Legislature(2017 - 2018)BUTROVICH 205

04/14/2017 03:00 PM RESOURCES

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03:00:38 PM Start
03:01:14 PM HB111
05:32:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change --
Heard & Held
-- Testimony <Invitation Only> --
Uniform Rule 23 Waived
+ Bills Previously Heard/Scheduled TELECONFERENCED
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
3:01:14 PM                                                                                                                    
CHAIR  GIESSEL announced  consideration of  HB 111,  sponsored by                                                               
the  House  Resources  Committee. (CSHB  111(FIN)(EFD  FLD),  30-                                                               
LS0450\L, was before the  committee.) She welcomed Representative                                                               
Tarr, Co-Chair House Resources Committee,  and staff to introduce                                                               
the bill.                                                                                                                       
3:01:36 PM                                                                                                                    
REPRESENTATIVE  TARR, Alaska  State Legislature,  Juneau, Alaska,                                                               
explained that  when SB  21 was passed,  oil was  $94/barrel, and                                                               
lawmakers  didn't  spend  much  time  looking  at  the  low-price                                                               
environment.  Since  then,  the price  has  changed  dramatically                                                               
going  down   to  $27/barrel.  Not  envisioning   that  low-price                                                               
environment, they  didn't consider  a scenario  in which  some of                                                               
the "Big Three" oil companies might have to operate at a loss.                                                                  
LISA  WEISSLER,  Chief  of  Staff  to  Representative  Josephson,                                                               
Alaska State Legislature, Juneau,  Alaska, introduced herself and                                                               
said she was available to comment on HB 111.                                                                                    
REPRESENTATIVE  TARR  added  that  their  position  is  that  the                                                               
existing  system is  broken and  is too  generous in  a low-price                                                               
environment, particularly  with the  cash credits that  can build                                                               
up over  time. For example,  right now the Department  of Revenue                                                               
(DOR)  has about  $600  million in  applications  for FY17;  $100                                                               
million has  been addressed, but  that leaves about  $500 million                                                               
more.  It has  $200 million  worth  of applications  on hand  and                                                               
anticipates $400 million  more for FY18. So, at the  end of FY18,                                                               
the entire obligation  will be $1.1 billion,  and that obligation                                                               
will  have to  be met.  She explained  that the  FY18 obligations                                                               
represent the  calendar year 2016  environment. So, the  state is                                                               
catching up from what were the  historic lows. She said the state                                                               
currently has, in  SB 21, a hybrid  system of a gross  tax at low                                                               
prices and a net profit tax at high prices.                                                                                     
3:04:12 PM                                                                                                                    
SENATOR VON IMHOF joined the committee.                                                                                         
REPRESENTATIVE   TARR   said   they   worked   with   legislative                                                               
consultant, Mr.  Ruggerio, who  suggested establishing  goals for                                                               
what they  want to accomplish  with the  oil and gas  tax regime.                                                               
For Alaska, stability  is one of the goals, as  well as remaining                                                               
competitive relative  to other regimes. Minimizing  downside risk                                                               
for the  state (like  what happened  in a  low-price environment)                                                               
was another.                                                                                                                    
According to Mr.  Ruggiero the current system is  too complex and                                                               
difficult to understand.  It has a lot of moving  parts, like the                                                               
migrating  credits in  which taxes  are  calculated monthly,  but                                                               
then  unused credits  from one  month can  be applied  to another                                                               
month. Stacking  provisions on top  of one another  have dramatic                                                               
consequences  in a  low-price environment.  He also  talked about                                                               
how Alaska is the only regime  to offer cash credits, but if that                                                               
was the  only thing  that mattered,  then all  investment dollars                                                               
should have  been coming  to Alaska.  But all  investment dollars                                                               
didn't come to Alaska, so other things need to be considered.                                                                   
REPRESENTATIVE TARR  said Mr. Ruggiero  related that it  was good                                                               
to have a  net profit system, but too many  things are now linked                                                               
to the price per  barrel. If one runs the math,  it means at some                                                               
point  someone is  a loser,  because the  cost of  doing business                                                               
will either  go up or down.  If things are too  closely linked to                                                               
the price  per barrel, the  value erodes either for  the industry                                                               
or for the state.                                                                                                               
3:06:54 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
REPRESENTATIVE  TARR said  Mr. Ruggiero's  recommendation was  to                                                               
bracket off  the production tax  value (PTV), or the  net profit,                                                               
and that  is what  this bill  does. She  explained that  the per-                                                               
barrel  credit equation  has  a  lot of  power,  because the  tax                                                               
calculation is  calculated first, and then  the per-barrel credit                                                               
is added on top of that. Alaska  was in the minimum tax for quite                                                               
some time.                                                                                                                      
The  cross-over from  the minimum  tax to  the net  profit system                                                               
happens  between $60  and $80/barrel.  None of  this will  change                                                               
with changes  proposed from HB  111, version  \L. Transportation,                                                               
lease  expenditures,  capital  and operating  expenses  are  also                                                               
allowable deductions.                                                                                                           
3:09:27 PM                                                                                                                    
HB 111, version \L, eliminates  the per-barrel credit and reduces                                                               
the base  tax rate from  35 percent  to 25 percent.  Mr. Ruggerio                                                               
reasoned if  one truly has  a net  profit system, that  means one                                                               
will allow  for transportation costs  and lease  expenditures and                                                               
then work off  the production tax value,  because that represents                                                               
She said 25  percent was selected, because that  was the original                                                               
base tax rate in SB 21. The  previous tax policy, PPT, had a 22.5                                                               
percent   base  tax   rate.  With   that   background  in   mind,                                                               
Representative  Tarr said,  they started  to focus  on production                                                               
tax value (PTV), and the final  version of HB 111 went along with                                                               
Mr. Ruggiero's recommendation to do  a bracketed tax system, just                                                               
like an  income tax system,  but bracketed off the  PTV, ensuring                                                               
that it  remains a true  net profit system  (where transportation                                                               
and lease expenditures are deducted).                                                                                           
REPRESENTATIVE TARR said the bill specifics are:                                                                                
     - reduces  the base  tax rate to  25 percent.  This was                                                                    
     chosen because  the original version of  Senate Bill 21                                                                    
     that  passed  in  2013  proposed  a  base  rate  of  25                                                                    
     -  eliminates the  per barrel  credit.  The per  barrel                                                                    
     credit  couldn't be  eliminated  without also  reducing                                                                    
     the  base tax  rate, because  35 percent  would be  too                                                                    
     - retains  the minimum  tax feature:  below $50  is the                                                                    
     point  of  demarcation  for  where  it  becomes  a  net                                                                    
     profits system. So,  below $50 a 4  percent minimum tax                                                                    
     is   retained  along   with   the  existing   step-down                                                                    
     structure as the price drops down to 1 percent.                                                                            
     - hardens the  floor at 4 percent, so there  would be a                                                                    
     true  minimum tax,  because it  was a  surprise to  the                                                                    
     Department of  Revenue (DOR) when  some of  the credits                                                                    
     went below  that floor, which  is what happened  in the                                                                    
     very low-price environment.                                                                                                
REPRESENTATIVE TARR reviewed  that HB 111 has the  minimum tax of                                                               
4 percent with a  hard floor and at $50 goes  to a 25-percent tax                                                               
3:14:40 PM                                                                                                                    
She referred members to an  on-line document about the history of                                                               
the tax  credits, and said  everyone agrees that  the purchasable                                                               
tax credits  must be  addressed. Why were  they offered  in first                                                               
place?  The state  had always  hoped incentives  would bring  new                                                               
entrants and  independents to  the state  while making  sure that                                                               
the  major  fields  were still  producing.  The  cashable  credit                                                               
feature was to attract the new  entrants, because they are in the                                                               
phase of  spending a lot of  money but getting no  production. If                                                               
those cash credits are eliminated,  an alternative is needed that                                                               
will still make Alaska an attractive place to invest.                                                                           
REPRESENTATIVE  TARR  related  that  Mr.  Ruggiero,  among  other                                                               
things,  suggested allowing  100 percent  of the  carried-forward                                                               
losses, which  this bill does.  That was  in response to  some of                                                               
the  new   entrants  and  independents   saying  they   would  be                                                               
significantly  disadvantaged   by  only  being  able   to  use  a                                                               
percentage of  the credit, because  of all the years  of spending                                                               
before production,  and the 100-percent, carried-forward  loss is                                                               
typical of what other regimes around the world do.                                                                              
To encourage  getting into  production as  soon as  possible, she                                                               
said HB  111 allows a  10 percent reduction  in the value  of the                                                               
carried-forward losses  after seven  years, specific to  the year                                                               
in which it  was earned. For example, if a  company earns in year                                                               
one, but doesn't  get to production in year seven,  at year eight                                                               
only 10 percent  would be reduced from the year-one  losses. If a                                                               
company went to nine years, 10  percent would be reduced from the                                                               
year-two losses.  So, there is a  full seven years to  be able to                                                               
accumulate  losses  and  still  be   able  to  use  them  against                                                               
production tax. Mr. Ruggiero said  this keeps Alaska competitive,                                                               
and it's in line with what other regimes offer.                                                                                 
3:18:30 PM                                                                                                                    
REPRESENTATIVE TARR said  this version of HB 111 adds  a level of                                                               
progressivity where  the first $60 (which  represents $100/barrel                                                               
oil) of  PTV is taxed  at 25 percent.  Then, just like  an income                                                               
tax, there is  another bracket, but it's only the  portion of PTV                                                               
above  the  $60 that  would  be  taxed  at  40 percent.  So,  for                                                               
$120/oil, the first  $60 of PTV would be taxed  at 25 percent and                                                               
the  next bracket  of  $20  would be  taxed  at  40 percent.  The                                                               
consultant recommended  taking less  on the low  end and  more on                                                               
the high end to provide a balanced average over time.                                                                           
3:20:22 PM                                                                                                                    
REPRESENTATIVE  TARR explained  that  the  gross value  reduction                                                               
(GVR) provision repeals  the extra 10 percent GVR  for the higher                                                               
royalty  fields. If  the carried-forward  losses are  allowed for                                                               
seven  years and  then production  begins, but  it's GVR  oil, in                                                               
addition to  being able  to subtract the  losses against  any tax                                                               
liability,  there  are the  GVR  reductions.  This provision  was                                                               
scaled back in trying to keep some value to the reduction.                                                                      
The  third-party  assignment of  credits  is  also repealed.  She                                                               
explained that one  of the things that has  become challenging is                                                               
the  current provision  that allows  companies to  borrow against                                                               
the certificate from the State of  Alaska. Now that some of those                                                               
certificates have not  been paid, those companies,  in turn, have                                                               
not paid  their bank  loans, resulting in  the bridge  loans. The                                                               
bridge loans  won't go  on forever,  so the  domino-effect lesson                                                               
was learned,  and the state  is transitioning  to carried-forward                                                               
3:22:03 PM                                                                                                                    
REPRESENTATIVE  TARR said  there is  an interest  in having  some                                                               
transparency  about  the  state's investments,  because  if  cash                                                               
credits  are eliminated  and  the  incentive is  in  the form  of                                                               
carried-forward  losses, the  state  is essentially  still a  co-                                                               
investor  in  these projects,  and  those  losses represent  lost                                                               
revenue. Earlier, HB  111 had three or  four different provisions                                                               
related to information, both for  legislators and the public, but                                                               
most  of  those  have  been removed,  and  public  disclosure  is                                                               
limited  to  the  lease expenditures.  Mr.  Ruggiero  said  other                                                               
regimes around the  world deliver significant data  to the public                                                               
that include lease expenditures,  activity, production, etc., but                                                               
the state is not doing something that is that involved.                                                                         
3:23:40 PM                                                                                                                    
REPRESENTATIVE TARR  said the interest  rates were changed  in HB
111. Currently  the statute  allows six  years for  completion of                                                               
audits, but  that timeline is  challenged by some changes  in the                                                               
tax  system  that  require  new regulations  to  be  drafted  and                                                               
adopted, thus creating delay. The  Department of Revenue (DOR) is                                                               
just meeting the six-year deadline now,  but their goal is to get                                                               
ahead of  the schedule. She  added that  HB 247, which  passed in                                                               
2016, changed the  interest provision to no  interest after three                                                               
years, but this bill changes that  back to six years, to make the                                                               
timelines match.                                                                                                                
3:25:33 PM                                                                                                                    
The  ring-fencing  provision  allows   losses  to  be  linked  to                                                               
locations  rather than  to companies.  This would  segregate work                                                               
done by one  company if it is  operating in two areas  and one is                                                               
much  more profitable  than the  other, and  the losses  from one                                                               
less  profitable field  wouldn't  completely eat  away the  value                                                               
from another more profitable area.                                                                                              
3:26:33 PM                                                                                                                    
REPRESENTATIVE TARR  said the  revenue impact  for FY18  is about                                                               
$20 million in  the current price environment,  which some people                                                               
think will continue for some five  years. Backup for HB 111 looks                                                               
at  several  different price  scenarios  and  compares Alaska  to                                                               
other regimes  around the world.  Their foundational goal  was to                                                               
create something  that is durable at  all prices and at  all time                                                               
REPRESENTATIVES  JUSTIN PARRISH  and  DELENA  JOHNSON joined  the                                                               
3:30:09 PM                                                                                                                    
MS.  WEISSLER continued  the analysis  and related  that she  was                                                               
working off  a sectional analysis  from CS HB  111(FIN)(EFD FLD),                                                               
Section  1 deletes  a reference  to  the 10  percent gross  value                                                               
reduction (GVR), which is being repealed. (conforming amendment)                                                                
Section 2  amends disclosure tax  information in  accordance with                                                               
the new  provisions that are going  to allow both tax  credit and                                                               
lease  expenditure information  to  be  made public.  (conforming                                                               
3:30:55 PM                                                                                                                    
Section  3 is  where the  three-year limit  on the  interest rate                                                               
gets changed.                                                                                                                   
3:31:02 PM                                                                                                                    
Sections 4  & 5 allows  the Department  of Revenue (DOR)  to make                                                               
more information  public. Section  5 adds  a new  subsection that                                                               
lets  the DOR  to make  otherwise publicly  available information                                                               
public.  Currently,  they  are hampered  by  the  confidentiality                                                               
statutes  they  operate under.  This  relates  to the  taxpayer's                                                               
information and tax credits.                                                                                                    
Section 6  changes the  tax rate  from 35  percent to  25 percent                                                               
after January  1, 2018. Because of  SB 138, the gas  tax is going                                                               
to change to a tax on the  gross in 2022. So, throughout the bill                                                               
a lot of  sections deal with that, because oil  and gas are taxed                                                               
together until 2022, which is when gas gets its own system.                                                                     
3:32:43 PM                                                                                                                    
Section 7 establishes a 15  percent tax bracket that is triggered                                                               
at a production tax value of $60.                                                                                               
Section 8  hardens the minimum tax  floor to ensure that  new oil                                                               
will still benefit from the GVR incentive.                                                                                      
3:33:24 PM                                                                                                                    
Sections 9 - 14 are conforming amendments with the new tax rate.                                                                
3:33:40 PM                                                                                                                    
Section  15 eliminates  the  North  Slope carried-forward  annual                                                               
loss (net operating loss credit).  Middle Earth will still have a                                                               
net operating loss credit that will still be cashable.                                                                          
Sections 16  and 17 are  conforming amendments for  the hardening                                                               
of  the minimum  floor. they  relate to  both net  operating loss                                                               
credits and the  new oil $5-per barrel credit,  which remains the                                                               
3:34:16 PM                                                                                                                    
Section 18  relates to the  exploration credits which  apply only                                                               
to Middle Earth.  That is changed to match with  the hardening of                                                               
the minimum floor.                                                                                                              
3:34:29 PM                                                                                                                    
Section 19 relates  to the information that will  be required now                                                               
and  this is  for both  lease  expenditures and  credits. It's  a                                                               
description  of the  expenditure and  the lease  or property  for                                                               
which the expenditure was incurred.                                                                                             
3:34:48 PM                                                                                                                    
Sections  20 that  relates to  different filers.  The information                                                               
related  to the  lease expenditures  will be  helpful in  the new                                                               
ring-fencing provision.                                                                                                         
Section 21 is  language that is in all versions  of the bill that                                                               
would  insure that  the gross  value at  the point  of production                                                               
does  not  go  below  zero.  The gross  value  at  the  point  of                                                               
production  is a  determinative factor  in both  royalty and  our                                                               
production  tax. The  concern is  that there  are projects  where                                                               
transportation costs  could be  so high that  it could  take that                                                               
part of it to below zero.                                                                                                       
3:35:39 PM                                                                                                                    
Sections 22 - 25 are conforming amendments.                                                                                     
3:35:49 PM                                                                                                                    
Sections 26 is significant in that  this is where the 100 percent                                                               
of net operating losses will be carried forward to production.                                                                  
In  conjunction  with  section  27, this  is  where  the  percent                                                               
carried-forward  gets reduced  by 10  percent after  seven years.                                                               
This is also where the ring-fence provision is added.                                                                           
3:36:19 PM                                                                                                                    
Section 28 is a conforming amendment.                                                                                           
Section  29   contains  repeals:  the   sliding-scale  per-barrel                                                               
credit, the assignment  of the tax credits  to the third-parties,                                                               
and  the 10  percent  gross value  reduction  for higher  royalty                                                               
Section 30 establishes  a legislative work group  to analyze Cook                                                               
3:36:50 PM                                                                                                                    
Section 31  relates to the  minimum tax floor, the  net operating                                                               
loss  credit,  the repeal  of  the  third-party assignments,  and                                                               
those provisions will apply on or after January 1, 2018.                                                                        
Section  32, the  net loss  carried-forward provisions,  apply to                                                               
lease expenditures incurred on or after January 1, 2018.                                                                        
Section  33 is  a transition  for  the assignment  of tax  credit                                                               
certificates so  that the  department may  continue to  apply and                                                               
enforce  these  tax  credit  assignments  to  third  parties  for                                                               
credits applied for before January 1, 2018.                                                                                     
3:37:35 PM                                                                                                                    
Sections  34  is  another  transition  provision  for  filing  to                                                               
clarify that everything kicks in after January 1, 2018.                                                                         
Section 35 is another transition  that a taxpayer produces oil or                                                               
gas before January  1, 2018 will still qualify for  that extra 10                                                               
percent gross value reduction for the higher royalty fields.                                                                    
Section  36  will  allow  for  retroactivity  of  regulations  to                                                               
carried out  this act.  That often  becomes necessary  because of                                                               
the time it might take to get regulations in place.                                                                             
Section 37  will make  the change to  the delinquent  interest of                                                               
the  three-year   cap  on  the   accrual  of  interest   that  is                                                               
retroactive to January  1, 2017. It doesn't  affect anything, but                                                               
the DOR can explain how it helps them with their accounting.                                                                    
3:38:35 PM                                                                                                                    
Sections  38 -  40 are  the effective  dates that  failed in  the                                                               
House, so members can see what they were.                                                                                       
3:38:57 PM                                                                                                                    
CHAIR  GIESSEL  thanked  her  for  the  sectional  analysis,  and                                                               
finding no  questions, invited the  commissioners of DNR  and DOR                                                               
to the table.                                                                                                                   
3:39:10 PM                                                                                                                    
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
Juneau,  Alaska,  supported HB  111.  He  said the  Governor  has                                                               
consistently stated  Alaska needs a  broad fiscal plan  where all                                                               
parties share  in the solution  that balances the  state's budget                                                               
this  year. The  budget has  been  cut dramatically,  as well  as                                                               
public services to the people  of Alaska. In addition, the people                                                               
of Alaska have given in the form of a reduced dividend.                                                                         
COMMISSIONER  HOFFBECK said  the Governor  feels strongly  that a                                                               
broad-based tax on oil and oil  and gas tax credit reform need to                                                               
be completed next, but  he was going to focus on  the oil and gas                                                               
tax.  Last year,  the Governor  introduced HB  247 that  included                                                               
both tax  credit reform and  new revenues, and in  particular, an                                                               
adjustment to the minimum tax  component in the state's severance                                                               
tax.  HB 247  was passed  by  the legislature,  but focused  more                                                               
narrowly on Cook Inlet credits.                                                                                                 
COMMISSIONER  HOFFBECK  said  that  this year  the  Governor  has                                                               
clearly flagged that oil and gas  tax credit reform is a priority                                                               
and  part  of  a  balanced  fiscal  plan;  however,  leaving  the                                                               
specifics of  how to achieve  that goal to the  legislature. Last                                                               
year, the  Governor had  difficulty moving a  large slate  of tax                                                               
bill, and learned that legislation  moves through the legislature                                                               
a little  easier when  it has a  champion within  the legislature                                                               
versus trying  to push it  through. The  House picked up  the oil                                                               
and gas  tax bill this year  and has moved it  through the House.                                                               
The Governor,  in honoring  his commitment  that he  would accept                                                               
legislation  that would  achieve the  goal of  a balanced  fiscal                                                               
solution,  even if  it varied  from how  he might  have done  it,                                                               
supported it.                                                                                                                   
HB 111 is  different than what he proposed in  the past; however,                                                               
much the  same as with  the Permanent Fund Protection  Act, which                                                               
was also  very different  than what  he originally  proposed, the                                                               
Governor was supportive, because it  achieved the goal. HB 111 is                                                               
the only  vehicle in front of  them for dealing with  the oil and                                                               
gas piece  of the fiscal plan,  and the Governor stands  with the                                                               
House in  bringing it  to the Senate  for further  discussion and                                                               
review.  They see  it  as  a critical  component  to the  broader                                                               
fiscal solution, and  the Governor's commitment to  the Senate is                                                               
the same as it  was with the House: to work  them and provide the                                                               
best information  possible, and work  to come to a  solution that                                                               
everybody can agree upon.                                                                                                       
3:43:56 PM                                                                                                                    
ANDY MACK,  Commissioner* Department of Natural  Resources (DNR)*                                                               
Juneau,  Alaska* said  DNR has  a historically  distinct role  in                                                               
Alaska and  one of those  is ensuring that  both the DNR  and the                                                               
DOR  fulfill their  statutory  responsibilities.  They conduct  a                                                               
rigorous  process in  order to  maximize the  benefit to  Alaskan                                                               
residents  and  focus  primarily  on  the  leasing  process,  the                                                               
unitization process,  and managing  those agreements,  which come                                                               
in  the  form of  contracts  with  the  state and  various  owner                                                               
interests, and  the state has  historically done  a "tremendously                                                               
strong job."                                                                                                                    
At  one point  in the  HB 111  process, DNR  had a  very distinct                                                               
role, but that  is no longer the case. The  section requiring DNR                                                               
to do  some pre-approval was  taken out of  the bill, but  he was                                                               
happy to discuss the processes that the department goes through.                                                                
COMMISSIONER  MACK   said  the  department  fulfills   some  very                                                               
important  roles in  Alaska.  One  of those  is  in managing  the                                                               
state's lease  interests and units,  they consider a  whole range                                                               
of issues. They tend to stay  away from any particular topic, for                                                               
instance,  tax,  but  look  at  the  best  way  to  manage  those                                                               
agreements  to   get  to  the  maximum   production  for  Alaska.                                                               
Occasionally,  they are  asked  to look  at  issues like  royalty                                                               
modification, for instance.  In those cases, they put  a range of                                                               
issues on  the table. If an  applicant wants DNR to  consider how                                                               
to ensure that a particular unit  can be placed in production, or                                                               
if  there  is a  unit  under  certain  circumstances that  is  in                                                               
production  that might  fall  out of  production,  then they  can                                                               
consider a  whole range  of options. They  stand ready  to answer                                                               
questions about that  process. He wanted to be clear  that DNR is                                                               
driven by the constitution and by leases and unit agreements.                                                                   
3:46:58 PM                                                                                                                    
CHAIR  GIESSEL  said for  the  past  10  years  the DNR  and  DOR                                                               
commissioners  have articulated  goals of  attracting investment,                                                               
spurring competition,  and getting more  oil in the  pipeline. Is                                                               
that  the  same goal  structure  that  he  and the  governor  are                                                               
working under?                                                                                                                  
COMMISSIONER HOFFBECK answered  yes. The goal for DOR  is to have                                                               
production and revenue from that  production. Production just for                                                               
the sake of production is not  beneficial to the state. The state                                                               
needs revenue  to run on; it  has many obligations to  the people                                                               
of Alaska. He said the Governor  has been very clear that the oil                                                               
industry - at all levels - is part of the fiscal solution.                                                                      
COMMISSIONER MACK  answered yes; it is  the policy of the  DNR to                                                               
constantly  update  and  ensure   that  the  leasing  process  is                                                               
attractive, that  the terms  lay out a  framework for  folks that                                                               
want to  bid in  that process, that  once they  have successfully                                                               
secured the  leases, which  is an  exclusive right  to go  in and                                                               
develop the  resource, that it  effectively manages.  Through the                                                               
unit management  process, DNR frequently  deals with  requests to                                                               
expand units; in some cases,  those expansion efforts are tied to                                                               
work  commitments.  In  certain situations,  companies  are  also                                                               
consolidating  their efforts  and  the department  works on  that                                                               
issue. In recent years, folks  - Oooguruk, Nikaitchuq, and Nuna -                                                               
have  come  to the  state  asking  for  royalty relief  to  bring                                                               
projects on  line. The  state evaluated a  number of  factors and                                                               
determined  it was  in its  interest to  modify royalty  rates so                                                               
that those projects  could come on line. The  process is rigorous                                                               
and takes quite a bit of time.                                                                                                  
CHAIR  GIESSEL said  royalty  is  a gross  tax,  and  at low  oil                                                               
prices, it  takes a significant  amount of the profit.  She asked                                                               
how  he  saw  this  bill helping  with  getting  more  production                                                               
through TAPs and, therefore, more revenue for the state.                                                                        
COMMISSIONER HOFFBECK  answered the answer is  multi-faceted. The                                                               
simple  answer  that gets  thrown  out  there -increase  taxes  -                                                               
doesn't  increase  production.  The  state has  an  unstable  tax                                                               
system  right  now. It's  been  modified  multiple times  over  a                                                               
period of time and is under  continuous assault now, and there is                                                               
no  consensus within  the  community  that it  is  the right  tax                                                               
structure.  They are hoping  to land on something where everybody                                                               
"can put their swords  down for a few years and  just let it play                                                               
out." But work must be done to get there.                                                                                       
Another part  of the answer  is the  billion-dollar appropriation                                                               
to pay  off the existing  credits, probably the  most significant                                                               
thing  they can  do  to  get capital  back  into  the fields  and                                                               
working again,  but the  Governor can't do  that until  the state                                                               
has a  stable fiscal environment.  Part of  that is to  bring the                                                               
oil  and gas  tax credit  component in  line so  the state  isn't                                                               
continuing to  build additional credit liability  that it doesn't                                                               
have  the  capacity to  pay.  He  said,  "I think  stability  and                                                               
getting credits paid off will be a  huge plus if we can move this                                                               
bill as  part of  the fiscal package  through the  legislature to                                                               
conclusion this year."                                                                                                          
3:53:19 PM                                                                                                                    
COMMISSIONER  MACK added  that royalty  has  been described  many                                                               
ways; as  the owner's share of  the resource in some  cases. What                                                               
the department has  been doing recently is  understanding how the                                                               
state  can capitalize  on fundamental  statehood agreements  like                                                               
access  to areas  which have  previously  been unavailable,  like                                                               
ANWR, NPRA,  and OCS. They  also continue to perfect  the state's                                                               
leasing system of  areawide leasing, a very  effective system for                                                               
making sure that the maximum  number of acres are available every                                                               
CHAIR GIESSEL asked if he would  agree that in the last two years                                                               
production has increased on the North Slope.                                                                                    
COMMISSIONER MACK answered that the  actuals the year ending June                                                               
30, 2016  showed a 1-2 percent  increase, and it looks  like FY17                                                               
will be the same.                                                                                                               
CHAIR GIESSEL remarked the past  couple of years have been pretty                                                               
3:55:11 PM                                                                                                                    
COMMISSIONER  MACK   responded  that  Alaskans  should   be  very                                                               
encouraged  with  those  numbers,  but also  be  mindful  of  the                                                               
CHAIR  GIESSEL said  in terms  of the  goal of  more oil  through                                                               
TAPS,  that  can   be  checked  off.  She  asked   how  he  would                                                               
characterize the  concept of  the entrants  into the  North Slope                                                               
and new finds over the last two years.                                                                                          
COMMISSIONER MACK replied that without  the unit data in front of                                                               
him, he would just focus his  answer on the North Slope. The news                                                               
is positive  with respect to  the Prudhoe Bay Unit  and satellite                                                               
fields.  One  transaction  resulted  in  Hilcorp  taking  over  a                                                               
handful of units on the North  Slope. Kuparuk has some good news,                                                               
and Nikaitchuq  and Oooguruk have  qualified for  royalty relief;                                                               
Nuna  is not  in  production,  yet. Those  two  fields are  doing                                                               
"reasonably well,"  but are not  huge producers and  have royalty                                                               
A series of new announcements have  come from the western side of                                                               
the  state-owned  land: area  that  includes  the SMU  Unit,  the                                                               
Placer Unit,  the Pikka  Unit, west of  the Colville  River Unit,                                                               
and the  Greater Moose's  Tooth Unit.  Those units  straddle both                                                               
state  and federal  lands,  and it's  difficult  to put  together                                                               
large permitting  packages. In  the case of  the Pikka  Unit, for                                                               
instance,  which is  being driven  by  the Nanushuk  Development,                                                               
they must  get a permit from  the lead agency, the  U.S. Corps of                                                               
Engineers, along with other federal  and state agencies. There is                                                               
reason  to be  hopeful about  the NPRA,  tempering that  with the                                                               
need to get permits and safely develop those fields.                                                                            
CHAIR GIESSEL  thanked him saying  he made his points  very well:                                                               
any production takes years before it's realized.                                                                                
4:01:14 PM                                                                                                                    
SENATOR VON IMHOF asked the long-term  price of oil in the recent                                                               
spring forecast that was presented to the Finance Committee.                                                                    
COMMISSIONER  HOFFBECK  replied  in  the  range  of  $70-75.  The                                                               
private nominal price is $54 for  FY18 and $60 for FY19, and then                                                               
growing up into the $80 and $90s.                                                                                               
SENATOR VON IMHOF said with that  in mind, they have identified a                                                               
price,  and  considering that  Alaska  has  some of  the  highest                                                               
production costs  in the world,  she asked if they  wouldn't want                                                               
to  create a  suite  of tax  structures  that incorporated  those                                                               
variables that  are unique to  Alaska as  well as unique  to this                                                               
ongoing environment that  is expected in the  future. Her concern                                                               
is  that  Commissioner  Hoffbeck   said  he  wanted  to  increase                                                               
production  but  also  increase the  government's  take  on  that                                                               
production,  and  when  the  state   already  has  a  challenging                                                               
environment and an extraordinarily long  time to begin a project,                                                               
they should  want to create  a ladder structure of  fields coming                                                               
on  each  couple  years  or  so.  "To  do  that  we  have  to  be                                                               
competitive at  all times  globally," she  said. So,  Alaska must                                                               
look at  its environment and at  what other regimes are  doing so                                                               
it can  position itself.  She is  worried that  he is  being very                                                               
hopeful for Alaska's unique situation.                                                                                          
COMMISSIONER HOFFBECK explained  that what he meant  when he said                                                               
the state needs  more, is that production without  revenue is not                                                               
necessarily its goal.  The state should receive  revenue from the                                                               
oil and  gas production on  the North  Slope. It is  a structural                                                               
issue with our  tax system, being a net tax,  at least within the                                                               
Unite States.  When oil  prices fell, Alaska  lost 90  percent of                                                               
its  revenue. The  next  closest  state lost  30  percent of  its                                                               
revenue. Most of the states were in the 6-7 percent range.                                                                      
SENATOR VON  IMHOF asked  what aspect  of the  net tax  makes the                                                               
largest impact to the state's flawed tax structure.                                                                             
COMMISSIONER HOFFBECK  replied that multiple components  within a                                                               
net tax  structure allow  for large  deductions against  the sale                                                               
price of the  oil before calculating the tax,  and the per-barrel                                                               
credit is a substantial reduction in  the value of the oil at low                                                               
oil prices. Part of it is just  the inherent fact that it's a net                                                               
In  looking  at what  is  a  proper  tax structure,  rather  than                                                               
looking at how  we compete with ourselves might not  be the right                                                               
question.  The  ultimate  comparison  goes more  to  Senator  von                                                               
Imhof's   question:   how   does  Alaska   compete   with   other                                                               
4:07:21 PM                                                                                                                    
SENATOR WIELECHOWSKI said  experts have told them  over the years                                                               
that the analysis  is exactly the opposite of what  he just said.                                                               
Spencer Hosie,  a former oil and  gas attorney for the  state for                                                               
many  years, said  not  to  look at  how  we  compete with  other                                                               
jurisdictions around the world. That  when the oil companies sign                                                               
a  lease in  the  state  of Alaska  they  have  an obligation  to                                                               
produce when they can make  a reasonable profit. One doesn't look                                                               
at what  a company can  make in Texas  or North Dakota.  He asked                                                               
the commissioner if  he is saying now we shouldn't  be looking at                                                               
what the  leases require  them to  do, which  is to  produce when                                                               
they  can  make  a  reasonable   profit?  Furthermore,  it's  not                                                               
following the law.                                                                                                              
4:08:36 PM                                                                                                                    
COMMISSIONER HOFFBECK replied  that is not what he  said. He said                                                               
his  concern  was that  people  are  asking  if our  current  tax                                                               
structure  is  this   better  or  worse  than   our  current  tax                                                               
structure. If the  conclusion is that this is going  to result in                                                               
a great tax  burden, and that somehow makes  it a non-competitive                                                               
tax structure,  that is  not the  right comparison.  The question                                                               
is: does  that tax change  make us non-competitive at  being able                                                               
to compete for the investment dollars here in Alaska.                                                                           
4:09:35 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked him  how  they  were going  to  move                                                               
forward on this issue, because he  had never seen an oil tax bill                                                               
done  in  this  fashion.  He  thought  Representatives  Tarr  and                                                               
Josephson had  done an outstanding  job, but it's  highly unusual                                                               
for a  governor to  not put  forward a  tax overhaul.  The reason                                                               
it's  important for  the governor  and  the executive  to take  a                                                               
strong position is  because he has the  expertise and information                                                               
that the legislature doesn't have access to.                                                                                    
SENATOR WIELECHOWSKI  said he  also had  never seen  an executive                                                               
not hiring consultants. So, he wants  to know if this is going to                                                               
harm the industry,  and wanted the executive to  take a position.                                                               
Their obligation is to get the maximum benefit for the resource.                                                                
4:11:45 PM                                                                                                                    
COMMISSIONER HOFFBECK  said the  administration and DOR  had been                                                               
actively engaged  in analyzing  and bringing  forward information                                                               
and  presenting to  the  extent on  the House  side  that he  was                                                               
accused  of it  being  his  bill. "The  Governor  stands by  this                                                               
bill," recognizing it has another body to get through.                                                                          
SENATOR STEDMAN  commented on the  magnitude of the  reduction in                                                               
the  value of  the oil  to  Alaska's treasury  relative to  other                                                               
states, because Alaska is the only  state that owns the oil. But,                                                               
probably,  everybody, including  the  property  owners in  states                                                               
with private royalty systems, got pounded pretty hard.                                                                          
This  morning they  had  an  update on  the  state's revenue  for                                                               
2017/18, and  it was  good news. He  asked the  administration to                                                               
run the current  structure and the proposed structure  in HB 111,                                                               
because he  thought they would  find FY17  is in the  minimum tax                                                               
environment,  but will  drop into  a different  calculation going                                                               
forward with  this bill,  and possibly out  of that  minimum tax.                                                               
That impact  should be measured.  It looks like a  production tax                                                               
value (profit  oil) of just  over $1  billion in 2017  changed to                                                               
$2.4 billion. In other words,  he said, miner movements make huge                                                               
dollar  differences   in  revenue.   He  explained  that   it  is                                                               
challenging  for   policy  makers  because  all   their  data  is                                                               
consolidated  monthly  from  multiple  companies.  He  noted  the                                                               
importance  of  not  falling  into the  trap  of  "single  barrel                                                               
examples." The calculations impact millions of barrels.                                                                         
CHAIR  GIESSEL thanked  him,  adding that  she  agreed with  what                                                               
Senator  Wielechowski  said  about the  administration  having  a                                                               
consultant  in  the  past.  It  is  very  unusual  that  internal                                                               
modeling is  being used versus  having a consultant.  She invited                                                               
the director  of the Division  of Oil  and Gas forward  and asked                                                               
her  to broadly  paint  a picture  of what  exists  on the  North                                                               
Slope: the potential and if Alaska had experienced peak oil.                                                                    
4:19:25 PM                                                                                                                    
CHANTAL WALSH, Director,  Division of Oil and  Gas, Department of                                                               
Natural  Resources   (DNR),  Anchorage,  Alaska,   answered  that                                                               
looking at the past  30 years, it is safe to  say the Prudhoe Bay                                                               
reached its peak oil production a  couple of years back, but this                                                               
second year  of production  increase on the  North Slope  is very                                                               
exciting. However,  it is  hard to  think that  enough production                                                               
would come on to get the state over 1 million barrels a day.                                                                    
CHAIR  GIESSEL stated  that 1  million barrels  a day  "is not  a                                                               
standard  that any  of us  have articulated  aiming for."  She is                                                               
basically looking  at more production  through TAPS,  because the                                                               
less flow  the pipeline has  the more  challenging it is  for the                                                               
flow to continue.                                                                                                               
4:21:26 PM                                                                                                                    
CHAIR GIESSEL  said Armstrong and  Repsol, partners in  the Pikka                                                               
Unit, have  discovered a  new stratum in  the geology  located in                                                               
the west  end of the North  Slope, and asked her  to elaborate on                                                               
it. Have other discoveries happened there?                                                                                      
MS. WALSH  replied that  the Pikka discovery  is in  the Nanushuk                                                               
formation, and  they were not  the first to find  hydrocarbons in                                                               
that  interval, but  the  first to  find  enough hydrocarbons  to                                                               
develop. It's a  shallower horizon in much younger  rocks. It was                                                               
being looked  for prior to this  find. In large part,  it is what                                                               
was  added  to the  ConocoPhillips  announcement  in the  Greater                                                               
Moose's Tooth area.                                                                                                             
CHAIR GIESSEL asked  her to describe how far apart  Pikka is from                                                               
the ConocoPhillips discovery.                                                                                                   
MS. WALSH guessed it's about 30 miles to the west.                                                                              
SENATOR  GIESSEL  said in  other  words,  this is  potentially  a                                                               
"rather big strata."                                                                                                            
MS. WALSH  responded that they  are thought to be  separate units                                                               
and  not connected  from a  geologic standpoint.  The rock  layer                                                               
that keeps  the formation  intact is different  in area  than the                                                               
CHAIR  GIESSEL asked  her what  the expected  production is  from                                                               
both the Armstrong and the ConocoPhillips discoveries.                                                                          
MS. WALSH answered Armstrong estimated  120,000 barrels a day and                                                               
ConocoPhillips has estimated that same, as well.                                                                                
CHAIR GIESSEL  asked her to  describe the  API, the grade  of oil                                                               
for both units.                                                                                                                 
MS. WALSH  replied the  Pikka Unit is  light oil  (normal gas/oil                                                               
ratios),  and  moving   west  the  source  rocks   make  it  more                                                               
challenging  to  bring  the  higher  GOR  oils  into  facilities,                                                               
because of gas and water constraints.                                                                                           
CHAIR  GIESSEL asked  if the  light oils  in the  two discoveries                                                               
might be beneficial  to other companies that  might be interested                                                               
in  starting  to  develop  the heavier  oil  deposits  using  the                                                               
lighter  oil to  dilute  them for  easier  transport through  the                                                               
MS.  WALSH replied  that a  lighter oil  will make  it easier  to                                                               
transport heavy oils, particularly with  the ability to mix them.                                                               
The challenge for heavy oil  is the price environment ($50/barrel                                                               
range), because  technology doesn't  exist that  allows it  to be                                                               
produced economically.                                                                                                          
4:26:22 PM                                                                                                                    
CHAIR GIESSEL  asked if  any other plays  are connected  to these                                                               
two discoveries (in the Nanushuk formation).                                                                                    
MS.  WALSH  answered  that   Armstrong/Repsol  just  drilled  the                                                               
Horseshoe Well 20 miles south of  their play, and believe the two                                                               
are connected.                                                                                                                  
CHAIR GIESSEL remarked that is great news.                                                                                      
SENATOR  WIELECHOWSKI  asked  if  there  had  been  any  economic                                                               
analysis  for  the bill  and  compared  to the  existing  regime,                                                               
because that is the key in this whole debate.                                                                                   
MS. WALSH replied that is  a Department of Revenue question since                                                               
it is more focused on royalties.                                                                                                
SENATOR MEYER asked her thoughts on Smith Bay.                                                                                  
MS.  WALSH replied  that the  Smith Bay  field is  very exciting.                                                               
It's  also  part  of  the Nanushuk  formation,  but  a  different                                                               
interval. It's more inlaid with  shales and has less clean sands,                                                               
and it is in the very  early years of exploration. The department                                                               
hasn't seen production tests, yet.                                                                                              
4:29:15 PM                                                                                                                    
SENATOR MEYER  asked if the oil  at Prudhoe Bay has  a gravity of                                                               
MS. WALSH answered yes.                                                                                                         
SENATOR MEYER asked  if the Willow and Pikka fields  are like the                                                               
flow at the Sadlerochit Formation in Prudhoe Bay.                                                                               
MS. WALSH replied  that the Willow and Pikka  fields have lighter                                                               
oil than the Sadlerochit reservoir.                                                                                             
CHAIR  GIESSEL   asked  if  her  division   handles  the  seismic                                                               
MS. WALSH answered  yes, along with the  Department of Geological                                                               
and Geophysical Surveys (DGGS).                                                                                                 
CHAIR GIESSEL said the state  has a wealth of seismic information                                                               
that  is reaching  its age  to be  disclosed, and  she heard  the                                                               
department  was considering  determining  its  value and  perhaps                                                               
putting a user fee on it. How is that progressing?                                                                              
MS. WALSH replied that it has  progressed, and the idea is not to                                                               
put a price  tag on the seismic,  itself, but to put  a price tag                                                               
on what  it costs the department  to process the data  to make it                                                               
available publically. It takes quite  a bit of staff interactions                                                               
and following stringent regulations  about what pieces of seismic                                                               
data can be public.                                                                                                             
4:31:47 PM                                                                                                                    
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
Juneau, Alaska,  said he  would take the  lead on  presenting the                                                               
analysis of CSHB 111(FIN)(EFD FLD)  on Oil and Gas Production Tax                                                               
and  Credits. He  mentioned that  he also  included some  history                                                               
slides that everyone had seen before.                                                                                           
CHAIR  GIESSEL  asked  if  this   list  captures  the  governor's                                                               
concerns  and  if the  governor  views  these elements  as  "must                                                               
MR. ALPER  answered no, but  his name is  on one of  the upcoming                                                               
slides. He  said the governor  has spoken about  several specific                                                               
concerns  that he  hopes are  addressed in  whatever oil  and gas                                                               
legislation  passes, and  HB  111 meets  those  concerns, but  it                                                               
doesn't necessarily meet them in the only way possible.                                                                         
One of  was his goals  is getting Alaska  out of the  business of                                                               
cash credits:  accepting the reality  that we no longer  have the                                                               
revenues, the  cash flows, the  financial standing to be  able to                                                               
participate with upfront cash towards these projects.                                                                           
The second goal is a little  subtler, but it's about reducing the                                                               
state's  liability  towards   potential  large  future  projects,                                                               
because now that  the state is out of credits  and is accepting a                                                               
paradigm that  for all intents  and purposes, costs are  going to                                                               
be carried  forward and be used  in the future. So,  Alaska needs                                                               
to get its  head around what they are worth  and how that relates                                                               
to the  taxes future producers are  hoped to be paying  once they                                                               
bring that oil and gas into production.                                                                                         
A  third  goal  is  to  defer  the  state's  participation  until                                                               
something comes into  production. It's not just  about not paying                                                               
cash; it  means making  sure that whatever  value created  is not                                                               
transferable  to other  fields.  It  should have  to  be used  to                                                               
offset the new  value from the new production  these programs are                                                               
trying to incentivize  and not to write down  profits from legacy                                                               
And finally,  just the  general statement  that the  oil industry                                                               
should be part of the  broader solution, as Commissioner Hoffbeck                                                               
alluded to in his opening remarks.                                                                                              
CHAIR GIESSEL asked if industry had not been participating.                                                                     
MR. ALPER  replied industry has  been the largest  participant in                                                               
Alaska's budget  over time, but if  the state accepts that  it is                                                               
at the  starting point  of having a  balanced and  stable budget,                                                               
several different things  need to move a little  bit between here                                                               
and there.                                                                                                                      
MR. ALPER stated that CSHB  111(FIN)(EFD FLD) eliminates the idea                                                               
of  the carried-forward,  annual-loss credit  (NOL), specifically                                                               
for the North Slope, effective  next January. That part is carved                                                               
out of the  oil credits statute and is replaced  with the idea of                                                               
the carried-forward  lease expenditures.  SB 21, passed  in 2013,                                                               
eliminated  capital credits  on  the North  Slope.  For the  most                                                               
part, the  small producer  credit is being  phased out.  The main                                                               
credit of value on the North  Slope today is this NOL credit, and                                                               
that is  what is being  eliminated in CSHB 111(FIN)(EFD  FLD) and                                                               
turned into carried-forwards.                                                                                                   
4:37:15 PM                                                                                                                    
MR. ALPER  used slide 6  to explain  the history of  tax credits.                                                               
The  state has  participated in  tax credits  to the  tune of  $8                                                               
billion through  the end  of the  prior fiscal  year. Of  that $8                                                               
billion,  about $4.5  billion  is  through offsets,  subtractions                                                               
from tax, and about $3.5  billion is in actual cash, appropriated                                                               
money where  the state  wrote checks  or electronic  transfers to                                                               
industry  to compensate  them for  some desired  behaviors (terms                                                               
under one  of the state's  tax credit programs). The  North Slope                                                               
has  $4.4 billion  in tax  offsets. During  the earlier  years of                                                               
credits when  the tax  system known as  ACES [Alaska's  Clear and                                                               
Equitable Share], the primary credit  offsetting taxes was the 20                                                               
percent qualified capital expenditure  credit, which was repealed                                                               
in 2014 and replaced with  the per-taxable barrel credit. That is                                                               
the primary tax offsetting credit that has added up over a 10-                                                                  
year period to  $4.4 billion. Meanwhile, the cash  credit side on                                                               
the  North Slope  has added  up to  about $2.3  billion. That  is                                                               
actual  cash  out  the  door  and  doesn't  reflect  the  pending                                                               
obligation that the state is holding now.                                                                                       
4:38:41 PM                                                                                                                    
For the  non-North Slope, which  includes the Cook Inlet  and the                                                               
area known  as Middle  Earth, transactions are  few and  small in                                                               
comparison, and it is very  hard to report them without violating                                                               
taxpayer confidentiality.  Consequently, they get lumped  in with                                                               
Cook Inlet and get referred  to as "non-North Slope." Very little                                                               
credits  are used  against tax  liability in  this area,  because                                                               
there is very little tax liability.  It has statutory tax caps at                                                               
17 cents  per 1,000 cubic feet,  and until this year  the oil tax                                                               
was  effectively zero  (less  than $100  million).  The tax  caps                                                               
resulted in another $500 million to $800 million in tax savings.                                                                
MR.  ALPER said  Cook Inlet  has had  a lot  of cash  tax credits                                                               
because of  legislation passed that  increased them in  2010, and                                                               
the state put $1.2 billion into  cash credits there. In doing so,                                                               
it has hopefully resolved the  supply shortages that were a major                                                               
issue in that part of the state for several years.                                                                              
4:40:35 PM                                                                                                                    
CHAIR GIESSEL  noted that  the Native  Corporations of  Doyon and                                                               
Ahtna are working in Middle Earth,  and asked if they would pay a                                                               
production tax.                                                                                                                 
MR. ALPER answered that there  is no current production in Middle                                                               
Earth,  and  yes,  the  production  tax is  in  addition  to  the                                                               
underlying tax  in SB 21. A  maximum tax statute is  in place for                                                               
Middle Earth that  is in some ways comparable to  the maximum tax                                                               
in place  for Cook Inlet. It  was passed as part  of the Frontier                                                               
Basin bill of  2012, and it works  out to be 4  percent gross tax                                                               
for the first  seven years of production. That will  phase out in                                                               
2027. If someone brought some  resource into production, it would                                                               
have a very low tax.                                                                                                            
CHAIR  GIESSEL  asked  if Native  Corporations  pay  a  corporate                                                               
income tax.                                                                                                                     
MR. ALPER replied  that they are for-profit  corporations and not                                                               
tax exempt. They  are, for the most part,  C corporation, because                                                               
they  have more  than 100  shareholders. The  department's annual                                                               
corporate tax reports parse them out as a segment.                                                                              
4:42:09 PM                                                                                                                    
Of the  $2.3 billion of  North Slope credits, about  $1.5 billion                                                               
went  to projects  that are  now  in production.  Going a  little                                                               
further, Mr. Alper  said, the number of barrels are  a little bit                                                               
more every year and bring in about $24/barrel.                                                                                  
Another $800  million has  gone to  11 projects  that do  not yet                                                               
have  any production,  Mr. Alper  said.  Some of  them have  been                                                               
abandoned  and  some  of  them  will  continue  to  progress  and                                                               
hopefully will put  oil in the pipeline. So,  about two-thirds of                                                               
the North Slope money has gone towards actual production.                                                                       
In  Cook Inlet,  about three-quarters  of the  money has  gone to                                                               
eight  projects that  now have  production and  a quarter  (about                                                               
$300  million) has  gone to  projects that  do not  yet have  any                                                               
production. However,  some projects are just  getting started and                                                               
have  a relatively  minute  amount of  production  to which  some                                                               
credits may  have been  applied. But  over time,  that production                                                               
will  dilute the  credit obligation,  and the  state's per-barrel                                                               
investment will decline.                                                                                                        
CHAIR GIESSEL noted  that he has access to  confidential data and                                                               
asked if a legislator could  sign a confidentiality agreement and                                                               
see that data.                                                                                                                  
MR.  ALPER  answered  no.  The  Internal  Revenue  Service  (IRS)                                                               
restricts the department's ability  to share this information. It                                                               
has an  extra locked door  and rules  over how the  file cabinets                                                               
are locked, for instance. A provision  in HB 247 that passed last                                                               
year calls for a report of  how much tax credits were received by                                                               
company per calendar year, and  the first report will be released                                                               
this month.                                                                                                                     
4:44:38 PM                                                                                                                    
MR. ALPER said slide  8 shows why there is a  strong need for the                                                               
state  to  get  out  of  the  cash  business.  Conceptually,  the                                                               
department  was expecting  a large  amount of  revenue from  this                                                               
industry and  thought 10-15  percent of  it should  be reinvested                                                               
into the oil  of tomorrow. However, once  the revenue disappeared                                                               
and costs stayed the same, that idea needed to be revisited.                                                                    
4:46:38 PM                                                                                                                    
Slide  8 showed  what production  tax looks  like with  each year                                                               
being  represented by  three  bars:  the first  one  is what  the                                                               
production tax  would have been  without any credits,  the middle                                                               
one reflects  the actual revenue  received by the state,  and the                                                               
third bar  subtracts the cash  credits that were  appropriated by                                                               
the legislature  and paid  out by  the Tax  Division in  a fiscal                                                               
year.  The high  point was  in FY08  when the  state had  over $7                                                               
billion  in statutory  revenue and  nearly $7  billion in  actual                                                               
revenue  received,  and maybe  $200  million  was spent  on  cash                                                               
credits.  Revenue from  the  production tax  ranged  in the  $2-6                                                               
billion range for seven or eight  years until 2014 when the price                                                               
collapsed. Now the  state's credit obligations are  very close to                                                               
if  not   actually  exceeding  the  revenue   received  from  the                                                               
production tax  (not considering  other revenue sources  from the                                                               
oil and gas industry, which analysis is on slide 9).                                                                            
Slide 9  looks at  the same  data set  with the  state's royalty,                                                               
corporate income tax,  and property tax layered  on top. Although                                                               
it's  not  quite  as  extreme looking,  the  impact  is  similar.                                                               
Companies received upwards  of $9 billion in five or  more of the                                                               
high years now  to where it is in the  $1-1.5 billion range. That                                                               
makes a multi-million credit program no longer affordable.                                                                      
4:47:10 PM                                                                                                                    
CHAIR GIESSEL  asked him  to pause  on slide  9 at  2017-2026 and                                                               
asked if the credits are from  the potential of the refinery, gas                                                               
storage, and LNG credits.                                                                                                       
MR.  ALPER replied  this represents  the status  quo and  doesn't                                                               
incorporate  any  changes  made  by  this  legislation.  So,  the                                                               
largest  component   of  their  ongoing  credit   obligation  are                                                               
operating loss credits earned on the North Slope.                                                                               
SENATOR WIELECHOWSKI asked what the blue line represents.                                                                       
4:48:20 PM                                                                                                                    
MR. ALPER  replied that  it represents  the idea  of non-cashable                                                               
credits.  The   statute  limits  the  availability   of  cash  to                                                               
companies who  produce less  than 50,000 barrels  a day.  So, the                                                               
major  producers  and more  recently  Hilcorp  who have  publicly                                                               
spoken  to  going  over  that  threshold  are  not  eligible  for                                                               
credits. Should those companies earn  credits, they would have to                                                               
hold them and carry them to a  future year and use them to offset                                                               
their  own tax  liability.  It  is a  number  that  goes to  zero                                                               
immediately.  Earlier  versions of  this  analysis  based on  the                                                               
spring 2016 forecast had a much  lower oil price and they started                                                               
seeing  some large  carried-forward NOL  balances from  the major                                                               
producers,  and that  is  why that  data set  was  added to  this                                                               
SENATOR WIELECHOWSKI asked if the NOLs had been zeroed out.                                                                     
MR. ALPER  answered that the  best data point  to talk to  is the                                                               
expected price of oil for  FY17. The fall forecast was $50/barrel                                                               
(it  was $47).  Last spring's  forecast was  $39. The  difference                                                               
between  that $39  and $47  is very  material when  the breakeven                                                               
price for the average producer on the North Slope is around $43-                                                                
44/barrel. So, where the  department was previously contemplating                                                               
everyone losing  hundreds of millions  of dollars, now it  sees a                                                               
slightly better  than break-even  environment, so all  the carry-                                                               
forwards  fell out  of the  analysis when  the fall  forecast was                                                               
4:49:58 PM                                                                                                                    
He   next  addressed   the  state's   unpaid  credits   and  said                                                               
historically the  statutory language  was open-ended:  the amount                                                               
presented for repurchase is appropriated  to the Tax Credit Fund.                                                               
Money would be moved as needed,  and there was plenty of it then.                                                               
The  totals would  be  counted at  the  end of  the  year and  be                                                               
reported  in the  Revenue Sources  Book from  year to  year. What                                                               
happened in  2016 is  that at  the end of  the 2015  session, the                                                               
Governor  through  his  veto capped  the  appropriation  at  $500                                                               
million.  That number  turned out  to be  just about  right; only                                                               
$498.5  million was  needed.  So  FY16 was  for  all intents  and                                                               
purposes "no  harm, no  foul." Of that  number, about  60 percent                                                               
($287 million  of $498 million)  was paid  out in Cook  Inlet and                                                               
Middle Earth outside the North Slope area.                                                                                      
He  said  that the  $1  billion  appropriation that  Commissioner                                                               
Hoffbeck alluded  to that was  attached to  HB 247 last  year did                                                               
not survive. The  Senate and the House put $460  million into the                                                               
budget. Of that,  the Governor vetoed $430 million.  Even had the                                                               
$460  million passed,  that would  have been  inadequate for  the                                                               
expected volume of credit obligation for FY17.                                                                                  
MR. ALPER said  that regulations cover what happens  in the event                                                               
of a  cash shortfall:  a first/in-first/out  formula is  used and                                                               
the $30 million  was paid out primarily to some  older Cook Inlet                                                               
capital  credits. That  will be  documented in  the report  to be                                                               
issued later this month.                                                                                                        
The FY18 budget has $74 million,  and based on the formula change                                                               
to the  spring forecast  update and  slightly higher  oil prices,                                                               
that $74  million is  going to  be adjusted  to $76  million. The                                                               
formula  is  basically 15  percent  of  what the  production  tax                                                               
calculation is  before any credits  are used to  offset liability                                                               
(AS 43.55.028(b)(c)).                                                                                                           
4:52:23 PM                                                                                                                    
So, with the  $30 million limitation, a little  over $600 million                                                               
has been issued  since the beginning of the  current fiscal year.                                                               
Of that, $100 million  can be taken off the table  one way or the                                                               
other.  Some  of the  credits  have  been  paid; some  have  been                                                               
transferred to  a taxpayer who  could use them against  their own                                                               
tax liability,  and some of  them are ineligible  for repurchase,                                                               
probably related to the size of  the company. Now $500 million is                                                               
awaiting repurchase.                                                                                                            
January 1,  2017, is an  important date, because  certain changes                                                               
happened  as part  of HB  247: certain  regulatory sequencing,  a                                                               
priority to  hire Alaska  hire, and  other provisions.  That does                                                               
not apply  to this $500 million.  It will be paid  first, and the                                                               
rest will  be paid  pro-rata. So, should  the legislature  at the                                                               
end of  this day  appropriate $76  million, roughly  everyone who                                                               
holds  a credit  certificate will  get paid  15 percent  of their                                                               
obligation. Then the  next $500 million, however  many years that                                                               
takes,  will  go   this  $500  million  of   calendar  year  2016                                                               
certificates. Once they  are completed, they will go  to the 2017                                                               
certificates; those will be further  ranked by this new filter of                                                               
resident  hire  percentage.  Should the  legislature  appropriate                                                               
$400 million, everyone gets 80 cents on the dollar.                                                                             
4:54:12 PM                                                                                                                    
In hand, the  Tax Division has $200 million in  credits, the bulk                                                               
of which are exploration credits  (025. credits). These require a                                                               
full  audit  and  those  will  go  out  this  year.  A  bunch  of                                                               
exploration credits came  in late, because they  sunset last July                                                               
1 (2016),  and some companies  may have "frontloaded"  their work                                                               
to take advantage of that credit.  At the peak, being able to use                                                               
the  exploration  credit  in  concert  with  the  carried-forward                                                               
annual loss credit, the state could  have been on the hook for up                                                               
to 85 percent  of the ongoing expenses of  an exploration project                                                               
on the North Slope, specifically in the year 2015.                                                                              
The  new  work  flow,  which   hasn't  been  aggregated  yet,  is                                                               
primarily  operating loss  credits  that came  in  with the  2016                                                               
production  tax returns  that were  due  on March  31. Those  are                                                               
expected to  total $400 million.  The whole suite  of obligations                                                               
totals $1.1 billion, minus whatever is appropriated this year.                                                                  
MR. ALPER stated that  is why the state must get  out of the cash                                                               
credit business.                                                                                                                
4:56:49 PM                                                                                                                    
Issue number  two is  reducing the  state's liability  related to                                                               
potential large  future investments,  or what  the carry-forwards                                                               
are  worth. He  explained that  the House  reduced the  base rate                                                               
from  35  percent  to  25  percent,  and  that  had  certain  tax                                                               
implications at different  price ranges. It also  changes the way                                                               
companies  get to  use their  carry-forwards when  they use  them                                                               
against a future tax. Currently,  those carry-forward credits are                                                               
worth 35 cents on  the dollar to reduce taxes. The  way HB 111 is                                                               
written they would  be worth 25 cents on the  dollar, a reduction                                                               
of  28 percent  of  their value  to the  company.  It aligns  the                                                               
operating  loss credit  rate with  the effective  tax rate  being                                                               
paid by the  company, so the state  is not paying more  on a loss                                                               
than  it is  receiving on  a  profit at  the other  end. This  is                                                               
illustrated on  slide 13, but  it is distorted, reason  being the                                                               
per-barrel credit,  an unintended consequence of  the addition of                                                               
the per-barrel  credit that was  done for certain  policy reasons                                                               
not  so much  related to  revenue during  the time  of the  SB 21                                                               
debates four years ago.                                                                                                         
MR. ALPER stated that Mr.  Ruggiero started the conversation over                                                               
how to  align the loss rate  with the effective tax  rate and the                                                               
House Finance  Committee eventually  adopted his idea  of getting                                                               
rid of  the credits  and simply  going with a  net tax  rate that                                                               
steps  up  over  time.  Their  current  iteration  has  a  single                                                               
bracket, but it  does some "neat things"  regarding effective tax                                                               
rates that he would show later.                                                                                                 
CHAIR GIESSEL asked if the  per-barrel calculation is a credit or                                                               
part of the tax system.                                                                                                         
MR.  ALPER replied  for accounting  purposes it  is considered  a                                                               
credit,  but  in  many  ways,  it  is  not  a  credit.  It  is  a                                                               
foundational  part of  Alaska's  tax system.  He  added that  the                                                               
intent  was not  to  tax anyone  at  35 percent,  but  to have  a                                                               
sliding-scale, variable-rate tax  that went up and  down with the                                                               
price  of  oil.  But,  because  of the  way  the  mechanical  tax                                                               
calculation  works, a  carried-forward expenditure  is subtracted                                                               
from  the  profit,  and  the   benefit  of  that  subtraction  is                                                               
calculated  at  the  35  percent rate.  That  is  the  disparity.                                                               
Although the tax rate is lower  in effect, the tax calculation is                                                               
actually 35 percent, and it causes some unusual calculations.                                                                   
4:59:59 PM                                                                                                                    
SENATOR MEYER said he remembered  when the sliding scale (the new                                                               
progressivity) was  put in  and it was  always confusing  to him,                                                               
because as  the price of oil  goes down the scale  goes closer to                                                               
the 25  percent base  rate and as  the price of  oil goes  up, it                                                               
slides  back up  closer  to  35 percent.  He  asked  if that  was                                                               
MR.  ALPER responded  that was  absolutely correct  and explained                                                               
that SB 21  had three phases: the original bill  had a 25 percent                                                               
flat tax.  The idea  of a $5  subtractive credit,  which provided                                                               
progressivity  at a  higher rate  at higher  prices and  lower at                                                               
lower prices was  added in the Senate. The sliding  scale of .038                                                               
percent was added in the House Resources Committee.                                                                             
SENATOR MEYER  referring to  page 6  asked if  the $8  billion in                                                               
credits on the North Slope is an accurate number.                                                                               
MR. ALPER  answered no; the  number the department elects  to use                                                               
is $3.5  billion (on slide 7).  That is the true  cash obligation                                                               
that impacts the  state's budget. The other $4.5  billion is part                                                               
of the  foundational tax calculation;  they didn't  really expect                                                               
to  get  that  revenue  before   the  subtraction.  It's  certain                                                               
mechanical things that happen because  of the way it's calculated                                                               
that leads to these "unusual over-valuing of losses."                                                                           
5:00:57 PM                                                                                                                    
MR. ALPER  continued to slide  14 that  provides an example  of a                                                               
historic  tax regime,  ACES, and  compares it  to SB  21 for  two                                                               
different variables.  The solid blue line  reflects the effective                                                               
tax  rate under  ACES  at different  price points.  It  was a  25                                                               
percent tax  with a  progressive element at  higher prices  and a                                                               
capital  credit  that  is  subtracted and  is  based  on  certain                                                               
assumptions of  capital spending.  It was a  very steep  tax that                                                               
got very high  at higher prices and it went  down towards zero at                                                               
low prices.  The dotted blue  line represents the 25  percent NOL                                                               
credit  rate that  was part  of the  law during  the ACES  era. A                                                               
company  that was  losing money  and getting  a benefit  from the                                                               
state for that loss was receiving  it at the 25 percent rate. So,                                                               
for the most  part, if the price of oil  was over $90/barrel, the                                                               
tax rate exceeded the credit rate.  If the price of oil was below                                                               
$90/barrel, the tax rate was lower than the credit rate.                                                                        
SB 21, the  red line, starts at  a 35 percent tax  that is stair-                                                               
stepped down  reflecting the phasing  in of each $1  increment in                                                               
the per-barrel credit until it  gets down to around $70-75/barrel                                                               
where it goes steeply up again.  That is where it intersects with                                                               
the minimum tax. SB 21 has a  much harder floor than ACES did, so                                                               
it has low-end protection. That is  why the SB 21 revenue line is                                                               
higher  than  the ACES  line  at  lower  prices, but  what  isn't                                                               
illustrative about this  slide is the 35 percent  NOL credit rate                                                               
that at  all price points  is higher than  the tax rate.  That is                                                               
the distortion  this bill attempts  to resolve. This  is separate                                                               
and distinct from any conversation  about tax increases resulting                                                               
in more revenue.                                                                                                                
SENATOR WIELECHOWSKI  asked him  for a rough  number on  how much                                                               
additional  revenue  the  state  gets for  every  effective  rate                                                               
percentage point increase.                                                                                                      
MR.  ALPER  replied  that  is impossible  to  say,  because  it's                                                               
extremely variable with  price. Obviously, 1 percent  at $100 oil                                                               
is very different than 1 percent at $50 oil.                                                                                    
SENATOR  WIELECHOWSKI  asked  him  to  use  the  current  revenue                                                               
forecast for  a year,  if they  were to  raise the  effective tax                                                               
rate 1 percentage point.                                                                                                        
MR. ALPER  answered that earlier  analyses of a prior  version of                                                               
the bill  that had a minimum  tax increase was a  1 percent gross                                                               
rate  going  from a  4  to  a 5  percent,  and  that was  in  the                                                               
neighborhood of $50-60 million.                                                                                                 
CHAIR GIESSEL noted that Mr.  Alper's modeling stopped at $50 and                                                               
asked why he didn't go further down.                                                                                            
MR. ALPER  replied that  he didn't create  this table  and didn't                                                               
specifically ask for a cutoff. So,  he couldn't say, but he could                                                               
say that  the minimum tax as  prices get to the  break-even point                                                               
and beyond, reaches more than  100 percent. That's the nature of:                                                               
if  companies are  losing money  and  the state  is collecting  a                                                               
gross  tax, that  becomes  a  very regressive  tax  that goes  to                                                               
infinity. In the  interests of fitting it on  the graph, perhaps,                                                               
is why it was  cut off at $50. It was  an executive decision made                                                               
by the economist who put the graph together.                                                                                    
CHAIR GIESSEL commented  that they modeled SB 21  much lower, and                                                               
that line that  goes upward continued to go upward  well past the                                                               
SB 21 dotted NOL line.                                                                                                          
5:05:17 PM                                                                                                                    
MR.  ALPER  said the  third  issue  being  raised  in HB  111  is                                                               
deferring  the  participation  to  the new  project.  This  is  a                                                               
controversial topic and  it can be resolved in  several ways, but                                                               
this bill  contains a ring  fence, which means  a carried-forward                                                               
loss  gets  attached  to  a   specific  lease  or  property.  The                                                               
department would administer it by  the unit, that says until that                                                               
unit has value to be offset,  those carry forwards can't be used.                                                               
This protects  the state's  interest from the  failure case  of a                                                               
project where  someone has spent  a lot  of money but  didn't get                                                               
very close to production, and  they could sell their company, and                                                               
then those carried-forward losses would  migrate to the buyer. If                                                               
that  buyer was  a North  Slope major  producer who  might own  a                                                               
share of Prudhoe Bay and/or  Kuparuk, they could use these losses                                                               
to  offset taxes  from the  legacy  production. That  is not  the                                                               
intent of  the program, so  the purpose  of these sections  is to                                                               
make  sure that  the state  doesn't lose  taxes until  the fields                                                               
come  into production  from which  the investment  was originally                                                               
CHAIR GIESSEL asked if that is happening now.                                                                                   
MR. ALPER  answered yes,  and the  idea of  a field-based  tax is                                                               
very typical everywhere else in the  world. Alaska's tax is a co-                                                               
mingled North Slope  segment; all the North  Slope producers file                                                               
taxes  together.  So, there  isn't  an  issue of  carried-forward                                                               
losses, because they are still in the credit paradigm.                                                                          
He said  the ring fence is  structured to be limited  to carried-                                                               
forward losses. In other words,  if a company like ConocoPhillips                                                               
that has  incumbent production but  a major new project  on which                                                               
they are  spending a lot of  money, that spending so  long as its                                                               
offsetting  their profit  on the  North Slope  continues to  be a                                                               
single  entity for  tax  purposes.  There is  no  delay in  their                                                               
ability  to use  that spending.  If someone  has a  loss, because                                                               
they  don't  have  production  or  a low-price  year  as  in  the                                                               
ConocoPhillips case,  the amount  of the loss  is the  only thing                                                               
that would be bound by the  ring fence. It is limited to carried-                                                               
forward  lease expenditures  that can't  be used  in the  current                                                               
SENATOR  VON  IMHOF asked  if  this  provision applies  to  other                                                               
industries that have multiple locations  in Alaska, as well, like                                                               
restaurants and retail stores.                                                                                                  
5:08:27 PM                                                                                                                    
MR.  ALPER replied  no; Alaska's  oil and  gas production  tax is                                                               
unique, and he couldn't find a  good analogue for it elsewhere in                                                               
the tax system.                                                                                                                 
SENATOR  VON IMHOF  asked  what  the incentive  would  be for  an                                                               
existing  producer to  buy  a struggling  project,  if it's  ring                                                               
MR. ALPER answered, if a company  believes it could bring it into                                                               
production, because of the presence  of a resource. The danger is                                                               
if it's  a failed project  where the  owner doesn't think  it can                                                               
come into  production, but they  are holding $1 billion  of carry                                                               
forwards that  cost the state  $250 million in offset  taxes from                                                               
legacy  production. That  is what  the  ring fence  is trying  to                                                               
protect against.                                                                                                                
SENATOR VON  IMHOF said she  thought his thinking had  flaws, but                                                               
would need to reflect on the subject for a while.                                                                               
MR.  ALPER  said  he  looked  forward to  working  with  all  the                                                               
committee  members  as  this  bill  works  its  way  through  the                                                               
SENATOR  WIELECHOWSKI recalled  a  lot of  discussion about  ring                                                               
fencing  under  ACES,  and  the reason  they  didn't  adopt  ring                                                               
fencing was to encourage major producers  to go out and invest in                                                               
other much  more expensive fields and  get a large write  off. He                                                               
asked if  ring fencing is used  in other parts of  the world, and                                                               
MR. ALPER replied that it's not so much ring fencing as project-                                                                
specific taxes: a  concession or some sort  of production sharing                                                               
agreement to bring  a specific project into  development. It will                                                               
have its own investment and  tax structure; it just doesn't blend                                                               
into  the  next  field  over.  Alaska was  like  that  under  the                                                               
economic limit  factor (ELF), a  tax rate that varied  from field                                                               
to field. The idea of having  the North Slope be a single blended                                                               
tax unit is recent since the passage of PPT in 2006.                                                                            
5:11:24 PM                                                                                                                    
MR. ALPER  said the  specific provisions of  HB 111  are straight                                                               
forward.  Previous  versions changed  the  minimum  tax, but  the                                                               
current version keeps  the existing 4 percent floor,  but many do                                                               
not know  it is actually a  sliding-scale floor. If the  price of                                                               
oil should  go below  $25/barrel, it  would go  to 3  percent and                                                               
below $20, it  would go to 2 percent, below  $17.50 to 1 percent,                                                               
and should the  price of oil be below $15,  the minimum tax would                                                               
go  away completely.  These kinds  of numbers  which are  tied to                                                               
fixed  dollars tend  to erode  in value  over time,  as inflation                                                               
gets in the way. This law was passed  in 2006 and $25 oil then is                                                               
very different than it is now.                                                                                                  
Interestingly  enough, the  graph  that showed  the  SB 21  curve                                                               
where the  minimum tax  goes as  high as  $75/barrel, but  in the                                                               
bill before  them the  minimum tax would  only be  relevant below                                                               
about  $50/barrel. The  net  tax would  be in  place  at $50  and                                                               
above. Even though the gross  tax isn't changing, the net changes                                                               
around it are moving the curves around.                                                                                         
MR. ALPER said the other issue  is one of hardening or making the                                                               
floor  not able  to be  penetrated using  various credits.  Under                                                               
current law,  the only credit  that is  hardened to the  floor is                                                               
the  per-barrel credit  (024(j)),  which is  being eliminated  in                                                               
this bill.  HB 111  prevents most credits  from being  used below                                                               
the floor; it  is very much of  a hard floor bill  except for the                                                               
small producer credit,  which can be used to go  below the floor.                                                               
Then there is  something of a hybrid  calculation that's invented                                                               
in one section  that hasn't been seen before that  allows the GVR                                                               
subtraction, the 20 percent reduction  to be applied to the gross                                                               
before  the  minimum  tax  calculation. That  amounts  to  a  3.2                                                               
percent hard  floor (80 percent  of 4  percent). So, they  get to                                                               
take the  GVR, which is  a 20  percent subtraction and  then they                                                               
calculate the 4 percent on that  reduced number. This is a way of                                                               
preserving some tax  benefit for the GVR fields  when the minimum                                                               
tax is in place.                                                                                                                
5:14:16 PM                                                                                                                    
MR.  ALPER referred  to  slide  18 and  said  the  idea of  carry                                                               
forwards in  HB 111 replaces  the 35  percent NOL credit  and 100                                                               
percent of losses are carried  forward and subtracted from future                                                               
production tax value.  In many ways, it is no  different than the                                                               
current  year's  spending, only  it  can  be  brought up  in  the                                                               
future. One  feature is the  decline in value that  was presented                                                               
as an  incentive to get  production done  in a timely  manner. So                                                               
long as  those carry  forwards are used  within seven  years they                                                               
have full value;  beginning in the eight year  they start eroding                                                               
at 10  percent per  year and  would be  completely lost  after 17                                                               
years. The ring fencing is also present.                                                                                        
5:15:21 PM                                                                                                                    
MR. ALPER  said the tax rate,  itself, has the most  headlines on                                                               
this bill  and eliminating  the current 35  percent tax  with the                                                               
per-barrel credit that ranges $0-8/barrel.  It is replaced with a                                                               
25 percent  flat rate  and the  per-barrel credit  is eliminated.                                                               
That is at lower prices, anyway,  identical to the original SB 21                                                               
proposal from  the Parnell Administration.  It would be  the same                                                               
revenue and the  same tax at oil prices  below $90-95/barrel, the                                                               
entire expected range of the near  and mid-term future and at the                                                               
time was  acceptable to  industry. However,  it is  a substantial                                                               
tax increase  of roughly  $100-300 million at  oil prices  in the                                                               
$50-100 range.                                                                                                                  
Instead of having the progressivity,  this bill has progressivity                                                               
only instead of having it by  subtraction, it has it by addition.                                                               
So, the 25 percent is the base  rate and then there is a bracket,                                                               
should  there  be  a  relatively  high  profit  year,  where  the                                                               
production  tax  value  is greater  than  $60/barrel.  Only  that                                                               
portion  of the  value above  $60 would  be taxed  at the  higher                                                               
rate, with  the additional 15 percent  surtax or in effect,  a 40                                                               
percent tax.  The first $60  would only ever  be taxed at  the 25                                                               
percent  rate. That  is  more  like the  bill  that the  previous                                                               
administration  brought in  in  2011, HB  110,  which passed  the                                                               
House and not the Senate.                                                                                                       
Interestingly, Mr. Alper said this  very closely tracks SB 21 and                                                               
is revenue-neutral at  high prices. It's not the  same 35 percent                                                               
tax; it's the 25 percent  plus this progressivity, but the result                                                               
is the same. Once you get out  of the tax increase, above $100 it                                                               
is the  same revenue as current  law. It aligns the  value of the                                                               
carried forward to the effective tax  rate. If you're paying a 25                                                               
percent tax  and have a carry  forward, you are getting  value at                                                               
the 25 percent level. If you're  paying a 30 percent tax and have                                                               
a carry  forward, you are getting  value at the 30  percent rate.                                                               
It creates some  symmetry between the developer  and the producer                                                               
in the tax code.                                                                                                                
5:18:15 PM                                                                                                                    
MR. ALPER  said there are some  small changes to the  gross value                                                               
reduction (GVR)  that experienced a  major change last  year with                                                               
HB  247 in  that it  was  made no  longer permanent.  It's now  a                                                               
temporary benefit for new production  that meets certain criteria                                                               
and it's a 30-percent gross reduction.                                                                                          
So, CSHB  111(FIN)(EFD FLD)  creates a hard  floor which  did not                                                               
used to  exist. Currently GVR oil  can pay a zero  tax; under the                                                               
proposal a  GVR oil would be  paying the 3.2 percent  hard floor.                                                               
The 5-percent,  per-barrel credit is maintained  whereas the per-                                                               
barrel  credit on  the  legacy  oil is  eliminated.  This has  an                                                               
unusual  result: it's  a tax  increase at  lower prices,  because                                                               
there is a  hard floor, but at higher prices  it's actually a tax                                                               
cut on new  oil, because a of the 25  percent tax supplanting the                                                               
existing 35 percent tax.                                                                                                        
The  other  thing  CSHB  111(FIN)(EFD   FLD)  does  is  repeal  a                                                               
provision  from SB  21 that  created a  second category  of gross                                                               
value reduction,  a 30 percent  benefit, if all leases  are state                                                               
leases with greater than 12.5  percent royalty. It's something of                                                               
a payback  of the incremental  revenue from high  royalty fields.                                                               
The 30 percent GVR is repealed in this version of the bill.                                                                     
5:19:40 PM                                                                                                                    
CHAIR GIESSEL asked how it is  rational to raise the tax at lower                                                               
prices and yet at higher prices it's a lower tax.                                                                               
MR. ALPER replied  that he could speak to the  motivations of the                                                               
people who  wrote this version of  the bill, but he  senses it is                                                               
an unanticipated  consequence of  making multiple changes  at the                                                               
same time. The desire was to  harden the floor, and hardening the                                                               
floor is  inevitably a tax  increase at  low prices if  the floor                                                               
wasn't already hard. They also happen  to be cutting the base tax                                                               
rate. If  that $5 per-barrel  credit were eliminated  because the                                                               
other per barrel credits was  eliminated, he sensed that it would                                                               
be more revenue neutral at  higher prices. It's an interaction of                                                               
choices that  are made, and  the bulk  of the decisions  are made                                                               
around the legacy oil, because that's where the revenue is.                                                                     
CHAIR GIESSEL  said the GVR  was intended  for new oil.  The high                                                               
royalty fields  obviously have higher  royalty (gross  tax); even                                                               
at low  prices it's always there.  She was confused about  why it                                                               
is being eliminated.                                                                                                            
MR. ALPER  replied that he  is not  speaking for or  against this                                                               
provision,  but Representative  Seaton, who  brought it  forward,                                                               
said  in  the  Finance  Committee if  these  are  higher  royalty                                                               
fields, it means  that industry sees them as  more valuable. They                                                               
could bid  a higher royalty  with the expectation that  they were                                                               
prepared to give a larger royalty  to the state for the privilege                                                               
of  being able  to develop  that resource.  Why, therefore,  give                                                               
that incremental royalty  back through a higher  new oil benefit?                                                               
From his  point of view,  it seemed  counter intuitive to  give a                                                               
larger  benefit to  a field  that  almost by  definition has  the                                                               
higher prospectivity and higher likelihood of success.                                                                          
CHAIR GIESSEL thanked him for that explanation.                                                                                 
5:22:02 PM                                                                                                                    
SENATOR WIELECHOWSKI  recalled that  when ACES was  introduced it                                                               
had a  10 percent  gross floor  and a  lower progressivity  of .2                                                               
percent,  and the  compromise  was  to take  out  the 10  percent                                                               
floor. Then SB 21 got rid of the  high end. So, now the state has                                                               
no  functioning income  at  the  low end  or  the  high end,  but                                                               
interestingly, he  remembers members  of the oil  industry saying                                                               
they were okay  with ACES when it was  originally introduced with                                                               
the 10 percent floor. "Correct me if I'm wrong on that."                                                                        
His other  point is the 30  percent GVR for high  royalty fields,                                                               
was a  last-minute amendment to  SB 21  had in the  House Finance                                                               
Committee with  very little  debate about  where that  30 percent                                                               
GVR was  added. "Am  I correct  in my  recollection of  those two                                                               
MR. ALPER, working backwards through  his questions, answered yes                                                               
to  his second  question.  That was  not part  of  the bill  that                                                               
passed the  Senate; the 30 percent  GVR addition was part  of the                                                               
CS in  the House Finance  Committee a  couple of days  before the                                                               
final passage.                                                                                                                  
It's not  productive to rehash  the legislative history  of ACES,                                                               
but  he and  several committee  members where  here for  it. "But                                                               
you're here and I'm here, so  why not?" The 10-percent hard floor                                                               
was limited to  Prudhoe Bay and Kuparuk,  specifically defined as                                                               
fields  with life-time  aggregate  production of  over 1  billion                                                               
barrels.  He  recollected  that  it  was  not  received  well  by                                                               
industry,  and part  of  the compensation  for  removing it  from                                                               
subsequent  versions  of   the  bill  was  to   add  the  steeper                                                               
progressivity calculations.                                                                                                     
5:24:34 PM                                                                                                                    
MR. ALPER  said other  provisions of the  bill like  the interest                                                               
rate  going  to  zero  is  a substantial  hardship  for  the  Tax                                                               
Division  to  implement.  The  is  not  about  incentivizing  the                                                               
department  to  get  its  audits   done  faster,  but  making  it                                                               
difficult to  settle a  tax obligation.  If the  department comes                                                               
forth three  or seven  years later saying  a company  owes money,                                                               
the instinct  is to challenge and  appeal it and take  it all the                                                               
way  through the  court system,  because there  is no  down-side.                                                               
It's not about  years four, five, and six; it's  more about years                                                               
seven,  eight, and  nine. He  was less  concerned about  what the                                                               
interest rate is  and more concerned that whatever it  is it stay                                                               
there for continuity of whatever the obligation is.                                                                             
His preference  to align the interest  rate for all tax  types is                                                               
not  in this  bill,  although  that is  what  the department  did                                                               
historically.  It  was 11  percent  in  the  distant past  and  3                                                               
percent plus the federal rate under  SB 21, and HB 247 carved out                                                               
a separate  interest rate for the  oil and gas production  tax at                                                               
this new  7 percent plus  federal rate for three  years declining                                                               
to zero.  Meanwhile, the  3-percent SB 21  rate remains  in place                                                               
for the other 20-odd tax programs he administers.                                                                               
MR. ALPER  mentioned the annual  report of refunded  cash credits                                                               
written in  HB 247, this  bill expands  that to credits  that are                                                               
issued or  held and not  cashed, lease expenditure  totals, lease                                                               
expenditures carried  forward, tying  it to the  lessor property,                                                               
and the  purpose of the  expenditure. The dataset that  gets used                                                               
to build  the ring fence  is also  within the limits  of taxpayer                                                               
confidentiality, and some  legal advice is needed as  to what can                                                               
be reported.                                                                                                                    
5:26:46 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  he has any  sense of  cash credit                                                               
impacts to the state if Smith Bay was built.                                                                                    
MR. ALPER replied that the department  uses a big round number to                                                               
describe the  Smith Bay  project or the  Pikka project,  and it's                                                               
not unusual for the capital cost  to exceed $10/12 per barrel for                                                               
a  billion-barrel, in-the-ground  project.  He could  comfortably                                                               
say this could be a $10-billion project and possibly more.                                                                      
If  a  company were  to  spend  $10  billion under  current  law,                                                               
presuming the  state is buying  cash credits, it could  result in                                                               
$3.5 billion  of credit liability.  The current limitation  is an                                                               
individual company  (not per  project) can  only get  $70 million                                                               
per year, with  some caveats. One would assume that  such a large                                                               
project wouldn't be  done by a company acting  alone, but someone                                                               
with three  or four  partners. So, they  are looking  at multiple                                                               
hundreds of millions of dollars a year of obligation.                                                                           
5:28:14 PM                                                                                                                    
MR. ALPER  said the third  provision is  the idea of  gross value                                                               
going below zero.  His modeling slides used Point  Thomson as the                                                               
example,  although  he  didn't   like  singling  out  a  specific                                                               
project, but  he used  Point Thomson  because it  happen to  be a                                                               
currently small  production at  a remote site  with a  very large                                                               
pipeline that  is therefore  expensive to  operate, and  they are                                                               
paying  a  $17  tariff  to  get  the  22  miles  to  the  nearest                                                               
connection to  pre-existing infrastructure. So, they  could be in                                                               
a circumstance  at low  prices where they  would have  a negative                                                               
wellhead  value   before  getting   to  lease   expenditures  and                                                               
operating costs.  Their gross  value would  be below  zero. Under                                                               
current law,  gas cannot have a  gross value below zero,  but oil                                                               
can. So, that negative value  would migrate and be usable against                                                               
their  taxable value  from other  fields, essentially  bringing a                                                               
downstream cost into an upstream  calculation. His staff has been                                                               
adamant in saying  that this is a  necessary technical correction                                                               
that should be  made, and although it's  controversial, this bill                                                               
version does not let gross value  for a particular field go below                                                               
5:29:30 PM                                                                                                                    
The assignment statute  was added relatively late in  the game in                                                               
an unrelated  non-oil bill  that passed in  2013, the  ability to                                                               
directly  assign the  tax credit  certificate, so  that when  the                                                               
state is  buying something  it doesn't pay  the company  but pays                                                               
the banker directly.  That has led to  some sub-optimal decisions                                                               
being  made  over investment.  Meanwhile  that  money isn't  even                                                               
going to  go into the oil  patch; it's going to  go to somebody's                                                               
banker.  Taking  away  the assignment  statute  was  intended  to                                                               
simplify that world.                                                                                                            
Finally, he  said there  is the  creation in the  bill of  a Cook                                                               
Inlet working  group. House  Bill 247 extended  the tax  cap last                                                               
year, which was  scheduled to go away in 2022.  The intent, as he                                                               
understood it, was  for a perpetual extension.   Meanwhile, there                                                               
was  an aggressive  credit system,  which will  phase out  and be                                                               
eliminated  next year.  The  tax cap  extension  resulted in  the                                                               
long-term tax plan  for Cook Inlet now being the  17-cent gas tax                                                               
and the $1/barrel oil tax.  Interestingly, that $1/barrel oil tax                                                               
effectively goes  away in  2022, anyway.  Because of  the changes                                                               
from the  AKLNG bill, SB 138,  which passed in 2014,  the gas tax                                                               
goes  to a  gross tax  on the  North Slope  and Cook  Inlet. That                                                               
results in  all the lease  expenditures being  calculated against                                                               
the oil side. Because Cook Inlet  is such a gas-heavy basin, that                                                               
would be enough to zero-out the oil tax.                                                                                        
The $1/barrel tax isn't a flat  tax; it's a maximum tax and would                                                               
reduce the oil  tax to zero beginning in 2022  under current law.                                                               
So, for that  reason and others, the other body  put in a working                                                               
group to reconsider the oil tax in Cook Inlet.                                                                                  
5:32:17 PM                                                                                                                    
CHAIR GIESSEL thanked him and noting they are at a breaking                                                                     
point in the presentation, she adjourned the Senate Resources                                                                   
Committee meeting at 5:32 p.m.                                                                                                  

Document Name Date/Time Subjects
Agenda - April 14 - 2017.pdf SRES 4/14/2017 3:00:00 PM
HB111 Sponsor Statement ver L 4.8.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111 Sectional Analysis-Explanation of Changes ver L 4.8.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111CS(FIN) Fiscal Note - DOR-TAX 4.9.17.PDF SRES 4/14/2017 3:00:00 PM
HB 111
HB111CS(FIN) Supporting Document - DOR Presentation 4.7.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111CS(FIN) Supporting Document - DOR Presentation Part Two 4-7-17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111 Supporting Document-Tax Credit History 3.17.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111 Supporting Document - Sample Letters in Support 3.12.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111 Opposing Document - Sample Letters in Opposition 3.9.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB0111 -Version L.A.PDF SRES 4/14/2017 3:00:00 PM
HB 111
HB111 - DOR Presentation - 4.14.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111
HB111 Sectional Analysis Ver L 4.14.17.pdf SRES 4/14/2017 3:00:00 PM
HB 111