 111, version  N. First he addressed Section                                                                    
14 related to the per  barrel credit, which the slide termed                                                                    
as  the  "new  drillsite  killer."  He  explained  that  the                                                                    
statutory tax  rate implemented with  SB 21 and  the sliding                                                                    
scale per barrel credit were  integrated into a joint system                                                                    
and were not  independent from one another.  He recalled the                                                                    
conversation in  the House  Finance Committee  during debate                                                                    
on SB 21 related to sliding  scale. He explained that as the                                                                    
base rate  moved up, the  sliding credits were put  in place                                                                    
to  offset  the  cost  and   to  provide  an  incentive  for                                                                    
production.  He emphasized  it had  been  a critical  policy                                                                    
shift between  ACES and  SB 21. He  explained that  ACES had                                                                    
incentivized  spend, while  SB  21 incentivized  production.                                                                    
The state  had wanted more  production down TAPS,  which had                                                                    
occurred. He underscored  that it only worked  when the base                                                                    
rate and  per barrel  credit worked  together to  provide an                                                                    
appropriate  incentive  for  investment  and  to  provide  a                                                                    
competitive policy to attract  the next dollar of investment                                                                    
verses other locations. He stated  that BP saw Section 14 as                                                                    
hugely   detrimental   in   running   economics   on   large                                                                    
investments in  particular. A  tax hit  or reduction  on the                                                                    
per barrel  credit would severely  dampen the  economics and                                                                    
competitiveness of large investments  with big spend and big                                                                    
production opportunity.                                                                                                         
4:08:36 PM                                                                                                                    
Mr.  Bilbao  continued  to  address slide  6  and  spoke  to                                                                    
Section  26  of  the  legislation related  to  the  new  DNR                                                                    
process,   which   the    slide   termed   the   "investment                                                                    
decelerator." He stated that it  was necessary to know how a                                                                    
project  would  be treated  financially  if  BP was  running                                                                    
economics,  otherwise  it  was   not  possible  to  run  the                                                                    
economics.  He  elaborated  that   before  he  sanctioned  a                                                                    
project  he needed  to know  whether items  were deductible,                                                                    
which meant  he would need  to submit  up to 100  percent of                                                                    
the  investment for  review by  DNR.  He questioned  whether                                                                    
companies  would   be  kept  whole  if   regulatory  process                                                                    
resulted  in  project  delays  and  would  impact  value  to                                                                    
companies. The  administrative review  could be  onerous and                                                                    
more fundamentally,  challenging around the ability  to make                                                                    
an  investment decision.  He thanked  the committee  for its                                                                    
time.  He  encouraged  a   conversation  around  a  targeted                                                                    
problem  statement   such  as   cashable  tax   credits.  He                                                                    
reiterated his  belief that companies  should be  kept whole                                                                    
and  continued exploration  should be  encouraged. He  asked                                                                    
the  committee to  understand that  a broader  policy change                                                                    
would  be viewed  by the  industry as  a fundamental  policy                                                                    
shift making  Alaska less  competitive than  other locations                                                                    
around the world.                                                                                                               
4:10:23 PM                                                                                                                    
Representative Wilson referred to slide  4. She asked if the                                                                    
on  the  slide  state   taxes  included  local  municipality                                                                    
property taxes.                                                                                                                 
Mr. Bilbao  answered that the  slide was based on  data from                                                                    
the  [2016] DOR  Revenue Sources  Book for  state taxes.  He                                                                    
detailed  that  when   determining  economics,  BP  included                                                                    
everything it was paying regardless  of whether it fell in a                                                                    
production tax  bucket, state  corporate income  tax bucket,                                                                    
or other.  The information  on the  slide reflected  an "all                                                                    
in" revenue going  to the state. He believed  the slide came                                                                    
from page 29 of the book.                                                                                                       
Representative Wilson  asked for verification the  slide did                                                                    
not   include   municipalities.    She   did   not   believe                                                                    
municipalities  were included  in  the  DOR Revenue  Sources                                                                    
Mr. Bilbao did not believe so, but he would follow up.                                                                          
Representative  Wilson  asked  for an  estimate  of  federal                                                                    
taxes on  the same  barrel in order  to understand  the true                                                                    
Mr.  Bilbao believed  there was  a broad  difference in  the                                                                    
current  year for  different industry  members.  He did  not                                                                    
imagine there was a large  federal income tax payment if the                                                                    
industry was suffering a loss. He would follow up.                                                                              
4:12:38 PM                                                                                                                    
SCOTT  JEPSEN,  VP   EXTERNAL  AFFAIRS  AND  TRANSPORTATION,                                                                    
CONOCOPHILLIPS,  provided a  PowerPoint presentation  titled                                                                    
"House  Finance  Committee  CSHB111" dated  March  22,  2017                                                                    
(copy  on  file). He  outlined  his  intent to  speak  about                                                                    
benefits SB 21  had brought to Alaska, what  it was intended                                                                    
to do, and  whether it had met its intent.  He also intended                                                                    
to speak  about the  current competitive environment  in the                                                                    
U.S. The  testimony would also address  specific elements of                                                                    
HB 111.                                                                                                                         
Mr. Jepsen turned to slide  3 titled "FY 2017 Producer Share                                                                    
vs  ANS WC  -  Fall  2016 RSB  Assumptions."  The chart  was                                                                    
derived from the 2016 Fall  Revenue Sources Book compiled by                                                                    
DOR; it  showed net cash  flow split between the  state, the                                                                    
federal  government, and  producers,  as a  function of  oil                                                                    
price for  FY 17. The  Y axis  represented net cash  flow in                                                                    
millions  of   dollars.  The  state's  share   consisted  of                                                                    
royalty, severance tax, state  income tax, and property tax.                                                                    
Also  included  in  the  calculation  were  the  per  barrel                                                                    
credits, but the cashable or  other tax credits had not been                                                                    
included  because they  were discretionary  expenditures the                                                                    
legislature had  decided to make  to encourage  new entrants                                                                    
to  the North  Slope  for further  tax  purposes. The  chart                                                                    
represented strictly  the revenue  side of the  equation. He                                                                    
pointed to the  red portion of the bars on  the chart, which                                                                    
indicated  the state  had  the largest  share  at all  price                                                                    
points. He  referred to  2013 when $80  per barrel  had been                                                                    
considered a  low oil price. The  share to the state  was in                                                                    
the higher $40s and the  investor share had been around mid-                                                                    
$30s. At around $60 per  barrel, the ratio between the state                                                                    
and investors  remained close to  the same. At  lower prices                                                                    
where profits  were thin, particularly below  $45 per barrel                                                                    
where  industry  was  in the  negative,  the  state's  share                                                                    
continued   to  increase.   The   chart   did  not   include                                                                    
percentages on  the state's share  below $45 per  barrel was                                                                    
because the share was infinite;  any net profit was consumed                                                                    
by the  state through existing  gross taxes -  primarily the                                                                    
minimum severance tax, royalty, and property tax.                                                                               
Mr. Jepsen  continued to  address the chart  on slide  3. He                                                                    
referred  to discussion  on whether  there should  be a  set                                                                    
amount  of  money  received  by  the  state  (a  floor).  He                                                                    
explained  that there  was.  He detailed  it  was the  gross                                                                    
taxes the  state already received.  In the case  of property                                                                    
tax, it  was not  price dependent,  but value  dependent. He                                                                    
communicated that  the state already  took the  lion's share                                                                    
of the  revenue -  it took  far more  than the  investor. He                                                                    
noted that  if the  federal and  state share  were combined,                                                                    
the  total was  in the  mid-$60s,  which was  a pretty  high                                                                    
government take. He referred to  earlier discussion by Vice-                                                                    
Chair Gara related to effective  versus statutory tax rates.                                                                    
He explained that the chart  represented what the government                                                                    
took  after  operating  costs and  capital  investments.  He                                                                    
could  not define  fair share  for the  legislature, but  it                                                                    
appeared the  state was already  in a pretty  good position,                                                                    
particularly at low  oil prices. An increase  in taxes would                                                                    
further widen the  gap between investor and  state share and                                                                    
would make costs increase in Alaska.                                                                                            
Mr.  Jepsen  noted he  would  address  what the  competitive                                                                    
environment   looked  like.   He  continued   that  anything                                                                    
increasing the industry's costs  in a high-cost environment,                                                                    
would not  going to incentivize  investment. The  per barrel                                                                    
credit  had  been  included  because   it  was  an  integral                                                                    
component  of the  tax rate  calculation. He  explained that                                                                    
the  specific  credit  had been  implemented  in  the  House                                                                    
Resources  Committee   as  a  way  of   taking  the  extreme                                                                    
regressivity out of  the tax rate when looking  at lower oil                                                                    
prices. He  clarified that it was  not a credit per  se, but                                                                    
it was an integral part of the tax rate calculation.                                                                            
4:17:41 PM                                                                                                                    
Vice-Chair Gara asked if the  slide counted or did not count                                                                    
the  tax rate  reduction. Mr.  Jepsen answered  that it  was                                                                    
Mr. Jepsen advanced to slide  4 titled "Activities since Tax                                                                    
Reform  (SB21) Passed."  The slide  addressed the  number of                                                                    
projects sanctioned since  the passage of SB  21 and whether                                                                    
they had  occurred due to  the passage  of SB 21.  The slide                                                                    
showed  all of  the various  investments ConocoPhillips  and                                                                    
its partners  had authorized since  the passage of SB  21 in                                                                    
2013. Shortly after the passage  of the bill the company had                                                                    
added  two  new  rigs  to  the Kuparuk  rig  fleet,  it  had                                                                    
sanctioned and taken delivery of  two new-build rigs, and in                                                                    
2016  the company  had  four to  five  rigs running  between                                                                    
Kuparuk and  Alpine. At  present the rig  count was  down to                                                                    
three for a couple of  reasons. First, Conoco had worked off                                                                    
much of the  backlog in terms of fixing wells  needing to be                                                                    
worked  over.   Additionally,  due  to  the   current  price                                                                    
environment, the  company had  high-graded the  portfolio in                                                                    
terms of wells  that made since to drill  at current prices.                                                                    
However,  the  investment  and  drilling  opportunities  the                                                                    
company  had  identified  three  years  earlier  were  still                                                                    
there. He stated  that hopefully the company  would have the                                                                    
ability to revisit the  opportunities assuming an investment                                                                    
climate that incentivized investment  as well as some uplift                                                                    
in oil price.                                                                                                                   
Mr. Jepsen continued to address  slide 4. In 2016 Conoco had                                                                    
sanctioned   another  new-build   rig  (an   extended  reach                                                                    
drilling rig).  The rig would significantly  change how much                                                                    
the  company  could  develop  from   a  single  drill  site.                                                                    
Currently the  maximum it  could reach  from a  single drill                                                                    
site was  approximately 55 square  miles; the new  rig would                                                                    
extend  that to  about 120  square miles.  The change  could                                                                    
represent a paradigm shift as  it could reduce the number of                                                                    
drill sites  it took to develop  a discovery or a  new field                                                                    
and would  let the company  get further  out to the  edge of                                                                    
the reservoir in places that may  be marginal if it were not                                                                    
for the fact that the work  could be done without putting in                                                                    
more infrastructure like gravel.  Conoco had also authorized                                                                    
additional  investment  in  its   viscous  oil  resource  in                                                                    
Kuparuk - the  North East West Sak (NEWS) at  drill site 1H.                                                                    
He elaborated that when prices  had dropped, the project had                                                                    
been paused  for about one  year and the company  had looked                                                                    
hard at what  it could do to reduce costs  and was currently                                                                    
back to work on the project.                                                                                                    
Mr. Jepsen  continued to speak  to slide 4. The  company had                                                                    
brought the first  new drill site 2S on stream,  which was a                                                                    
project of  about $450  million and  brought in  about 8,000                                                                    
barrels per  day. Conoco had sanctioned  18 additional wells                                                                    
at CD5. The CD5 decision had  been independent of SB 21, but                                                                    
the company had  decided in the past year it  would drill an                                                                    
additional  18   wells  in  the  region.   The  company  had                                                                    
sanctioned  Greater Moose's  Tooth 1  in 2015.  He expounded                                                                    
that exploration  had been underway in  the late 1990s/early                                                                    
2000s  in  the  specific  area  of  the  National  Petroleum                                                                    
Reserve -  Alaska (NPRA). The  company had  made discoveries                                                                    
in the area  and had completed an EIS in  2004 with the goal                                                                    
to do CD5 and then CD6  and CD7 (Greater Moose's Tooth 1 and                                                                    
2). However,  the process had  not gone according to  plan -                                                                    
there had been  some issues with the  regulatory process and                                                                    
CD5  had  not come  online  until  several years  back.  The                                                                    
decision  to  make the  other  investments  such as  Moose's                                                                    
Tooth  1 were  independent decisions.  He underscored  there                                                                    
was  nothing in  the  past that  would  dictate that  Conoco                                                                    
would have to make the  decision. When looking at investment                                                                    
decisions the  company considered price, the  quality of the                                                                    
reservoir,  the  rate it  would  earn,  the cost  to  invest                                                                    
capital, and the tax framework.  The projects had made sense                                                                    
to Conoco since the passage of  SB 21; he believed SB 21 had                                                                    
been a key  factor in the decision to move  forward - it was                                                                    
not  the   only  factor  -   but  it  helped   position  the                                                                    
investments better in the company's portfolio.                                                                                  
Mr. Jepsen explained that at  present the company was trying                                                                    
to  permit  Greater Moose's  Tooth  2  (located about  eight                                                                    
miles  west of  Greater  Moose's Tooth  1),  which would  be                                                                    
another  $1  billion-plus  project and  was  anticipated  to                                                                    
bring  in about  25,000 to  30,000 barrels  per day  at peak                                                                    
production  with about  700  positions during  construction.                                                                    
The project  was estimated  to come  online about  2021. The                                                                    
company had  recently announced  another major  discovery in                                                                    
NPRA - about  eight miles west of Greater Moose's  Tooth 2 -                                                                    
called  Willow. Willow  was a  much larger  discovery -  the                                                                    
company   was   estimated   300  million-plus   barrels   of                                                                    
recoverable oil.  It was  potentially a  multibillion dollar                                                                    
investment with production of up  to 100,000 barrels per day                                                                    
depending on  the development scenario pursued.  The company                                                                    
continued to  be bullish in Alaska  investment. He furthered                                                                    
that  in December  [2016] the  company had  picked up  about                                                                    
737,000 acres in  federal and state lease sales  in NPRA and                                                                    
just east  of NPRA  on state  acreage. The  company believed                                                                    
there continued  to be exploration  potential, which  it was                                                                    
Mr.  Jepsen  discussed  that  since   2013  there  had  been                                                                    
significant  industry  investment  by other  players.  North                                                                    
Slope production  had grown for  the first time in  about 14                                                                    
years by  2 percent in  2016. In  2015 the decline  had been                                                                    
slight at  about zero percent.  He recalled that  during the                                                                    
debate on  SB 21 people had  asked what would happen  if the                                                                    
bill passed. People had asked  if decline would be offset or                                                                    
production would increase.                                                                                                      
4:23:32 PM                                                                                                                    
Mr. Jepsen continued  to address slide 4.  He explained that                                                                    
at the  time no one had  been able to answer  the questions.                                                                    
He had  not known whether  the projects would  be sanctioned                                                                    
at the  time because the  bill had been under  debate. Since                                                                    
the passage  of SB 21,  significant work had taken  place on                                                                    
the North Slope  - substantially more so than  what had been                                                                    
taking place  before the passage  of the bill. Not  only had                                                                    
decline  been offset,  but production  growth had  begun. He                                                                    
pointed to a  chart in the bottom right corner  of the slide                                                                    
showing Conoco's capital budget back  to 2012. The blue bars                                                                    
represented the percentage of  the company's overall capital                                                                    
budget for each year (from  2012 to 2017). He continued that                                                                    
2012 had  been the last full  year of ACES; during  the ACES                                                                    
regime  from 2007  to 2012,  the company  had spent  between                                                                    
$700  million and  $800 million  per year  in Alaska.  Since                                                                    
then  the company's  budget  had been  higher.  Even in  the                                                                    
current  environment  of  low oil  prices  the  company  was                                                                    
planning  on spending  about $1  billion in  Alaska. He  had                                                                    
showed  the  percentage  as  a  function  of  the  company's                                                                    
overall  corporate  capital  expenditure to  show  that  its                                                                    
budget had  varied based  on the  projects it  was pursuing,                                                                    
but it  had remained  pretty consistent and  had grown  as a                                                                    
percentage of Conoco's overall corporate budget.                                                                                
Mr.  Jepsen relayed  that in  2017  the company's  corporate                                                                    
budget  was  about  $5  billion  and  Alaska  would  receive                                                                    
approximately 20  percent of the  total allocation.  Part of                                                                    
the  reason  was related  to  current  projects the  company                                                                    
would continue  with; the projects  had been  authorized due                                                                    
to the  positive investment climate in  Alaska amongst other                                                                    
things.  He hoped  the trend  would continue,  but it  would                                                                    
depend in part  upon whether a significant  tax increase was                                                                    
implemented in Alaska.                                                                                                          
4:25:21 PM                                                                                                                    
Mr.  Jepsen moved  to slide  5  and addressed  how the  bill                                                                    
would impact on  competition. A map on the  slide showed the                                                                    
unconventional fields in the Lower  48, which were basically                                                                    
the shale fields  (oil fields were represented  in green and                                                                    
gas fields  were represented  in red).  He pointed  to large                                                                    
investments  made  indicated  next to  the  Bakken,  Permian                                                                    
Basin, and  Eagle Ford  fields on  the slide.  He elaborated                                                                    
that  much of  the investment  activity had  focused on  the                                                                    
areas over  the last  few years. At  the present  time there                                                                    
had been  a decrease  in price,  less capital  available for                                                                    
investment, and  companies were allocating capital  based on                                                                    
the cost of  supply. He detailed that Alaska  had to compete                                                                    
against projects that were typically  cheaper to develop and                                                                    
operate and  with fewer regulatory  hurdles. He  referred to                                                                    
work in NPRA, which was a  very difficult place to work from                                                                    
a regulatory point of view  - due to the federal government,                                                                    
not  the state.  He discussed  that Alaska  was a  high-cost                                                                    
location to invest.  The state was opportunity  rich, but it                                                                    
was necessary to  be able to compete if the  company were to                                                                    
continue investing in Alaska.                                                                                                   
4:26:59 PM                                                                                                                    
Mr. Jepsen  addressed slide  6 titled  "Unconventional: Top-                                                                    
Tier   Resource  Base   and  Growing."   He  detailed   that                                                                    
information  on  the  slide had  been  taken  from  Conoco's                                                                    
November 10,  2016 analyst meeting. The  slide addressed the                                                                    
company's resource  base within its portfolio  as a function                                                                    
of cost of  supply. The cost of supply  (dollars per barrel)                                                                    
was represented on the Y axis  and the resource was shown on                                                                    
the X axis.  At $50 per barrel, Conoco had  about 15 billion                                                                    
barrels  of   resource  it  could  develop.   He  noted  the                                                                    
information  was pretty  representative  of what  investment                                                                    
opportunities looked  like for the  industry as a  whole. In                                                                    
Alaska, Conoco's  cost of supply was  at the top end  at the                                                                    
$40 to $50  per barrel range. Over the past  year Conoco had                                                                    
focused much  of its attention  on how to decrease  its cost                                                                    
of supply on  all of its investment  opportunities. The cost                                                                    
of  supply on  CD5  had  dropped from  $62  to  $40. He  was                                                                    
concerned  that   if  the  base   tax  rate   structure  was                                                                    
increased, it would drive costs  of supply up and would make                                                                    
companies  less  competitive,  which could  result  in  less                                                                    
investment in Alaska. He explained  it would have a negative                                                                    
long-term  effect  if  the   company  invested  less  money,                                                                    
resulting  in fewer  jobs,  less  production, less  royalty,                                                                    
less severance tax, and less revenue to the state.                                                                              
4:29:01 PM                                                                                                                    
Mr. Jepsen  turned to  slide 7 and  relayed the  minimum tax                                                                    
rate increase (from 4 percent to  5 percent) in HB 111 would                                                                    
be a 25 percent tax increase  at low oil prices. The company                                                                    
viewed the change to the  per barrel credit as a fundamental                                                                    
change  to the  SB 21  tax structure.  He stressed  that the                                                                    
state already received  the lion's share of  the net revenue                                                                    
- the bill  would increase the share even  higher. He stated                                                                    
the  interest change  was  punitive,  primarily because  the                                                                    
state largely controlled the time  it took to finish some of                                                                    
the  audits.  He  referenced intention  to  comment  on  the                                                                    
migrating tax credit change,  the tax information disclosure                                                                    
provisions, and the NOL provisions.                                                                                             
Mr. Jepsen advanced to slide  8 titled "CSHB111 Represents a                                                                    
Significant Increase  in Tax Rate."  The chart  attempted to                                                                    
show  the percentage  increase as  a function  of oil  price                                                                    
between  CSHB 111  and SB  21.  The Y  axis represented  the                                                                    
percentage increase in tax rate  as a function of oil price.                                                                    
The chart was  complicated as it tried to  take into account                                                                    
changing the minimum tax rate,  changes in the timing of the                                                                    
sliding scale, and  a different effective use  of per barrel                                                                    
credits. The  company viewed the CS  as a tax increase  - at                                                                    
lower prices the bill represented  a 25 percent tax increase                                                                    
and when looking at per  barrel credits it still represented                                                                    
a  fairly significant  tax increase  at  medium prices.  The                                                                    
company  would be  making money,  but the  consideration was                                                                    
where the  changes would put  the company at total  cost. He                                                                    
stressed  that total  cost mattered.  He  spoke about  lower                                                                    
total  costs  in  other  locations   around  the  world.  He                                                                    
returned to  slide 5 and  explained that the cost  of supply                                                                    
for places like  Eagle Ford, Bakken, and  Permian Basin took                                                                    
into account  whatever the royalty  rates may be.  They took                                                                    
into account the  royalty rates and higher  severance tax in                                                                    
North Dakota.                                                                                                                   
Mr. Jepsen summarized that total  cost mattered. He stressed                                                                    
that it was not whether the  state had the highest or lowest                                                                    
severance tax,  but about what  it cost to produce  a barrel                                                                    
in  Alaska and  how it  competed  with other  places in  the                                                                    
world.   He  underscored   that  there   was  not   infinite                                                                    
investment money - it was  necessary to place investments in                                                                    
the  best place  a company  could achieve  the best  return.                                                                    
Conoco   was  hoping   Alaska  would   continue  to   remain                                                                    
competitive. He posed  a question about why  the company was                                                                    
doing business  in Alaska if it  was such a high  cost place                                                                    
to conduct  business. First, the  production characteristics                                                                    
in  Alaska were  different than  the unconventionals,  which                                                                    
were typically  high rate and  steep decline. In  Alaska the                                                                    
characterization  could  be  offset with  more  conventional                                                                    
reservoirs with  a lower rate  of decline. Conoco  still saw                                                                    
the ability  to grow production  in Alaska; it  would invest                                                                    
in locations that fit in  their portfolio that made sense in                                                                    
the current  price environment,  and where  it could  make a                                                                    
reasonable rate of return under  the tax regime. The company                                                                    
still  saw  places in  Alaska  where  it could  explore  and                                                                    
potentially grow its base  and potentially generate positive                                                                    
net income and  cash flow. He cautioned that if  the cost of                                                                    
supply curve increased too much those things could change.                                                                      
4:33:24 PM                                                                                                                    
PAUL   RUSCH,  VICE   PRESIDENT,  FINANCE,   CONOCOPHILLIPS,                                                                    
addressed  slide  9  related to  migrating  per  barrel  tax                                                                    
credits. He referenced previous  presentations from DOR that                                                                    
showed  where  taxpayers had  migrated  the  per barrel  tax                                                                    
credits from one  month to another during the  year in 2014.                                                                    
Conoco  disagreed  with  the  view.  He  detailed  that  the                                                                    
production  tax was  an annual  tax,  but monthly  estimated                                                                    
installment  payments were  made  to help  ensure the  state                                                                    
received tax  payments throughout  the year.  At the  end of                                                                    
the  year (March  of the  following year)  companies made  a                                                                    
final tax payment.  He specified that in  2014 taxpayers had                                                                    
utilized their full  allotment of the annual  per barrel tax                                                                    
credits;  they had  not migrated  them from  month-to-month,                                                                    
but had used  what was allowed by law for  the tax year. The                                                                    
change proposed  in HB 111  had been identified as  a simple                                                                    
change  to a  perceived  problem in  the  existing tax  law;                                                                    
however, it  was fundamentally  moving the  annual tax  to a                                                                    
monthly  tax.  He  referred  to testimony  on  some  of  the                                                                    
difficulties the  change would  create related to  trying to                                                                    
calculate the monthly tax to  the precise dollar. The change                                                                    
would  increase the  complexity and  would potentially  open                                                                    
the  door  to  other  changes  in  the  same  direction.  He                                                                    
underscored there  was no such  thing as  migrating credits.                                                                    
He stressed  the change was  really nothing more than  a tax                                                                    
4:36:07 PM                                                                                                                    
Mr.  Rusch moved  to  slide 10  titled  "Basis for  Interest                                                                    
Change  Unsupported."   Conoco  viewed  the   interest  rate                                                                    
increase   was  really   a  punitive   interest  rate   when                                                                    
considering how long  the audit process took  and how little                                                                    
control the taxpayer had over  the entire process. The slide                                                                    
included  a chart  titled "Production  Tax Audit  Timeline,"                                                                    
which showed the  company's audit status from  2006 to 2011.                                                                    
He relayed  that 2006 was the  only tax year that  had fully                                                                    
completed   the  audit   process,   which  represented   the                                                                    
magnitude of time  it took to complete the  process. He used                                                                    
2007 as  an example  and explained the  gray portion  of the                                                                    
bar represented the tax year.  The final tax return for 2007                                                                    
had been  filed in March  2008. The  red portion of  the bar                                                                    
included the following six years  and represented the period                                                                    
of time  DOR took to complete  the audit. He noted  that the                                                                    
department had taken  three years to complete  the audit for                                                                    
2006  (three years  had been  the statute  of limitation  in                                                                    
2006, but  it was  six years beginning  in 2007).  There was                                                                    
nothing  the  taxpayer  could do  to  impact  the  schedule.                                                                    
Following  the red  portion of  the  bar there  was a  small                                                                    
orange section,  which represented a 60-day  period in which                                                                    
the  taxpayer  could appeal  the  results  of the  audit  if                                                                    
desired. The  bar included an additional  two-year period in                                                                    
yellow,  which  represented  the informal  decision  process                                                                    
(the first  appeal process) -  most of which  was controlled                                                                    
by  the  department.  A  small   blue  segment  of  the  bar                                                                    
represented  a 30-day  period for  the  taxpayer to  appeal.                                                                    
Finally,  the  green  portion   represented  the  Office  of                                                                    
Administrative Hearings. He summarized  that the process had                                                                    
taken nine years  for 2007. Interest had  been incurred over                                                                    
the  entire  period  unless a  limitation  was  implemented,                                                                    
which is what had been in place previously.                                                                                     
Mr.  Rusch elaborated  that  under HB  247  [oil tax  credit                                                                    
legislation   passed  in   2016]  the   interest  rate   had                                                                    
effectively   doubled  from   4   percent   to  8   percent.                                                                    
Additionally,   the    three-year   limitation    had   been                                                                    
implemented at the same time,  which Conoco had perceived as                                                                    
an  effort to  create some  incentive to  shorten the  audit                                                                    
timeframe.  He  furthered  that  HB  111  was  contemplating                                                                    
maintaining the high interest rate,  but doing away with any                                                                    
incentive for DOR  to shorten the audit  time. He reiterated                                                                    
there was  very little the  taxpayer could do to  impact the                                                                    
slow  timeline. The  company saw  applying  a high  interest                                                                    
rate in that environment as punitive.                                                                                           
4:40:03 PM                                                                                                                    
Mr. Rusch addressed other concerns on slide 11:                                                                                 
   · Tax policy should be focused on the aggregate, not                                                                         
     individual tax payer information                                                                                           
        o Disclosure of individual tax return information                                                                       
          may violate SEC, anti-trust, or other regulations                                                                     
        o Puts recipients at risk of violating federal law                                                                      
        o Confidentiality agreements are difficult to                                                                           
          enforce    -provision     provides    for    broad                                                                    
   · Pre-approval of lease expenditures (NOLs) could                                                                            
     effectively require advance approval of production,                                                                        
     prices, and all expenses                                                                                                   
        o Could create significant bureaucracy                                                                                  
        o Results in uncertainty / instability regarding                                                                        
          tax treatment                                                                                                         
        o No legislative guidance regarding implementation                                                                      
Mr. Rusch  elaborated on slide  11. He clarified that  in no                                                                    
way was  Conoco saying it did  not want to provide  the data                                                                    
to  the  state. He  detailed  that  the company  provided  a                                                                    
significant  amount  of  data  to  the  state  already.  The                                                                    
question for Conoco,  was about who needed to  see the data.                                                                    
He  furthered  that  DOR  could   provide  the  data  on  an                                                                    
aggregate basis to the legislature.  He addressed the second                                                                    
portion  of slide  11 related  to the  preapproval of  lease                                                                    
expenditures.  He  pointed  to  a lack  in  clarity  in  the                                                                    
drafting of the  bill; the pending regulations  left a great                                                                    
amount  of uncertainty.  He explained  the  bill required  a                                                                    
company to  know in  advance whether it  would have  an NOL,                                                                    
which  the company  would not  know. One  option was  that a                                                                    
company would bring all expenses  in for approval. Companies                                                                    
would  also have  to try  to make  a determination  based on                                                                    
assumptions around  production and  price. He stated  it was                                                                    
problematic  and would  create  significant bureaucracy  and                                                                    
uncertainty. He referred to  references in earlier testimony                                                                    
about mismanagement.  He reasoned that it  alone would scare                                                                    
companies  because  it  would become  very  subjective.  For                                                                    
example,  he questioned  who  would decide  if  a delay  was                                                                    
mismanagement  or due  to regulatory  issues. He  reiterated                                                                    
that  the discussion  would scare  people off  if they  were                                                                    
making significant investments.                                                                                                 
4:44:50 PM                                                                                                                    
Mr. Rusch continued to address  slide 11 and NOL changes. He                                                                    
explained that Conoco had not  yet incurred any NOLs to date                                                                    
and barring  a significant reduction  in prices, it  did not                                                                    
anticipate being  there. He stated  that the NOL  change was                                                                    
very complicated  and added another  layer of  complexity to                                                                    
the tax, which he questioned  the necessity of. He discussed                                                                    
that   in  most   developments   there   were  partners   in                                                                    
investments in  Alaska, which would  create some  issues. He                                                                    
provided a summary on slide 12:                                                                                                 
   · CSHB111 represents a significant increase in the base                                                                      
     tax structure in an already high cost environment -                                                                        
     moves Alaska in the wrong direction                                                                                        
   · CSHB111 provisions regarding NOLs and individual tax                                                                       
     disclosure   requirements    will   create   additional                                                                    
     barriers to doing business in Alaska                                                                                       
   · SB21 is working -it has stimulated investment                                                                              
     resulting in jobs, production, and increased State                                                                         
     revenue -let it continue to work                                                                                           
Mr.  Jepsen   elaborated  that  oil  flowing   in  TAPS  had                                                                    
increased in  2016 for  the first  time in  a long  time. He                                                                    
detailed that significant discoveries  had been announced by                                                                    
Conoco  and several  other  companies. Additionally,  Conoco                                                                    
had  sanctioned and  completed a  number of  developments on                                                                    
the North  Slope over the  last few years. He  stressed that                                                                    
increasing taxes  would increase the cost  of doing business                                                                    
in  Alaska, which  could result  in  less investment,  fewer                                                                    
jobs,  lower production,  and ultimately  reduce revenue  to                                                                    
the state.                                                                                                                      
4:47:54 PM                                                                                                                    
Co-Chair  Seaton   stated  that   one  of  the   things  the                                                                    
legislature had tried to do the  previous year in HB 247 was                                                                    
limit  the state's  exposure on  credits given.  He believed                                                                    
the concept  had been melded into  the preapproval provision                                                                    
in  HB  111.  He  explained   that  the  previous  year  the                                                                    
legislature had  been looking at allowing  credits to accrue                                                                    
if a company  was working on a development  plan and getting                                                                    
closer  to production  tax credit.  He asked  if the  method                                                                    
would work better  for industry if the  state was attempting                                                                    
to limit its exposure for the cost of developing credits.                                                                       
Mr.  Jepsen responded  that the  scenario  mentioned by  Co-                                                                    
Chair   Seaton  would   not  require   any  divestiture   or                                                                    
disclosure of any cost data,  price assumptions, or anything                                                                    
else -  which would not be  as invasive as the  provision in                                                                    
HB 111 or as chilling to  investment. He continued it was up                                                                    
for  the  legislature to  decide  whether  it discouraged  a                                                                    
company from  coming to  Alaska to  explore, buy  leases, or                                                                    
other.  He noted  that at  that  point in  time the  company                                                                    
would  not  be  in  a  development plan  at  that  time.  He                                                                    
questioned  whether  the  company   would  be  in  the  same                                                                    
competitive  position  as  someone  else  who  might  be.  A                                                                    
potential  downside to  the scenario  presented by  Co-Chair                                                                    
Seaton  was -  the state  wanted new  investors, but  it was                                                                    
implementing  another barrier  relative to  someone who  may                                                                    
already be in Alaska.                                                                                                           
Co-Chair  Seaton asked  if the  production tax  credits were                                                                    
exploration tax credits  or were they building  up a seismic                                                                    
log that  could be sold  to someone else never  intending to                                                                    
have  something   go  into  production.  He   explained  the                                                                    
legislature had been trying to  determine a balance in terms                                                                    
of what it  was trying to incentivize.  He requested written                                                                    
feedback around the issue. He  understood concerns about the                                                                    
intrusiveness of  an approval  process, but  the legislature                                                                    
was  trying to  address what  it  could afford  and what  it                                                                    
wanted  to incentivize  at present.  He spoke  about credits                                                                    
leading to production versus merely activity.                                                                                   
Mr.  Jepsen  answered  that  by   in  large  the  activities                                                                    
described by Co-Chair Seaton probably  did not impact Conoco                                                                    
significantly. He  understood that the cashable  tax credits                                                                    
were a significant  issue for the state at  present. He also                                                                    
understood  the  desire by  the  legislature  to ensure  the                                                                    
state received the  most bang for its buck.  He would follow                                                                    
up  at  a later  time  if  he  had additional  thoughts.  He                                                                    
thought some  later testifiers would  have a better  idea of                                                                    
what  it would  mean for  their business  because they  were                                                                    
actually doing that kind of business.                                                                                           
Representative  Guttenberg spoke  to the  disclosure of  tax                                                                    
returns  and   concern  by  the  industry.   He  was  always                                                                    
concerned  that  DOR could  not  answer  a question  due  to                                                                    
confidentiality.  He detailed  that numbers  were aggregated                                                                    
and  the  department  could  not   separate  them  out.  The                                                                    
legislature was  trying to determine  tax policy  apart from                                                                    
information from  consultants and industry,  the information                                                                    
from the department  was what the legislature had  to go by.                                                                    
He  stated  that much  of  the  information was  public  and                                                                    
available in other jurisdictions  around the world. He asked                                                                    
if Conoco would  be willing to make  information the company                                                                    
disclosed in other locations public in Alaska.                                                                                  
4:53:57 PM                                                                                                                    
Mr. Jepsen replied that he was  not aware of any location in                                                                    
the  world  where Conoco's  federal  tax  return was  public                                                                    
information.  He believed  tax policy  should be  based upon                                                                    
results it  provided. He stated  it could be changed  if the                                                                    
results were  not desirable. However, he  believed trying to                                                                    
craft  tax  policy around  individual  tax  returns was  bad                                                                    
policy. He stated that it would  not be possible to ever get                                                                    
exactly  the  desired  outcome. He  thought  successful  tax                                                                    
policy  achieved the  average  of the  goal  - some  players                                                                    
would do better  and others would do worse.  He relayed that                                                                    
Conoco   provided  substantial   information   to  DOR.   He                                                                    
continued  that  the department  had  tight  control of  the                                                                    
information.  He  did  not  believe   he  could  follow  the                                                                    
company's  tax  return and  make  decisions  based upon  the                                                                    
return.  He  did  not  believe   the  information  would  be                                                                    
beneficial for Conoco  or the committee. He  opined that DOR                                                                    
was doing  a pretty  good job  conveying to  the legislature                                                                    
and the public what the tax  policy was doing for the state.                                                                    
If the  desired results were  not being achieved it  was the                                                                    
legislature's purview to change the tax law.                                                                                    
Representative   Guttenberg  believed   the  confidentiality                                                                    
posed a  problem as  the previous  day Mr.  Alper [Director,                                                                    
Tax Division,  Department of Revenue]  had not been  able to                                                                    
respond  to two  of  his  questions. He  did  not know  what                                                                    
Conoco's board of  directors would do if it  had to consider                                                                    
investment  policies  in  places  where they  did  not  have                                                                    
information.  He  knew  that  when looking  at  one  set  of                                                                    
numbers or one audit it  would not be possible to understand                                                                    
due  to complexity.  He did  not  understand the  industry's                                                                    
opposition  to  providing  the legislature  with  access  to                                                                    
information. He  noted the information  may not  be relevant                                                                    
and  may not  be decipherable.  However, he  opined that  to                                                                    
understand how  something was working in  some scenarios but                                                                    
not others was a disservice to everyone.                                                                                        
Vice-Chair  Gara  appreciated   the  company's  presence  in                                                                    
Alaska and its commitment to  projects. He referred to slide                                                                    
5  titled  "Significant  Investment Competition."  He  asked                                                                    
which states the Bakken shale play was located in.                                                                              
Mr. Jepsen answered North Dakota and Montana.                                                                                   
Vice-Chair Gara asked if the  company was still investing in                                                                    
those locations. Mr. Jepsen answered in the affirmative.                                                                        
Vice-Chair  Gara  clarified his  interest  was  "not to  tax                                                                    
companies into  submission so that you're  bleeding red." He                                                                    
continued that  some individuals wanted  a 10 to  15 percent                                                                    
gross  tax at  all prices,  but it  would put  oil companies                                                                    
under water at  $40 to $50 per barrel. He  stated that North                                                                    
Dakota  had a  10  percent  gross tax  at  all  prices -  it                                                                    
increased to 11  percent around $80 per barrel.  He asked if                                                                    
his representation of the North Dakota tax was fair.                                                                            
Mr.  Jepsen  believed the  existing  price  point [in  North                                                                    
Dakota] moved from 10 to 10.5 percent.                                                                                          
Vice-Chair  Gara  surmised  the  tax was  much  higher  than                                                                    
Alaska's 4 percent gross minimum tax.                                                                                           
Mr. Jepsen  answered by returning  to slide 6. He  stated it                                                                    
was not about what a particular  tax was, but what the total                                                                    
government take looked like. In  Alaska, a significant share                                                                    
of the  net revenue  went to  the state  at any  given price                                                                    
point. He  explained it was  not about whether  North Dakota                                                                    
was  getting more  than in  Alaska; it  was about  the total                                                                    
cost.  He  understood  the dilemma  facing  the  legislature                                                                    
related to  what the  tax rate  should be  - whether  it was                                                                    
reasonable and  met the  state's tax  and revenue  needs. He                                                                    
explained that the cost of  supply was already very high and                                                                    
companies  were struggling  to compete.  If the  legislature                                                                    
did anything  to increase the  cost, the company  would fall                                                                    
out of the game. He underscored that total cost mattered.                                                                       
Vice-Chair  Gara noted  that in  North Dakota  the royalties                                                                    
paid  by  companies were  largely  to  private landowners  -                                                                    
instead  of bidding  on a  lease like  in Alaska,  companies                                                                    
paid  an  acreage  cost  there.   He  relayed  it  had  been                                                                    
explained to the committee  that Alaska was cost-challenged.                                                                    
He  noted  that  one  thing   that  Conoco  did  that  other                                                                    
companies  did  not  do  -  because  of  SEC  rules,  Conoco                                                                    
reported its Alaska and regional  profits. He expounded that                                                                    
in Conoco's fourth quarter of  2015 it had made $110 million                                                                    
in  adjusted  earnings  in  Alaska,  lost  $101  million  in                                                                    
Canada, lost $219  million in the Lower 48,  made less money                                                                    
in all  of Europe  and North Africa  combined, and  had lost                                                                    
money in all  other international areas. The  only areas the                                                                    
company had made  more money than in Alaska was  in the Asia                                                                    
Pacific and  Middle East  regions combined.  He asked  if he                                                                    
should infer  from those  numbers that  Alaska was  really a                                                                    
terrible place to do business.                                                                                                  
5:01:17 PM                                                                                                                    
Mr. Jepsen  answered that unfortunately  SEC-type accounting                                                                    
did  not necessarily  give an  adequate picture  of where  a                                                                    
company was  in terms  of generating  cash flow.  There were                                                                    
numerous things that went into  SEC accounting that were not                                                                    
representative  of  "what  we  would  all  look  at  in  our                                                                    
checkbook."  Ultimately,  the   company  actually  had  more                                                                    
positive cash flow  in the Lower 48 pre-tax  than in Alaska.                                                                    
He deferred to his colleague  to provide an additional slide                                                                    
in response to Vice-Chair Gara's question.                                                                                      
Mr. Rusch  informed the committee that  the company's annual                                                                    
report  was currently  available.  The  slide would  address                                                                    
full-year data.  He pointed  out that  due to  the company's                                                                    
size it  reported its Alaska results  separately. The annual                                                                    
report  showed specific  cost data  for  Alaska relative  to                                                                    
other  parts  of  the  world.  He  stressed  that  the  cost                                                                    
structure in Alaska was  significantly higher than elsewhere                                                                    
in the world. He referred  to its remote locations and noted                                                                    
that  everything was  more expensive  everywhere in  Alaska.                                                                    
For example,  an all-in cost  for Alaska was about  $43 [per                                                                    
barrel]  including  transportation, tax,  development  cost,                                                                    
and production cost. Whereas, the  total cost was around $20                                                                    
in the Lower 48.                                                                                                                
Mr.   Rusch  addressed   a  supplemental   slide  1   titled                                                                    
"ConocoPhillips   Earnings  and   Estimated  Cash   Flow  ($                                                                    
Million)."  The slide  included  a table  titled "2016  Cash                                                                    
Flow Estimate." The slide used  an SEC-type net income based                                                                    
on U.S. GAP [General  Accounting Principles] guidelines. For                                                                    
the year Alaska had  generated positive adjusted earnings of                                                                    
$233 million  and the  Lower 48  had a  loss of  almost $1.9                                                                    
billion.  He underscored  the importance  of cash  flow. The                                                                    
table  adjusted for  two items  including  income taxes  and                                                                    
depletion  and depreciation.  The table  added income  taxes                                                                    
back in to  demonstrate that the company  was corporately in                                                                    
a loss position. The company  was not receiving a refund for                                                                    
the tax benefit. He stated that  the data made Lower 48 look                                                                    
even worse because  of the receipt of  a significant federal                                                                    
tax  benefit. After  the inclusion  of  income taxes  Alaska                                                                    
pre-tax earnings were  $216 million and the  Lower 48 showed                                                                    
a  loss  of almost  $3  billion.  The large  adjustment  was                                                                    
depletion  and depreciation,  which  was a  way to  amortize                                                                    
previous  capital  and  fixed  assets  over  the  period  of                                                                    
production.  He  detailed that  a  units  of production  was                                                                    
calculated  and  a  depletion   and  depreciation  rate  was                                                                    
assigned to each  barrel produced. The number  for the Lower                                                                    
48 was significantly higher than  the rate for Alaska. There                                                                    
were  a  number  of  factors driving  the  different  rates,                                                                    
including  the significant  capital investment  made in  the                                                                    
Lower 48 over the preceding four  to five years. Much of the                                                                    
investment  had   been  to   set  up   infrastructure  (i.e.                                                                    
pipelines and other fixed assets) for future production.                                                                        
Mr. Rusch continued to address  the supplemental slide 1. He                                                                    
relayed  that the  reserve base  in  the Lower  48 was  much                                                                    
smaller relative  to the capital  size. Units  of production                                                                    
were  calculated based  on the  booked  proved reserves.  He                                                                    
furthered  that the  Lower 48  developments were  fairly new                                                                    
and they  were only able to  book a small percentage  of the                                                                    
production expected  out of the wells  - additional reserve-                                                                    
adds would  be seen  over time. When  the non-cash  item was                                                                    
added  back the  estimated  cash flow  before investing  was                                                                    
about $1.1  billion for Alaska  versus $1.3 billion  for the                                                                    
Lower  48.  Once  the  capital  expenditures  (cap-ex)  were                                                                    
factored in the  estimated pre-tax cash flow  for Alaska was                                                                    
$200 million and  $9 million for the Lower  48. He explained                                                                    
that the  results were  not stellar.  He specified  that the                                                                    
company had $12  billion to $13 billion  invested in Alaska.                                                                    
When looking at  the companies Lower 48  business only about                                                                    
40 percent  of its  production was oil  - the  remainder was                                                                    
natural gas liquids and gas. He  noted that the gas price in                                                                    
the Lower 48 had been  approximately $13. He referred to the                                                                    
future investments  Conoco was  making in  the Lower  48 and                                                                    
explained that it  was investing in oil, not  gas. He shared                                                                    
that the company had recently  announced it was disposing or                                                                    
marketing a  significant portion  of its  gas assets  in the                                                                    
Lower 48.  The slide  represented a  combination of  oil and                                                                    
gas; however,  future investments were veering  towards oil,                                                                    
which would be much more profitable.                                                                                            
5:10:25 PM                                                                                                                    
Co-Chair Seaton  wondered if  there was  an effect  of being                                                                    
able  to write  off 100  percent of  cap-ex in  the year  it                                                                    
accrued  versus having  to do  a  depreciation schedule.  He                                                                    
asked if it showed up in the slide.                                                                                             
Mr. Rusch  responded that the  information presented  in the                                                                    
table  [supplemental  slide 1]  was  purely  on a  financial                                                                    
basis.  There was  no accelerated  depreciation or  anything                                                                    
else.  He  clarified  that  all of  the  fixed  assets  were                                                                    
amortized  on units  of production;  it  was very  different                                                                    
than  what  was  witnessed  in  tax  depreciation  or  other                                                                    
depreciation purposes.                                                                                                          
Co-Chair  Foster recognized  Senator Peter  Micciche in  the                                                                    
5:11:49 PM                                                                                                                    
Vice-Chair  Gara  emphasized  that  the gross  tax  rate  in                                                                    
Montana of  10 percent was  250 percent higher than  the tax                                                                    
in Alaska. He reiterated  his earlier statement about losses                                                                    
Conoco had experienced outside of  Alaska in 2015. He stated                                                                    
that  in almost  every year  going back  to 2010  Alaska was                                                                    
either  the  most  profitable  or  the  location  where  the                                                                    
company had lost  the least or close to the  least amount of                                                                    
money. He  was glad to  know the company was  profitable and                                                                    
was  doing  better in  Alaska  than  in most  other  places.                                                                    
However, he believed it indicated  Alaska was a decent place                                                                    
to  invest. He  added  that even  under  ACES Alaska  ranked                                                                    
first of second for Conoco;  the Middle East and Europe were                                                                    
the places where it tended to do better.                                                                                        
Mr.  Jepsen reiterated  that the  items shown  on the  slide                                                                    
were not cash results, reflections  of where the company was                                                                    
investing  its  money,  or  of  the  lower  cost  of  supply                                                                    
opportunities the  company could invest in.  The company had                                                                    
about 7 billion  barrels of resource to invest  in below $35                                                                    
per  barrel  cost of  supply,  which  was where  Conoco  was                                                                    
currently  putting its  money.  The  company had  historical                                                                    
investments that were putting it  in the negative net income                                                                    
category due to  the drop in oil price.  He underscored that                                                                    
the data did  not represent cash flow  numbers. He explained                                                                    
that Wall Street  liked to evaluate companies  on net income                                                                    
because  it  tended  to smooth  out  investments  over  time                                                                    
rather  than   presenting  a   "saw  tooth"   profile.  Many                                                                    
investors  believed the  net income  method  should be  done                                                                    
away with and  only cash flow should be used  because it was                                                                    
what  determined what  a company  was actually  earning. The                                                                    
company  was not  putting  its  money in  gas  fields or  in                                                                    
places that  would continue to drive  its earnings negative;                                                                    
it  would  put  the   investment  in  different  places.  He                                                                    
continued that  Conoco had invested  quite a bit in  some of                                                                    
the unconventional  basins and it  would not begin  to drill                                                                    
more wells.  He concluded that  it was not possible  to take                                                                    
from the  numbers presented on  the slide that Alaska  had a                                                                    
big  advantage  over  the  places   Conoco  was  looking  at                                                                    
investing at present.                                                                                                           
5:15:07 PM                                                                                                                    
Representative   Kawasaki  asked   about  the   key  metrics                                                                    
included in  the calculation of production  cost per barrel.                                                                    
Mr. Rusch  responded that the  number was all  inclusive and                                                                    
represented   production   tax,   taxes   on   net   income,                                                                    
transportation, and  the development  cost where  Conoco had                                                                    
taken its  capital on a  per barrel  basis. The goal  on the                                                                    
slide was to  show all spend in the current  year divided by                                                                    
Representative  Kawasaki  asked  for verification  that  the                                                                    
calculation included  capital expenses  for the  year, which                                                                    
had been high in 2016.                                                                                                          
Mr. Rusch responded  that when he had referenced  a $43 [per                                                                    
barrel cost  for Alaska] it  reflected an all-in  number. He                                                                    
referenced the $16.12 cost per  barrel for Alaska versus the                                                                    
$11.06 cost  per barrel in  the Lower  48 [at the  bottom of                                                                    
the supplemental slide  1] and explained that  it was purely                                                                    
a production cost number (primarily  lifting costs and other                                                                    
related expenses).                                                                                                              
Representative  Kawasaki asked  for  clarification that  the                                                                    
number  did or  did not  include capital  and transportation                                                                    
costs. Mr.  Rusch responded  that it  did not  include those                                                                    
5:17:09 PM                                                                                                                    
Representative  Kawasaki   referred  to   slide  6   of  the                                                                    
presentation. He asked  about the definition of  the cost in                                                                    
supply. He wondered  if the cost of  supply included capital                                                                    
expenses  paid  in  the   year,  transportation  costs,  and                                                                    
lifting costs.                                                                                                                  
MR.  Jepsen  answered  that  the  cost  of  supply  was  the                                                                    
breakeven price required to get  a 10 percent rate of return                                                                    
on an after tax basis.  It included all elements - severance                                                                    
tax, royalty, and transportation; it was an all-in metric.                                                                      
Representative Kawasaki asked if  capital was also included.                                                                    
Mr. Jepsen responded that capital was included.                                                                                 
Representative  Pruitt  returned  to  the  discussion  about                                                                    
required  information the  legislature was  asking companies                                                                    
to  provide. He  quoted from  slide 11  of the  presentation                                                                    
that disclosure  of individual  "tax return  information may                                                                    
violate SEC, anti-trust, or  other regulations." He provided                                                                    
a  scenario  where  state law  potentially  conflicted  with                                                                    
federal law and asked which Conoco would chose.                                                                                 
Mr.  Jepsen replied  that  he  hoped there  would  not be  a                                                                    
situation where  the scenario would  occur -  presumably the                                                                    
legislature  would  ensure   its  regulations  aligned  with                                                                    
federal  law.   He  relayed   that  generally   federal  law                                                                    
superseded state law.                                                                                                           
Representative  Pruitt asked  whether the  state would  open                                                                    
itself up to litigation from  Conoco's investors if it tried                                                                    
to  force the  company to  provide certain  information that                                                                    
could violate federal law.                                                                                                      
Mr. Jepsen  replied that  he was not  an attorney  and could                                                                    
not definitively  answer the question.  The company  was not                                                                    
planning on being  in an NOL situation;  therefore, it would                                                                    
not  be   planning  on   coming  to   the  state   with  the                                                                    
information. From  a generic standpoint  he believed  it was                                                                    
very  problematic and  the  issue  raised by  Representative                                                                    
Pruitt was legitimate.                                                                                                          
5:20:21 PM                                                                                                                    
Co-Chair  Seaton  asked  to return  to  the  previous  slide                                                                    
[supplemental slide 1]. He referred  to a realized oil price                                                                    
in  Alaska  of  $41.93  and production  cost  in  Alaska  of                                                                    
$16.12. He stated  it turned out to be  $26.00. The realized                                                                    
oil price in the Lower 48  was $37.49 with a production cost                                                                    
of $11.06,  which equaled $26.50. He  asked for verification                                                                    
that the  Company's margin in  Alaska compared to  the Lower                                                                    
48 was essentially equal.                                                                                                       
Mr. Rusch clarified  that the $41.93 and  $16.12 figures did                                                                    
not include transportation. It was  necessary to also factor                                                                    
in transportation costs of approximately  $10 per barrel for                                                                    
Alaska;  transportation cost  for  the Lower  48 barrel  was                                                                    
Co-Chair  Seaton  asked  if the  presenters  had  any  other                                                                    
slides that  showed Alaska costs or  production volumes that                                                                    
would give a  more definitive picture of  what Alaska looked                                                                    
like from Conoco's perspective.                                                                                                 
Mr. Jepsen responded  that they did not  have any additional                                                                    
information on  hand. He  noted that  the annual  report had                                                                    
been published and was the  source for the information shown                                                                    
on the slides.                                                                                                                  
Co-Chair Seaton  asked for verification  that the  price and                                                                    
cost  information were  from the  annual report.  Mr. Jepsen                                                                    
answered in the  affirmative. He added that  the figures did                                                                    
not include  capital or transportation on  production costs.                                                                    
Given that much of the  company's production in the Lower 48                                                                    
represented low  margin investments (i.e. natural  gas), the                                                                    
company wanted  to invest in  other locations  where margins                                                                    
were higher.                                                                                                                    
Co-Chair Seaton remarked that  his calculations still showed                                                                    
about the  same margins [between  Alaska and the  Lower 48].                                                                    
He stated  that a  look had  been taken  at the  fields with                                                                    
gross  value   reduction  (GVR),   which  had   an  entirely                                                                    
different margin, cost expenditure,  and yield to the state.                                                                    
One  of the  problems may  be with  melding GVR  field costs                                                                    
with non-GVR fields. He asked  if it would be problematic to                                                                    
have costs associated with GVR  fields only offsetting costs                                                                    
or  profits from  GVR fields.  He  wondered if  it would  be                                                                    
problematic to  ring fence the  two things  separately since                                                                    
there was such  a large differential with 20  percent GVR in                                                                    
the fields.                                                                                                                     
Mr. Jepsen  responded that anytime ring  fencing was applied                                                                    
it created  problems including different classes  of assets.                                                                    
Additionally, it made  it more difficult to  evaluate how to                                                                    
invest as  a function of  a company's overall  portfolio. He                                                                    
stated that ring  fencing had been talked about  a number of                                                                    
times  related to  heavy oil  and  GVRs. Philosophically  he                                                                    
believed it would put the state in  a bad place - it did not                                                                    
necessarily  incentivize  the  right   behavior  as  it  was                                                                    
important to have people investing  in the best projects. He                                                                    
believed the  current system (without ring  fencing) lead to                                                                    
a  more  reasonable  development  scenario  where  companies                                                                    
invested  in the  best projects  and the  best outcome  from                                                                    
5:24:59 PM                                                                                                                    
Vice-Chair Gara  referred to the  realized oil price  at the                                                                    
bottom  of  the supplemental  slide  1.  He wondered  if  it                                                                    
represented the average Alaska oil  price in 2016. Mr. Rusch                                                                    
responded in the affirmative.                                                                                                   
Vice-Chair Gara  continued to address the  slide referred to                                                                    
the $233  million in  profit for the  company in  Alaska. He                                                                    
noted that in  general terms for oil  companies $233 million                                                                    
was  not a  substantial profit.  He asked  if the  company's                                                                    
breakeven price in Alaska was at  oil prices in the $30s per                                                                    
barrel or lower.                                                                                                                
Mr. Jepsen  could not comment  on what the  Alaska breakeven                                                                    
price may be; it was not publicly disclosed information.                                                                        
Vice-Chair Gara  surmised the breakeven was  somewhere below                                                                    
Co-Chair  Seaton interjected  that  the  questions were  not                                                                    
5:26:37 PM                                                                                                                    
AT EASE                                                                                                                         
5:27:36 PM                                                                                                                    
BENJAMIN JOHNSON,  PRESIDENT, BLUECREST  ENERGY II,  LP (via                                                                    
teleconference), provided  a PowerPoint  presentation titled                                                                    
"House  Finance  Committee  -  CS  for  HB111,  J.  Benjamin                                                                    
Johnson Testimony" dated  March 22, 2017 (copy  on file). He                                                                    
read from a prepared statement:                                                                                                 
     Good  afternoon   Co-Chairs  Foster  and   Seaton,  and                                                                    
     members of  the Committee. For  the record, my  name is                                                                    
     J.  Benjamin Johnson.  I am  the president  and CEO  of                                                                    
     BlueCrest Energy Inc. Thank you  for the opportunity to                                                                    
     speak concerning this very important matter.                                                                               
Mr. Johnson commented  that he was the first  of the smaller                                                                    
producers  and also  the only  producer testifying  from the                                                                    
Cook Inlet. He continued to address prepared remarks:                                                                           
     First, I want to echo  what we've heard today from Kara                                                                    
     Moriarty  and   other  members  of  the   industry.  In                                                                    
     particular,  I  want  to emphasize  the  importance  to                                                                    
     Alaskans  of fostering  an environment  that helps  get                                                                    
     Alaska's vast  resources developed and brings  value to                                                                    
     its residents.                                                                                                             
     Just  last  year we  heard  many  voices claiming  that                                                                    
     Alaska's  oil  industry  was  dying.  The  conventional                                                                    
     wisdom said that it was time to "move on" beyond oil.                                                                      
     But now we  know that was wrong! In  fact, the positive                                                                    
     changes to the  state's tax system over  past years has                                                                    
     attracted  the capital  and new  companies so  that the                                                                    
     natural decline  of TAPS  has been  stemmed -  at least                                                                    
     for now  - and  the state has  laid the  foundation for                                                                    
     decades of continued production.                                                                                           
     And of  course, we've all heard  about three gargantuan                                                                    
     oil finds that have been  announced on the North Slope.                                                                    
     But  that's just  what has  been  announced! Who  knows                                                                    
     what   else   may  be   coming   as   result  of   more                                                                    
     exploration!? These huge new  fields will take time and                                                                    
     a lot  of money to  reach production. But if  these new                                                                    
     finds can be  developed, they are poised to  usher in a                                                                    
     new  era  of  productivity  and long  term  wealth  for                                                                    
5:31:00 PM                                                                                                                    
Mr. Johnson moved to slide 2 and 3 and continued prepared                                                                       
     In the Cook Inlet, we have  also seen a re-birth of old                                                                    
     fields,  doubling the  total Cook  Inlet production  of                                                                    
     oil and ending the gas supply crisis.                                                                                      
     Right now,  BlueCrest is  developing a  substantial new                                                                    
     field  in  the Cook  Inlet.  The  Cosmopolitan Unit  is                                                                    
     poised  to become  the largest  oil producing  field in                                                                    
     the Cook Inlet and has  the potential to provide enough                                                                    
     natural gas  to supply  the Southcentral  utilities for                                                                    
     many  years  to come.  Because  of  the location,  Cook                                                                    
     Inlet fields  can be developed  much more  quickly than                                                                    
     those on the Slope. Yes,  the size is smaller than some                                                                    
     of  the largest  North  Slope fields,  but  so are  the                                                                    
     costs and time  to bring online. For  example, we built                                                                    
     and turned  on our initial onshore  production facility                                                                    
     in Anchor Point in a little more than a year.                                                                              
5:32:16 PM                                                                                                                    
Mr. Johnson advanced to slide 4 and provided prepared                                                                           
     And  now, we  have  completed and  started-up the  most                                                                    
     powerful  Extended   Reach  Drilling  rig   in  Alaska,                                                                    
     specifically  designed for  this project.  A couple  of                                                                    
     weeks  ago,  we   successfully  finished  drilling  the                                                                    
     longest-reach well  ever in  the Cook  Inlet, resulting                                                                    
     in  thousands   of  feet  of   net  pay  for   new  oil                                                                    
     production. And  yesterday, we began drilling  the next                                                                    
     well that  will include two long  horizontal production                                                                    
     zones.  We have  the potential  to  drill up  to 20  of                                                                    
     these  large new  wells, likely  more than  doubling or                                                                    
     even tripling  the current  Cook Inlet  oil production.                                                                    
     While we  are drilling, we  create between 200  and 300                                                                    
     jobs, and they are almost all filled by Alaskans.                                                                          
     We  know  the oil  is  there;  it's  just a  matter  of                                                                    
     spending the  money to implement the  technology to get                                                                    
     it out.                                                                                                                    
5:33:13 PM                                                                                                                    
Mr. Johnson moved to slide 5 and read prepared remarks:                                                                         
     Now  let me  tell you  a little  bit about  BlueCrest's                                                                    
     story. Most  of you  know that, although  our corporate                                                                    
     headquarters  are  in  Texas,  I  am  from  Alaska.  My                                                                    
     parents lived  in Anchor Point  and Homer in  the '40's                                                                    
     and '50's  before I  was even  born, and  I grew  up in                                                                    
     Kenai.  I worked  my way  through college  on the  Cook                                                                    
     Inlet Platforms  and then  for ARCO  as an  engineer on                                                                    
     some  of  the early  Prudhoe  and  Kuparuk projects.  I                                                                    
     later  earned  my  master's degree  from  UAA  with  my                                                                    
     thesis  written on  "What to  do with  the North  Slope                                                                    
     gas?"  When  BlueCrest's   current  managers  initially                                                                    
     formed BlueCrest about 7 years  ago, I personally hoped                                                                    
     we'd  be able  to come  back  to Alaska  and bring  new                                                                    
     value to  this land.  But, in our  role as  managers of                                                                    
     assets for global private investors,  we have to do our                                                                    
     best  to  ensure  that their  investments  receive  the                                                                    
     highest returns possible.                                                                                                  
5:34:19 PM                                                                                                                    
Mr. Johnson discussed slide 6 and read from prepared                                                                            
     We've  heard  this theme  earlier  today  - and  I  can                                                                    
     personally testify  that it's a fact.  The oil business                                                                    
     is  largely  a  matter of  competition  for  investment                                                                    
     dollars. Large oil and gas  investors look all over the                                                                    
     world,  and  the  investment money  will  naturally  go                                                                    
     wherever  they  believe  it can  generate  the  highest                                                                    
     return. Our  investors have  the opportunity  to invest                                                                    
     their money in many locations  around the world, and we                                                                    
     have to  offer a better deal  to get them to  invest in                                                                    
     Long  before we  made the  decision to  come here,  the                                                                    
     BlueCrest management  team looked  all over the  US for                                                                    
     investment opportunities  that would  allow us  to find                                                                    
     and  develop new  oil and  gas.  We certainly  expected                                                                    
     that  Alaska  had  the resources  in  the  ground,  but                                                                    
     Alaska's  costs  and  administrative  processes  simply                                                                    
     made  it non-competitive  with fields  in the  Permian,                                                                    
     Gulf  Coast, or  North  Dakota  basins. Investments  in                                                                    
     Alaska  are daunting:  it costs  roughly three  to five                                                                    
     times  as much  to  drill a  well  or build  production                                                                    
     facilities in  Alaska as it  does anywhere else  in the                                                                    
5:35:32 PM                                                                                                                    
Mr. Johnson moved to slide 7 and continued to read from                                                                         
prepared remarks:                                                                                                               
     We weren't  even considering investing in  Alaska until                                                                    
     2009 when  we met  some representatives from  the State                                                                    
     of  Alaska  who  had  a booth  at  the  North  American                                                                    
     Petroleum   Exposition.   They  were   enthusiastically                                                                    
     urging  new  companies to  come  north  to develop  the                                                                    
     state's resources.  State officials  handed out  a book                                                                    
     ironically called  "Dispelling the Alaska  Fear Factor"                                                                    
     and   provided   information  sheets   describing   the                                                                    
     incentives the  state was  providing for  new explorers                                                                    
     and  developers  to  come  to  Alaska.  The  state  was                                                                    
     remarkably  offering to  rebate  a  portion of  upfront                                                                    
     investments  made by  oil companies  in  order to  help                                                                    
     make  the  Alaska  investments  more  competitive  with                                                                    
     investments in the Lower 48,  and the state has offered                                                                    
     a consistent schedule up until  last year for reviewing                                                                    
     and paying those credits on  time. The tax credits were                                                                    
     meant  to  tip the  balance  in  favor of  Alaska.  The                                                                    
     bottom line is that  BlueCrest chose to invest hundreds                                                                    
     of millions of dollars  in Alaska (instead of investing                                                                    
     elsewhere) because the incentives  offered by the State                                                                    
     were  believed   to  be  enough  to   offset  the  cost                                                                    
     differences between Alaska and the Lower-48.                                                                               
     Let me  be very clear.  We would not  be here -  and we                                                                    
     would not  be developing Cosmopolitan that  can provide                                                                    
     hundreds of millions of dollars  to the State over time                                                                    
     - but for  our initial belief in the good  faith of the                                                                    
     State of  Alaska to follow  through on its  promises to                                                                    
     When  we first  looked at  developing the  Cosmopolitan                                                                    
     project a  few years ago,  we very carefully  made sure                                                                    
     that we  would have  the investment funds  necessary to                                                                    
     get us to completion. We  believed that the State would                                                                    
     follow  through  with  its highly-promoted  tax  credit                                                                    
     program  that  actually  paid  cash  rebates  to  small                                                                    
     companies for their investments  in the state. Granted,                                                                    
     that    was    a   one-of-a-kind    opportunity.    But                                                                    
     nevertheless, it  was what the State  clearly announced                                                                    
     it would do.                                                                                                               
     So before we  ever started, we made sure  that we would                                                                    
     have  enough investment  money available  to get  us to                                                                    
     the point where we  could finally be cash-flow-positive                                                                    
     and begin  paying back the  investors. And,  of course,                                                                    
     as  committed to  us  by  the state's  representatives,                                                                    
     that plan  was based  on the belief  that a  portion of                                                                    
     the  total investments  would be  covered by  the state                                                                    
     tax credits.                                                                                                               
5:37:57 PM                                                                                                                    
Mr. Johnson moved to slide 8 and continued to read from                                                                         
prepared remarks:                                                                                                               
     And  we  did it.  As  of  today, we  have  successfully                                                                    
     proved  up  the large  oil  and  gas resources  in  the                                                                    
     Cosmopolitan  Unit.  We  have  completed  a  large  new                                                                    
     production facility (on-time  and under-budget), and we                                                                    
     have built  and started-up  the most  powerful drilling                                                                    
     rig  in the  state. We  have just  finished drilling  a                                                                    
     record-length  well that  could  be the  first of  many                                                                    
     future wells  with decades of production.  And that new                                                                    
     production will likely generate  more than $750 million                                                                    
     dollars in royalties alone for the state.                                                                                  
5:38:33 PM                                                                                                                    
Mr. Johnson moved to slide 9 and 10 and continued to read                                                                       
from prepared remarks:                                                                                                          
     To date, BlueCrest has invested  over $300 million, and                                                                    
     we have received about $26  million in tax credits. And                                                                    
     every penny  of those  credits has been  re-invested in                                                                    
     the field development.                                                                                                     
     But here's  the rub.  BlueCrest has  done its  part and                                                                    
     invested  everything we  said we  would, but  the State                                                                    
     has failed  to live up  to its original  commitments to                                                                    
     pay the tax  credits that have been earned  to date. We                                                                    
     fulfilled  our   commitments  to  invest   hundreds  of                                                                    
     millions  of dollars  in hard  cash for  development of                                                                    
     the Cosmopolitan  resources. But  the State has  so far                                                                    
     failed to  pay its share  of the tax credits,  and that                                                                    
     has  left a  large hole  in our  plans for  funding the                                                                    
     continuation of the field development.                                                                                     
5:39:29 PM                                                                                                                    
Mr. Johnson moved to slide 11 and continued to read from                                                                        
prepared remarks:                                                                                                               
     But  if the  remaining tax  credits are  not paid,  the                                                                    
     results to  the state are tangible:  Without receipt of                                                                    
     the rest of the tax  credits as originally promised, we                                                                    
     could be  forced to slow  or stop drilling the  new oil                                                                    
     wells that  would unquestionably provide  large returns                                                                    
     to the state,  resulting in a loss of  hundreds of jobs                                                                    
     for  Alaskans. Surely  it goes  without saying,  but if                                                                    
     the  wells   aren't  drilled,  Alaskans   get  nothing.                                                                    
     Alaska's  residents  lose  jobs.  Alaska  vendors  lose                                                                    
     business  opportunities.   And  the  state   and  local                                                                    
     governments lose revenue.                                                                                                  
     A  competitive production  tax  system with  incentives                                                                    
     for new development is absolutely  not a give-a-way. As                                                                    
     a major  land-owner, Alaska benefits from  every barrel                                                                    
     that is produced  on its lands, and I  contend that you                                                                    
     should   be   looking   at  this   as   an   investment                                                                    
     opportunity.  Alaska  stands   to  generate  tremendous                                                                    
     future  revenues  from  a dynamic  and  successful  oil                                                                    
     industry.  The  more  you  can   do  to  stimulate  new                                                                    
     development  and  enhanced   production  from  existing                                                                    
     fields,  the  more  Alaska's  residents  will  benefit.                                                                    
     Remember,  the state  gets zero  value if  that oil  is                                                                    
     never found or stays in the ground.                                                                                        
5:40:41 PM                                                                                                                    
Mr. Johnson moved to slide 12 and continued to read from                                                                        
prepared remarks:                                                                                                               
     HB111 is  a great example  of a terribly  misguided and                                                                    
     shortsighted  attack on  the goose  that lays  Alaska's                                                                    
     golden eggs.  Do you really think  you can dramatically                                                                    
     alter the tax  structure for short term  gain or create                                                                    
     incredible  administrative burdens  and  still get  the                                                                    
     same  production   value  in  the  future?   I've  been                                                                    
     involved in the US oil  industry for over 40 years now.                                                                    
     I've engineered  and managed  oil and  gas developments                                                                    
     all over the  country, and I can tell  you that passing                                                                    
     HB111 will  deprive Alaska  of future  developments and                                                                    
     will  result in  less future  state revenues  and fewer                                                                    
     Alaskan  jobs. In  the interest  of time,  I will  only                                                                    
     address a  couple of the  specifics in the bill,  but I                                                                    
     do  agree with  the  testimony of  AOGA  and the  other                                                                    
     companies we've heard today.                                                                                               
     I've got  to tell  you that the  pre-approval provision                                                                    
     in section  26 has got  to be the most  egregious waste                                                                    
     of government and industry resources  I've ever seen in                                                                    
     my  career. First  of all,  it's not  even possible  to                                                                    
     conduct  oilfield operations  if  we have  to stop  and                                                                    
     wait for  every expenditure to be  approved in advance.                                                                    
     We  can't even  always do  that internally,  because we                                                                    
     deal in a business  that is fraught with uncertainties,                                                                    
     and  we  often  have  to  react  quickly.  We  have  to                                                                    
     authorize   our  line-level   managers  to   make  many                                                                    
     spending  decisions  on  the   spot,  and  there  would                                                                    
     absolutely be no  time for an external  review. When we                                                                    
     encounter something  while drilling or  operating wells                                                                    
     and  facilities,  we  have to  handle  it  immediately.                                                                    
     Secondly,  no matter  how  you look  at  it, any  money                                                                    
     spent by industry costs industry  far more than any tax                                                                    
     deduction or  credit. So no  prudent oil  company wants                                                                    
     to spend  one more dollar  than is necessary.  And keep                                                                    
     in mind that under  the current existing process, every                                                                    
     expenditure is  actually reviewed by the  DOR after the                                                                    
     fact. No deductions or credits  are allowed if they are                                                                    
     not  in compliance  with current  regulations. So  this                                                                    
     proposed pre-approval process  would provide zero added                                                                    
     value to  the State, it  would require a  huge increase                                                                    
     in State  staff, and it  would delay projects. It  is a                                                                    
     lose-lose proposition.                                                                                                     
5:43:28 PM                                                                                                                    
Mr. Johnson moved  to slide 13 and 14 and  continued to read                                                                    
from prepared remarks:                                                                                                          
     Paramount to  BlueCrest and other smaller  companies in                                                                    
     the  state is  payment  of the  tax  credits that  have                                                                    
     already  been   earned  and  are   now  owed.   We  now                                                                    
     understand  that  you  may decide  to  change  or  even                                                                    
     eliminate  the tax  credit incentives  going forward  -                                                                    
     but please  at least honor the  state's commitments for                                                                    
     the amounts that have already been earned.                                                                                 
     So  to wrap  up, I'd  like to  re-emphasize the  future                                                                    
     potential   wealth  this   state   can   have  if   the                                                                    
     competitive economic environment  is done right. Alaska                                                                    
     is a  land of tremendous undeveloped  potential. I urge                                                                    
     you  to encourage  growth to  realize the  state's true                                                                    
     potential. Let's  all work  together to  wisely develop                                                                    
     and grow Alaska's long term value.                                                                                         
5:44:37 PM                                                                                                                    
Vice-Chair Gara  appreciated Mr. Johnson's  presentation. He                                                                    
understood  Mr. Johnson  knew about  the state's  $3 billion                                                                    
deficit, that  there was no  tax on  oil in Cook  Inlet, and                                                                    
that the state  owed close to $1 billion in  tax credits. He                                                                    
asked him  what the state should  do in terms of  paying the                                                                    
tax credits.                                                                                                                    
Mr. Johnson  offered that the  state should do  something to                                                                    
pay the  tax credits  even if  only a  portion was  paid. He                                                                    
stated  it was  not so  important that  the company  receive                                                                    
everything it  was owed immediately,  but whatever  it could                                                                    
get  was better  than nothing.  Additionally, he  noted that                                                                    
Alaska  had  money  in   savings;  however,  he  recommended                                                                    
against spending the money if it  would be lost and gone. He                                                                    
advised it was  a very careful decision to make  in terms of                                                                    
how to invest. He continued  that the state was investing in                                                                    
the future through  its tax program. He believed  it was key                                                                    
to ensure the future was positive.                                                                                              
Representative  Wilson  wondered  if certain  projects  were                                                                    
halted if tax credits were not paid.                                                                                            
Mr. Johnson  responded that BlueCrest had  enough money from                                                                    
its investors  to finish  the first  well and  almost finish                                                                    
the second well. He detailed that  if the company had all of                                                                    
the credits  it was owed  by the end  of the current  year -                                                                    
roughly another $100 million -  it would have the ability to                                                                    
continue drilling.  He elaborated  that there were  20 wells                                                                    
the company  could drill  - it could  be drilling  wells for                                                                    
years.  However, if  BlueCrest did  not receive  any payment                                                                    
for its credits  the board would likely have  to borrow more                                                                    
money to  enable completion of  the second well.  After that                                                                    
point,  the board  had not  approved continued  drilling. He                                                                    
explained  it would  be necessary  to determine  alternative                                                                    
ways to  finance the future.  He concluded that the  oil was                                                                    
there and  the company had  a great  team; he would  hate to                                                                    
have to shut down operations.                                                                                                   
Representative Wilson  asked if  Mr. Johnson meant  that the                                                                    
company  would  be forced  to  lay  people  off or  to  stop                                                                    
advancing construction.                                                                                                         
Mr. Johnson  clarified that BlueCrest was  not talking about                                                                    
laying  off  its  production  people, but  it  may  need  to                                                                    
temporarily shut down the drilling  program at some point in                                                                    
the future.  He specified  that if  drilling was  shut down,                                                                    
the  individuals currently  working in  that area  would not                                                                    
have a job for a while.                                                                                                         
Co-Chair Foster  thanked Mr.  Johnson for  his presentation.                                                                    
He  indicated that  the  committee would  take  a 10  minute                                                                    
5:49:22 PM                                                                                                                    
AT EASE                                                                                                                         
6:04:26 PM                                                                                                                    
PAT GALVIN,  CHIEF COMMERCIAL  OFFICER and  GENERAL COUNSEL,                                                                    
GREAT  BEAR PETROLEUM,  noted that  he was  the first  North                                                                    
Slope  exploration company  to testify  on the  bill and  to                                                                    
provide perspective on the playing  field and the balance of                                                                    
tax impacts on incumbents  versus new companies. He provided                                                                    
a  PowerPoint presentation  titled  "House  Finance HB  111"                                                                    
dated  March  22,  2017  (copy  on  file).  He  intended  to                                                                    
distinguish between  companies with current  production that                                                                    
were  able  to  offset   their  expenditures  against  their                                                                    
revenue  versus  new  companies without  revenue  that  were                                                                    
incurring losses until production  began. He addressed slide                                                                    
2 and relayed that the bill  did not work for new companies.                                                                    
He detailed  it abandoned  the long standing  state interest                                                                    
of encouraging new  companies to invest in  the North Slope.                                                                    
The  bill reduced  the incentive  for investment  and tilted                                                                    
the  playing field  and disproportionately  treated the  new                                                                    
companies  poorly in  relation to  the same  investment that                                                                    
may be made  by an incumbent company. The  bill also treated                                                                    
new companies  very differently  and negatively  in relation                                                                    
to incumbents.                                                                                                                  
Mr.  Galvin began  by addressing  the investment  aspect. He                                                                    
intended to  speak to  how investment  made by  an incumbent                                                                    
was  treated under  the current  tax system  and how  it was                                                                    
treated for  a new company.  He addressed a  situation where                                                                    
an incumbent made  a discovery and had to  invest $1 billion                                                                    
to  make   the  new   project  work  (slide   3).  Following                                                                    
investment,  the   company  could  immediately   deduct  the                                                                    
expenditure  from  its  revenue.  The  deduction  meant  the                                                                    
company  would  save  $350  million  on  its  tax  bill  (35                                                                    
percent).  He clarified  that  the 35  percent  was not  the                                                                    
company's effective  tax rate.  He detailed that  because SB
21  was  different  than  its  predecessor,  the  impact  of                                                                    
investment was different. He specified  that because the per                                                                    
barrel credit came after the  tax calculation, the amount of                                                                    
investment  an   incumbent  made   received  a   35  percent                                                                    
reduction in its tax bill.                                                                                                      
Mr. Galvin  spoke to  slide 4 and  explained that  under the                                                                    
status quo a  new company that made a  $1 billion investment                                                                    
in  a project  would  generate  a $1  billion  loss. The  35                                                                    
percent NOL credit was intended  to provide the company with                                                                    
an equivalent  economic value to  the savings  the incumbent                                                                    
received. Under  the status  quo, they  did not  receive the                                                                    
same economic value because the  new entrant was not able to                                                                    
immediately recover  a savings. The company  generated a tax                                                                    
credit  certificate and  received  $35 million  per year  in                                                                    
payments   from  the   state  (under   current  law)   until                                                                    
production  began.   If  the  company  decided   to  take  a                                                                    
significant reduction  in the value  of its  certificate, it                                                                    
could  receive a  total  of $61  million.  Once the  company                                                                    
began  production it  would begin  to  use the  certificates                                                                    
against its  tax bill. He  explained that the  new company's                                                                    
cost of  capital was fairly  significant and it was  a risky                                                                    
business  to be  in. He  furthered that  people expected  to                                                                    
receive a decent return on  their investment and the company                                                                    
was  missing out  on its  ability  to use  $350 million  for                                                                    
years to come.  He noted that the amount  also be diminished                                                                    
in value significantly  - in five years' time  the value may                                                                    
be worth only 60 percent of its original amount.                                                                                
6:10:51 PM                                                                                                                    
Mr. Galvin  turned to slide  5 and explained that  under the                                                                    
current version of  HB 111 the new company was  only able to                                                                    
take half of  the investment as a loss. He  detailed that in                                                                    
the  example  he  had provided  the  $1  billion  investment                                                                    
became a  $500 million  carry forward  loss. When  a company                                                                    
eventually  had production,  revenue was  deducted from  its                                                                    
eventual tax  obligation and  would end  up with  a combined                                                                    
aggregate of  $175 million value. With  the uplift currently                                                                    
in the  bill, the $175  million value was preserved  to some                                                                    
extent.  Under the  proposed bill,  an  incumbent making  an                                                                    
investment would  immediately receive a $350  million value,                                                                    
while a new  company making the same investment  would get a                                                                    
$175 million value.                                                                                                             
Mr. Galvin moved to slides 6  and 7 and addressed a scenario                                                                    
where an incumbent  and new company are 50/50  partners on a                                                                    
$2  billion project,  with each  investing  $1 billion.  The                                                                    
incumbent company  had to spend  $650 million for  its half,                                                                    
whereas the  new company had  to spend $825 million  for its                                                                    
half. He observed  that clearly the scenario  was unfair. He                                                                    
continued that  the new company would  feel disadvantaged in                                                                    
the system. He  remarked that the message would  be that the                                                                    
state would prefer incumbents spend  on projects rather than                                                                    
new companies.  Second, the commercial reality  was that the                                                                    
disparate economic value for partners  was a problem because                                                                    
the  partners  would  not  reach  an  agreement  on  how  to                                                                    
proceed. The  partners would be fighting  and negotiating on                                                                    
how to  deal with the  disparate treatment. He  concluded it                                                                    
would either slow  down or doom projects  that may otherwise                                                                    
go forward if companies were being treated equally.                                                                             
Mr. Galvin  sited a third observation  about the partnership                                                                    
scenario. There  would most likely be  arbitrage between the                                                                    
incumbent versus  the new company  related to  the project's                                                                    
value.  He  explained that  under  the  situation a  company                                                                    
would see  the scenario as  an advantage and would  offer to                                                                    
buy  out   the  other  company.  The   incumbents  would  be                                                                    
economically incentivized  to buy out their  partner because                                                                    
they could make  an immediate uplift in value  by buying out                                                                    
the partner for  a designated amount. He  explained that the                                                                    
incumbent  would  receive an  immediate  write  off. He  had                                                                    
heard concern from  a number of legislators  and others that                                                                    
the NOLs  were unaffordable  for the  state -  the companies                                                                    
would not be  paying taxes for years after  the project went                                                                    
into production. He agreed that  it may be true depending on                                                                    
the  economics  of  the project,  but  eventually  once  the                                                                    
company was able to recover its  cost, it would begin to pay                                                                    
taxes  on  profits.  He  explained   if  the  incumbent  was                                                                    
incentivized to  buy out the  new company, it  would receive                                                                    
an  immediate  tax  break  and   the  state  would  see  the                                                                    
immediate  reduction  in  tax receipts.  He  reiterated  the                                                                    
reasons  the impact  was detrimental  to the  state in  many                                                                    
6:16:31 PM                                                                                                                    
Mr.  Galvin  spoke  to  the   changes  provided  in  HB  111                                                                    
regarding  the small  producer credit  (slide  9). He  noted                                                                    
there had  been significant  talk about hardening  the [tax]                                                                    
floor], but  one of the  things that had not  been discussed                                                                    
was  the substantial  change it  made in  the way  the state                                                                    
addressed  small producers  trying  to get  up  to speed  on                                                                    
production. He explained that the  state had set in place an                                                                    
opportunity for companies who qualified  as a small producer                                                                    
to  receive a  non-transferrable credit  that did  not carry                                                                    
forward and was  only available to reduce taxes  in a single                                                                    
year. He continued that it  provided a cushion for companies                                                                    
operating  on the  margin  to bring  on  new production.  He                                                                    
explained  that in  the  aggregate  it did  not  have a  big                                                                    
impact  on the  state's  bottom line;  it  was also  winding                                                                    
down. The ability to become  eligible for the small producer                                                                    
credit had expired  the previous year. The credit  had a 10-                                                                    
year life and  most of those qualifying  had become eligible                                                                    
early in the 10-year period  and were currently near the end                                                                    
of  their   eligibility  period.  He  expounded   that  many                                                                    
companies  had  invested  and   become  producers  with  the                                                                    
expectation the  credit would be  available to them  as they                                                                    
go  forward.  He underscored  that  the  elimination of  the                                                                    
ability for a company to  use the credit against the minimum                                                                    
tax meant  essentially eliminating the value  of the credit.                                                                    
He  noted  that  swamping  the   economics  for  many  small                                                                    
companies was not in the state's interest.                                                                                      
6:18:42 PM                                                                                                                    
Mr. Gavin  scrolled to slide  10. He remarked that  a couple                                                                    
of bill  sections dealt with preapproval  of expenditures by                                                                    
DNR.  He pointed  out that  the provisions  only applied  to                                                                    
those costs that were expected  to become NOLs, meaning that                                                                    
only  new companies  would get  "this kind  of scrutiny"  of                                                                    
their   investment  decisions.   He  added   there  was   no                                                                    
information  on what  that scrutiny  would be.  He explained                                                                    
that  the  provisions  did  not   come  across  as  treating                                                                    
companies  on   an  equal  basis.   Similarly,  transparency                                                                    
sections in the bill only  dealt with NOL credits. He stated                                                                    
that  as effective  in the  particular bill  it was  "really                                                                    
kind of a nothing" because  it only applied to credits going                                                                    
away  at  the  same   time  the  transparency  would  become                                                                    
effective.  However,  if the  provision  was  moved over  to                                                                    
follow  the NOL  carry  forward it  would mean  transparency                                                                    
would be required only for  new companies. He observed there                                                                    
was not  much conversation  about the credits  taken against                                                                    
production  taxes, but  there  was  much conversation  about                                                                    
credits  paid  out  in  cash  payments.  He  stated  it  was                                                                    
strictly  a   function  of  the   way  the   budget  worked;                                                                    
therefore, the  public focused on  the cash  credit payments                                                                    
as the problem. He reasoned that  if the state ended up with                                                                    
a transparency that only exposed  new companies, it was what                                                                    
the  public  policy  would tinker  around  with,  which  was                                                                    
unfair and  was not  in the  state's long-term  interest. He                                                                    
encouraged treating  new companies equivalent  to incumbents                                                                    
and encouraging new companies to invest in Alaska.                                                                              
6:22:40 PM                                                                                                                    
Mr. Gavin  spoke to  what he understood  to be  the original                                                                    
intent of the bill. He believed  the intent had been to deal                                                                    
with the  cash credits  particularly with the  potential for                                                                    
new development projects coming  down the line. He addressed                                                                    
slide  12  titled "End  Cash  Repurchase  - Pay  Outstanding                                                                    
Certificates:  A  Bill  Explorers and  New  Producers  Could                                                                    
Support."  He  believed  there  seemed  to  be  a  potential                                                                    
opportunity  for   a  workable  bill:  a   bill  that  would                                                                    
eliminate  NOL  credits  and associated  cash  payments.  He                                                                    
noted the  dry hole  scenario had  caused confusion,  but he                                                                    
believed  it made  sense.  He  detailed the  idea  was if  a                                                                    
company came into the state,  drilled a couple of wells, was                                                                    
unsuccessful, and exited the state,  it should have the same                                                                    
economic value  of its  investment as  if it  was eventually                                                                    
achieving some production. He believed  there should be some                                                                    
equivalence to  the company's  investment value  versus what                                                                    
an incumbent or a new  company going to production would be.                                                                    
He  believed that  as originally  proposed  the new  company                                                                    
would have to drill its wells  and if it was unsuccessful it                                                                    
would  be  responsible  for paying  vendors  and  giving  up                                                                    
leases and then it would  be treated fairly along with other                                                                    
companies by  receiving a  check for  its risk.  He remarked                                                                    
that no  one would  testify the  current provision  was good                                                                    
for  them because  none of  them planned  to be  leaving the                                                                    
state. He  underscored that from the  state's perspective it                                                                    
made sense to try to attract new companies.                                                                                     
Mr. Gavin  reasoned that  if the  credits and  cash payments                                                                    
associated  with  NOLs were  eliminated,  it  would end  the                                                                    
"cash bleed" the  state was concerned about.  There would no                                                                    
longer be an issue of the  state having to pay cash payments                                                                    
as companies  moved towards development of  new projects and                                                                    
the loss  of value from  the status quo would  be relatively                                                                    
small given that current tax  credits were not paid out very                                                                    
quickly; the  investment from small  companies would  not be                                                                    
slowed down, there would be  an equivalence. He continued to                                                                    
address  a bill  explorers and  new producers  could support                                                                    
(slide 12):                                                                                                                     
   · Allow 100 percent carry-forward, and annual uplift,                                                                        
     for net operating losses                                                                                                   
        o Treats New Companies in a manner equivalent to                                                                        
   · Commit to repay all outstanding cashable tax credit                                                                        
     certificates within two years                                                                                              
        o End the current repayment uncertainty that is                                                                         
          threatening the survival of many new companies to                                                                     
   · Eliminate remaining HB111(RES) sections                                                                                    
Mr.  Gavin  elaborated on  the  items  listed on  slide  12.                                                                    
Allowing 100  percent carry forward to  maintain equivalence                                                                    
with incumbents. The  annual uplift was not  a giveaway, but                                                                    
simply captured  the value of the  current expenditure until                                                                    
it was actually realized.  He explained that the expenditure                                                                    
needed to grow over time in  order to recognize the value of                                                                    
a deduction was worth much less  at present than it would be                                                                    
in  five   years.  He  specified  that   explorers  and  new                                                                    
producers   had  creditors   expecting  repayment   and  the                                                                    
companies did not  have the ability to repay  them until the                                                                    
state  did. The  items listed  on  slide 12  would save  the                                                                    
state  cash  payments  and  would  keep  explorers  and  new                                                                    
producers on level footing with incumbents.                                                                                     
6:27:02 PM                                                                                                                    
Mr.  Gavin concluded  that the  bill was  flawed and  needed                                                                    
amending.  Great  Bear  wanted  to see  that  if  the  state                                                                    
eliminated the  cash payment obligations going  forward that                                                                    
it  was tied  to a  recognition it  needed to  pay back  the                                                                    
credits  that were  past due.  He believed  it needed  to be                                                                    
laid  out  more  clearly  than "nebulous  language"  in  the                                                                    
current bill about  being associated with a  fiscal plan. He                                                                    
remarked  that  no  one knew  what  that  language  actually                                                                    
Vice-Chair  Gara expressed  confusion about  the uplift  and                                                                    
noted  that the  state was  not inflation  proofing anything                                                                    
including  schools.  He  discussed  that  under  the  uplift                                                                    
provision the state paid a  credit and 8 percent interest on                                                                    
top  of that.  He wondered  about  a 2  percent interest  as                                                                    
something  closer  to  the  inflation  rate  and  the  "real                                                                    
growth" of money.                                                                                                               
Mr. Gavin  clarified that it  was not a credit.  He detailed                                                                    
that a  loss was carried  forward to eventually  be deducted                                                                    
against   future   revenue.   He  explained   that   current                                                                    
incumbents  received an  immediate 35  percent deduction  in                                                                    
the same  year. The intent  was to make  the value to  a new                                                                    
company  somewhat equivalent.  The  loss was  allowed to  be                                                                    
carried forward and if a  company had a 35 percent deduction                                                                    
the following  year given that its  money cost significantly                                                                    
more  than the  interest rate  presented -  the net  present                                                                    
value  of the  deduction  would be  reduced  because of  the                                                                    
company's general  cost of capital. The  uplift was intended                                                                    
to  mitigate the  issue -  to  recognize that  a 35  percent                                                                    
deduction was worth  less in the future than it  would be if                                                                    
taken at present. He elucidated  that it was not inflation -                                                                    
it was about the value of money to the company.                                                                                 
Vice-Chair Gara  knew that  Great Bear  had been  around for                                                                    
some time  and he recalled  six or seven years  earlier when                                                                    
the company had  announced there may be a big  shale play on                                                                    
the  North  Slope.  He  asked about  progress  made  on  the                                                                    
exploration.  He  disagreed with  the  idea  that the  state                                                                    
should  make  things equal  by  increasing  a new  entrant's                                                                    
deduction to make  it as overly generous  as the incumbent's                                                                    
deduction. He did not believe  a company paying a 10 percent                                                                    
profits tax should receive a 35 percent deduction.                                                                              
Mr.  Gavin responded  to Vice-Chair  Gara's second  question                                                                    
regarding the size of the  deduction. He recalled discussing                                                                    
with the  committee in the past  that it set the  amount. He                                                                    
advised that if the legislature  wanted to reduce the amount                                                                    
of the  deduction it should not  take Great Bear down  to 50                                                                    
percent because  it believed everyone  should be  reduced 20                                                                    
percent. He  stated it was  not good policy. The  purpose of                                                                    
the uplift  was to  treat companies equally.  He recommended                                                                    
finding  where  the  legislature was  comfortable  and  keep                                                                    
companies all even  by including the uplift. He  moved on to                                                                    
Vice-Chair  Gara's first  question and  answered that  Great                                                                    
Bear still  believed a  shale play could  work on  the North                                                                    
Slope.  It believed  that the  economics for  a conventional                                                                    
play  would work  much better,  particularly with  regard to                                                                    
initial investment. For the last  four years the company had                                                                    
focused  its   search  on   more  conventional   plays.  Its                                                                    
exploration  had  resulted in  a  number  of very  promising                                                                    
prospects the  company intended to  drill in the  next year.                                                                    
Based on  a successful conventional development  project the                                                                    
associated  infrastructure would  support an  unconventional                                                                    
or shale  play to  follow. He explained  that they  were all                                                                    
stacked on top of each  other; therefore, it was possible to                                                                    
follow from  the same pads  and potentially the  same wells.                                                                    
He  was as  optimistic  about finding  economic  oil on  the                                                                    
North Slope  as he had  been throughout his time  with Great                                                                    
Bear  and   before.  The  issues  it   faced  were  external                                                                    
including oil  prices and potential  changes to  the state's                                                                    
tax policy and credits.                                                                                                         
6:33:31 PM                                                                                                                    
Co-Chair Seaton asked whether  extending the capital expense                                                                    
of incumbents  to a  seven-year depreciation  schedule would                                                                    
even  the playing  field and  prevent arbitrage  between the                                                                    
incumbents and new companies.                                                                                                   
Mr.  Gavin  asked  for clarification  on  Co-Chair  Seaton's                                                                    
Co-Chair Seaton explained that the  idea of giving a capital                                                                    
expenditure write off  of 100 percent in the  first year for                                                                    
legacy  companies.   He  continued  that   normally  capital                                                                    
projects had to be depreciated  over time. He continued that                                                                    
instead of giving new companies  a seven-year uplift, legacy                                                                    
companies  could be  required  to  depreciate their  capital                                                                    
expenditures over  seven years.  He believed it  would equal                                                                    
out the  incumbents and new  players and would not  cost the                                                                    
state  more   money.  He  believed  Mr.   Gavin  wanted  new                                                                    
companies and incumbents  treated equivalently. He explained                                                                    
that he  believed it  was very rich  to allow  incumbents to                                                                    
write off 100 percent of their  cap-ex on a severance tax in                                                                    
a single year.  He noted that it cost the  state quite a bit                                                                    
of  money.  He  was  trying  to  determine  whether  it  was                                                                    
possible to  make things more equivalent  for incumbents and                                                                    
new  companies  instead of  paying  more  on an  uplift.  He                                                                    
remarked that many locations  made companies depreciate cap-                                                                    
ex, but Alaska did not.  Alternatively, he wondered if there                                                                    
was another mechanism that would level the playing field.                                                                       
Mr.   Gavin  indicated   that  what   Co-Chair  Seaton   was                                                                    
suggesting  would  be a  way  of  mitigating the  difference                                                                    
between the  incumbents and exploration  companies; however,                                                                    
the change  would create a  greater economic hurdle  for new                                                                    
projects to come on board.                                                                                                      
Co-Chair  Seaton   relayed  that  one  of   the  things  the                                                                    
committee had been  trying to do in the previous  year in HB
247 was  to address production tax  credits or expenditures.                                                                    
He  detailed there  had been  efforts to  limit the  state's                                                                    
exposure -  for example,  in relation  to a  production tax,                                                                    
perhaps  the state  should  only give  the  credits when  an                                                                    
approved development plan was in  place. He noted there were                                                                    
a number  of situations where companies  had conducted large                                                                    
seismic  projects, but  never went  into  production or  did                                                                    
exploration that  may result  in a  project 20  years later.                                                                    
He asked  if there  was any  way the  state could  limit its                                                                    
exposure of  costs to  the state  related to  production tax                                                                    
carry forward  offset. He mentioned the  preapproval process                                                                    
by DNR.                                                                                                                         
Mr. Gavin  thought that what Co-Chair  Seaton was describing                                                                    
had already  been resolved by  HB 247 and the  expiration of                                                                    
the  exploration  incentive  credits. He  detailed  that  at                                                                    
present  there  were  only  the NOL  credits  or  NOL  carry                                                                    
forward  losses.  There  was  no  business  model  he  could                                                                    
imagine where  a company would undertake  such a significant                                                                    
expenditure  unless  they  intended  to  get  some  sort  of                                                                    
revenue  out  of production  in  the  future. There  was  no                                                                    
ability  to  monetize,  profit,   or  return  any  money  to                                                                    
investors  through  that  kind  of  a  system.  One  of  the                                                                    
problems with the bill's current  language pertaining to DNR                                                                    
it  failed  to  establish   a  system  that  encouraged  new                                                                    
investment.  He  spoke  to  the  importance  of  encouraging                                                                    
companies to  come in and  take risks, drill wells  that may                                                                    
fail,  and shoot  seismic  to learn  about  the geology  and                                                                    
identify   potential  areas   for  future   exploration  and                                                                    
production.  He continued  that investment  would dry  up on                                                                    
the  front   end  if  the   state  only  provided   a  lease                                                                    
expenditure for  situations where a discovery  had been made                                                                    
and a  company was moving towards  production. He elaborated                                                                    
that it  was too risky and  the economics were not  there to                                                                    
justify that  kind of  risk exposure  for new  companies. He                                                                    
believed the state had come a  long way in terms of what was                                                                    
seen during  the heat of  the post-SB  21 uplift in  the NOL                                                                    
rate  stacked  on  top  of  either  Cook  Inlet  credits  or                                                                    
exploration incentive  credits where it had  been looking at                                                                    
75  to 85  percent of  costs being  covered compared  to the                                                                    
system going  forward. The system  moving forward  allowed a                                                                    
company to  carry a  35 percent  loss forward.  He explained                                                                    
that it would result in  different behavior. He believed the                                                                    
things described by Co-Chair Seaton  was no longer likely to                                                                    
be pursued by anyone.                                                                                                           
6:42:13 PM                                                                                                                    
Representative Guttenberg surmised with  the crash of prices                                                                    
and  the state's  inability to  pay  credits the  industry's                                                                    
perspective was that the situation  had entirely changed. He                                                                    
referred to NOLs and other  items. He asked what had changed                                                                    
and what  the state needed  to respond to "that's  still out                                                                    
Mr.  Gavin  replied  that  the  issue  had  resolved  itself                                                                    
because multiple things  had timed out and HB  247 had ended                                                                    
the Cook  Inlet credit. There  had been a  two-year increase                                                                    
in the NOL credit rate from  35 percent up to 45 percent and                                                                    
exploration incentive  credits had  been stacked on  the NOL                                                                    
credit. Both items had expired.  The only remaining item was                                                                    
the 35 percent credit or  the carry forward loss. That level                                                                    
of state participation  would not alter behavior  in the way                                                                    
the state may have seen in the past.                                                                                            
6:44:07 PM                                                                                                                    
Co-Chair Seaton suggested  that if the 35  percent credit or                                                                    
the  carry  forward were  not  going  to alter  behavior  he                                                                    
reasoned that the state should not be spending the money.                                                                       
Mr. Gavin  corrected his prior statement.  He clarified that                                                                    
he  believed   Co-Chair  Seaton  had  been   speaking  about                                                                    
imprudent  investment decisions  and  finding a  way to  cut                                                                    
them off. He detailed that  the motivating factors that lead                                                                    
to  the  imprudent decisions  were  no  longer present.  The                                                                    
current status quo would in  no way incentivize that kind of                                                                    
behavior. The  state would  get people  looking for  oil who                                                                    
were   making  prudent   investments  associated   with  the                                                                    
likelihood that  the investment would  result in  future oil                                                                    
production - otherwise those companies  would be out tens to                                                                    
hundreds  of  millions  of   dollars.  The  situation  would                                                                    
motivate good decisions on its own.                                                                                             
6:47:03 PM                                                                                                                    
PAT  FOLEY,  SVP  ALASKA   RELATIONS,  CAELUS  ENERGY,  LLC,                                                                    
mentioned  the experts  that had  testified  before him.  He                                                                    
expressed his  intent to address why  Caelus mattered, about                                                                    
its production  dilemma, and in  generalities about  HB 111.                                                                    
He  underscored that  tax policy  mattered. The  legislature                                                                    
decided policy  and the industry  decided its  own behavior.                                                                    
He encouraged  the legislature to incentivize  the behaviors                                                                    
it would like to see.  He provided a PowerPoint presentation                                                                    
titled "Caelus Activity Update:  House Finance Committee, HB
111" dated March 22, 2017.                                                                                                      
Mr.  Foley  began  on  slide  2  and  addressed  why  Caelus                                                                    
mattered.  He relayed  that Caelus  was an  operator on  the                                                                    
North  Slope. The  company operated  the Oooguruk  field and                                                                    
made  about 14,000  barrels per  day  for a  total of  about                                                                    
28,000 million  barrels of oil (Pioneer  and Caelus combined                                                                    
was  more  than  $2  billion).   The  company  had  recently                                                                    
sanctioned its  Nuna project (shown  in right on slide  2) -                                                                    
the project  was currently a  large gravel pad.  The company                                                                    
had  also bought  about 350,000  acres to  the east  and the                                                                    
previous  year it  had  drilled  two successful  exploration                                                                    
discovery wells in Smith Bay.                                                                                                   
6:49:20 PM                                                                                                                    
Mr. Foley addressed the Nuna project and read from slide 3:                                                                     
     Nuna Oil Development                                                                                                       
     · Caelus holds 100 percent interest                                                                                        
     · 2 wells confirm reservoir deliverability                                                                                 
     · 2,800 BOPD flowed from 1st Torok well                                                                                    
     · 100 - 150 + MMBO 2P reserves                                                                                             
     · 20,000 to 25,000 BOPD peak production                                                                                    
     · Completed 22-acre NDS drill pad & road                                                                                   
     · 600,000 CY gravel / 27,000 loads                                                                                         
     · Economic Impact                                                                                                          
     · 300 FTE contractor construction /drilling jobs                                                                           
     · $2.2 Bn in royalties and taxes                                                                                           
     · Next Steps                                                                                                               
     · Investor Confidence: Legislature                                                                                         
     · Modules / Flow lines                                                                                                     
Mr. Foley elaborated  on slide 3. Caelus hoped  to see first                                                                    
oil as soon as  late 2018 - to make that  happen it would be                                                                    
necessary to commit to the  project, purchase line pipe, and                                                                    
install flow lines the current  winter. However, the company                                                                    
was  hesitant to  take on  the activity  because of  low oil                                                                    
prices  and due  to uncertainty  in the  oil tax  regime. He                                                                    
pointed to the Nuna financials  reflected in the lower right                                                                    
table on slide  3. He explained that the  figures were based                                                                    
on an  oil price of  $70 per barrel; therefore,  the numbers                                                                    
would not be  as high in the current  price environment. The                                                                    
company was working  hard to go forward with  the project if                                                                    
the reality was closer to oil  prices of $60 per barrel. The                                                                    
numbers  showed that  the  company had  over  $2 billion  in                                                                    
future revenues that  would go to the state  with about $700                                                                    
million in production tax, $500  million in net profit share                                                                    
payments, and $1 billion in  royalty payments. He noted that                                                                    
the question  was always asked  about what was  received [by                                                                    
the state]  for the  tax credits. He  agreed that  the state                                                                    
was  helping  the  industry  with  tax  credits.  Under  the                                                                    
current law  the Nuna project  would continue to  accrue and                                                                    
earn about $150 million in  tax credits. He detailed that if                                                                    
the  state  helped  contribute about  $150  million  and  in                                                                    
exchange it  returned over $2 billion  - it was more  than a                                                                    
15  times multiple  on the  investment.  He recognized  that                                                                    
perhaps a  more fair  way to  look at  the scenario  was the                                                                    
state's  return on  all  of its  tax  credit investment  was                                                                    
closer to a multiple of 10.                                                                                                     
6:51:34 PM                                                                                                                    
Mr.  Foley provided  an update  on the  Smith Bay  discovery                                                                    
(slide  4)  located  in the  National  Petroleum  Reserve  -                                                                    
Alaska  (NPRA).  He  emphasized   that  Smith  Bay  was  the                                                                    
discovery of  a very substantial resource.  There were about                                                                    
6 billion barrels of  oil on its leases - it  could be up to                                                                    
10 billion barrels. He detailed  that the discovery included                                                                    
an  area  of  over  300  square miles,  the  two  wells  had                                                                    
confirmed a gross interval of  about 1,000 feet in thickness                                                                    
and the  net sand was about  200 feet. He furthered  that it                                                                    
was   a  tight   reservoir  and   to  develop   the  project                                                                    
commercially  it would  be necessary  to expend  substantial                                                                    
capital  and to  drill numerous  wells. He  stated that  the                                                                    
"thing that saves us out  here" was the oil they discovered,                                                                    
which  was about  43  degree gravity  oil  (about twice  the                                                                    
quality  of the  average  Prudhoe Bay  oil). He  underscored                                                                    
that the  oil was low viscosity  and high mobility -  it was                                                                    
possible to  produce more  oil due  to its  quality, through                                                                    
poor quality rocks.                                                                                                             
Mr.  Foley continued  to address  slide  4. He  acknowledged                                                                    
that  Caelus had  significant work  to do  on the  Smith Bay                                                                    
project.  He  noted  that  "these   are  not  reserves."  He                                                                    
clarified that  resource was defined  as oil in  the ground,                                                                    
while  reserves were  economically recoverable.  The company                                                                    
planned to  drill another  appraisal well  in the  winter of                                                                    
2018, which would  be a lateral well of about  2,000 feet in                                                                    
length. The  well would  be fracture  stimulated and  a flow                                                                    
test would  be conducted. He clarified  that the exploration                                                                    
activity  was taking  place  out on  the  Beaufort Sea.  The                                                                    
company  would spend  well over  $100 million  to drill  the                                                                    
well.  Following  the  work  the  company  would  begin  its                                                                    
environmental  regulatory   process  for   an  environmental                                                                    
impact statement. The company hoped  to be successful on the                                                                    
project and  hoped to have  first oil sometime  around 2025.                                                                    
If  the project  came to  fruition it  would represent  more                                                                    
than 200,000  barrels of day into  the Trans-Alaska Pipeline                                                                    
System (TAPS), thousands  of oil field jobs,  and nearly $28                                                                    
billion in total revenues to  the state. The total came from                                                                    
$15  billion  in  royalty  payments,   $10  billion  in  tax                                                                    
payments,  and  $3  billion  in   ad  valorem  payments.  He                                                                    
reiterated that the numbers reflected  oil prices of $70 per                                                                    
barrel. He added that due to  the remoteness of the area and                                                                    
the high cost  associated it could take oil  prices close to                                                                    
$70 per barrel for the project to move forward.                                                                                 
6:54:28 PM                                                                                                                    
Mr.  Foley  summarized  potential  Caelus  contributions  on                                                                    
slide  5. Contributions  could include  more than  2 billion                                                                    
barrels of additional production  into TAPS, more than 2,000                                                                    
jobs  during the  construction and  drilling phase  at Smith                                                                    
Bay, and total payments of over $34 billion to the state.                                                                       
Mr. Foley turned to slide 6  and addressed what he termed as                                                                    
Alaska's  production dilemma.  The  slide  included a  graph                                                                    
showing  Alaska  oil  production  from  2000  to  2040.  The                                                                    
production actual  production decline was from  2000 to 2017                                                                    
was  shown in  blue  and the  projected  decline for  future                                                                    
years was shown  in gray. He reminded the  committee that in                                                                    
2000  TAPS had  more  than  1 million  barrels  per day.  At                                                                    
present  production was  only half  that amount  at slightly                                                                    
more  than 500,000  barrels per  day. He  pointed to  a pink                                                                    
horizontal  bar on  the graph  representing  where the  TAPS                                                                    
minimum  throughput  became   challenged  at  about  300,000                                                                    
barrels per day.  He remarked that he had spoken  to a group                                                                    
with  Admiral Tom  Barrett  [president  of Alyeska  Pipeline                                                                    
Service Company]  in Fairbanks the previous  day. He relayed                                                                    
that  Admiral   Barrett  had  reminded  everyone   that  the                                                                    
industry was  very good at  solving problems, but  there was                                                                    
not yet a technical  solution to continue production through                                                                    
TAPS at  less than 300,000  barrels per day.  The collective                                                                    
goal was  not to allow  throughput to decline  below 300,000                                                                    
barrels per  day. He pointed  to two  big ledges on  the far                                                                    
right of  the slide -  the lower  peak reflected all  of the                                                                    
known  projects   Caelus  was  not  a   part  of,  including                                                                    
Armstrong's  Pikka  project   and  ConocoPhillips'  work  at                                                                    
greater  Moose's  Tooth.  The  graph  did  not  include  the                                                                    
expanded success  Armstrong hoped  to enjoy  due to  its new                                                                    
wells drilled  in the current  year (including  Willow). The                                                                    
higher  light  blue  peak  reflected  Caelus's  contribution                                                                    
including Nuna,  Smith Bay  phase one  and two,  and hopeful                                                                    
exploration  success in  its  eastern  acreage, which  would                                                                    
bring throughput up to more than 1 million barrels per day.                                                                     
6:56:38 PM                                                                                                                    
Mr.  Foley  advanced  to  slide  7  and  quoted  Ken  Alper,                                                                    
[Director, Tax Division, Department of Revenue]:                                                                                
     "… elimination of the NOL would have made it harder                                                                        
     for independents to proceed with their projects"                                                                           
          Tax Director Ken Alper, Alaska Department of                                                                          
          Senate Resources Committee, February 1, 2017)                                                                         
Mr. Foley  elaborated that HB  111 did  not put more  oil in                                                                    
TAPS and it  did not create more jobs or  new investment. He                                                                    
continued to  address the slide and  provided several quotes                                                                    
by Rich Ruggiero [tax consultant to the legislature]:                                                                           
     Alaska: great rocks but high costs - "These risks need                                                                     
     to be offset by favorable tax features"                                                                                    
     "New players should be encouraged to increase activity                                                                     
     … they bring a fresh perspective"                                                                                          
     "Every regime, everywhere you go, allows, especially                                                                       
     with a development like Smith Bay,                                                                                         
     everyone who develops gets to deduct the cost of what                                                                      
     it took them to get that production                                                                                        
     from future revenues from that project. Every regime."                                                                     
     "To deny that would really move Alaska to the bottom                                                                       
     of the competitive scale. "                                                                                                
          Rich Ruggiero, Castle Gap Advisor                                                                                     
          Senate Resources Committee, various dates, 2017                                                                       
Mr. Foley expounded on the  slide. He agreed with an earlier                                                                    
statement  by Vice-Chair  Gara  that Alaska  was  not a  bad                                                                    
place to do business. He  shared that in his previous career                                                                    
he had  worked internationally and had  been responsible for                                                                    
evaluating  new  country  entries.  He  detailed  that  when                                                                    
evaluate the  risk it was  necessary to  consider government                                                                    
take, the  resource potential, how abundant  the contracting                                                                    
community was,  above ground risk,  and other.  He concluded                                                                    
that all in all Alaska was  a great place to do business. He                                                                    
continued  that  Alaska  had  attracted  companies  such  as                                                                    
Caelus,  Great Bear,  and Armstrong.  He  remarked that  the                                                                    
state  had  worked  feverishly   to  help  attract  the  new                                                                    
companies and he implored the  legislature to help keep them                                                                    
in  Alaska.   He  agreed  with   Mr.  Ruggiero   that  fresh                                                                    
perspective should be welcomed by the state.                                                                                    
6:59:27 PM                                                                                                                    
Mr. Foley  continued to  slide 8  titled "Alaska's  Future -                                                                    
Which slice  do you want?"  He clarified that the  slide did                                                                    
not show  a production forecast.  He asked members  to think                                                                    
of  the pie  charts shown  on the  slide as  a cartoon.  The                                                                    
upper left  quadrant showed the  piece of the pie  the state                                                                    
was  entitled to  in  Alaska on  average  under the  current                                                                    
system.  He detailed  that the  pie chart  reflected 500,000                                                                    
barrels per  day. The  blue portion  of the  chart reflected                                                                    
the state's share at 60 percent.  The pie chart on the upper                                                                    
right showed  the state's share  under HB 111 -  the state's                                                                    
portion  was bigger.  Under  an  alternative scenario  where                                                                    
production was  doubled the chart  on the lower  left showed                                                                    
the state's  portion of the pie  in a growth scenario  - the                                                                    
state's portion of the pie  would remain the same. The lower                                                                    
right pie chart depicted an  HB 111 scenario where the state                                                                    
would receive  a bigger pie and  a larger piece of  the pie.                                                                    
He understood it was rational  economic behavior, but he did                                                                    
not believe it  was a feasible solution. He  did not believe                                                                    
the   state  could   increase   taxes,   make  Alaska   less                                                                    
competitive, and still allow the pie to grow.                                                                                   
7:01:30 PM                                                                                                                    
Mr. Foley  moved to slide  9 remarked there  was significant                                                                    
conversation about  Alaska being entitled to  its fair share                                                                    
and  a question  about  what constituted  a  fair share.  He                                                                    
believed it was  the wrong question to ask.  He believed the                                                                    
question to ask  was how competitive the state  wanted to be                                                                    
and if  it was  seeing the activity  it wanted.  He reasoned                                                                    
that if  the state  was satisfied  with current  activity it                                                                    
was  fine. Alternatively,  he recommended  raising taxes  if                                                                    
there  was too  much activity  or finding  a way  to attract                                                                    
investment if there was too  little activity. He agreed with                                                                    
Mr. Galvin's  testimony that  there needed to  be a  way for                                                                    
the state to  make the payment to the  companies for credits                                                                    
they had earned.  Caelus had made investments  in good faith                                                                    
and hoped  the legislature could  find a way  to appropriate                                                                    
money to pay all of the  credits it had earned. He explained                                                                    
that   Caelus  was   continuing  to   strive  to   make  big                                                                    
investments,  which  it could  not  do  with its  money.  He                                                                    
specified  that   when  Caelus   went  to  the   market  for                                                                    
investment,  there   were  two   things  that   mattered  to                                                                    
investors: confidence and stability.  Any changes to the tax                                                                    
law impacted  stability. Additionally,  as long  as payments                                                                    
remained unpaid  it shook  investors' confidence  that their                                                                    
money  would   be  returned  if  they   invested  in  future                                                                    
Mr. Foley summarized that HB  111 would increase barriers to                                                                    
entry, it  would negatively impact new  developments, and it                                                                    
would make  Alaska less competitive for  new investments. He                                                                    
conceded  that  it may  generate  short-term  gains, but  it                                                                    
would have  a harmful effect  on the state's  fiscal health.                                                                    
He  stated the  bill  would not  attract future  investment,                                                                    
help  new developments  come online,  put  more oil  through                                                                    
TAPS, or put more Alaskans to  work. He shared a story about                                                                    
a  recent   visit  to  the   pipeline  training   center  in                                                                    
Fairbanks. He  furthered that there were  numerous graduates                                                                    
from the  program, but  very few were  going into  oil field                                                                    
jobs. He stated that as changes  were made to the tax policy                                                                    
it was  the people who suffered  due to lost jobs  or other.                                                                    
He  provided a  story about  the  owner of  a truck  driving                                                                    
company.  The owner  had been  working to  help his  drivers                                                                    
understand that tax policy matters.  He underscored that due                                                                    
to  the state's  tax system,  every  Alaskan is  in the  oil                                                                    
7:05:23 PM                                                                                                                    
Representative  Wilson  asked  if Caelus  was  investing  in                                                                    
projects  because of  the passage  of SB  21 or  whether the                                                                    
projects had already been in the works.                                                                                         
Mr.  Foley replied  that Caelus  had  purchased the  Pioneer                                                                    
assets. He detailed that Pioneer  had come to Alaska in 1992                                                                    
and  had done  significant work.  He explained  that Pioneer                                                                    
had a wealth of opportunities in  the Lower 48 as one of the                                                                    
premium  companies in  the Permian  [Basin]  shale play.  He                                                                    
furthered that Pioneer had decided  to divest its assets and                                                                    
had sold to  Caelus, which had all occurred under  SB 21. He                                                                    
referred to  the high progressivity element  under the prior                                                                    
ACES  tax  regime  and although  companies  could  earn  tax                                                                    
credits,  the credits  could not  be  monetized unless  they                                                                    
were sold  to another  company at  a discount.  He explained                                                                    
that SB  21 had brought  the progressivity down -  at higher                                                                    
prices the  share was  more equitable -  and it  allowed new                                                                    
companies to  sell earned tax  credits at full value  to the                                                                    
state. He  referred to the  characterization of  tax credits                                                                    
as a  subsidy or handout. He  countered that it was  not the                                                                    
intent of the  credits. He specified that the  intent of the                                                                    
credits was to level the  playing field so the efficiency of                                                                    
investments for  new players was similar  to the incumbents.                                                                    
He  believed it  was unfortunate  to  think of  them as  tax                                                                    
credits or NOLs. Alternatively,  he suggested thinking about                                                                    
the  efficiency  of   allowing  large  profitable  companies                                                                    
making  lease  expenditures  to save  $0.35  per  $1.00.  He                                                                    
furthered that  new companies were  not able to  utilize the                                                                    
credits  until later  down the  road;  therefore, the  state                                                                    
made the decision to pay 100 percent cash value for them. H                                                                     
Mr. Foley admitted and understood  that the state was not in                                                                    
a position  to continue  to pay  cashable tax  credits going                                                                    
forward. One  of the recommendations from  a House Resources                                                                    
Committee consultant  was considering allowing the  costs to                                                                    
roll forward  and increase them  with an interest  rate. The                                                                    
resources committee  had said no to  the recommendation, but                                                                    
had  allowed  companies to  take  half  of the  credits.  He                                                                    
implored  the committee  to maintain  a level  playing field                                                                    
for  companies.  He  continued  that  if  current  taxpayers                                                                    
enjoyed  a benefit  of $0.35  on the  $1.00 for  every lease                                                                    
expenditure, the state could put  new companies in a similar                                                                    
position  by  allowing  them to  roll  credits  forward  and                                                                    
compensate  for the  time value  of money  with an  interest                                                                    
7:09:21 PM                                                                                                                    
Representative Wilson  asked if rolling the  credits forward                                                                    
with an interest  rate would allow Caelus to do  some of the                                                                    
projects  it wanted  to. She  referred to  the option  as an                                                                    
alternative if the state was unable to pay cash credits.                                                                        
Mr.  Foley  clarified  that there  were  two  very  separate                                                                    
issues. He  explained that at  present Caelus  held cashable                                                                    
tax  credit  certificates in  excess  of  $100 million.  The                                                                    
company had done the work  to earn another $100 million. The                                                                    
company would like the state to  find a way to honor and pay                                                                    
the $200  million. He conceded  the payment did not  need to                                                                    
be  immediate,  but  a  bankable   plan  was  needed.  Going                                                                    
forward, he  encouraged finding a  way to keep  companies in                                                                    
the  same economic  position  if the  program  needed to  be                                                                    
discontinued and the company would  no longer be eligible to                                                                    
accrue  cashable tax  credit certificates.  He was  troubled                                                                    
that  people  became hyper  focused  on  the production  tax                                                                    
element. He  reminded members  there were  numerous elements                                                                    
to  government take  including  bonus,  royalty, ad  valorem                                                                    
tax,  and jobs  from the  activity. He  noted it  would mean                                                                    
companies paid  less production tax  in the future,  but the                                                                    
state would receive royalty from day one.                                                                                       
Representative   Wilson  spoke   to   the  cashable   credit                                                                    
component. She asked  if having a set payment  plan (such as                                                                    
designating that  the state  would pay  the credits  owed to                                                                    
companies  within in  a five-year  period)  would be  better                                                                    
than the current situation.                                                                                                     
Mr.  Foley answered  that  five years  sounded  like a  long                                                                    
Representative Wilson  stated she had just  used that number                                                                    
as an example. She asked for a more realistic number.                                                                           
Mr.  Foley  suggested  a two-year  period  where  the  state                                                                    
specified  it  would  pay  a given  amount  at  present  and                                                                    
another  set  amount  later.   He  requested  something  the                                                                    
companies could rely and bank upon.                                                                                             
Vice-Chair Gara thought he had  heard Mr. Foley testify that                                                                    
every  regime let  Caelus recover  all of  its expenses.  He                                                                    
discussed that  states in the  Lower 48  ran on a  gross tax                                                                    
and  companies  were not  able  to  deduct. He  referred  to                                                                    
Louisiana  that  had  a  gross  tax  of  about  12  percent.                                                                    
Louisiana had a  minimal deduction for well costs  for up to                                                                    
two years. He asked for  verification that many other states                                                                    
with gross tax did not let companies get their money back.                                                                      
Mr.  Foley replied  that he  believed  it was  wrong to  mix                                                                    
regimes. He  elaborated that in  general the Lower 48  was a                                                                    
royalty  system  with a  gross  tax.  Alaska was  a  complex                                                                    
hybrid of  a royalty and a  net tax with a  gross tax floor.                                                                    
His  statements  related to  other  regimes  had been  about                                                                    
international locations with a net tax system.                                                                                  
Vice-Chair Gara  spoke to locations  with a profits  tax. He                                                                    
remarked  that  companies  did  not  receive  all  of  their                                                                    
expenses  back  in  many of  those  locations.  He  believed                                                                    
companies  received a  portion  based on  the  tax rate.  He                                                                    
asked if  the company got every  dollar back or was  able to                                                                    
deduct it.                                                                                                                      
Mr. Foley deferred  the question to Rich  Ruggiero who would                                                                    
address the  committee at  a later date.  He added  that for                                                                    
regimes with  split profits, profits were  always calculated                                                                    
by  the sum  of a  company's total  costs minus  the sum  of                                                                    
total  revenue;  tax  was  paid  on the  amount  if  it  was                                                                    
positive, but  the amount was  rolled forward if  the amount                                                                    
was negative.                                                                                                                   
Vice-Chair  Gara asked  if  Caelus's  purchase from  Pioneer                                                                    
included Oooguruk and Nikaitchuq.                                                                                               
Mr.  Foley answered  that  Pioneer had  been  the owner  and                                                                    
operator  of  Oooguruk;  the asset  had  been  purchased  by                                                                    
Caelus when  it bought  out Pioneer.  He furthered  that ENI                                                                    
was Caelus's  30 percent  partner; ENI  was the  100 percent                                                                    
owner of Nikaitchuq.                                                                                                            
7:15:05 PM                                                                                                                    
Vice-Chair Gara stated that Oooguruk  had been started prior                                                                    
to  the implementation  of SB  21 and  had received  royalty                                                                    
relief from  the state  like Nikaitchuq.  He stated  that no                                                                    
one had  spoken about the  benefit the state  provided where                                                                    
if  tax was  too  high on  a field,  the  state reduced  the                                                                    
royalty up to 13 percent.                                                                                                       
Mr.  Foley answered  that  Pioneer had  sold  its assets  to                                                                    
Caelus.  During that  time Caelus  had been  looking at  the                                                                    
state and  when SB  21 became law,  it created  an incentive                                                                    
program  that attracted  Caelus  to come  up  to Alaska.  He                                                                    
agreed that Oooguruk  predated SB 21. He  furthered that the                                                                    
field  had qualified  for  royalty  modification, which  was                                                                    
about to come to an end.  After the implementation of SB 21,                                                                    
Caelus had  sanctioned Nuna, it had  purchased 350,000 acres                                                                    
of leases  in the east,  and it had drilled  two exploration                                                                    
wells  in Smith  Bay. He  relayed that  Nuna had  received a                                                                    
royalty  modification, which  was done  during an  oil price                                                                    
environment  that was  similar to  the present.  The royalty                                                                    
modification  for  Nuna  would  expire -  one  of  the  time                                                                    
requirements  was production  by  a certain  date. He  added                                                                    
that  Caelus  would  likely  apply  for  a  renewed  royalty                                                                    
Co-Chair  Seaton mentioned  the cashable  credit regime.  He                                                                    
provided a  scenario of a  regime where  a company had  a 35                                                                    
percent partner.  He wondered about  the value.  He wondered                                                                    
if the  state's participation  was seen differently  under a                                                                    
cashable credit scenario.                                                                                                       
7:18:15 PM                                                                                                                    
Mr. Foley replied that he  was not certain he understood the                                                                    
question.  He   explained  that   credits  were   earned  in                                                                    
accordance with how costs were  borne. For example, if a new                                                                    
company and  earned a 50  percent working interest  it would                                                                    
earn 50 percent of the credits.                                                                                                 
Representative Pruitt stated that  one of the major concerns                                                                    
that was  vocalized was that  a production tax would  not be                                                                    
seen. He used  the Nuna development as an  example. He asked                                                                    
about how  long there would  be development coming  from the                                                                    
project and how long it would  be before the state would see                                                                    
the  production  tax come  in  after  the repayment  of  the                                                                    
Mr. Foley answered that Nuna  would hopefully have its first                                                                    
oil in 2018. He furthered there  would be a drilling rig for                                                                    
about four  years and production  would begin  around 20,000                                                                    
barrels  per day.  He specified  that royalties  at Oooguruk                                                                    
were higher than  normal. The large fields  had a one-eighth                                                                    
flat royalty,  but Oooguruk had one-eighth  royalties plus a                                                                    
30 percent net profit. He  had other leases with a one-sixth                                                                    
royalty.  He did  not  know  when the  state  would see  the                                                                    
payout of  the production  tax credits,  but the  answer was                                                                    
knowable. He believed Mr. Ruggiero  would show the committee                                                                    
examples  of typical  oil fields  and how  they may  look in                                                                    
terms of cash flow.                                                                                                             
7:21:29 PM                                                                                                                    
Representative Pruitt appreciated  the response. He believed                                                                    
people could get  lost in the credits and  fail to recognize                                                                    
they would  bring about a  benefit. He noted that  Mr. Foley                                                                    
had highlighted that in a  net profits tax everyone was able                                                                    
to write off  the development cost. He  believed the concern                                                                    
was the  state wanted  its money  immediately. He  wanted to                                                                    
ensure there  was discussion about  the long-term  nature of                                                                    
the projects.  He reasoned that receiving  money immediately                                                                    
did not  always end up  being the best  long-term investment                                                                    
for the state. Beyond the  royalty, there will be production                                                                    
tax coming  from investments. He  surmised it may just  be a                                                                    
matter of time before the money came in.                                                                                        
Mr.  Foley moved  to slide  3 showing  the Nuna  development                                                                    
overview. He asked  members to imagine a  scenario where the                                                                    
state  never received  a production  tax  dollar. The  state                                                                    
would  still receive  royalty  of over  $1  billion and  net                                                                    
profit share payments  of about $500 million.  He then moved                                                                    
to slide 8 showing four pie  charts. He wanted to find a way                                                                    
to "grow the  pie." He would like the large  blue portion of                                                                    
the large circle as opposed to  the small circle; it was how                                                                    
the state would be rewarded.                                                                                                    
Representative   Wilson  asked   how  the   discussions  the                                                                    
legislature had  annually [pertaining  to oil  tax] impacted                                                                    
Caelus's ability to get partners.                                                                                               
Mr. Foley answered  that it was challenging.  He stated that                                                                    
the  company  was  not  challenged   in  resources,  it  was                                                                    
challenged by raising money at  oil prices of $50 per barrel                                                                    
and due to the uncertainty in the tax regime in the state.                                                                      
Representative  Wilson  believed sometimes  the  legislature                                                                    
lived in its  own bubble and forgot that when  it was trying                                                                    
to recoup money  it may actually be losing  more because oil                                                                    
companies could  not find partners and  development faltered                                                                    
because  the industry  was  perpetually  wondering what  the                                                                    
state would do next.                                                                                                            
7:25:13 PM                                                                                                                    
JEFF HASTINGS, CHAIRMAN and  CHIEF EXECUTIVE OFFICER, KUUKIP                                                                    
SAE  AND  CEO,  SAEXPLORATION,   referred  to  a  PowerPoint                                                                    
presentation  titled "House  Finance Committee"  dated March                                                                    
22, 2017 (copy on file).  He shared that SAExploration was a                                                                    
prime contractor and an explorer;  it was also the holder of                                                                    
approximately $20 million in tax  credits and would probably                                                                    
receive another  $60 million  in credits  over the  next few                                                                    
months. He read from slide 2:                                                                                                   
   · Our team has been partnered with the Kuukpik                                                                               
     Corporation for the past 20 years                                                                                          
   · The company employs and average of 400 people per year                                                                     
  · The Kuukpik-SAE JV is a consistent revenue source to                                                                        
        o Kuukpik Corporation and its shareholders                                                                              
        o The village of Nuiqsut                                                                                                
        o The thousands of Alaskan families that benefit                                                                        
          from each program                                                                                                     
   · We are committed to preferentially hire Native                                                                             
     Alaskans and Alaska residents                                                                                              
       o We are proud of our 80%+ Alaskan hire rate                                                                             
   · We are committed to using Alaskan subcontractors and                                                                       
Mr. Hastings turned  to slide 3 titled "Our  Core Business -                                                                    
Collecting Seismic Data":                                                                                                       
   · Seismic Operations are the tip end of the spear                                                                            
   · Seismic data is critical information, essential to the                                                                     
     success of an exploration program                                                                                          
   · Recently, use of new technology is producing higher                                                                        
     resolution images of the subsurface                                                                                        
        o Information that is a direct correlation to the                                                                       
          new   discoveries   which   have   recently   been                                                                    
   · The information gathered from the seismic data is                                                                          
     critical to finding new opportunities, new reserves to                                                                     
     sustain Alaska into the future.                                                                                            
Mr. Hastings elaborated on slide 3.                                                                                             
7:28:42 PM                                                                                                                    
Mr. Hastings  turned to  slide 4  and addressed  the benefit                                                                    
from a  single program.  The graph on  the right  was titled                                                                    
"AKlaq 3D Seismic  Program," which was a  tax credit program                                                                    
shot in 2016. The single  program was benefitting over 1,000                                                                    
Alaska families.  The majority of the  revenue generated was                                                                    
paid  to subcontractors  and suppliers  who are  Alaskan. Of                                                                    
the  $57  million  in revenue  generated,  $49  million  was                                                                    
earned  by  Alaskan  contractors   and  suppliers.  Slide  5                                                                    
included a  snapshot of the  190-plus suppliers  the company                                                                    
used per year.                                                                                                                  
Mr.  Hastings  moved to  slide  6  and discussed  an  annual                                                                    
seismic  revenue chart  from 2012  to 2017.  He shared  that                                                                    
seismic activity was  a good barometer of the  health of the                                                                    
exploration  effort  in any  given  area.  The chart  showed                                                                    
three vertical  timelines shown  in red -  in 2012  and 2013                                                                    
there was  approximately $40 million  and $57  million spent                                                                    
respectively. With  the passage of  SB 21 [indicated  by the                                                                    
first red  vertical bar]  the increase  in spending  went to                                                                    
$139   million   and  $217   million   in   2014  and   2015                                                                    
respectively.  The second  red  vertical  bar indicated  the                                                                    
first cut of the tax  credit appropriation ($200 million cut                                                                    
in the  fall of 2016)  - at the same  time there had  been a                                                                    
decline  in  commodity  price.  In many  ways  there  was  a                                                                    
perfect storm  happening in Alaska.  The desire was  for new                                                                    
ideas and reserves  to come online, but  the commodity price                                                                    
was falling,  the state had  a fiscal gap, funding  had been                                                                    
cut  for  tax credits,  and  the  result  was a  55  percent                                                                    
difference  in the  amount of  dollars spent  on seismic  in                                                                    
2016.  The third  red  vertical bar  between  2016 and  2017                                                                    
reflected  the second  cut in  the tax  appropriation, which                                                                    
also resulted in  a 55 percent decrease  in seismic activity                                                                    
spending  in  Alaska. He  noted  the  chart represented  all                                                                    
seismic spending in the state.                                                                                                  
Mr. Hastings  turned to slide  7 titled  "Historical Seismic                                                                    
Programs." He pointed to the  increase in programs following                                                                    
the passage  of SB  21 and the  decrease when  the commodity                                                                    
price began to  fall and the tax  credit appropriations were                                                                    
cut  in  2015  and  2016.  In 2016  the  number  of  seismic                                                                    
programs fell to two.                                                                                                           
7:32:46 PM                                                                                                                    
Mr.  Hastings  turned to  slide  8  titled "Alaska  O&G  Tax                                                                    
Policy: Our Perspective":                                                                                                       
   · Alaska's current tax structure has resulted in an                                                                          
     increase in capital spending, which has resulted in                                                                        
     more data, new opportunities and reserves.                                                                                 
        o Seismic data enabled by current tax structure                                                                         
          resulted in major North Slope reserve discoveries                                                                     
   · The veto of the tax credit budget appropriation in                                                                         
     2015 and again in 2016 has had several negative                                                                            
        o Capital spending is down--Including capital                                                                           
          spending in the contractor community                                                                                  
        o There is no visibility, or confidence on the                                                                          
          State's willingness to settle what it owes                                                                            
        o Liquidity/money needed to fund projects has all                                                                       
          but dried up                                                                                                          
        o Independents,   seismic    companies,   and   most                                                                    
          contractors cannot self-fund                                                                                          
        o Many contractors are still waiting to be paid for                                                                     
          services they have rendered                                                                                           
Mr.  Hastings  elaborated  on slide  8.  He  explained  that                                                                    
legacy producers  had gone to  work and had  increased their                                                                    
capital  spending.  Alaska  had   attracted  new  ideas  and                                                                    
companies into  the state with independents  and the state's                                                                    
contractor community had started  to invest in new equipment                                                                    
and innovative ways to lower  the cost to offset the falling                                                                    
commodity cost. The seismic data  enabled by the current tax                                                                    
structure had  resulted in  four of  the recent  major North                                                                    
Slope  reserve discoveries  announced in  the last  three to                                                                    
four months. The new data  and new players were resulting in                                                                    
new reserves and  increased production. The veto  of the tax                                                                    
credit budget  appropriation in 2015  and again in  2016 had                                                                    
had  several  negative  effects  including  reduced  capital                                                                    
spending,  no  confidence  in  the  state's  willingness  to                                                                    
settle  what it  owes, liquidity  and money  needed to  fund                                                                    
projects  had dried  up or  was very  difficult to  get, and                                                                    
many contractors were still waiting  to be paid for services                                                                    
they had rendered in 2014 and 2015.                                                                                             
7:35:39 PM                                                                                                                    
Mr. Hastings  spoke to the  reality for  SAE on slide  9. He                                                                    
explained that the delayed tax  credit payout had forced the                                                                    
company to  a crossroads where two  options surfaced. Option                                                                    
one was to  seek protection under the  Chapter 11 bankruptcy                                                                    
code and leave Alaska vendors  hanging and option two was to                                                                    
restructure    the   company    and   work    with   Alaskan                                                                    
subcontractors  and  suppliers  to  find  a  way  to  extend                                                                    
payments. The  company had opted  for option two,  which had                                                                    
eliminated  90  percent  of   the  shareholder  equity  (the                                                                    
majority had been held by  employees). He shared that he had                                                                    
moved  to Alaska  in  1986 and  he had  built  two or  three                                                                    
companies; he wanted to continue  investing in the state. He                                                                    
emphasized that it had been  nine months since the last veto                                                                    
[of tax credit  appropriations] and there was  still no plan                                                                    
[by the state]. He spoke  to uncertainty and no visible plan                                                                    
on how the  state would fund its debt. As  a public company,                                                                    
SAExploration  continued to  see its  equity eroding  as the                                                                    
uncertainty continued.                                                                                                          
Mr. Hastings moved  to slide 10 titled "The  Impact of HB111                                                                    
on Kuukpik SAE":                                                                                                                
   · This bill as proposed reduces the cap on state                                                                             
     purchase of credits from $70 million to $35 million                                                                        
     per company which will dramatically stretch out                                                                            
     payments for the debt owed.                                                                                                
   · The secondary market, which is already uncertain of                                                                        
     its ability to purchase credits will be destroyed by                                                                       
     this bill                                                                                                                  
        o many of us will have no other opportunity to                                                                          
          monetize the credits owed other than through the                                                                      
   · There is no clear view or timeline for exploration tax                                                                     
        o When will the applications be processed?                                                                              
        o When will they be issued?                                                                                             
        o When will they be paid?                                                                                               
   · The impact on this Alaska company, our Alaska                                                                              
     subcontractors and all the Alaskan families that make                                                                      
     their living through these companies will be                                                                               
Mr. Hastings elaborated on the  slide. He explained that the                                                                    
bill  as  currently  written  would  destroy  the  secondary                                                                    
market.  As  an  exploration  company,  SAExploration  would                                                                    
never  produce  a  barrel  of oil;  therefore,  it  had  two                                                                    
options -  for the state to  pay the company or  to offer it                                                                    
into  a  secondary market.  He  explained  that because  the                                                                    
secondary market  had been paralyzed,  the company  only had                                                                    
one option  remaining. He underscored  that the  company was                                                                    
in  dire need  of  a strategy  and plan  from  the state  to                                                                    
indicate  to  investors  and  shareholders  that  there  was                                                                    
something to  look forward to.  He continued that  there was                                                                    
no clear  view of  the timeline  related to  exploration tax                                                                    
credits.  He understood  the credits  had expired;  however,                                                                    
there were numerous credits that  still had not been issued.                                                                    
He  spoke  to the  compounding  impact  on the  company  and                                                                    
subcontractors  waiting in  line.  The  company was  already                                                                    
impacted  on  its wait  for  cash.  The bill  would  present                                                                    
another significant challenge.                                                                                                  
7:39:54 PM                                                                                                                    
Mr. Hastings He underscored  it was critical Alaska remained                                                                    
competitive  with regards  to global  investment. He  shared                                                                    
that  every 1.5  days the  company moved  a 200-person  camp                                                                    
three miles,  which cost  about $100,000  per day.  The same                                                                    
crew in the Lower 48 was  one-third the size and the workers                                                                    
lived in hotels instead of  camps. He stressed the high cost                                                                    
of operating  in Alaska. He  concluded with slide  11 titled                                                                    
"The Way  Ahead." He stressed the  need for more oil  in the                                                                    
pipeline in order  for Alaska to remain  competitive; it was                                                                    
also necessary to  find a way to lower  costs for companies.                                                                    
The companies needed  the state to issue the  tax credits in                                                                    
a timely  manner and for  companies to know when  they would                                                                    
be paid. He  referred to the third bullet point  on slide 11                                                                    
and explained  that if  full and timely  payment was  not an                                                                    
option  for the  state, it  needed to  ensure the  secondary                                                                    
market was  available for the  selling of credits.  In order                                                                    
to do that,  the secondary market needed  to have confidence                                                                    
and a  clear understanding of the  statutes and regulations.                                                                    
He  stated the  company  needed a  sustainable, lasting  tax                                                                    
structure   going  forward   -  one   that  encouraged   new                                                                    
development and  innovation, while  maximizing value  to the                                                                    
Mr. Hastings  discussed that many  people involved  had made                                                                    
difficult choices  and he  recognized that  many legislators                                                                    
had  inherited the  issue. He  continued  that everyone  was                                                                    
facing  the low  commodity  price  situation. Companies  had                                                                    
laid people off  and were continuing to cut  costs. He spoke                                                                    
to HB 111  and the fair share. He offered  that every dollar                                                                    
the state  attempted to put  on its  side of the  fair share                                                                    
pile was  probably a dollar that  would not be spent  on the                                                                    
types of things  needed to put another barrel of  oil in the                                                                    
7:44:08 PM                                                                                                                    
Representative Wilson relayed she had  not ever heard of the                                                                    
company and noted the presentation  was very good. She asked                                                                    
how the  company's process worked  - she wondered if  it got                                                                    
hired by oil companies.                                                                                                         
Mr.  Hastings  answered  that   SAExploration  was  a  prime                                                                    
contractor  -  oil  and  gas companies  hired  it  to  shoot                                                                    
particular  seismic  programs.  He referred  to  an  earlier                                                                    
comment by  Co-Chair Seaton and  explained that  the company                                                                    
also collected  speculative seismic data. He  used the Aklaq                                                                    
survey  as  an  example,  which  was  probably  the  highest                                                                    
resolution seismic survey ever shot  on the North Slope. The                                                                    
survey  was  also  shot  over  acreage  with  six  or  seven                                                                    
different leasees. The goal was  to find enough underwriting                                                                    
to drive the cost of the  program. In the specific case, the                                                                    
expiration  side of  the  tax credit  gave  a credit,  which                                                                    
could lower  the company's cost  to its end  purchasers. The                                                                    
NOLs were decreased for every  dollar the company brought in                                                                    
- the  data was  licensed. Every  dollar brought  in lowered                                                                    
the NOL  credit. It was also  important to note that  all of                                                                    
the  data became  property of  the  state in  order for  the                                                                    
company to apply  for the credit; after ten  years the state                                                                    
could use the data for additional leasing incentive.                                                                            
7:46:25 PM                                                                                                                    
Vice-Chair  Gara referred  to Mr.  Hastings comment  that he                                                                    
would  address Vice-Chair  Gara's question  on cost.  He was                                                                    
interested in whether cost in  Alaska or something else that                                                                    
had made ConocoPhillips' profits  much higher in Alaska than                                                                    
in almost any other region in the world.                                                                                        
Mr. Hastings  explained that the  Aklaq survey at  that cost                                                                    
$57 million to shoot in  Alaska would cost about $19 million                                                                    
to shoot in the Permian Basin.                                                                                                  
Vice-Chair  Gara spoke  to his  frustration  that some  were                                                                    
suggesting the  state should tax  similarly to  North Dakota                                                                    
or Louisiana with  a 10 to 12.5 percent gross  tax no matter                                                                    
what the price was. He stated  it could put companies in the                                                                    
red up until  $70 to $90 per barrel. He  did not believe the                                                                    
idea  was  good.  He  reasoned that  he  was  interested  in                                                                    
getting a small increase  when companies were profitable. He                                                                    
noted  that many  legislators were  trying  to explore  that                                                                    
concept. He  did not  believe he  would ever  be able  to do                                                                    
anything that  would make  an oil company  say it  would pay                                                                    
the amount.                                                                                                                     
Mr.  Hastings explained  that his  comments were  more about                                                                    
the  delicate   situation  in  Alaska  at   present  -  many                                                                    
companies were competing for  global dollars. Although there                                                                    
were  great  opportunities  in   Alaska,  it  was  extremely                                                                    
difficult for investors, shareholders,  and public equity to                                                                    
continue to  invest in the  state. His point had  been there                                                                    
was currently  a dangerous  balance and  he did  not believe                                                                    
anyone understood  where the tipping point  was. He surmised                                                                    
the tipping point  would be different for  every company. He                                                                    
shared  that his  company was  already working  at or  below                                                                    
cost  at the  current  oil  price of  $45  per barrel.  Many                                                                    
contractors  had agreed  to  work at  cost  in exchange  for                                                                    
something in  the future. When  the state looked  at raising                                                                    
taxes or  hardening the [tax]  floor, which was a  cash flow                                                                    
problem at the end of the  day, there had to be more avenues                                                                    
open to  the state than  taking another dollar it  needed to                                                                    
be spent  on the types of  things it would take  to get more                                                                    
oil  in the  pipeline. The  state had  assets, which  surely                                                                    
allowed the  state to find  different ways to  bridge itself                                                                    
across the fiscal gap.                                                                                                          
7:50:40 PM                                                                                                                    
Co-Chair  Seaton referred  to  the  language indicating  the                                                                    
bill would reduce  the cap on the state  purchase of credits                                                                    
from  $70  million credit  to  $35  million (slide  10).  He                                                                    
remarked  that during  the meeting  the committee  had heard                                                                    
from several  companies with  over $100  million or  more in                                                                    
credits. Currently  the structure  was first in,  first out.                                                                    
He needed clarification on the  slide. He believed the slide                                                                    
indicated amount of money going to more companies.                                                                              
Mr. Hastings replied  that he could not speak  for all other                                                                    
companies, but  currently SAExploration  did not  know where                                                                    
it fell  in the queue. The  company may have to  come before                                                                    
the committee  the following  year and  relay it  had missed                                                                    
the funding. He  explained that if all  players were leveled                                                                    
and credit 1  was the same as credit 21  in timing, everyone                                                                    
would  be  looking  at  $35 million  per  year.  There  were                                                                    
numerous outstanding  credits that had not  been issued that                                                                    
had  the potential  to fall  in the  next year  or following                                                                    
year's  queue that  had been  earned  in 2014  and 2015.  He                                                                    
explained it was a problem.                                                                                                     
Co-Chair  Seaton asked  for clarification  on Mr.  Hasting's                                                                    
position.  He  asked  if the  legislature  should  keep  the                                                                    
number at the higher amount  so fewer companies received the                                                                    
money or  reduce the number to  $35 million as in  HB 111 in                                                                    
order for  the money to  stretch [across all  companies]. He                                                                    
surmised  if  there  was  $300  million,  it  would  stretch                                                                    
through twice as  many companies with a $35  million cap per                                                                    
year instead of  a $70 million cap per year.  He thought the                                                                    
slide  appeared to  recommend paying  the  higher amount  to                                                                    
fewer companies.                                                                                                                
7:53:41 PM                                                                                                                    
Mr. Hastings explained there were  numerous companies with a                                                                    
lot  of   different  financing  criteria  at   present.  For                                                                    
example,  if a  company  had $120  million  in tax  credits,                                                                    
under the  current $70  million limit  the company  would be                                                                    
paid in  two years. He  could only speak  for SAExploration,                                                                    
but obviously  getting the money  faster was much  easier to                                                                    
sell to stock  and bond holders than having to  wait for the                                                                    
funds over a four year  period. He underscored that having a                                                                    
plan was  the important thing  - something that  gave people                                                                    
visibility. He  explained that it  was not possible  to keep                                                                    
telling  the  board  or  bond holders  that  the  state  was                                                                    
working  on it,  because it  had  been saying  that for  two                                                                    
years already.  He believed  they needed to  come up  with a                                                                    
plan  people felt  confident in.  It was  currently a  total                                                                    
unknown  and to  continue the  unknown would  mean only  one                                                                    
outcome for many companies.                                                                                                     
Co-Chair Seaton  wanted to hear  from other  companies about                                                                    
whether  they  recommended  the $70  million  or  the  lower                                                                    
amount of $35 million.                                                                                                          
7:56:03 PM                                                                                                                    
Representative Tilton  thanked Mr. Hastings for  providing a                                                                    
different  perspective.  She  appreciated  the  company  for                                                                    
employing  Alaskans.  She  referred to  the  confidence  and                                                                    
clear  understanding of  statutes and  regulations on  slide                                                                    
11. She  believed she had heard  that the bill made  it hard                                                                    
to  have  confidence. She  asked  for  the accuracy  of  her                                                                    
Mr.  Hastings answered  that the  secondary market  had been                                                                    
very  thin to  begin with;  there had  not been  significant                                                                    
opportunity  in  the secondary  market.  He  referred to  an                                                                    
advisory bulletin  - the secondary  market was  paralyzed at                                                                    
the current point.  The market did not  know whether credits                                                                    
earned and  taken below the  floor were allowable  under the                                                                    
new interpretation. He  stated that it could be  back to the                                                                    
passage of  SB 21 -  the regulation was a  significant issue                                                                    
that needed to be clarified.  There was already paranoia and                                                                    
now there  was no  cash payment  for an  NOL. He  provided a                                                                    
hypothetical scenario  where the credits that  were supposed                                                                    
to go to everyone August 31  were pushed to January 2018. In                                                                    
that  scenario the  explorers without  any  ability to  roll                                                                    
forward  the credits  based on  expenditures would  be done.                                                                    
The bill was written based on  the date of issuance, not the                                                                    
date the  credit was  earned. Feasibly,  $15 million  to $40                                                                    
million in  tax credits could  roll across the date  and the                                                                    
state would no longer make the cash payment.                                                                                    
Representative Tilton  surmised the bill would  be unhelpful                                                                    
to  the company,  especially  since it  had  already had  to                                                                    
Mr. Hastings replied that the graphs  on slides 6 and 7 were                                                                    
a clear  barometer. He stated  that people would  take their                                                                    
feet off  the investment accelerator. Companies  had created                                                                    
new  opportunities, increased  production, and  had invested                                                                    
in Alaska's  oil and gas  future. The  vetoed appropriations                                                                    
in conjunction with  a declining oil price and  HB 111 meant                                                                    
companies  would   decelerate  and  move   cautiously  going                                                                    
forward. He continued  that the bill would  mean taking time                                                                    
and  analyzing business  decisions.  He  concluded that  for                                                                    
Alaska's  future,  the  business   decisions  needed  to  be                                                                    
8:01:20 PM                                                                                                                    
Representative  Thompson noted  that Armstrong  Oil and  Gas                                                                    
had provided written testimony to the committee.                                                                                
HB  111  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair  Foster provided  the  schedule  for the  following                                                                    

Document Name Date/Time Subjects
HB 111 BlueCrest 2017-03-22 Testimony House Finance - with slides shown.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 Industry Testimony Armstrong - Production Tax option 2017.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 BlueCrest House Finance Testimony Slides 03-22-2017.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 SAE Hastings_HB111 house finance FINAL.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 AOGA HFIN vers N 03 22 17 FINAL.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 BP testimony_House Finance_March 22 2017_final.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 Caelus Energy House Finance JPF.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 ConocoPhillips HFIN Testimony 3. 22 2017vFnB.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 Great Bear2017.3.22-GBP House Finance Testimony.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 SAE Hastings_HB111 house finance FINAL.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 Doyon Written Testimony for FINAL 3.22.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 COP Supplemental Slide Testimony.pdf HFIN 3/22/2017 1:30:00 PM
HB 111
HB 111 HFIN Hilcorp Testimony .pdf HFIN 3/22/2017 1:30:00 PM
HB 111