Legislature(2017 - 2018)BUTROVICH 205

04/17/2017 01:00 PM RESOURCES

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Audio Topic
01:00:28 PM Start
01:00:51 PM HB111
04:14:15 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
Heard & Held
-- Testimony <Invited from Industry> --
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
1:00:51 PM                                                                                                                    
CHAIR   GIESSEL  announced   consideration   of   HB  111   [CSHB
111(FIN)(efd fld)  was before the  committee]. She noted  that HB
111 was  first heard  on April  14, 2017,  and two  hearings were                                                               
held  on April  15. The  first  hearing today  will have  invited                                                               
testimony, and  the hearing  at 5:00 p.m.  will allow  for public                                                               
Senators Wielechowski and Von Imhof joined the committee.                                                                       
1:01:13 PM                                                                                                                    
KARA MORIARTY, President and CEO,  Alaska Oil and Gas Association                                                               
(AOGA),  Anchorage, said  her presentation  has been  unanimously                                                               
approved   by  oil-producing   AOGA   members.  The   association                                                               
represents the majority  of oil and gas  producers, refiners, and                                                               
exploration companies in Alaska, as  well as the Alyeska Pipeline                                                               
Service Company,  which transports  oil from  the North  Slope to                                                               
1:03:01 PM                                                                                                                    
MS. MORIARTY  referred to  slide 3 of  her presentation  and said                                                               
that the oil and gas  industry is Alaska's economic driver, which                                                               
may seem  like a  bold statement,  but one third  of all  jobs in                                                               
Alaska can be attributed to  that industry. For every direct job,                                                               
she said,  another 20  jobs are created  in the  state's economy.                                                               
Her data is from  three years ago, and it will  be updated by the                                                               
end of May. With current low  oil prices, it is still the largest                                                               
contributor to  the state's unrestricted revenue.  At low prices,                                                               
Senate Bill  21 [passed  in 2013]  provides a  higher tax  to the                                                               
state than  ACES would  have. The  industry was  cash-negative in                                                               
2016, but state and local  governments received over $2.1 billion                                                               
in  revenue. "No  other industry  in Alaska  comes even  close to                                                               
this level of economic activity," she stated.                                                                                   
MS.  MORIARTY  said  policy  makers often  make  goals,  and  the                                                               
industry  often looks  at how  a policy  will impact  measures of                                                               
success,   including  production,   investment,  competitiveness,                                                               
revenues,  and  "fair share."  Four  out  of  those five  can  be                                                               
measured objectively,  but fair  share is  subjective and  in the                                                               
eye of the  beholder, she explained. She said  that production is                                                               
extremely important. Last  fiscal year there was  a three percent                                                               
increase in production.  It was the first  increase in production                                                               
in  almost 14  years.  She  said the  industry  is  on track  for                                                               
another  stable year  in production.  March  of 2017  was a  good                                                               
month for the industry and  for Alaska. The average production in                                                               
March  was 565,000  barrels per  day  through TAPS  [Trans-Alaska                                                               
Pipeline System].                                                                                                               
1:06:00 PM                                                                                                                    
MS. MORIARTY said that was  higher than any month since December,                                                               
2013.  It is  higher than  any  March since  2012, so  it is  not                                                               
necessarily  seasonal. It  is a  trend, she  said, and  is really                                                               
remarkable.  The  volumes  this  year so  far  are  right  around                                                               
558,000 barrels per day. This  first quarter is the highest since                                                               
2013. "So, good  news for us." She said her  next chart is older,                                                               
and it  was used in 2012  by a former legislative  consultant. It                                                               
shows what investment has been in  that decade and oil prices. As                                                               
prices spiked,  investment followed  it in the  Lower 48  and was                                                               
relatively  flat  in  Alaska.  A chart  from  the  Department  of                                                               
Revenue  (DOR) shows  the spending  stayed  relatively flat  from                                                               
2007 to 2012 but spiked after the passage of Senate Bill 21.                                                                    
SENATOR MEYER joined the committee.                                                                                             
1:08:00 PM                                                                                                                    
MS. MORIARTY  stated that it  is remarkable how the  spending has                                                               
stayed the same  vis-à-vis oil prices. "It's  just something that                                                               
we  wanted to  point out  to you."  Why is  investment important?                                                               
Alaska needs it, she said.  She showed oil production projections                                                               
from the  Energy Information  Administration from  October, 2016,                                                               
and  pointed out  the projections  for Alaska  production without                                                               
new investment. It  does not include any new projects,  and it is                                                               
following  a trend  line without  new  investments. The red  line                                                               
represents  TAPS  minimum  throughput, which  is  around  300,000                                                               
barrels  per day.  She  said that  the  Alyeska Pipeline  Service                                                               
Company is  aggressively pursuing ways  to manage the  pipe below                                                               
that minimum,  "in fact, even  today they have to  do temperature                                                               
monitoring,  more frequent  pigging, additional  investment, heat                                                               
into  the  line."  Admiral  Barrett  (President  of  the  Alyeska                                                               
Pipeline  Company)  has  said that  the  engineering  problem  of                                                               
economically transporting  smaller amounts  of oil  is yet  to be                                                               
solved, but it does not mean that it won't happen.                                                                              
1:09:48 PM                                                                                                                    
MS. MORIARTY said  there are exciting recent  discoveries. One of                                                               
AOGA's  main selling  points when  marketing is  that Alaska  has                                                               
about  one third  of the  nation's reserves.  "So, it's  not like                                                               
Alaska  is running  out,"  she  said, but  the  remaining oil  is                                                               
challenging and  more expensive to  produce. Over the last  12 to                                                               
18  months there  have been  many major  discoveries, and  she is                                                               
excited  about  them.  If Smith  Bay,  Conoco's  Willow  project,                                                               
Armstrong's unit,  and Hilcorp's  Liberty project come  online in                                                               
ten  years, the  average daily  production will  be over  500,000                                                               
barrels in the next decade.                                                                                                     
MS.  MORIARTY said  the previous  slide would  look different  if                                                               
that oil gets produced. She  said stability is important, and she                                                               
noted that  Castle Gap Advisors  told the committee  that changes                                                               
occur. It  is just  a matter  of the changes  being in  the right                                                               
direction with regard  to stability. For the past  12 years there                                                               
have been  many changes  to Alaska's tax  policy. She  provided a                                                               
chart  of those  changes. In  the  industry's view,  five out  of                                                               
seven   changes  are   tax  increases,   some  significant,   and                                                               
increasing taxes is  the wrong direction. Some  say that industry                                                               
has asked for over half of  these changes, and that is simply not                                                               
true.  "We  actually  opposed  over half  of  the  changes."  The                                                               
industry had  major concerns with  components of Senate  Bill 21,                                                               
as well.  She presented a  chart showing  what regions do  as oil                                                               
prices  changed over  the past  15 years.  Alaska is  not on  the                                                               
chart from  January, 2016, but if  IHS Energy was aware  of House                                                               
Bill  247,   Alaska  would   have  been   the  only   orange  box                                                               
representing an increase  in government take in  that column. Not                                                               
many regions were increasing taxes that year.                                                                                   
1:13:48 PM                                                                                                                    
MS. MORIARTY said  another parallel when looking at  the chart is                                                               
what Alaska  does for other  industries that rely on  a commodity                                                               
price. What does Alaska do  when other commodity prices fall out?                                                               
She  asked about  fishing, mining,  or emergencies.  The industry                                                               
never came  to Alaska,  she said, asking  for anything  more. "We                                                               
were  just asking  to  not  make any  changes  in this  low-price                                                               
environment." Regarding fair share, as  a mom with three kids she                                                               
knows  that fair  is in  the eyes  of the  beholder. This  is the                                                               
government take  today; it  is not the  government take  under HB
111, she  noted. At every oil  price, the state takes  more money                                                               
than industry and  the federal government, even  as companies are                                                               
cash-negative. HB  111 would  increase the  state's portion  at a                                                               
variety of prices.                                                                                                              
1:15:43 PM                                                                                                                    
MS. MORIARTY said  it is important for the  Department of Revenue                                                               
to share the  governor's four goals and concerns  for tax reform.                                                               
The first goal is to transition  Alaska away from the business of                                                               
providing cash credits  and rebates to the oil  and gas industry.                                                               
The  second  is  to  reduce  the  state's  liability  related  to                                                               
potential large  future investments.  The third  is to  defer the                                                               
state's direct participation  in the cost of a  new project until                                                               
it comes into production, and fourth  is to have the oil industry                                                               
participate as part of the  overall fiscal plan for Alaska. Maybe                                                               
the fourth  goal should be that  the oil and gas  industry should                                                               
participate more,  because it already participates  in the fiscal                                                               
plan for  Alaska, she  stated. This  bill will  just add  more to                                                               
that level of participation.                                                                                                    
MS.  MORIARTY said  individual companies  will  talk about  which                                                               
components of  HB 111 will impact  them the most, but  AOGA wants                                                               
to  summarize its  view  of the  bill. It  is  important for  the                                                               
public  to recognize  that  the bill  eliminates  more than  cash                                                               
credits. She  stated that there is  a lot of attention  on Alaska                                                               
getting  out of  the  business  of making  cash  payments to  the                                                               
industry,  but  the  payments  are  not  something  the  industry                                                               
created; the state  created the policy of cash  payments to those                                                               
who produce  less than 50,000  taxable barrels per day.  The bill                                                               
removes that policy. It eliminates  "another portion of the gross                                                               
value reduction,  which was  already reduced  last year  in House                                                               
Bill 247." It devalues the  net operating loss and eliminates the                                                               
sliding scale per barrel credit, which  is not and never has been                                                               
a cashable credit. She has  heard during this legislative session                                                               
that the  sliding scale credits  were generous and that  it would                                                               
not be a big deal to eliminate  them. She said it is important to                                                               
remember that  the sliding scale  credits are a  fundamental part                                                               
of the  tax system. They are  not credits in the  true meaning of                                                               
what  the public  thinks credits  are.  When Senate  Bill 21  was                                                               
originally drafted, the  tax rate was 25 percent,  and during the                                                               
modeling the  department and the  legislature discovered  that it                                                               
was  a  very regressive  tax,  and  the  effective tax  rate  was                                                               
dramatically lower at  low prices. So, they  worked together, she                                                               
said, to  create nothing more than  a math formula that  kept the                                                               
effective tax  rate stable at  about 25  percent over a  range of                                                               
prices,  and they  created  an element  of  progressivity in  the                                                               
system. "Like  most net tax  systems, we  never pay the  full tax                                                               
rate; trying  to create a  system where industry pays  35 percent                                                               
or higher would be draconian, at best," she added.                                                                              
1:20:04 PM                                                                                                                    
MS.  MORIARTY said  the  math  formula was  created  to keep  the                                                               
effective tax rate at about  25 percent using this per-barrel tax                                                               
credit.  Consultants have  described  it that  way,  and the  DOR                                                               
recognizes it as  does the current tax director.  He testified in                                                               
June, 2015,  saying that the  sliding scale credits  are integral                                                               
and are  offsets to an otherwise  high tax rate. He  said that it                                                               
is  hard  to  consider  them  a  credit  in  the  context  of  an                                                               
inducement  to doing  work. She  stated  that her  point is  that                                                               
changing or eliminating  them will change the structure  of SB 21                                                               
and  will be  an immediate  tax increase  on fields  that provide                                                               
over 90 percent of current production.                                                                                          
1:21:37 PM                                                                                                                    
MS. MORIARTY  said a key aspect  to recognize is there  are other                                                               
provisions that alter SB 21, such  as changing the base tax rate,                                                               
creating progressive  higher tax brackets, changing  the NOL [net                                                               
operating  loss]  credit  to   a  carry-forward  loss  deduction,                                                               
eliminating  the   10  percent   GVR  [gross   value  reduction],                                                               
hardening  the minimum  tax floor,  and creating  burdensome ring                                                               
fencing  for the  administration  of costs  and deductibility  of                                                               
costs. She added  that most of the provisions have  nothing to do                                                               
with  cash credits,  "and we  would argue  most of  these go  way                                                               
beyond the governor's stated goals."                                                                                            
1:22:43 PM                                                                                                                    
MS.  MORIARTY  addressed  the  NOL conversion  and  said  HB  111                                                               
eliminates  cash payments  to the  industry by  changing the  net                                                               
operating loss  credit, because  that is  really the  only credit                                                               
after  HB 247  goes into  effect that  will remain  on the  North                                                               
Slope.  The proposal  is "that  we'll just  simply convert  those                                                               
credits to  a deduction, add a  little bit of an  uplift for time                                                               
value of  money, and we'll  be good to go."  However, legislative                                                               
consultants and companies have  confirmed, through modeling, that                                                               
there is no way the industry  can be made whole by converting the                                                               
NOL from a  credit to a carry-forward loss  deduction. There will                                                               
not be  100 percent trade  off, she explained, even  with uplift,                                                               
because of "the  way our tax structure works." If  the goal is to                                                               
preserve as much value for the  NOL credits as possible, the bill                                                               
needs to have  mechanisms to allow for  continued new investment.                                                               
Companies absolutely need  to recover 100 percent  of their costs                                                               
with some type of uplift.                                                                                                       
1:25:15 PM                                                                                                                    
MS. MORIARTY  referred to  page 18 of  her presentation  and said                                                               
some people have suggested that  the carry-forward deductions are                                                               
a subsidy, because cash credits  are a subsidy. "Well, that's not                                                               
true." Net  operating loss deductions  allow for the  recovery of                                                               
essential costs  when companies lose money,  so it is just  how a                                                               
net-based system works. The  NOL encourages continued investments                                                               
for those losing  money, because they can recover  the money. The                                                               
recovery  of a  NOL is  critical,  and impeding  the recovery  by                                                               
decreasing  the value  or adding  a time  limit "does  affect the                                                               
timing of  when that benefit  is realized, and it  doesn't matter                                                               
if you're a producer or an explorer or an investor," she stated.                                                                
1:27:40 PM                                                                                                                    
MS. MORIARTY noted  that not allowing the full  recovery of costs                                                               
means it is  not a net-based tax system,  "because companies will                                                               
be paying  more than the  net." Carry-forward deductions  are the                                                               
only  proper way  to account  for spending  money in  a net-based                                                               
system; you  have to recognize  the need for full  cost recovery,                                                               
she  declared. There  are other  changes to  SB 21,  and frankly,                                                               
they  don't  have  much  to  do  with  refundable,  cashable  tax                                                               
credits.  On the  section changing  gross value  at the  point of                                                               
production, the committee's own  consultant pointed out that this                                                               
provision is  a flaw,  she said,  because it  prevents part  of a                                                               
taxpayer's real cash expenditures from ever being used.                                                                         
MS. MORIARTY said HB 111 is  a significant tax increase. There is                                                               
no way to  get around that. She said she  thinks both consultants                                                               
on Saturday  called it an  incredible tax increase, and  one said                                                               
the fiscal note from the Department  of Revenue might be a little                                                               
low. She  said she  wants to leave  the committee  with pictures,                                                               
because AOGA is  preparing for a really fun  anniversary in June.                                                               
She showed the Prudhoe Bay  discovery well when it was surrounded                                                               
by a  pristine environment. The  anniversary is for the  start of                                                               
production and the  completion of TAPS, which was  a project that                                                               
people said  could not be  done. They  did it anyway,  she noted,                                                               
and  it  changed the  landscape  of  Alaska's economy.  She  also                                                               
showed a photo  of Smith Bay exploration work  last winter, where                                                               
people are  saying it is  too expensive  and will never  be done.                                                               
She asked  that the  version of  HB 111  that passed  the Housebe                                                               
voted down.                                                                                                                     
1:30:05 PM                                                                                                                    
SENATOR  STEDMAN referred  to  page 12  of  the presentation  and                                                               
noted that the  spring forecast is $55. He asked  if the industry                                                               
or DOR  could "count the  cash and split up  in bars, and  we can                                                               
compare it." There are no numbers  indicated, and he asked to see                                                               
how the cash flow will match with  the bars on the chart. He said                                                               
that it would  be nice to actually look at  the dollars collected                                                               
and the expenses that the industry "has participated in."                                                                       
CHAIR GIESSEL said she will request that.                                                                                       
SENATOR STEDMAN  referred to  the PPT  [Petroleum Profits  Tax of                                                               
2006] when  there was about  $2.5 billion in  lease expenditures,                                                               
"and we're trying  to double it to stimulate  production." "If we                                                               
take  historic  '14,  it  looks like  the  operating  costs  have                                                               
dropped about  $300 million,  but the capital  costs from  '14 to                                                               
this recent  spring update is  about $1.6 billion." He  said that                                                               
the  point of  his question  is, "if  we have  right at  about $2                                                               
billion in capital expenditures, where  in '14 we had right under                                                               
$4 billion, and  to keep the old field alive,  I guess my concern                                                               
is the  next several years,  as far as production  versus capital                                                               
expenditures,  and I  was wondering  if she  had any  comments on                                                               
that." It is something  we have tried to keep an  eye on over the                                                               
years,  regardless of  the tax  structure, he  added. Old  fields                                                               
take a lot of money to keep running.                                                                                            
MS.  MORIARTY  responded  that  specific  investments  should  be                                                               
addressed by  the companies.  It is  an important  component, and                                                               
they have done  everything they can to become  more efficient. It                                                               
is not  unusual for  companies to  seek efficiencies,  she added.                                                               
That  means  the contracting  community  has  also reduced  their                                                               
costs, because  they need the  business. When prices go  back up,                                                               
there will  be a corresponding  increase in those  costs, because                                                               
those contractors will be looking to recover.                                                                                   
1:33:50 PM                                                                                                                    
SENATOR VON  IMHOF referred to  page 17 of the  AOGA presentation                                                               
stating that a  mechanism needs to be established  to maintain as                                                               
much value  as possible.  Ms. Moriarty  also said  the per-barrel                                                               
credit is  fundamentally important to maintain  a competitive tax                                                               
structure, yet  by putting together the  different presentations,                                                               
it is  the same per-barrel credit  that gets in the  way to fully                                                               
realize the NOL. "How do we address that conundrum?"                                                                            
MS. MORIARTY said  that is something that AOGA is  looking at and                                                               
trying to identify  ways that that could happen. She  said she is                                                               
hopeful that  the legislative consultants can  help the committee                                                               
with that. It could come down  to the ordering of how the credits                                                               
are applied,  she said, and what  could be allowed to  pierce the                                                               
minimum  tax floor.  There are  lots  of levers,  and looking  at                                                               
recalculating the  tax and  those mechanisms,  "you might  get to                                                               
the  answers. We  don't have  a perfect  solution identified  for                                                               
SENATOR STEDMAN  said it looks  like there is a  fundamental flaw                                                               
in  Alaska's tax  structure dealing  with the  per-barrel credit,                                                               
and it creates anomalies that  inhibit the ability to allow these                                                               
costs to  go forward  in a  normal cost  recovery process.  It is                                                               
important for viewers to realize  that this is done everywhere in                                                               
the world on  a net tax system;  this is not out  of the ordinary                                                               
to recover  costs, he explained. What  is out of the  ordinary is                                                               
the cash  payments that have the  state in its financial  jam, as                                                               
opposed to  carrying them  forward to  use against  production at                                                               
the time  of production. It  will be challenging to  work through                                                               
this, which is a fundamentally fatal  flaw. How do we get back to                                                               
treating our  oil basin  like other  sovereigns around  the world                                                               
where we  don't disadvantage  the industry  by not  allowing them                                                               
full-cost  recovery? If  we don't  allow that,  we will  be at  a                                                               
disadvantage and less attractive.                                                                                               
MS.  MORIARTY said  it is  important  to remember  that the  per-                                                               
barrel credits have never been cashable  and have to be earned in                                                               
the current year, so there has to  be a reordering of how the tax                                                               
system  works to  allow for  as much  as possible  retaining that                                                               
value of the current NOL system.                                                                                                
CHAIR GIESSEL  thanked her and said  that was a great  hearing on                                                               
Saturday from the consultant.                                                                                                   
1:38:08 PM                                                                                                                    
DAN  SECKERS,  Tax Counsel,  ExxonMobil,  Anchorage,  said it  is                                                               
troubling  that the  industry is  being  asked to  testify on  an                                                               
attempted  tax   increase,  especially   when  the   industry  is                                                               
struggling. This would  be the seventh change in  under 13 years,                                                               
he added. It is not helping  and is undermining confidence in the                                                               
tax system. He said to make  no mistake, the bill is nothing more                                                               
than an  adverse tax increase.  It is a significant  rewriting of                                                               
SB 21,  especially with today's  prices, which many  believe will                                                               
be the same  in the future. He said ExxonMobil  believes SB 21 is                                                               
working as  intended, because investments  and production  is up,                                                               
and  it's been  a help  to the  economy. Alaska  needs to  remain                                                               
globally competitive, and the committee  substitute will not help                                                               
attract  investments but  will make  matters worse.  Ms. Moriarty                                                               
did a great job highlighting concerns  with the bill, and he will                                                               
not belabor what the committee has already heard.                                                                               
MR. SECKERS  said it sounds  great for  revenue, but how  will it                                                               
work with  the interplay on  the North Slope and  between various                                                               
companies?  He  asked  if  the  committee  has  given  it  enough                                                               
attention to what  this really will do? The bill  has been pushed                                                               
pretty quickly.  He said many  of the  features of the  bill have                                                               
been brought up before. There  are some hidden little mine fields                                                               
that have been  brought in through HB 247  by the administration.                                                               
Most of  those are  bad ideas,  he opined, and  that is  why they                                                               
were not  enacted last year.  "Why would  you want to  enact them                                                               
again this year?" He said  the committee substitute will not help                                                               
the economy;  it will do  the exact  opposite. It sounds  good to                                                               
drop the tax  rate from 35 to  25. If that happened  and the per-                                                               
barrel credits  were taken  away, isn't that  SB 21  as proposed?                                                               
Those  two  components  were  there, he  said.  "Why  isn't  that                                                               
acceptable? Didn't  you guys  support that  then?" The  answer is                                                               
no, he  said. He told  the committee to go  back and look  at the                                                               
testimony by ExxonMobil. "We opposed  that," he said, because the                                                               
rate is  too high,  especially with  current prices.  The sliding                                                               
scale per barrel  credits were put in to mitigate  what is a very                                                               
high rate of tax.                                                                                                               
MR.  SECKERS  said  he  saw  Mr. Marks'  testimony,  and  he  was                                                               
fascinated how he showed the  competitive lines. Removing the tax                                                               
credits and lowering the tax rate  should go hand in hand, but it                                                               
will raise the  tax on industry on  the North Slope by  up to 300                                                               
percent for the  price ranges that will occur  in the foreseeable                                                               
future. "As policy  makers, you honestly think  that that's going                                                               
to  make  Alaska more  competitive  or  less?"  He asked  if  the                                                               
industry  will spend  more money  if the  cost of  doing business                                                               
goes up.  "Why would our  industry react differently than  if you                                                               
did that to,  say, fishermen, restaurant owners,  or Walmart?" He                                                               
said Exxon  is big, but  hardening the floor will  deny companies                                                               
that made money  this year that need to recover  costs from prior                                                               
years  today  in this  current  environment.  It will  discourage                                                               
investment  and  it will  create  a  disincentive to  make  those                                                               
MR.  SECKERS said  the  NOL  is a  very  troubling  piece of  the                                                               
puzzle.  He believes  that NOLs  are  not subsidies.  The tax  is                                                               
based on  a net  system, and  the recovery of  loss is  a central                                                               
component  since it  balances revenues  and expenses.  It affects                                                               
the competitiveness of a project  tremendously. He said to ask if                                                               
it is in the best interest of the  state. A NOL is not a badge of                                                               
honor; it means  that a company was  making critical investments,                                                               
even though they were losing  money, to employ Alaskans, with the                                                               
expectation that  they can get  it back without  limitation. "But                                                               
it  gets  worse   than  that.  Ask  yourself   from  a  practical                                                               
perspective how will  this actually work, okay?"  This bill would                                                               
require ring  fencing to  be put around  fields that  lose money,                                                               
which sounds great  in theory. He suggested putting  a ring fence                                                               
where "you can  only recover your costs against  that one field."                                                               
The consultants  have shown  that when you  start doing  that, it                                                               
changes the investment  portfolio and the rate of  return on that                                                               
field. He said  the likely thing that will happen  is that if the                                                               
bill  goes into  effect,  he will  get a  call  from his  manager                                                               
asking if investments will put the  company in a loss. He said he                                                               
will not be able to predict  the future, but maybe the investment                                                               
doesn't go forward  since the economics have  changed. "What does                                                               
that mean? Is  the investment going to stall now  and wait? I can                                                               
only drill so many months in  a year…might as well wait until the                                                               
fall." He said maybe the  investment never goes forward, and "who                                                               
wins in that environment?"                                                                                                      
1:46:26 PM                                                                                                                    
MR. SECKERS asked  how the bill will affect  the dynamics between                                                               
partners. He said if two companies  want to invest in a field, it                                                               
will drive  one of them  into a loss, but  not the other  one, so                                                               
"are they  going to  see eye-to-eye on  how that  investment will                                                               
go?"  He said  he  is not  talking about  the  one having  better                                                               
capital rating or  better borrowing. He said he  is talking about                                                               
the tax policy  driving a very distinct  conversation between the                                                               
partners,  "and who's  going to  win in  that environment?  How's                                                               
that going  to turn out? I  don't know." He asked  if anybody has                                                               
thought about  that. "What happens  if I have two  companies that                                                               
are  spending? They're  going  to put  another  field out  there.                                                               
Company  A  is spending  a  lot  more.  Company  B is  maybe  not                                                               
spending so much." Company A  gets to enjoy immediate recovery of                                                               
all their costs  in that year, he explained. He  said his company                                                               
files  a consolidated  segment-based  tax. It  isn't a  field-by-                                                               
field tax but one on activities on  the North Slope as a whole to                                                               
encourage going to a producing field from a nonproducing field.                                                                 
MR.  SECKERS  said  a producing  field  helps  fund  exploration,                                                               
because a company  will say, "I got more money  coming from here;                                                               
I  can use  it here."  Ring-fencing  in this  state could  really                                                               
change the  economics on  investments. He  asked what  policy the                                                               
state is  trying to drive  to. Alaska will reward  companies that                                                               
spend less,  because they  can write off  their costs  today, and                                                               
penalize companies  that spend more  and drive them into  a loss.                                                               
"If that's  what you want, that  could be a practical  outcome of                                                               
the policy you  put in place," he opined. He  asked the committee                                                               
what the  problem is  they are  trying to solve.  He said  he has                                                               
heard the concern  of companies buying other  companies, and they                                                               
will acquire losses. If that is  the issue, don't apply a shotgun                                                               
to a solution that only requires  a 22. He told the committee not                                                               
to penalize everything in the North Slope.                                                                                      
1:48:53 PM                                                                                                                    
MR.  SECKERS said  this is  a unique  environment, and  "they say                                                               
ring fencing  is common in  other parts  of the world."  He noted                                                               
that he has  not practiced international law in a  long time, but                                                               
his understanding is that most  of them-not all of them-when they                                                               
ring fence, they ring fence a  project. "We have a slope-wide tax                                                               
basis, not a project filing basis,  so how's this going to work?"                                                               
If there  are five  fields, for example,  and four  are producing                                                               
and one  has a loss, the  four can be consolidated.  That changes                                                               
the  fundamental structure  of SB  21 in  the segment  reporting.                                                               
"You're being asked to underwrite a  tax that's been on the books                                                               
for 11  years in a  matter of a  week and  a half," he  said. The                                                               
bill was pushed  through without anybody looking  at the economic                                                               
consequences,  other than  nice  words. The  gross  value at  the                                                               
point of production  can't go below zero,  but the administration                                                               
never really  describes what  that will  do. He  said he  files a                                                               
consolidated tax return. "I'm sorry,  it's not our fault that the                                                               
oil is  located far away in  many places," he added.  This policy                                                               
will say that the state wants  his company to explore in the far-                                                               
reaching fields,  "and I'm sorry  it costs so  much to get  it to                                                               
market." It's  not Texas  or North Dakota,  and it  is expensive.                                                               
"So, what's the policy of the state  going to be?" If a field has                                                               
economic  issues, it  gets  buffered by  the  revenue of  another                                                               
field. This  policy will encourage  exploring, "but shame  on you                                                               
if  you're too  far away  from  any of  the existing  facilities,                                                               
because if you  do, and prices fall, bingo, we're  going to raise                                                               
your taxes  on that field-and  that field  alone." He said  he is                                                               
concerned about the policy of the  state-to sit there and drive a                                                               
policy that is a step change  to attack a single field. This will                                                               
have  implications for  any field  that  comes on  far away  from                                                               
existing facilities. Enacting  this legislation is a  leap in the                                                               
wrong  direction,  he concluded,  and  will  double or  quadruple                                                               
ExxonMobil's  taxes at  low prices,  which is  when Alaska  wants                                                               
investments. He  said we  are all  struggling, but  he questioned                                                               
raising taxes on a struggling company.                                                                                          
1:53:19 PM                                                                                                                    
SENATOR STEDMAN said he believes  Mr. Seckers is referring to the                                                               
current   tax   structure  where   "we're   in   a  minimum   tax                                                               
environment."  Under  the proposed  bill,  "we'd  be outside  the                                                               
minimum   tax,   therefore   dropping   into   another   set   of                                                               
calculations,"  which would  increase  the  dollars the  industry                                                               
would be  paying the state.  "So, we basically have  two separate                                                               
tax structures  on top of each  other, one being the  minimum tax                                                               
somewhere in the high sixties and  down, and north of that price,                                                               
falling into the 35 percent net profits tax."                                                                                   
MR.  SECKERS said  he is  correct.  What happens  in the  current                                                               
price range  is that a lot  of companies are in  the minimum tax,                                                               
and this would triple their taxes.  For companies that are not in                                                               
the minimum  tax, "then that  will get  lumped out of  that," and                                                               
there could be a mathematically infinite tax increase.                                                                          
SENATOR  STEDMAN said  there was  a spring  forecast a  couple of                                                               
days ago. The  net profit that we are talking  about splitting up                                                               
is  $1.3 billion.  Of that,  the state's  minimum tax  spread was                                                               
about $38  million. "Therein lies  the discussion of  the minimum                                                               
tax and  where it should  be applicable, where it  shouldn't, and                                                               
how do we  deal with it." He  said he does not  have any answers,                                                               
but it is  exciting to see the profitability come  back so robust                                                               
in the oil basin, "because  when they're not healthy, neither are                                                               
we." He said he does not want to  see a tax change every time the                                                               
price forecast changes. Since the  PPT, the legislature has never                                                               
looked  at  ring  fencing  on  the micro  level,  but  the  state                                                               
basically ring-fences Cook  Inlet and middle earth,  which is the                                                               
center part  of the  state. North of  68 degrees,  everything was                                                               
consolidated,  because the  state wanted  to get  to more  remote                                                               
locations, like  Smith Bay  and Pt.  Thomson. He  suggested being                                                               
very careful  with the  ring fencing in  order not  to negatively                                                               
impact the economics.                                                                                                           
MR. SECKERS  agreed with his comments.  He said not to  be swayed                                                               
by what  sounds good  in concept while  not understanding  how it                                                               
will actually work.  Part of the attraction of high  tax rates is                                                               
in consolidating the economics on  the North Slope. One field can                                                               
help the development of another,  and ring fencing would cut that                                                               
avenue off.  It can cause  some disconnect between  partners, and                                                               
there is no winner.                                                                                                             
SENATOR  WIELECHOWSKI  asked  if  Mr. Seckers  thinks  SB  21  is                                                               
adequate  for getting  the  kind of  investment  Alaska needs  in                                                               
order to increase oil production.                                                                                               
MR.  SECKERS  said  he  believes that  the  forecast  shows  that                                                               
production is  up. He said a  lot of people fixate  on production                                                               
tax and see that  the state is giving it away or  selling it at a                                                               
deep discount. That  is one piece of the puzzle,  and people need                                                               
to look  at the entire economic  model. The industry pays  a high                                                               
regressive royalty,  and they  pay property  tax when  they start                                                               
work, which is a regressive tax.  They are also subject to income                                                               
tax. He  said SB  21 is  working and has  been beneficial  to the                                                               
SENATOR WIELECHOWSKI asked  if that is a change  in his position,                                                               
because he  testified previously  that SB  21 would  not increase                                                               
investment and production.                                                                                                      
MR. SECKERS said he initially  opposed it, but everybody knows it                                                               
is a radical  improvement over ACES. When it changed,  he said it                                                               
would lead to more investment  and increased production. The rate                                                               
is  still high.  "I don't  believe our  testimony has  changed in                                                               
that regard," he stated.                                                                                                        
2:00:56 PM                                                                                                                    
SENATOR STEDMAN said his previous  comment about the $1.3 billion                                                               
increase in production  tax value and the $38  million going into                                                               
the minimum tax, we do pick  up royalties of $88 million, "so you                                                               
need to  add those  two together  to see  the whole  magnitude of                                                               
what's going on."  If projects don't go forward,  Alaska does not                                                               
get the  royalty, he added.  Then he said  he had just  looked at                                                               
the wrong  column, and  he clarified  that it  is a  $438 million                                                               
revenue increase to the state, not $88 million.                                                                                 
2:02:52 PM                                                                                                                    
DAMIAN BILBAO,  Vice President,  Commercial Ventures,  BP Alaska,                                                               
Anchorage,  said  BP is  opposed  HB  111  because  it is  a  tax                                                               
increase and takes  Alaska "out of the game"  for investments. It                                                               
would impact  BP cash flow  by approximately $90 to  $180 million                                                               
when  oil is  between  $55  and $65  per  barrel. That  financial                                                               
impact is  about what BP  spends on  drilling in any  given year.                                                               
Policy  matters,  and  Senate  Bill   21  has  made  Alaska  more                                                               
competitive. Alaska  is competing with  other places, and  in the                                                               
last  few years  the  competition has  become  domestic. The  tax                                                               
increase  will make  production more  expensive and  will require                                                               
more technology to offset the taxes.                                                                                            
2:05:00 PM                                                                                                                    
MR.  BILBAO  showed  two graphs  by  consultants  Wood  Mackenzie                                                               
comparing investments  in different regions. The  comparisons are                                                               
indexed to  a common starting point  of 2003, he said.  The Lower                                                               
48 investments surged beyond global  growth and Alaska growth. As                                                               
oil prices grew,  investments moved with it. As  oil prices began                                                               
to decline  in 2014, Alaska  investments grew when  other regions                                                               
declined. He said his company believes  that is because of SB 21.                                                               
After 2014,  production increased in other  regions and flattened                                                               
out  in  Alaska.  "We've  seen,   over  the  last  two  years,  a                                                               
fundamentally different  production profile in Alaska  than we've                                                               
seen in any other place that we operate."                                                                                       
2:07:45 PM                                                                                                                    
MR. BILBAO  turned to  a US  government graph  showing production                                                               
from  1990  and  pointed  out  the 2014  increase  in  tight  oil                                                               
production, and he  said that reflects technology. "You  see a US                                                               
Lower 48 growth in production of  almost 5 million barrels of oil                                                               
per  day."  In  the  mid-1980s, Alaska  accounted  for  about  25                                                               
percent of US  oil production. Today, it is less  than 5 percent.                                                               
As investment is allocated, there  are many other places, even in                                                               
the  US, where  that  investment can  go, "and  you  can see  how                                                               
technology is  making that investment  grow in the Lower  48." In                                                               
the last  year, rigs are returning  to the Lower 48  and they are                                                               
three times more efficient than they were a few years ago.                                                                      
2:09:11 PM                                                                                                                    
MR. BILBAO said that for legal reasons  there is no Y axis on the                                                               
next chart,  which represents the "17  different locations across                                                               
the BP upstream  portfolio and the amount of  cash they generated                                                               
in 2016."  The chart represents  free cash before  federal taxes,                                                               
he  explained.  Alaska  reflected  a  cash  loss  within  the  BP                                                               
upstream portfolio. Alaska is different  because of its location,                                                               
and that  affects BP's bottom  line. There are three  things that                                                               
move the  investment: efficiency,  use of technology,  and fiscal                                                               
policy. "We saw SB 21 make  Alaska more competitive and we saw it                                                               
attract investment."  It delivered additional production,  but at                                                               
these oil prices, "you can see how Alaska performed within BP."                                                                 
2:11:07 PM                                                                                                                    
MR. BILBAO said fiscal policy  is entirely within the sovereign's                                                               
control.  He showed  a graph  representing  four different  North                                                               
Slope decline rates.  A black line represents the  version [of HB
111  tax policy]  that was  presented  last week.  "I think  that                                                               
averages out  to about 5 percent  decline," he said. The  line is                                                               
highlighted  against a  2 percent  decline and  did not  assume a                                                               
flat  production going  forward. He  said the  2 percent  decline                                                               
reflects SB 21. The graph also  shows an 8 percent decline, which                                                               
is more  of what was happening  prior to SB 21.  Without material                                                               
investment, the fields on their own  perform at a decline rate in                                                               
the  mid-teens,  he  stated,  which  is  conservative.  For  each                                                               
decline, the royalty is calculated at  a fixed price. He said his                                                               
point is that  depending on the rate of decline,  there will be a                                                               
fundamentally different  royalty value to the  state. If Alaska's                                                               
tax policy  continues to deliver  a 2 percent decline,  the total                                                               
royalty value to the state would  be over $12.5 billion, versus a                                                               
revenue sources book  of around $10.5 billion.  The more historic                                                               
8 percent decline would have a $9.5 billion royalty value.                                                                      
2:13:53 PM                                                                                                                    
MR. BILBAO noted that Alyeska  warns of a technological challenge                                                               
when  the rate  is less  than 300,000  [barrels per  day] of  oil                                                               
through  TAPS,  which  should  be  considered  while  looking  at                                                               
decline  rates. He  said BP  has  principles of  tax policy  that                                                               
Alaska  should adopt.  A policy  should encourage  more oil  down                                                               
TAPS from  all players,  he said.  It should  extend the  life of                                                               
"backbone" fields,  Prudhoe Bay  and Kuparuk,  which make  up the                                                               
vast majority of  oil down TAPS. A new or  smaller field requires                                                               
oil  to  layer  on  top  to flow  efficiently.  A  policy  should                                                               
encourage more independents, which is  good for the state and for                                                               
the industry. He  finds that SB 21 delivers  more production from                                                               
the legacy fields, and there  has been more material discovery on                                                               
the North  Slope in the  last few years than  has been seen  in a                                                               
very long time. A policy  cannot pick winners and losers, because                                                               
there  are unintended  consequences from  differentiating between                                                               
one field or one company and  another. The industry is very quick                                                               
to act  on those  unintended consequences, he  stated, and  it is                                                               
best to avoid  them. He is proud that BP  is celebrating 40 years                                                               
of  Prudhoe Bay  production, and  he believes  there's many  more                                                               
years to play for-with the right policy, but not with HB 111.                                                                   
2:16:02 PM                                                                                                                    
SENATOR  VON IMHOF  referred to  page 6  of the  presentation and                                                               
said  that the  green line  is  the decline  in production  under                                                               
Senate Bill  21, and  that line  does not  go below  the 300,000-                                                               
barrel threshold needed for TAPS.                                                                                               
MR. BILBAO said 300,000 is not a  hard line but the start of less                                                               
efficiency and more difficult operations  of TAPS. The slower the                                                               
oil  flows down  TAPS, the  more problems  arise, but  Alyeska is                                                               
focused on solving the problem. The  2 percent is indicative of a                                                               
more competitive policy  like SB 21. Lower costs  extend the life                                                               
of legacy  fields and mitigate  risks of the  midstream challenge                                                               
by years, not months.                                                                                                           
2:18:05 PM                                                                                                                    
SENATOR STEDMAN  recalled that  prior to SB  21, there  was ACES,                                                               
and the forecast  was a 2 percent decline going  out for decades.                                                               
The  green line  is not  surprising, and  the red  line would  be                                                               
extremely  alarming.  He asked  which  projects  can be  directly                                                               
related  to SB  21 tax  policy.  He said  he has  never gotten  a                                                               
complete  list  of  projects.  As   the  fiscal  terms  get  more                                                               
favorable  to  the industry,  they  create  a stimulus.  That  is                                                               
pretty  basic, but  he would  like to  know if  the industry  can                                                               
pinpoint which barrels are attributable to that policy.                                                                         
MR. BILBAO  said the fundamental  difference with  today's policy                                                               
is that  it challenges  the industry to  do more.  The per-barrel                                                               
credit effectively  places the additional burden  on the producer                                                               
to go  find a way to  deliver more production in  the same field.                                                               
There is something incredibly energizing  about what is happening                                                               
now.  Anybody  in   any  company  is  managing   the  fields  and                                                               
facilities  differently, and  the results  speak for  themselves.                                                               
The fact that more oil flowed down  TAPS in 2016 than in the year                                                               
before is unbelievable. He said  he remembers "being in this body                                                               
a few years ago during the  SB 21 debate being challenged whether                                                               
there would  be any new oil  that resulted from SB  21, much less                                                               
flat  production." It  is remarkable  that they  are all  sitting                                                               
here today talking about that  and looking at "1-Q-2017 numbers,"                                                               
he  said. It  is the  way  we are  working together.  One of  the                                                               
biggest changes is  actually on base management.  There have been                                                               
new pads,  but the  way industry  has managed  the base,  and the                                                               
people   in  the   office   who  have   done   that,  is   almost                                                               
SENATOR STEDMAN  said a consultant  noted that Alaska has  one of                                                               
the  most complex  tax systems.  He asked  Mr. Bilbao  to explain                                                               
upstream, midstream,  and downstream and  if BP has  any exposure                                                               
to anything  besides upstream. Price  is about $10 above  what is                                                               
shown in the chart. We all want to be in the black, he said.                                                                    
2:22:54 PM                                                                                                                    
MR. BILBAO  said the chart  includes regional pictures,  not just                                                               
production of oil  and gas fields. In Alaska,  the chart reflects                                                               
BP's upstream  producing fields and the  midstream investments in                                                               
the  pipeline  and  the  ships.  The  graph  reflects  cash  flow                                                               
delivery  for  that region.  In  Alaska,  BP has  been  cash-flow                                                               
negative for the  last couple of years, he said,  but it has been                                                               
working hard  to be more  efficient. He expects  BP to be  in the                                                               
black in  2017, but it is  not a sustainable business  model. "We                                                               
believe we've turned  the corner, but we'll have to  see where we                                                               
are at the end of the year."                                                                                                    
SENATOR WIELECHOWSKI  asked where Alaska  ranks on the  chart for                                                               
profits in 2016.                                                                                                                
MR. BILBAO said if the chart  depicted profits, it would still be                                                               
in the red.                                                                                                                     
SENATOR  WIELECHOWSKI asked  if  the recent  Journal of  Commerce                                                               
article was incorrect to say that  BP made $85 million, with most                                                               
of that in Alaska.                                                                                                              
MR. BILBAO said that is part  of the picture. The company files a                                                               
20F that  reflects its upstream  business, so when  talking about                                                               
Alaska, BP includes its midstream  ownership of TAPS and the cost                                                               
of ships. It all costs money, so  BP incurred a loss in 2016, and                                                               
referenced a correction article by the same publication on that.                                                                
SENATOR WIELECHOWSKI asked about the  internal rate of return and                                                               
net present values  in Prudhoe Bay. What do they  look like under                                                               
SB 21 and HB 111 using forecast numbers?                                                                                        
2:25:50 PM                                                                                                                    
MR.  BILBAO said  BP does  not provide  the economic  returns for                                                               
individual  projects. "You  are  talking about  a  wide range  of                                                               
investment opportunities,"  he said,  like new  pad construction,                                                               
new rigs, and opportunities in  other fields. In Alaska there are                                                               
a  lot more  projects that  BP wants  to progress,  and the  most                                                               
important thing is  that BP continues to focus  on making Prudhoe                                                               
Bay and its Alaska businesses  competitive, independent of price.                                                               
In the  past the  company has  tended to rely  on price  "to save                                                               
us." It is trying  to move away from that and  to where it drives                                                               
the performance  and makes the  business more competitive.  If BP                                                               
makes the  business more  competitive, it  will compete  for more                                                               
capital  and  more projects.  If  costs  go  up, that  makes  the                                                               
business less competitive.                                                                                                      
SENATOR  WIELECHOWSKI  asked  how to  determine  competitiveness.                                                               
What rate  of return is a  competitive number for BP?  He said he                                                               
would like the  legislature to know what these  numbers are under                                                               
different taxes.  How can  the legislature make  sure that  BP is                                                               
getting the return that it needs?                                                                                               
2:28:12 PM                                                                                                                    
MR. BILBAO said it is  important to consider the financial impact                                                               
and the economic impact of a tax  policy. "If I own a house and I                                                               
am struggling to pay the  mortgage, it doesn't really matter that                                                               
renovating the  bathroom is a  good return investment,"  if there                                                               
is no money  to pay for it,  he said. If BP is  not making money,                                                               
it will be challenging to  compete for an investment opportunity.                                                               
It  is  important to  consider  both.  For what  the  legislature                                                               
should be looking  at, it should be looking at  the amount of oil                                                               
flowing down  TAPS. That is an  outcome, and the policy  in SB 21                                                               
is meant to encourage a  certain outcome, and that is production,                                                               
and  that is  what the  state is  getting. Also,  there are  more                                                               
players on  the North Slope,  which is the  result of SB  21. The                                                               
policy has  been successful. He  said if  the state is  trying to                                                               
support  a  project,  it  is  trying to  pick  one  project  over                                                               
another,  and  the  industry  will  be  quick  to  react  to  the                                                               
unintended aspects  of that,  which you would  not want.  He said                                                               
not  to get  into the  game of  picking losers  and winners.  The                                                               
current policy is good for investment.                                                                                          
SENATOR  WIELECHOWSKI said  if BP  does a  deal with  Conoco, the                                                               
"numbers people"  will figure  out a  reasonable rate  of return.                                                               
What is a  reasonable rate of return to  encourage production and                                                               
investment?  What  is a  reasonable  net  present value,  so  the                                                               
legislature knows what to shoot for in a tax structure?                                                                         
MR. BILBAO  said he doesn't have  a number; he can  only tell the                                                               
committee the  consequences of state  policy. The  current policy                                                               
encourages investment and  exploration, but the policy  of HB 111                                                               
would not do a lot of that.                                                                                                     
2:32:10 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  what  financial  metrics the  policy                                                               
makers should be looking at.                                                                                                    
MR.  BILBAO  said  projected economic  metrics  don't  drive  the                                                               
outcomes. The  financial and development outcomes  tell the state                                                               
if  its  policies are  working.  Either  companies are  producing                                                               
more, or they  are not. If they  are getting a 3 percent  or a 30                                                               
percent rate of  return, as long as they are  out there producing                                                               
for  you, then  your policy  is working.  The metrics  should not                                                               
matter to a sovereign. "Right  now, you're generating the outcome                                                               
you want," he said.                                                                                                             
2:33:39 PM                                                                                                                    
CHAIR GIESSEL said she was in  Alaska when TAPS was built, so she                                                               
is interested in  making sure that the flow  continues. She added                                                               
that she  is very, very  pleased to see  the leveling out  of the                                                               
decline. It was  more than a 3 percent  increase when considering                                                               
BP pulled  it up  from its  decline, but  how many  Alaskans have                                                               
lost their jobs at BP?                                                                                                          
MR. BILBAO  answered that over  the last three years,  the number                                                               
of  employees went  from  2,700  to 1,700  due  to divestment  of                                                               
certain fields,  and he does  not know about contractors  and the                                                               
multiplier effect. It  is significant; those are  our friends and                                                               
neighbors. About 80 percent of  BP employees are Alaska residents                                                               
or qualify for the Alaska PFD, he added.                                                                                        
SENATOR HUGHES noted  that Mr. Bilbao said that  BP experienced a                                                               
loss in 2016. She asked what that was.                                                                                          
MR. BILBAO said  there was about $80 million profit  on the field                                                               
side and a loss of $200  million "on the pipe and shipping side."                                                               
If you only care about the $80  million, "our view is that HB 111                                                               
would take care of that as well and wipe that out."                                                                             
2:36:40 PM                                                                                                                    
SENATOR STEDMAN  said if  Alaska gets the  policy right,  it gets                                                               
the jobs.  It is an extremely  complex tax system. It  seems like                                                               
we will  be in the  minimum tax  for the foreseeable  future, and                                                               
the net  profits tax will  probably not be implemented.  He asked                                                               
about  the inefficiency  the state  is imposing  on BP  and state                                                               
employees with this overly complex tax code.                                                                                    
MR. BILBAO said that nothing is  as difficult as changing the tax                                                               
code, reeducating people, and building new models.                                                                              
2:38:41 PM                                                                                                                    
PAUL   RUSCH,   Vice   President  of   Finance,   ConocoPhillips,                                                               
Anchorage, said  Senate Bill  21 is working  and has  resulted in                                                               
increased  investment  in Alaska.  Referring  to  page 2  of  his                                                               
presentation, he said  the ERD (extended reach  drilling) rig was                                                               
sanctioned in  2016. It is  a game changer for  ConocoPhillips on                                                               
the North Slope. It will  reach more resources, he explained, and                                                               
will be  operating in 2020. He  said Greater Moose's Tooth  1 was                                                               
sanctioned  in 2015,  and work  is progressing  for first  oil in                                                               
2018, including a  busy construction season this  winter. It will                                                               
cost $900  million and should  produce 30,000 barrels of  oil per                                                               
day.  He expects  a GMT2  [Greater  Moose's Tooth  2] project  in                                                               
2018.  Each  will provide  about  600  to 700  construction  jobs                                                               
during development. Other projects  represent about $3 billion in                                                               
gross of expenditures and about  50,000 barrels per day. He noted                                                               
the exploration  work announced earlier  this year at  the Willow                                                               
site. It is still under appraisal,  but it is expected to provide                                                               
200,000  barrels  per  day.  ConocoPhillips   is  active  in  the                                                               
December 2016 lease sale.                                                                                                       
MR. RUSCH referred to a bar  chart on the capital expenditures of                                                               
ConocoPhillips,  which is  up to  $1 billion.  The percentage  of                                                               
spending in  Alaska relative to total  ConocoPhillips capital has                                                               
gone  from 6  percent to  20 percent  since 2012,  driven by  the                                                               
reductions  in  expenditures around  the  world  and low  prices.                                                               
ConocoPhillips  has   had  smaller  reductions  in   Alaska  than                                                               
elsewhere.  This  is  an  indication  that  Alaska  is  competing                                                               
favorably under Senate Bill 21.                                                                                                 
2:44:04 PM                                                                                                                    
MR. RUSCH turned  to page 3 of his presentation.  He said the net                                                               
cash  flow is  on the  left  side, and  it shows  that the  state                                                               
always has  the largest share.  When investors are  losing money,                                                               
the  state  is still  making  some,  so  the government  take  is                                                               
infinite.  The  next  chart  shows  the  percentage  increase  in                                                               
production taxes under HB 111  relative to the current system. It                                                               
is a significant increase in taxes,  especially in the $50 to $80                                                               
price  range. The  bill was  described as  a modest  tax increase                                                               
that was fixing the tax credit  problem, and the chart shows that                                                               
the bill is a large increase in production taxes.                                                                               
2:46:58 PM                                                                                                                    
MR. RUSCH  showed his next  chart of the competition  that Alaska                                                               
is facing  for investment dollars. It  focusses on unconventional                                                               
oil  in  the Lower  48  and  Canada.  The  data are  specific  to                                                               
ConocoPhillips  but  are  likely   indicative  the  industry.  It                                                               
portrays the cost of supply for  15 billion barrels, and each bar                                                               
represents a  specific set of  resources, he stated. On  the left                                                               
are projects  that have a  cost of  supply in the  single digits,                                                               
and  it  goes up  to  $50  per  barrel.  It captures  all  costs:                                                               
development,   operating,   and  fiscal   terms.   Unconventional                                                               
resources are represented by the  yellow bars, and ConocoPhillips                                                               
has 7  billion barrels of  unconventional resources in  the Lower                                                               
48 with a cost of supply of  about $35 per barrel. He said Alaska                                                               
cost of  supply is  close to  $50 per barrel.  The company  has a                                                               
cheaper alternative to Alaska, so it  is trying to bring down the                                                               
costs. He said  the cost of supply for the  CD5 project in Alaska                                                               
was brought down from $66 to $40 per barrel.                                                                                    
2:50:24 PM                                                                                                                    
MR. RUSCH said  production taxes are part of the  cost of supply,                                                               
so they  can make Alaska  projects less competitive to  the Lower                                                               
48 alternatives.  He presented  the key concerns  with HB  111 on                                                               
slide  6. The  main  concern is  an increase  in  cost since  the                                                               
company has  lower cost opportunities. Additionally,  HB 111 puts                                                               
an end  to the  three-year interest  period that  was established                                                               
last year, and it is punitive  because it applies a high interest                                                               
rate for  a time  that is  largely controlled  by the  state. The                                                               
audit process  in Alaska has  a six-year statute  of limitations,                                                               
and that is  set by the state. Beyond that  is an appeal process,                                                               
which is largely  controlled by the state, so it  could be six to                                                               
nine years  before an audit  is resolved, he said.  This schedule                                                               
can  lead to  tax assessments  that are  larger than  the initial                                                               
audit findings. As  part of HB 247, the  interest was effectively                                                               
doubled,  but  it  reduced  the   audit  period.  Under  HB  111,                                                               
incentives for shortening the audit period have been removed.                                                                   
2:53:11 PM                                                                                                                    
MR. RUSCH  said there has been  a lot of discussion  on hardening                                                               
the floor, and there is some  confusion on whether this is a hard                                                               
floor. Testimony from  last year suggested that "we  did not have                                                               
a  hard floor."  The  recent  advisory bulletin  put  out by  DOR                                                               
attempts  to harden  the floor,  which conflicts  with the  SB 21                                                               
statutes. He  stated that  any efforts to  harden the  floor will                                                               
erode the value of tax credits or the GVR benefits.                                                                             
2:54:20 PM                                                                                                                    
MR. RUSCH suggested  that the NOL provisions in HB  111 need some                                                               
improvement. ConocoPhillips is not  eligible for the reimbursable                                                               
credits, but it supports the change  in the NOLs from a credit to                                                               
a  carry-forward  deduction. However,  there  are  issues in  the                                                               
ability to fully  recover these expenses. The  combination of the                                                               
ring fencing  and the reduction  in value after seven  years will                                                               
erode  the value  of the  NOLs. He  said that  ring fencing  will                                                               
reduce the value  of a discovery like Willow,  and the disclosure                                                               
requirements of  NOLs are too  broad and effectively  release the                                                               
entire tax  return, which could  disclose the cost of  a drilling                                                               
rig,  for  example,  violating  antitrust  rules.  Alaska  has  a                                                               
complex   tax  system,   and  the   ring  fencing   could  create                                                               
administrative burdens. He  concluded that SB 21  is working, and                                                               
increasing taxes will make Alaska less competitive.                                                                             
SENATOR  STEDMAN referred  to page  3,  which looks  like it  was                                                               
created after  the 2016  fall revenue source  book. He  asked for                                                               
the calculation  to be run  with updated figures, because  at low                                                               
prices  royalties  become  more  dominant  for  the  state,  "and                                                               
clearly we're  coming out of a  state of low prices,  so it would                                                               
give us  a better feel  to have  the spring forecast  numbers. He                                                               
expressed appreciation for including percentages on the chart.                                                                  
2:59:17 PM                                                                                                                    
SENATOR WIELECHOWSKI referred  to slides 3 and 4, and  at $60 per                                                               
barrel, it  shows the state getting  46 percent of the  take, and                                                               
it  looks  like that  is  $5  billion,  which  would be  over  $2                                                               
billion, and the next slide shows  a 100 percent tax increase. He                                                               
asked if the  state's production tax increased by  100 percent to                                                               
$4 billion.                                                                                                                     
MR.  RUSCH  said  numbers  on  slide 3  includes  all  taxes  and                                                               
royalty, not  just production  tax. The tax  increase on  slide 4                                                               
includes only the production tax.                                                                                               
3:00:36 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  what increase  Mr. Rusch  calculates                                                               
for all taxes.                                                                                                                  
MR. RUSCH said he  did not have that figure. He  said he tried to                                                               
be  very  transparent. The  bill  addresses  production tax,  not                                                               
royalty or other taxes.                                                                                                         
SENATOR WIELECHOWSKI  said it is confusing,  because the previous                                                               
chart includes all  of that. What would the total  take be at $60                                                               
per barrel? Is it a lot less than 100 percent?                                                                                  
MR. RUSCH said he did not know.                                                                                                 
3:02:54 PM                                                                                                                    
CASEY  SULLIVAN,  Director  of  Government  and  Public  Affairs,                                                               
Caelus Energy LLC, Anchorage, said  Caelus Energy is a privately-                                                               
held independent exploration and  production company that started                                                               
in 2011 and  came to Alaska in 2014. [CEO]  Jim Musselman has had                                                               
a series of worldwide successes.  First with Triton Energy, which                                                               
was faltering, and Mr. Musselman  arrived and quickly moved it to                                                               
one  of the  largest independent  companies headquartered  in the                                                               
US. Triton  brought a difficult deep-water  field near Equatorial                                                               
Guinea  from  exploration  to  development   in  14  months.  Mr.                                                               
Musselman  and  his  team  then   started  Kosmos,  which  had  a                                                               
significant discovery with  the Mahogany 1 well that  is now part                                                               
of the Jubilee  field. It is a deep-water play,  he added, and it                                                               
went  from  exploration to  production  in  40 months.  The  team                                                               
consists of worldwide, successful oil finders and producers.                                                                    
MR.  SULLIVAN  said that  Pioneer  Alaska,  "kind of  our  legacy                                                               
company  here,"  came  to  Alaska  in  2002  and  was  the  first                                                               
independent  on  the North  Slope.  The  net profits  tax  system                                                               
encouraged  new independents,  and it  worked in  many ways,  and                                                               
Caelus  is an  example of  that. Caelus  Energy has  operated the                                                               
Oooguruk  unit since  2008. That  field is  a structure  that Mr.                                                               
Musselman found  attractive, and  it took five  years to  go from                                                               
sanction to production, a record  time for an offshore island, he                                                               
noted. "We are already working  and finding great success here in                                                               
MR.  SULLIVAN said  Mr.  Musselman  is in  Alaska  because it  is                                                               
abundant  with  resources. Many  had  shied  away from  investing                                                               
here, but the passage of Senate  Bill 21 was a signal that Alaska                                                               
was open  for business.  That occurred at  the same  time Pioneer                                                               
was looking to divest. "We're glad  he made that decision, and we                                                               
hope that  Alaskans are too," he  stated. He showed a  map of the                                                               
North Slope,  with the areas  in blue representing  Caelus Energy                                                               
lease holdings.  The middle area  is the flagship  Oooguruk unit,                                                               
and it produces  5 million gross barrels of  oil annually. Caelus                                                               
Energy was responsible for about  25 percent of the recent annual                                                               
increase in production.  Good policy allows it to  invest and use                                                               
technology to  increase reservoir capacity. On  the eastern shore                                                               
is about 350,000 acres of  exploration area. "We immediately shot                                                               
a great deal of high-resolution,  3-D seismic into that area," he                                                               
said, and  there are  very exciting prospects  to explore  for in                                                               
the next  couple of years. He  pointed out the Smith  Bay area on                                                               
the map  that Caelus  Energy acquired  in 2015.  He said  most of                                                               
this  activity happened  after SB  21, because  it is  a balanced                                                               
system  that  encourages legacy  and  independent  fields on  the                                                               
North Slope.  Caelus is  the type of  company Alaska  was looking                                                               
for, and he hopes it will be here for the next 40 years.                                                                        
3:09:36 PM                                                                                                                    
MR. SULLIVAN said  the discussion often focusses on  what the new                                                               
projects  will  cost  the  State  of Alaska  instead  of  on  the                                                               
benefits  to  the state.  The  Nuna  development is  the  onshore                                                               
companion  to  the Oooguruk  field  and  has  up to  150  million                                                               
barrels,  which should  produce 25,000  barrels per  day at  peak                                                               
production. It  was discovered, appraised, and  shelved under the                                                               
ACES  tax regime,  but  the  Caelus team  has  looked  at it  and                                                               
realized it  is an opportunity to  get new oil into  the pipeline                                                               
as soon  as possible, he said.  There is a 22-acre  pad and road,                                                               
and there are  two wells ready to go. One  of the wells delivered                                                               
an  IP [initial  production]  rate  of 2,800  barrels  a day,  so                                                               
Caelus  needs investor  confidence now,  so it  can get  right to                                                               
work in  constructing the  modules and  installing some  of those                                                               
flow  lines. For  Alaskans, this  project will  deliver 300  jobs                                                               
during  construction and  300 during  production, he  said. Under                                                               
House  Bill 247,  "which  is sort  of what  we  live under,"  and                                                               
Senate Bill  21, Caelus Energy  would earn about $151  million in                                                               
refundable  credits,   but  the  state  would   get  back-in  the                                                               
lifecycle  of this  field-close to  $2 billion  in royalties  and                                                               
3:11:32 PM                                                                                                                    
MR. SULLIVAN said the project that  has been in the news is Smith                                                               
Bay, which is truly a  world-class discovery. Other companies had                                                               
been in the area doing seismic  work, and Caelus Energy used that                                                               
data for  an exploration program.  "I can't say enough  about the                                                               
Alaskan  contractor workforce-they  are  able to  get into  these                                                               
remote environments…and  explore and  do it safely  and swiftly."                                                               
It  is really  remarkable, he  added. In  Caelus Energy's  leases                                                               
alone, there  are close to  6 billion  barrels of oil,  and maybe                                                               
with the  surrounding area there  are 10 billion  barrels. Caelus                                                               
Energy  looks  at  analogs  of projects  and  believes  that  the                                                               
recovery  factor is  30  or 40  percent, so  that  makes about  2                                                               
billion recoverable barrels. He said  he has heard that Smith Bay                                                               
will drown the state in  ongoing deferred taxes and net operating                                                               
losses,  and  that is  valid,  but  a  project  like this  is  of                                                               
national and  state significance  that can  provide oil  and jobs                                                               
for the  next 40 or more  years. "This is a  really exciting time                                                               
for Alaska,  not just Smith Bay,  but Willow, Nanushuk -  this is                                                               
exciting times, and policy does  matter." At the peak, there will                                                               
be thousands  of construction jobs  for the pipeline,  roads, and                                                               
facilities, he said,  and there will be close  to 200,000 barrels                                                               
per day  during the  peak. That  means $28  billion to  Alaska in                                                               
royalties, wages, and  taxes. The company hopes  to build another                                                               
well this  winter, but  it is  dependent on  what happens  in the                                                               
legislature, he advised.                                                                                                        
3:14:26 PM                                                                                                                    
MR. SULLIVAN said the next  generation of development from Caelus                                                               
Energy  can add  billions of  barrels and  thousands of  jobs. He                                                               
showed a slide that represents  the tension in the current policy                                                               
debate.  Will the  legislature create  a  policy that  encourages                                                               
development and puts  Alaskans to work and  provides more revenue                                                               
to the state, "or  are we going to create a  policy that is going                                                               
to lock  up those resources  for future generations for  a short-                                                               
term gain?" He  said the current policy is  balanced and attracts                                                               
investment.  Caelus Energy  opposes HB  111 as  it stands,  as it                                                               
represents a significant  tax increase and will  hamper new field                                                               
3:15:29 PM                                                                                                                    
MR. SULLIVAN said  Caelus Energy has been  very transparent about                                                               
what prices it  needs to get projects moving,  which is somewhere                                                               
in the  mid-sixties. His  chart on  page 8  shows that  the price                                                               
needs to  be higher "to  be able to  take those projects  off the                                                               
shelf." He  stated that  Alaska's tax  director, Ken  Alper, said                                                               
the impacts of the  policy on new oil would be  a tax increase at                                                               
lower prices due to the hard floor.                                                                                             
3:16:55 PM                                                                                                                    
MR. SULLIVAN  said that because  Caelus Energy is not  subject to                                                               
the  minimum tax  floor now,  it  is able  to use  credits to  go                                                               
beneath  that.  Hardening  the  floor  creates  an  infinite  tax                                                               
increase, because the  tax goes "from zero to  the adjusted 3.2."                                                               
Referring to  the next  slide of  his presentation,  Mr. Sullivan                                                               
said the original profits-based  system leveled the playing field                                                               
for  new  and  legacy  operators,  and that  was  the  goal.  New                                                               
developments  have  a  much higher  hurdle,  and  enalytica,  the                                                               
legislature's former-consultants  said that the NOL  credit aimed                                                               
to equalize  tax impacts. It did,  but this bill considers  it an                                                               
alternative to that credit. Senate  Bill 21 created a competitive                                                               
system and made  a conscious effort to encourage new  oil and new                                                               
players. Last year,  House Bill 247 was billed  as reforming Cook                                                               
Inlet, but it made significant changes  to the North Slope and to                                                               
new players through the GVR and the capped credits.                                                                             
3:18:06 PM                                                                                                                    
MR.  SULLIVAN  said  Caelus  Energy is  not  insensitive  to  the                                                               
situation that Alaska is in;  these low-price environments impact                                                               
everyone. "If we're  out of the cashable  credit business, that's                                                               
one future,"  but he asked the  state to make sure  that it takes                                                               
care to  make the small players  as whole as possible.  The shift                                                               
from a NOL credit to a  deduction is a major tax increase because                                                               
of the  low price and the  hard floor. The bill  also time-limits                                                               
the  carry forward,  which is  a valid  conversation, but  it can                                                               
become a  permanent loss in  deduction value. "Hey,  you're going                                                               
to spend  a dollar today, but  tomorrow you'll get half  of it or                                                               
you're  going to  lose some  of it.  Sorry." That  does not  make                                                               
great  policy, he  exclaimed. In  the bill,  there is  no uplift,                                                               
which was  recommended by consultants  to help the time  value of                                                               
money.  The  hard-minimum tax  floor  for  the  GVR fields  is  a                                                               
significant tax  increase: from  zero to  3.2. The  $5 per-barrel                                                               
credit for GVR  fields enacted in SB 21 was  an incentive for new                                                               
fields. It  was meant to be  an offset to high  royalty rates, he                                                               
stated. "We  would encourage that  you consider that  continue to                                                               
be allowed to be used against  the floor," he added. Every regime                                                               
allows for  cost recovery, and if  Alaska doesn't, it will  be at                                                               
the bottom rung of competitiveness.                                                                                             
3:20:33 PM                                                                                                                    
MR.  SULLIVAN stated  that Alaska's  policy goal  should be  more                                                               
production.  "Let's get  more  in the  pipe."  The fiscal  system                                                               
should be  competitive to keep players  moving forward, including                                                               
full recovery  of costs.  Caelus Energy  is 100  percent Alaskan,                                                               
but it competes  for capital against other types  of projects "in                                                               
different variations."  He asked  policy makers to  encourage the                                                               
secondary market.  There is an  opportunity to be able  to redeem                                                               
tax  certificates  with  another  taxpayer, and  that  should  be                                                               
allowed in a  way that works for both parties,  he said. The last                                                               
couple  of vetoes  were  very  impactful to  his  company and  to                                                               
Alaska's reputation. Is  Alaska open for business?  He asked that                                                               
the  legislature   help  make  good  on   those  outstanding  tax                                                               
certificates in a way that gets Alaskans back to work.                                                                          
3:22:10 PM                                                                                                                    
CHAIR  GIESSEL said  it sounds  like  Caelus Energy  acknowledges                                                               
that Alaska cannot afford to give cash credits any more.                                                                        
MR.  SULLIVAN said  it would  be great  to continue  the program,                                                               
because  small producers  could recoup  their costs  in a  timely                                                               
way. Legacy producers spend a dollar  and they can offset that in                                                               
their next  month, he explained. "We  spend a dollar and  we have                                                               
to wait sometimes a  year and a half, if not more,  to be able to                                                               
recoup that  same level of  cost." He  said Caelus Energy  is not                                                               
encouraging the  removal, but  it knows  that the  state is  in a                                                               
tough  position. The  company is  running  its economics  without                                                               
cashable  credits, because  it  has  not been  paid  in the  last                                                               
couple of terms.                                                                                                                
3:23:24 PM                                                                                                                    
SENATOR  WIELECHOWSKI referred  to  the statement  by Castle  Gap                                                               
Advisors on  page 9  of the  presentation regarding  every regime                                                               
allowing the  deduction of costs. He  asked if that is  true in a                                                               
gross tax regime like in Texas and North Dakota.                                                                                
MR. SULLIVAN said that the statement refers to net tax systems.                                                                 
SENATOR WIELECHOWSKI  said Alaska's tax director,  Mr. Alper, has                                                               
testified that a  project like Smith Bay could  cost $10 billion.                                                               
With a 35 percent net  operating loss cashable credit, that would                                                               
be an enormous outlay for  the state. What alternatives are there                                                               
to cashable credits?                                                                                                            
3:24:34 PM                                                                                                                    
MR. SULLIVAN said  that is a good question.  The cashable credits                                                               
are  capped, so  "we would  only get  $70 million  for that,  and                                                               
there  are some  of  those loss  carry-forwards,"  but the  state                                                               
would get the  reward of jobs and royalties. The  State of Alaska                                                               
could do other  things. For example, Caelus Energy  does not need                                                               
to be in the  business of owning a road to Smith  Bay or owning a                                                               
pipeline,  so  infrastructure  development can  play  a  critical                                                               
role.  A $10  billion  project without  the road  could  be a  $9                                                               
billion project.  Processing facilities do  not need to  be owned                                                               
by Caelus.  Native corporations could partner  with industry, but                                                               
those come with a cost, too, he acknowledged.                                                                                   
SENATOR STEDMAN recalled that only  one other regime in the world                                                               
has cashable  credits, so,  clearly, it  is an  anomaly. It  is a                                                               
sizable obligation  that the state  cannot meet, and that  is why                                                               
it  needs to  change course  and get  back into  the norm  of how                                                               
things are  structured worldwide,  he said.  He looks  forward to                                                               
working with Caelus Energy to come  up with something in order to                                                               
go forward with Smith Bay. This  is a $10 billion enterprise that                                                               
is several years out, and he  asked what financial help the state                                                               
has provided thus far.                                                                                                          
MR.  SULLIVAN  said  Caelus  Energy is  not  afraid  of  cashable                                                               
credits going  away even though  they lower the  entrance hurdles                                                               
of  new projects,  but  if  there are  changes,  please make  the                                                               
system competitive.  Moving from a  credit to a deduction  is not                                                               
equal. "What  we're trying  to figure  out is  how you  make that                                                               
deduction work in  a way that is less complex  but works also for                                                               
the new entrants."                                                                                                              
SENATOR  STEDMAN   said  he  was   asking  about  Smith   Bay  in                                                               
particular, because  it is a game  changer and might be  the size                                                               
of Kuparuk or bigger.                                                                                                           
MR. SULLIVAN said  the program was over $100  million to execute,                                                               
so the state would carry 75  to 80 percent of those costs through                                                               
its  NOL   and  exploration  credit  program.   The  company  has                                                               
certificates for a  portion of those costs, and  it will probably                                                               
receive  certificates for  the second  part of  those costs.  The                                                               
state is  not on the  hook for anything  yet, because it  has not                                                               
3:28:43 PM                                                                                                                    
SENATOR STEDMAN  said that  the people  at home  should recognize                                                               
that  the state  has been  helpful and  aggressive in  increasing                                                               
production  by not  putting the  entire burden  on the  industry.                                                               
There are billions  out in credits, and sometimes  the state does                                                               
not get due recognition for those  cash credits or the many other                                                               
types of credits.                                                                                                               
3:29:12 PM                                                                                                                    
SENATOR MEYER asked when the Nuna site will produce.                                                                            
MR.  SULLIVAN answered  that the  Nuna  oil development  is on  a                                                               
cutting edge in that it is  getting price opportunity in the mid-                                                               
fifties,  but  it   is  waiting  to  see  what   happens  in  the                                                               
legislature.  "If  we  could  buy  pipe  this  spring,  we  could                                                               
actually  install  that next  winter,  install  the modules,  and                                                               
we're confident in  first oil by late 2018, early  2019." He said                                                               
they would  predrill a number of  those wells, so they  would get                                                               
into peak production fairly quickly.                                                                                            
SENATOR MEYER asked if the price of oil needs to be $70.                                                                        
MR. SULLIVAN  said the price needs  to be in the  mid-sixties for                                                               
some time "to really help progress that project."                                                                               
3:30:35 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked what  sort of uplift  percentage rate                                                               
is fair for a project like Nuna  or Smith Bay. He asked about the                                                               
MR. SULLIVAN  said fair and  customary are two  different things.                                                               
Uplift rates vary.  Some are 10 percent compounded,  and some are                                                               
the cost  of capital,  which is  closer to 15  or 20  percent. He                                                               
suggested working with  consultants to find a  balance to benefit                                                               
the state  and the companies. The  goal is to drill  an appraisal                                                               
well in Smith  Bay, which is like a development  well. It will be                                                               
fracked and  will "flow that  back to  the surface." If  it shows                                                               
that there  are quantities for  deliverability, "we'll  engage in                                                               
the EIS  process," which  takes three  years. It  will be  six to                                                               
seven years before first oil, he concluded.                                                                                     
CHAIR GIESSEL asked if drilling "this winter" means 2018.                                                                       
MR.  SULLIVAN  said  yes,  the company  would  mobilize  all  the                                                               
equipment  at Pt.  Lonely  and then  drilling  would most  likely                                                               
commence January to March of 2018.                                                                                              
CHAIR GIESSEL  asked if  it will  be a  year before  conducting a                                                               
flow test and knowing if this project is even profitable.                                                                       
MR. SULLIVAN said yes. There is oil,  but he does not know "if we                                                               
can flow that oil."                                                                                                             
SENATOR COGHILL said  the state is considering the  value of cash                                                               
input. "Just like you have  to deal with the cost/value question,                                                               
you can see that we're struggling  with it as well." He asked how                                                               
ring fencing  will impact Caelus and  if it will cut  it off from                                                               
other partnerships.                                                                                                             
MR.  SULLIVAN  said  the   previous  testifiers  articulated  the                                                               
difficulties  with ring  fencing. It  would really  hamper Caelus                                                               
Energy's investment  cycle and investments  in outer areas  if it                                                               
could not  recoup those costs  against current  producing fields.                                                               
Credits in Alaska  have supported new independents,  and "in many                                                               
ways we  are kind  of the  poster child  of that,  and everything                                                               
that is on this slide really  did receive a great deal of benefit                                                               
from  the State  of  Alaska,  and that  might  not have  happened                                                               
without some of  those assistance." He said Caelus  Energy is not                                                               
unappreciative of  the help the  state agencies have  provided to                                                               
move projects forward.                                                                                                          
3:35:08 PM                                                                                                                    
JEFF HASTINGS,  Chair and CEO,  SAExploration (SAE), said  SAE is                                                               
managing partner  of Kuukpik SAE,  which is a joint  venture with                                                               
the village  of Nuiqsut. He  noted that  his team was  founded in                                                               
Alaska and  has been partnered  with the Kuukpik  Corporation for                                                               
over 20 years,  employing an average of 400 people  per year. The                                                               
Kuukpik SAE joint venture is  a consistent revenue source for the                                                               
corporation,  the   village,  and   hundreds  of   other  Alaskan                                                               
families.  He  said  the   company  preferentially  hires  Native                                                               
Alaskans,  and  it has  over  an  80  percent Alaska  hire  rate.                                                               
Kuukpik SAE primarily uses Alaska subcontractors and suppliers.                                                                 
3:36:56 PM                                                                                                                    
MR. HASTINGS said the core  business of Kuukpik SAE is collecting                                                               
seismic data;  "we create the images,  so the doctor can  see how                                                               
to operate  on the patient." It  is typically the first  to enter                                                               
exploration  areas, "so  we're  kind  of the  pointy  end of  the                                                               
spear."  The  images  are  used  to  afford  greater  success  in                                                               
drilling wells  and is  critical to  any exploration  program, he                                                               
added. Through SB 21, new  seismic technology is producing higher                                                               
resolution  images   of  the  subsurface,  which   has  a  direct                                                               
correlation to new discoveries.                                                                                                 
3:38:18 PM                                                                                                                    
MR. HASTINGS said the next  slide shows the 190 Alaskan suppliers                                                               
that support  our efforts every  year. Then he showed  an example                                                               
of how Alaskans benefit from  a single seismic program. The Aklaq                                                               
program   earned  $49   million  for   Alaskan  contractors   and                                                               
suppliers, he noted. Seismic creates  images of the subsurface so                                                               
companies can decide  where to lease and where  to drill. Kuukpik                                                               
SAE does  not drill  or develop  oil, but  its data  is typically                                                               
sold  or   licensed  to  oil  companies.   "That  ultimately  was                                                               
contemplated  in  the  tax  credit   system  when  it  was  first                                                               
created," he  stated. There were special  provisions to encourage                                                               
companies  to  collect  seismic  data  so  there  would  be  more                                                               
exploration  drilling. The  state agreed  to pay  tax credits  to                                                               
companies to  invest in seismic work,  and when the data  is used                                                               
by an  oil company, the state  "gets a piece of  that action-or a                                                               
refund for a particular tax credit."  The state will also own the                                                               
seismic data, he explained, and it  can do whatever it wants with                                                               
the data after 10 years.                                                                                                        
3:40:55 PM                                                                                                                    
MR. HASTINGS  showed a chart  of historic seismic  investment and                                                               
programs in the state from 2012  to 2017. The vertical axis shows                                                               
the dollars  spent, and he noted  that after SB 21,  seismic work                                                               
increased.  "It allowed  us  to compete  for  global dollars  and                                                               
create the type of environment  that the seismic data resulted in                                                               
new reserves  in Alaska." It  was not only legacy  producers, but                                                               
it was independents  going to work. These  were seismic companies                                                               
that were creating the seismic  data with no intent on producing,                                                               
he explained.  The chart shows  the tax appropriation cut  in the                                                               
fall  of 2016  and the  second  cut in  the summer  of 2017.  The                                                               
vetoes  in 2015  and 2016  had  several negative  effects on  the                                                               
seismic industry. Capital spending  slowed down with contractors,                                                               
and  there  was  no  visibility  or  confidence  in  the  state's                                                               
willingness  to  settle  what  it  owed.  The  capital  that  was                                                               
available to small companies, like  Kuukpik SAE, is all but dried                                                               
up, he  said. Many contractors  are waiting  to be paid  for work                                                               
done up to  two years ago. "You asked the  companies to invest in                                                               
seismic  and exploration  drilling,  and the  companies did  just                                                               
that," he  said. They  did so  because the  state was  willing to                                                               
help fund  them, and now  the state is  not paying the  bills and                                                               
rules are  being reinterpreted, which  has resulted in  a stalled                                                               
system. The seismic sector is typically the first to go.                                                                        
3:44:24 PM                                                                                                                    
MR.  HASTINGS said  there is  no  clear timeline  for paying  tax                                                               
credits. "When will  the 0-25 credits be  processed?" The seismic                                                               
tax credits are simple applications  and have been sitting in DOR                                                               
for over a year. He  explained that recent interpretations of the                                                               
regulations have eliminated a thin  secondary market; the DOR tax                                                               
division  advisory  bulletin,  2017-01, said  that  legacy  field                                                               
producers cannot use  any of the tax credits to  reduce their tax                                                               
below  the  4  percent  minimum. It  effectively  eliminates  his                                                               
company's  ability  to sell  the  few  certificates it  has  been                                                               
issued to other qualified taxpaying companies.                                                                                  
3:45:33 PM                                                                                                                    
MR. HASTINGS said  the state can help by creating  a timeline for                                                               
processing  the   seismic  exploration  credits.  It   was  never                                                               
envisioned  that  a seismic  explorer  would  drill for  oil,  he                                                               
stated,  the  obligation was  to  fund  the seismic  program  and                                                               
provide the data to the state.  Also, "we need to reestablish the                                                               
secondary  market"  by  allowing  tax   credits  to  be  used  by                                                               
producers  to  reduce their  tax  below  the 4  percent  minimum.                                                               
Alaska  needs to  restore  confidence  and show  that  it can  be                                                               
competitive. The  state created the  program, which is  the first                                                               
step in putting more oil down the pipeline.                                                                                     
3:46:59 PM                                                                                                                    
MR.  HASTINGS said  his company  has  answered the  call and  has                                                               
delivered the data, and  now the state has to live  up to its end                                                               
of the deal. Kuukpik SAE has two  options, and one is to file for                                                               
bankruptcy and  leave its vendors  hanging. He noted that  he has                                                               
an  office in  Senator Meyer's  district and  has been  in Alaska                                                               
since 1986. His  company chose, instead, to  restructure and work                                                               
with its subcontractors  to find a way to extend  the payments to                                                               
allow  the state  time to  pay its  bills. By  restructuring, the                                                               
company  eliminated 98  percent  of shareholder  equity, many  of                                                               
which  were held  by employees.  Seismic  data is  the basis  for                                                               
exploration, so  "you can think of  us as the canary  in the coal                                                               
mine. We've  been hit  hard by the  state's unwillingness  to pay                                                               
for  the  exploration tax  credit,  and  if the  canary's  having                                                               
problems breathing, the rest of the  miners are going to have the                                                               
same effect." There have been  difficult choices, and HB 111 will                                                               
further damage the industry.                                                                                                    
CHAIR GIESSEL said she appreciated his testimony.                                                                               
SENATOR VON  IMHOF referred to  the applications for  tax credits                                                               
that DOR has been holding and asked about their value.                                                                          
MR.  HASTINGS said  the  .023 credits  that  are currently  being                                                               
processed  under  the  120-day  statutory minimum  is  about  $32                                                               
million. The .025 credits are around $44 million.                                                                               
SENATOR VON IMHOF  asked about the connection of  the tax credits                                                               
and HB 111.                                                                                                                     
MR. HASTINGS  said his point  is that  there is already  an issue                                                               
with the  tax credit  payments. By  creating ring  fencing around                                                               
where  capital   expenses  can  be   used,  "then  how   does  an                                                               
exploration company transfer those credits  back in if there is a                                                               
secondary market?"                                                                                                              
SENATOR  MEYER said  it  is depressing,  because  it sounds  like                                                               
there is not much activity on the North Slope these days.                                                                       
MR. HASTINGS said his 2018 forecast  has the same or less seismic                                                               
activity as in 2017, which is down from the apex.                                                                               
SENATOR MEYER said seismic has  to occur before any discovery, so                                                               
it is not a good sign. He asked how much the state owes him.                                                                    
MR. HASTINGS  said, "We currently  have certificated  $24 million                                                               
worth of  .023 credits,  and we  are an  assigner of  another $77                                                               
million worth of credits that have yet to be issued."                                                                           
3:53:36 PM                                                                                                                    
SENATOR STEDMAN said that is not  a fun position for anyone to be                                                               
in, but  no sovereign gives  an open-ended call to  the treasury-                                                               
nowhere in the world. There are  limits put on severance tax, or,                                                               
in this case, there is a credit  bank that we fund, and there's a                                                               
calculation for that  for the minimum funding,  and we're funding                                                               
that. He  said his  point is that  it is getting  caught up  in a                                                               
down draft, because it is just  not done to have open-ended calls                                                               
on the  treasury, or there would  be no treasury. "So,  how do we                                                               
work ourselves  out of this  mess?" There  needs to be  a solvent                                                               
state and a solvent industry to  move forward, and there has been                                                               
good news  lately. There is more  oil out there to  find. This is                                                               
not the  end, it  may be  the beginning. "So,  we'll try  to work                                                               
through these budgetary issues, but  we have a mechanism that was                                                               
put  in place  to protect  the treasury  on the  downside, and  I                                                               
recognize,  at the  end  of  the day,  these  credits either  are                                                               
directly  paid by  the state  or  they're sold  and someone  else                                                               
deducts it, and  at the end of  the day it comes out  of the cash                                                               
flow coming to  the state." He said he does  not have any answers                                                               
to that, but it is not up to just one branch of government.                                                                     
3:55:45 PM                                                                                                                    
MR. HASTINGS  said that  the Colville River  area "has  been shot                                                               
over and shot  over for decades," and companies  are making large                                                               
discoveries  now  with  new technology  and  [higher]  resolution                                                               
seismic  data.  Bills  such  as   SB  21  allowed  the  state  to                                                               
participate financially so that that  type of technology could be                                                               
used  to  increase production,  and  that  needs to  continue  to                                                               
happen.  He said  everyone understands  not having  an open-ended                                                               
treasury bill, and the legislature  worked hard to put the proper                                                               
appropriations into the budget that  were vetoed and cut. He said                                                               
that when his company is faced  with the same types of scenarios,                                                               
it finds a way  to bridge that gap. The state  has a huge savings                                                               
account and  has billions of  dollars of in-ground  reserves that                                                               
the state will  get royalty for, he said. The  commodity price is                                                               
depressed, but the  state has the assets available to  find a way                                                               
to pay its bills.                                                                                                               
3:58:26 PM                                                                                                                    
SENATOR HUGHES  asked if  Kuukpik SAE  had made  any arrangements                                                               
with producers regarding credits  prior to the advisory bulletin.                                                               
She asked if that would handle the $100 million.                                                                                
MR. HASTINGS said the company had  a secondary market that it was                                                               
selling  credits to.  There was  a  willing buyer  and a  willing                                                               
seller,  and it  was a  very equitable  deal. "We  were satisfied                                                               
with the monies that we  were recovering even though they weren't                                                               
large  lump  sums;  they  were  enough  to  help  cash  flow  our                                                               
SENATOR  HUGHES  asked  if  the advisory  bulletin  came  out  in                                                               
MR. HASTINGS said the one he  referenced came out about two weeks                                                               
SENATOR HUGHES asked if that was  "enough to turn this around for                                                               
MR. HASTINGS said the downward  arrow on his slide represents all                                                               
seismic  programs that  were acquired  by a  seismic explorer,  a                                                               
seismic company,  an independent, or a  legacy producer. Although                                                               
the commodity  price is dropping,  "we're seeing  a deterioration                                                               
in  the confidence  in the  Alaska industry."  He noted  that the                                                               
committee has  heard all day long  what SB 21 did  for the state.                                                               
As the confidence begins to  erode, people take global dollars to                                                               
other  places. He  said  his  company might  be  able to  sustain                                                               
itself "in  a two-seismic program  environment," but to  put more                                                               
oil down the pipe, which is what  we are all here to do, "we need                                                               
to do something to incentivize people to go to work."                                                                           
SENATOR HUGHES  asked if  a provision to  allow producers  to use                                                               
Mr.  Hastings' credits  would increase  the  activity. The  chart                                                               
shows  a decrease  in activity.  "If  we're doing  away with  the                                                               
capital credits, would  this provision not only  help you recoup,                                                               
but  also  increase  the  activity,  because,  as  Senator  Meyer                                                               
brought up, that really has so much  to do with what we might see                                                               
in the future and is important to be ongoing?"                                                                                  
MR. HASTINGS  said he  worked as a  prime contractor  and seismic                                                               
explorer.  When he  was a  seismic explorer,  "those are  capital                                                               
dollars that  we commit to a  program and then we  license to the                                                               
industry." If there is a  market that includes a secondary market                                                               
or  a payment  plan  that can  be depended  on,  from the  state,                                                               
"then, yes, we would invest in more seismic programs."                                                                          
SENATOR MEYER asked if Alaska is the only place he works.                                                                       
MR.  HASTINGS answered  that  his company  started  in Alaska  in                                                               
2008,  and that  forced  it into  a more  global  market. It  now                                                               
services about  15 countries worldwide,  but Alaska is  still the                                                               
foundation of the company.                                                                                                      
PAT  GALVIN,  Chief  Commercial Officer,  Great  Bear  Petroleum,                                                               
Anchorage,  said  the  committee  has   not  heard  from  a  true                                                               
exploration  company  yet today,  but  that  is what  Great  Bear                                                               
Petroleum  is.  It  is  exploring  on the  North  Slope  and  has                                                               
expended $250 million  to date on three exploration  wells and on                                                               
about  500,000  acres of  3-D  seismic,  which has  identified  a                                                               
number  of very  attractive  conventional  prospects where  Great                                                               
Bear intends to do exploratory  drilling next winter. The company                                                               
is under  same stress  as other  companies since  it has  no cash                                                               
flow,  he  said,  and  it  has a  tremendous  obligation  to  its                                                               
creditors. Great Bear  borrowed against the tax  credits, but the                                                               
state did not  pay, "so we have  no cash to pay  the lenders." He                                                               
needs to  know if the  state is going to  identify a plan  to pay                                                               
off the tax credits in a reasonable period of time.                                                                             
MR.  GALVIN noted  that HB  111 ends  the cash  payments for  tax                                                               
credits. His concern  is if his company will "be  able to recover                                                               
our costs  of exploration  when we  actually have  production and                                                               
recover that against  our revenue before the  tax is calculated."                                                               
He  said,  under his  company's  economic  model, being  able  to                                                               
deduct those expenses if they are  not available as a credit will                                                               
be  "an  absolutely  essential  part  of  our  recovery  for  our                                                               
investors." It will  be the number one consideration  as it tries                                                               
to  attract other  investors. There  are other  provisions in  HB
111,  that are  problematic, he  added, but  there are  a lot  of                                                               
moving parts,  so he  will not go  through the  bill's specifics.                                                               
There is  political pressure  to change the  oil tax  system, and                                                               
Great Bear  Petroleum respects  that. As a  company that  will be                                                               
subject to the tax system,  it needs stability and something that                                                               
it can rely on.  The last 10 years have not  been stable, and the                                                               
state needs equilibrium.                                                                                                        
4:08:55 PM                                                                                                                    
SENATOR HUGHES asked how ring-fencing affects explorers.                                                                        
MR. GALVIN said  it depends on how  it will be defined.  As a new                                                               
company, Great Bear  does not have production,  but its portfolio                                                               
of prospects is likely to come on  line in a series as opposed to                                                               
all  at once,  so  as  the company  invests  in  capital for  the                                                               
initial development it  will be spending a  significant amount of                                                               
additional  capital  just to  put  the  infrastructure in  place,                                                               
which would then  be used for the economics of  the next project.                                                               
If the  projects are ring-fenced,  it could  significantly affect                                                               
the ability  to spread the  costs from the  additional production                                                               
and  make  it not  economic.  The  identity  of his  company  was                                                               
originally tied  to the unconventional  resource "that we  see on                                                               
our  acreage-the  shale  resource."  The shale  resource  can  be                                                               
developed eventually, and it may  be huge, but unconventional oil                                                               
development in Alaska  at current prices is not  economic for the                                                               
initial investment  and the infrastructure required.  He said the                                                               
company believes that by  developing conventional resources, that                                                               
infrastructure  can  then be  used  to  economically develop  the                                                               
unconventional oil. Ring fencing may preclude that option.                                                                      
4:11:12 PM                                                                                                                    
SENATOR MEYER  stated that  when Great Bear  came to  Alaska, Mr.                                                               
Galvin  was  the  commissioner   [of  the  Alaska  Department  of                                                               
Revenue], and  there were high  hopes that the company  was going                                                               
to drill  a lot more  than three wells.  He asked if  the company                                                               
has only  drilled three  wells because the  original plan  was to                                                               
target unconventional oil.                                                                                                      
MR. GALVIN  answered that there  was "strong  misconception about                                                               
some initial  testimony that was  done by our  founding president                                                               
who is  no longer with  the company." The president  testified as                                                               
to what  an unconventional  development would  look like,  and he                                                               
provided  information showing  that  hundreds of  wells would  be                                                               
required in order to develop  an unconventional resource, similar                                                               
to  projects in  Texas  and the  Bakken  [formation]. Mr.  Galvin                                                               
explained that  the testimony was  not a statement of  what Great                                                               
Bear was going to  do in the next three to five  years. "It was a                                                               
statement of if  we make a discovery and are  able to develop the                                                               
unconventional resources, this  is what's going to  come, and the                                                               
state better be prepared to support  that if it wants to see that                                                               
take place."                                                                                                                    
MR. GALVIN  noted that Great Bear  did drill the first  two wells                                                               
and identified  that the shale  resource does exist, but  it then                                                               
encountered  the cost  environment on  the North  Slope, and  the                                                               
drop in  oil prices,  making the  unconventional play  beyond its                                                               
reach. However, Great  Bear was fortunate that  it identified the                                                               
need for 3-D  seismic and was able to acquire  that each year for                                                               
the  last  five  years.  The   seismic  identified  a  number  of                                                               
conventional prospects "that  we believe will be  able to support                                                               
the  economics  of  the  North   Slope,  even  in  today's  price                                                               
environment." What the president said  may happen, but it will be                                                               
"a number of  years out, once we've built  out the infrastructure                                                               
in that area."                                                                                                                  
CHAIR GEISEL announced  that a hearing for  public testimony will                                                               
be held at 5 p.m. today, and she held HB 111 in committee.                                                                      

Document Name Date/Time Subjects
AGENDA - 4 - 17 - 17.pdf SRES 4/17/2017 1:00:00 PM
HB 111 - Testimony - AK Oil & Gass Assoc- 4 - 17 - 17.pdf SRES 4/17/2017 1:00:00 PM
HB 111
HB 111 - Testimony - BP - 4 - 17 - 17.pdf SRES 4/17/2017 1:00:00 PM
HB 111
HB 111- Testimony - ConocoPhillips - 4 - 17 - 17.pdf SRES 4/17/2017 1:00:00 PM
HB 111
HB 111 -Testimony - Caelus - 4 -17 - 17.pdf SRES 4/17/2017 1:00:00 PM
HB 111
HB 111 - Testimony - SAE - 4 - 17 - 17.pdf SRES 4/17/2017 1:00:00 PM
HB 111