Legislature(2015 - 2016)BARNES 124

02/27/2016 10:00 AM RESOURCES

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Audio Topic
10:00:00 AM Start
10:00:57 AM HB247
11:54:01 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change from 1:00 p.m. --
Heard & Held
-- Testimony <Invitation Only> --
- enalytica Oil & Gas Tax Credit Overview
- HB 247 Overview by Ken Alper, Director, Tax
Division, Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
10:00:57 AM                                                                                                                   
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
10:01:33 AM                                                                                                                   
JANAK   MAYER,   Chairman   &  Chief   Technologist,   enalytica,                                                               
Consultant  to  the  Legislative   Budget  and  Audit  Committee,                                                               
continued  his  analysis  (begun  on 2/26/16)  of  the  projected                                                               
impacts that  HB 247 would  have on the  oil and gas  industry in                                                               
Alaska.    He  resumed   his  PowerPoint  presentation  entitled,                                                               
"IMPACT OF HB  247:  COOK INLET ASSESSMENT," by  turning to slide                                                               
6, "COOK INLET  OIL AND GAS PRODUCTION: BASIC  FACTS."  Reviewing                                                               
the  history  of  Cook  Inlet  oil and  gas  production  and  the                                                               
evolution of  the basin over  time, he reminded members  that oil                                                               
peaked in  1970 and  then steadily  declined to  a trough  of 7.5                                                               
thousand barrels a  day (mb/d) in 2009.  Since  that time oil has                                                               
had a substantial uptick and is  now at 18 mb/d, more than double                                                               
what the inlet produced less than  a decade ago.  Gas production,                                                               
however,  has   not  seen  that   resurgence  in   production  in                                                               
particular  because gas  is limited  by local  demand conditions.                                                               
But,  there has  been  a  flattening of  the  gas  decline and  a                                                               
plateau.  An initial decline  in gross production occurred in the                                                               
1990s, but  then plateaued into the  2000s.  The plateau  was due                                                               
to  production of  gas  that had  previously  been reinjected  at                                                               
Swanson River  Oil Field.  A  decline then began after  2005, and                                                               
in the  last half decade  there has  been stable production  as a                                                               
result of new drilling in mature fields.                                                                                        
10:04:07 AM                                                                                                                   
MR. MAYER moved to slide 7,  "OIL UP FROM WORKOVERS, NEW WELLS IN                                                               
EXISTING  FIELDS," to  discuss the  cause of  the oil  turnaround                                                               
post-2010.   Drawing attention  to the chart  on the  left, "COOK                                                               
INLET: GROSS  OIL PRODUCTION BY  WELL VINTAGE," he  explained the                                                               
chart depicts  which decade a  well come on  line as well  as the                                                               
total  production of  all the  wells.   He noted  that production                                                               
from wells drilled  between 1991 and 2000 (green  line) came down                                                               
to a  trough of  about 2  mb/d in 2009,  then production  began a                                                               
substantial uptick.   That uptick  was not new wells,  but rather                                                               
increased production  from mature wells that  had had substantial                                                               
capital spent on workovers, the  result being more production now                                                               
than  a decade  ago.    This same  increase  from workovers  also                                                               
happened  with wells  drilled pre-1970  (red line).   Substantial                                                               
new drilling  began in 2011 (purple  line), he pointed out.   So,                                                               
new oil production is coming from  a mixture of workover work and                                                               
the new drilling that began in 2011.                                                                                            
MR. MAYER then  brought attention to the chart on  the right side                                                               
of slide  7, "COOK  INLET: GROSS  OIL PRODUCTION  BY FIELD."   He                                                               
pointed out that  each of the major oil fields  has a substantial                                                               
uptick  in the  latter years,  the  biggest uptick  being in  the                                                               
McArthur River Oil  Field.  However, he noted, almost  all of the                                                               
fields  come  from  a  fairly   low  base  and  have  substantial                                                               
increases in the last half decade.                                                                                              
10:06:52 AM                                                                                                                   
MR. MAYER  displayed slide 8,  "GAS FLATTENING FROM NEW  WELLS IN                                                               
EXISTING FIELDS,"  and stated that  gas production is  a slightly                                                               
different picture than  oil.  Drawing attention  to the left-hand                                                               
chart, "COOK  INLET: GROSS  GAS PRODUCTION  BY WELL  VINTAGE," he                                                               
explained that  the increased production, or  at least flattening                                                               
of decline, is  more a question of new wells  drilled rather than                                                               
well workovers.   The previous  vintages by and large  continue a                                                               
constant  decline   curve  relatively   speaking;  there   is  no                                                               
discontinuity of  a moment in  time where  suddenly a lot  of new                                                               
capital was  being spent on old  wells.  Rather, a  number of new                                                               
wells  were drilled  in the  post-2011 period  that have  come on                                                               
line and boosted production and  that has helped flatten out that                                                               
decline.   Mr. Mayer  turned to  the chart on  the right  side of                                                               
slide 8, "COOK  INLET: GROSS GAS PRODUCTION BY  FIELD," and noted                                                               
that an  increase can be  seen in only a  handful of fields.   In                                                               
particular, some  growth occurred in  the Kenai and  Beaver Creek                                                               
fields; a new  field, Kenai Loop, came on line  in 2012; and some                                                               
incremental production occurred  in Swanson River.   Not shown on                                                               
this chart is  the initial production from the first  well at the                                                               
Kitchen Lights Unit that began in December 2015.                                                                                
10:08:20 AM                                                                                                                   
REPRESENTATIVE  SEATON  said the  reason  HB  247 is  before  the                                                               
legislature is tax credits and the  value on the tax credits.  He                                                               
inquired  as to  how much  per  barrel of  oil and  how much  per                                                               
thousand cubic feet  (Mcf) of gas the $400 million  in Cook Inlet                                                               
credits translate into.  He explained  he would like to know what                                                               
the state's cost-to-benefit ratio is for this production.                                                                       
MR.  MAYER replied  he does  not have  these figures  due to  the                                                               
limits on  publicly available  data.   The Department  of Revenue                                                               
(DOR) is  restricted on what  it can  release in terms  of naming                                                               
specific taxpayers  and what specific  activities the  credits go                                                               
to.   Teasing out is  a big part of  the problem -  a substantial                                                               
amount is  spent on credits in  Cook Inlet and undoubtedly  a lot                                                               
of that  is spent  on oil  production and  exploration.   A large                                                               
part  of  the  concern  when  it comes  to  credits  is  insuring                                                               
adequacy  of gas  supply for  Cook Inlet.   However,  it is  very                                                               
difficult from the  publicly available data to tease  out what is                                                               
being  spent  on developing  new  gas  resources versus  what  he                                                               
suspects  is  a   lot  of  the  spending,  which   is  either  on                                                               
incentivizing  new oil  production,  exploration, or  a range  of                                                               
activities that  do not necessarily translate  into increased gas                                                               
security for Southcentral Alaska.                                                                                               
REPRESENTATIVE SEATON  remarked that there should,  at the least,                                                               
be the ability to get the gross  amount paid by the state and the                                                               
gross amount  of per barrel oil  equivalent (BOE) or Mcf  and, if                                                               
there   is  increased   production,  how   much  that   increased                                                               
production cost the state in refundable tax credits.                                                                            
10:11:06 AM                                                                                                                   
CO-CHAIR  TALERICO  surmised that  the  chart  on slide  4,  "BIG                                                               
DIFFERENCE  BETWEEN  NORTH SLOPE  AND  COOK  INLET," depicts  the                                                               
credits in their entirety for the  North Slope and for Cook Inlet                                                               
and does not distinguish between gas and oil.                                                                                   
MR. MAYER responded  correct, and said a lot  of that undoubtedly                                                               
goes towards  incentivizing new drilling  for oil  exploration or                                                               
other  activities that  are not  necessarily directly  related to                                                               
the question  of gas supply  for Southcentral Alaska.   The focus                                                               
of his  presentation is on  the question of  maintaining credits,                                                               
he  explained, but  in  regard  to policy  concerns  there is  no                                                               
question that the  current regime and carriage of  spending is on                                                               
a lot  of things that  are not  necessarily tied directly  to gas                                                               
supply for Southcentral Alaska.                                                                                                 
10:12:15 AM                                                                                                                   
MR.  MAYER returned  to his  presentation and  reviewed slide  9,                                                               
"COOK INLET GAS HAS GONE  THROUGH MAJOR TRANSITION."  He outlined                                                               
the major transition  that has taken place in the  Cook Inlet gas                                                               
market over the last several decades.   He described the old Cook                                                               
Inlet gas market as one with  a substantial degree of gas surplus                                                               
that could  be exported  via liquefied natural  gas (LNG)  or the                                                               
(now  closed)  nitrogen facilities  owned  by  Agrium U.S.,  Inc.                                                               
("Agrium").   There was period  of low wellhead prices  where the                                                               
Regulatory Commission  of Alaska  (RCA) looked at  contracts that                                                               
proposed pricing based on the Henry  Hub.  The RCA said the Henry                                                               
Hub  was much  too high  and  could not  be done,  which is  very                                                               
different than today's  world.  The overall market  view was that                                                               
gas  was long  and plentiful  and  it was  an era  where gas  was                                                               
produced  by large  international players.   The  old market  was                                                               
also  one   where  Southcentral   utilities  looking   to  ensure                                                               
stability and security of supply  could get very long-term stable                                                               
contracts that gave  the utilities exactly what they  needed.  In                                                               
addition  to long-term  contracts the  producers were  willing to                                                               
offer the utilities a high  degree of seasonal flexibility.  That                                                               
seasonal flex  largely came from supplies,  the fields themselves                                                               
could flex  up and down  to quite a  substantial degree in  a way                                                               
that they no longer can.   But, Mr. Mayer continued, the new Cook                                                               
Inlet gas market is  the opposite of the old.   There is now very                                                               
limited surplus.  In off-peak  periods there is still some degree                                                               
of export,  but by and large  gas is all absorbed  into the local                                                               
market.   Today has high  wellhead prices, a general  market view                                                               
that gas is  short.  It is  now a gas market  where the producers                                                               
are  mostly  smaller  more  focused  players.    Sales  contracts                                                               
between producers and utilities are for much shorter terms.                                                                     
10:14:45 AM                                                                                                                   
REPRESENTATIVE OLSON said another variable  at that point in time                                                               
was the  long-term gas contracts  with the Japanese.   During the                                                               
four  to  six weeks  of  cold  snaps,  he recalled,  the  British                                                               
thermal unit  (Btu) content going  to Japan could be  shorted and                                                               
then made up  for on the next load; this  was basically done over                                                               
the  phone.   There was  enough  supply in  Japan to  be able  to                                                               
absorb that readily and it worked out for years.                                                                                
MR.  MAYER answered  that in  terms of  where supply  flexibility                                                               
occurred  in the  past  versus  where it  occurs  now, there  was                                                               
enormous  supply   flexibility  solely  on  the   upstream  side.                                                               
Looking across  the years  between the  summer and  winter months                                                               
and  what  was  exported  by   the  Kenai  LNG  Plant  [owned  by                                                               
ConocoPhillips  Alaska,   Inc.  and  located  in   Nikiski],  the                                                               
difference  between those  two was  pretty muted  until just  the                                                               
last three  years.  In  the last  three years the  Kenai facility                                                               
has suddenly become a big  seasonal component of how the seasonal                                                               
nature  of  demand can  be  managed  in a  way  that  it was  not                                                               
necessarily in the past.                                                                                                        
10:15:59 AM                                                                                                                   
REPRESENTATIVE HERRON asked whether the  old should be wished for                                                               
or whether the new is just as good.                                                                                             
MR.  MAYER replied  the old  would always  be very  nice to  have                                                               
back,  but unfortunately  it  is not  always  possible.   Someone                                                               
responsible for  planning, contracting,  and purchasing gas  at a                                                               
utility would  be very  nostalgic for  the old.   The new  is not                                                               
impossible to  live with, it  is just  harder to figure  out what                                                               
needs to be done to get the security of supply that is needed.                                                                  
REPRESENTATIVE SEATON  requested that as Mr.  Mayer continues his                                                               
presentation he  point out if it  makes a difference on  what the                                                               
state's policy goal  is.  For example, if the  policy is securing                                                               
long-term  gas  for  in-state  usage  and  whether  that  creates                                                               
definitely  different policy  options, or  if policies  are being                                                               
enacted  to allow  people  to  export more  gas  or to  privately                                                               
market other than within the local supply.                                                                                      
MR. MAYER  responded he is  aware of those as  critical questions                                                               
and will delve into those as much as he can in later slides.                                                                    
10:17:47 AM                                                                                                                   
MR. MAYER  returned to slide  9 and  continued his review  of the                                                               
transition  from  the old  to  the  new  Cook Inlet  gas  market.                                                               
Fundamentally,  the   mature  fields  have  much   less  seasonal                                                               
flexibility than they  used to have and that flex  in what can be                                                               
delivered largely  instead now  comes from  the storage  side now                                                               
that there is the Cook  Inlet Natural Gas Storage Alaska (CINGSA)                                                               
facility  and then  other demand  factors including  for instance                                                               
seasonal cargoes from Kenai LNG Plant.                                                                                          
MR. MAYER displayed slide 10,  "MATURE BASIN HAS LIMITED SEASONAL                                                               
PRODUCTION FLEX," to elaborate on  the much more limited seasonal                                                               
production flex  seen today  as compared to  the past.   Bringing                                                               
attention to  the left-hand chart, "COOK  INLET: GAS PRODUCTION,"                                                               
he specified  it depicts gross production  [red line], reinjected                                                               
gas [green  line], and net production  [orange line].  It  is the                                                               
same chart as  that on the right-hand side of  slide 6, he noted,                                                               
but instead  of looking  at the production  in a  smoothed annual                                                               
data series it looks at a  monthly data series so that the intra-                                                               
year volatility  in production  can be seen.   [Between  1970 and                                                               
about 2006] there was a really  wide degree of variation versus a                                                               
much tighter band of what can  be produced at the wellhead in the                                                               
last  decade or  so.    Turning to  the  right-hand chart,  "COOK                                                               
INLET:  SEASONAL SWING  (MAX MONTH  - MIN  MONTH)," he  explained                                                               
that the  red line  represents subtracting  the minimum  month of                                                               
the year  from the maximum  month of the  year to see  the annual                                                               
degree of  swing of flexibility  of what could be  delivered from                                                               
the upstream fields themselves.   Between the early 1990s and the                                                               
latter part of the last decade,  a huge amount of ability was had                                                               
to deliver  seasonal flexibility.   The  gap between  the minimum                                                               
and the  maximum could  be as  high as 200  or 250  million cubic                                                               
feet per  day (Mmcf/d), so a  lot of seasonal variability  in the                                                               
structure of  demand could be accommodated.   Directing attention                                                               
to the  end of the  most recent years  depicted on the  chart, he                                                               
stated that  the large  peak seen is  probably an  artificial one                                                               
that has more to do with an  outage than a long-term pattern.  In                                                               
terms of a long-term pattern,  the swing capacity at the upstream                                                               
end is now down  to about 50 Mmcf/d as opposed  to the almost 250                                                               
Mmcf/d that was had a decade ago.                                                                                               
10:20:13 AM                                                                                                                   
MR. MAYER moved to slide  11, "DEMAND HAS, MEANWHILE, BECOME MORE                                                               
SEASONAL," to review  the reasons for why demand  has become more                                                               
seasonal  than ever  before.   He  explained  that the  left-hand                                                               
chart, "ALASKA:  GAS DEMAND  BY SECTOR,"  breaks down  the demand                                                               
between residential, commercial,  industry, and power generation,                                                               
while  the right-hand  chart, "ALASKA:  GAS DEMAND,"  depicts the                                                               
sum total of  those four sectors.  As would  be expected, the big                                                               
sources of seasonality in demand  are residential and commercial.                                                               
Power has  its own degree of  seasonality but is much  more muted                                                               
compared to residential  and commercial consumption of  gas.  The                                                               
industry sector was  of major importance prior  to 2006/2007; the                                                               
shutting of  Agrium's nitrogen facility being  the big difference                                                               
since then.  There  are two big impacts from that.   In the early                                                               
2000s  there was  very little  seasonality to  the nature  of the                                                               
industrial demand and,  because that demand was such  a big piece                                                               
of the  total and  was fairly  stable, in  general the  total was                                                               
more stable.  A period of  short gas supply began in those middle                                                               
years of  the previous  decade and  industrial usage  then became                                                               
effectively counter-seasonal, it was  being used primarily in the                                                               
off-peak  months  of  the  residential  and  commercial  sectors,                                                               
thereby  essentially   balancing  out  the  seasonality   of  the                                                               
residential and  commercial demand.   But now that  industrial is                                                               
no  longer a  major  piece of  the pie,  the  overall picture  is                                                               
dominated  by the  residential and  commercial  sectors which  is                                                               
where  the overwhelming  seasonal nature  of the  demand is.   As                                                               
seen on the  right-hand chart, the seasonality  of overall demand                                                               
has gone  from a  much tighter  to a much  broader swing  - going                                                               
from  less than  150  Mmcf/d to  more than  250  Mmcf/d of  total                                                               
demand.   So, there is  now much less seasonal  deliverability on                                                               
the  upstream  side,  but  yet  much  more  seasonal  consumption                                                               
patterns on  the demand side.   Getting these things to  match is                                                               
obviously a  key difficulty for  utilities to meet  that seasonal                                                               
demand profile.   That is why the Cook Inlet  Natural Gas Storage                                                               
Alaska facility  (CINGSA) and  the ability to  use the  Kenai LNG                                                               
Plant  in off  months have  become critical  in trying  to manage                                                               
some of these things.                                                                                                           
10:23:15 AM                                                                                                                   
MR. MAYER  reviewed slide 12,  "RECENTLY, EXPORTS HAVE  OFFERED A                                                               
SEASONAL  OUTLET," reporting  that in  recent years  exports have                                                               
started to  offer a seasonal  outlet.  He  said the chart  on the                                                               
left,  "US  LNG EXPORTS  FROM  KENAI,"  depicts [the  volume]  of                                                               
exports  from  the  Kenai  LNG Plant  during  the  timeframes  of                                                               
October to March  (red line) and April to  September (green line)                                                               
[for the years 1975-2015].  When  the two lines are identical, he                                                               
explained, it  is a non-seasonal  export profile - export  in the                                                               
winter months is largely the same  as in summer months.  When the                                                               
two lines diverge  is when the seasonality is seen  in the use of                                                               
that export  facility.  By and  large those two lines  track each                                                               
other pretty  well until  about 2013.   It  is in  2014/2015 that                                                               
that the export  facility becomes a substantial  component in the                                                               
seasonality  of demand  and being  counter-cyclical  in terms  of                                                               
providing demand  during the otherwise  off-peak periods  for the                                                               
residential and commercial  sectors.  In 2014 and  2015 the Kenai                                                               
LNG  Plant exported  13 and  16 Bcf,  respectively, which  helped                                                               
support the seasonal flexibility that is required.                                                                              
MR.  MAYER then  directed attention  to the  right-hand chart  on                                                               
slide 12, "KENAI LNG: PRICE  OF EXPORTED CARGOES," and noted that                                                               
until the  end of 2014 the  Kenai LNG Plant received  $14-$16 per                                                               
million British  thermal units (MMBtu).   It  is easy to  see how                                                               
that was profitable business even if  the plant was buying gas in                                                               
the Cook  Inlet rather than  producing the gas itself.   However,                                                               
[beginning in 2015] prices dropped  into the range of $6-$8/MMBtu                                                               
and in  more recent months have  been much closer to  $6 than $8.                                                               
Thought must  be given about the  combination of two things:   1)                                                               
ConocoPhillips'  divestiture  from  its Cook  Inlet  assets  that                                                               
produced the gas  historically used for export  through the Kenai                                                               
LNG  Plant, and  2) the  question  of how  the future  commercial                                                               
structure works  - whether  that gas is  being tolled  or whether                                                               
ConocoPhillips is  buying it at  the wellhead.   He said  he does                                                               
not know  enough about  those structures  to comment,  but warned                                                               
that  if the  low  prices  for exported  cargoes  continue for  a                                                               
substantial period  of time there  is a  real question as  to how                                                               
viable that is as a route to manage seasonality.                                                                                
10:26:13 AM                                                                                                                   
MR.   MAYER  addressed   slide   13,  "GAS   PRICES  HAVE   RISEN                                                               
CONSIDERABLY POST 2004," stating that  pricing has clearly been a                                                               
major factor in enabling additional  flattening of decline in gas                                                               
production.   Referring to the  left-hand chart, "COOK  INLET GAS                                                               
PRICE VS  HENRY HUB,"  he related  that, historically,  prices in                                                               
the Cook Inlet  (red line) have usually  been substantially below                                                               
the Henry Hub (green line), or  sometimes equal to the Henry Hub.                                                               
He recalled  the "famous" Regulatory  Commission of  Alaska (RCA)                                                               
price-making case where the RCA looked  at the idea of Henry Hub-                                                               
based pricing and  thought it was outrageously expensive.   It is                                                               
now ironic  to see that in  recent years the Henry  Hub price has                                                               
been about $2  per thousand cubic feet (Mcf) lower  than the Cook                                                               
Inlet prices,  which have stabilized  during these  recent years.                                                               
This price stabilization, he explained,  is in part the result of                                                               
the "consent decree" [between Hilcorp  Alaska, LLC, and the State                                                               
of Alaska, approved by the  Alaska Superior Court on 1/17/13] and                                                               
the set  prices put  in place  under a  number of  gas contracts.                                                               
Price stabilization  is also  related to the  RCA having  to take                                                               
into account  in making pricing  decisions the changes  that were                                                               
made by  the Cook Inlet Recovery  Act [House Bill 280,  passed in                                                               
2010 by the Twenty-Sixth Alaska  State Legislature].  The average                                                               
Cook Inlet prevailing price is around $6/Mcf.                                                                                   
MR.  MAYER then  brought  attention to  the  right-hand chart  on                                                               
slide 13,  "ENSTAR: ANNUAL GAS  SUPPLY CONTRACTS,"  and explained                                                               
the data  source is from  publically available  information about                                                               
ENSTAR Natural  Gas Company's ("ENSTAR")  gas contracts  from its                                                               
RCA cost  of gas adjustment  determination.  The chart  shows the                                                               
supply stack  by volume  and it  can be seen  that the  $6 figure                                                               
conceals a big  variation.  A substantial amount of  gas is being                                                               
bought at  prices as  low or  lower than  $4/Mcf, an  even bigger                                                               
amount is in  the range of $7-$8/Mcf, and there  are some smaller                                                               
contracts with the  price as high as $14/Mcf.   At this point the                                                               
consent  decree  prices  are  mostly   at  $7  plus/Mcf.    Other                                                               
jurisdictions have  tried to put  in place higher gas  pricing to                                                               
incentivize some  of the most  expensive production around.   For                                                               
example,  Argentina trying  to  incentivize  expensive shale  and                                                               
Egypt  trying to  incentivize expensive  offshore deepwater  gas.                                                               
Prices of  $5, $6, and  $7/Mcf have in  most of those  cases been                                                               
sufficient to produce some of that  most expensive gas.  There is                                                               
no question  that the increase in  gas pricing in Cook  Inlet has                                                               
played a major, major role in  the flattening of the decline that                                                               
has been seen and incentivizing  the discovery and development of                                                               
some of the new resources that is being seen at the moment.                                                                     
10:29:48 AM                                                                                                                   
MR. MAYER discussed slide 14,  "GAS SUPPLY AND DEMAND DYNAMICS IN                                                               
COOK INLET." On the supply side,  he said, gas production in 2015                                                               
was [103]  Bcf.  Recent  studies by  DNR estimate the  proven and                                                               
probable  reserves  ("2P reserves")  from  the  legacy fields  at                                                               
about  1.2   trillion  cubic  feet  (Tcf).     Additionally,  the                                                               
department  estimates about  400 Bcf  at the  Kitchen Lights  and                                                               
Cosmopolitan fields.   Presumably,  the department's  estimate is                                                               
intentionally  conservative, because  it is  very different  from                                                               
the statements  that have been made  by some of the  operators of                                                               
those fields.   However, if DNR's figure is used  for the moment,                                                               
the estimate of 2P gas reserves adds up to about 1.6 Tcf.                                                                       
MR. MAYER  qualified that when it  comes to the amount  of gas at                                                               
Kitchen Lights and Cosmopolitan, he  has no more data than anyone                                                               
else.   He advised  that since DNR  is clearly  authoritative and                                                               
intentionally  conservative, the  department's  number should  be                                                               
looked  at  more than  any  other.    He  recounted that  at  the                                                               
September [2015]  hearings on the state's  overall credit system,                                                               
a  representative  of  Furie  Operating  Alaska,  LLC,  ("Furie")                                                               
testified that Furie currently has  one well with peak production                                                               
at  about  18  Mmcf/d,  but  that in  principle  Furie  could  be                                                               
drilling many,  many more wells  and be producing 200  Mmcf/d for                                                               
15 years.   Doing  the math  for the gas  resource that  would be                                                               
required to  produce 200  Mmcf/d for 15  years, he  estimated the                                                               
size of  the resource  to be  about 1.5 Tcf.   So,  he counseled,                                                               
there  are  substantial  questions  yet to  be  answered  in  any                                                               
authoritative way as to the nature of that resource.                                                                            
10:32:26 AM                                                                                                                   
MR.  MAYER then  addressed the  demand side  for Cook  Inlet gas,                                                               
saying he  will use DNR's figure  of 1.6 Tcf to  think about what                                                               
that means  in terms  of the  overall supply  security situation.                                                               
He  noted  that the  2015  consumption  of  100 Bcf  pretty  much                                                               
matched the  supply [of  103 Bcf].   Of that,  80-85 Bcf  was in-                                                               
state  demand and  another 13-16  Bcf in  2014-2015 was  exported                                                               
through the  Kenai LNG  Plant.  According  to the  Alaska Gasline                                                               
Development Corporation's  (AGDC) forecasts  out to  2030, demand                                                               
could  rise to  115-130 Bcf/year,  he  related.   He offered  his                                                               
understanding that  that is  mostly not a  growing demand  in the                                                               
current  areas, but  rather  additional  penetration/new uses  of                                                               
gas.   If the nitrogen  facility were to restart,  AGDC estimates                                                               
that that would  add another 28 Bcf/year per train,  or almost 60                                                               
Bcf/year given the facility has two trains.                                                                                     
MR. MAYER explained that one set  of math could be to take either                                                               
1.2 or 1.6 Tcf  of gas in 2P reserves and  divide that by current                                                               
or  forecast future  demand.   However,  he continued,  enalytica                                                               
hesitates  to do  that  because gas  is not  produced  at a  nice                                                               
constant plateau,  but rather  on a decline  rate.   Just because                                                               
there are  reserves that could  be produced  at that rate  at the                                                               
moment does not necessarily mean it  can be done into the future.                                                               
But,  if both  Kitchen Lights  and  Cosmopolitan are  able to  be                                                               
developed, it seems  there is enough currently  known resource to                                                               
meet current  levels of demand at  least for the next  decade and                                                               
10:34:42 AM                                                                                                                   
MR. MAYER  pointed out, however,  that the market  side continues                                                               
to hold its  long-time perception and deep concern  of gas supply                                                               
shortage.  On the other  hand, the public testimony of developers                                                               
of new  resource, such  as Furie and  BlueCrest Energy,  Inc., is                                                               
that the  challenge is lack of  demand and the impact  of lack of                                                               
demand in developing their resources.   At first blush this seems                                                               
hard to reconcile  and hard to understand.  He  said this was the                                                               
question that most  perplexed him and Mr. Tsafos  when they first                                                               
began this analysis.  He explained  that the modeling on the next                                                               
several  slides spell  out that  picture  and why  both of  these                                                               
things can  be true at the  same time.  The  analysis starts with                                                               
some hypotheses.   For example, is  market timing the issue?   Is                                                               
the  market  currently covered  by  existing  contracts so  there                                                               
isn't  an opening  for new  producers now,  but there  will be  a                                                               
window in the future that  might enable larger scale development?                                                               
Is this a natural negotiation  process between buyers and sellers                                                               
who are  still trying to  figure out  the right pricing  point to                                                               
enable development  of this resource?   How  much of it  is about                                                               
fundamentally  different views  on resource  certainty?   What is                                                               
actually  at   some  of  these   new  fields  and   how  reliably                                                               
deliverable is  that gas?  All  these questions are part  of what                                                               
play into  the uncertainty on  both sides  of this picture.   The                                                               
next several slides  are the results of some  high level economic                                                               
modeling done by enalytica to  understand what this picture looks                                                               
like, particularly  for someone  currently trying to  develop new                                                               
gas resource in the Cook Inlet.                                                                                                 
10:36:49 AM                                                                                                                   
MR.  MAYER  showed  slide 15,  "PROJECT  #1:  MARKET  CONSTRAINED                                                               
(ASSUMPTIONS)," and  stated that the modeling  does not represent                                                               
any particular  project and is  not based on any  particular data                                                               
other  than  some  publically  made statements  by  some  of  the                                                               
companies  around  spending  on  such things  as  facilities  and                                                               
wells.    Referring  to  the  left-hand  chart,  "PRODUCTION  AND                                                               
DRILLING,"  he  outlined a  hypothetical  scenario  in which  the                                                               
company has spent $400 million on  a facility because it does not                                                               
have any existing mature fields  with production.  As an entirely                                                               
new development,  a platform, pipeline, and  other facilities had                                                               
to  be  built.    The   company  must  size  the  development  to                                                               
eventually  produce   a  substantial   quantity  of  gas.     The                                                               
development  could  produce,  say,  150 Mmcf/day  for  10  years.                                                               
However,  the constrained  gas  market will  only  allow for  the                                                               
contracting  and selling  of 15-20  Mmcf/d, so  the company  only                                                               
drills  one well.   (For  example, last  year Furie  testified it                                                               
drilled one  well that could  produce on  about 18 Mmcf/d.)   So,                                                               
because of the constrained demand  in this hypothetical scenario,                                                               
the  company only  drills that  one  well for  the first  several                                                               
years.   Several years later  the company attains the  ability to                                                               
sell 25-30  Mmcf/d and  it takes  several more  years to  hit the                                                               
mark of 30  Mmcf/d.  The company therefore spends  a whole decade                                                               
during which it only drills four wells.                                                                                         
MR. MAYER,  continuing his  discussion of  Project #1,  turned to                                                               
the  right-hand  chart on  slide  15,  "CASHFLOW AND  COMPONENTS:                                                               
$6/MCF,"  to review  the economics  of the  hypothetical project.                                                               
He explained the economics look  really, really difficult because                                                               
the  company had  the upfront  capital  expenditure ("capex")  of                                                               
$400  million (blue  bars) for  building the  platform and  other                                                               
facilities.   However, the  after tax  cash flow  ("ATCF") (black                                                               
dashed line)  is nowhere near as  negative as capex; this  is due                                                               
to  the impact  of the  substantial credits  that are  available.                                                               
Stacking the 25 percent Net  Operating Loss (NOL) Credit with the                                                               
20  percent Capital  Credit results  in 45  percent of  that cost                                                               
being  borne  after  the  fact  by the  State  of  Alaska.    The                                                               
remaining  65  percent is  borne  by  the  company.   That  ratio                                                               
changes  for drilling  expenditures  ("drillex") where  it is  as                                                               
high as  65 percent  effective support for  spending.   Even with                                                               
the  impacts  of  those  credits,   he  continued,  it  is  still                                                               
difficult  economics  to  make work,  because  the  company  must                                                               
struggle with  the big  upfront capital  expenditure that  had to                                                               
happen and  cannot produce  at anything like  an optimal  rate to                                                               
justify that capital expenditure due to the constrained demand.                                                                 
10:40:11 AM                                                                                                                   
MR. MAYER  brought attention  to slide 16,  "PROJECT #1:   MARKET                                                               
CONSTRAINED  (RESULTS)," to  look at  the six  charts summarizing                                                               
the economic  results for  this hypothetical  project.   He noted                                                               
that the top  three charts depict the split of  net present value                                                               
(NPV) across  a range of price  cases discounted at a  10 percent                                                               
rate between the  company, the federal government,  and the state                                                               
[one  chart representing  the status  quo under  Senate Bill  21,                                                               
passed  in  2013,  Twenty-Eighth Alaska  State  Legislature;  one                                                               
chart  representing   HB  247  for   NOL  only,  and   one  chart                                                               
representing  Senate  Bill  21 with  the  Gross  Value  Reduction                                                               
(GVR)].   He further  noted that the  bottom three  charts depict                                                               
[the  investment   metrics]  of  government  take   and  investor                                                               
internal rate of  return (IRR) [under the status quo,  HB 247 for                                                               
NOL only, and  Senate Bill 21 GVR].  He  explained that under the                                                               
status quo there  is:  no tax on oil,  although this hypothetical                                                               
scenario  is looking  at a  dry  gas development;  45 percent  in                                                               
stacked credits  for facilities capital spending;  and 65 percent                                                               
in stacked  credits for  drilling expenditures.   As seen  by the                                                               
investment  metrics chart  for the  status  quo, Alaska's  fiscal                                                               
regime is one  of the most generous in the  world with 40 percent                                                               
or less in  government take, but the project's rate  of return is                                                               
still quite challenged.  At [lower]  prices the rate of return is                                                               
below 10 percent and at higher  price levels the return goes into                                                               
the high  teens.   Some of  those price levels  are enough  for a                                                               
larger, more established  player that can get  cheap financing to                                                               
sanction   a  project.      However,   smaller  players   without                                                               
substantial assets  must look for  mezzanine financing,  which is                                                               
possibly  20 percent  or  more.   It  would  therefore be  really                                                               
difficult for  smaller players to  make this project  happen even                                                               
with the  existing substantial  credits.   It would  be possible,                                                               
but would require  further tweaking and optimization  and a whole                                                               
range of  other things to make  it happen.  Drawing  attention to                                                               
the chart  for the split  of net  present value under  the status                                                               
quo, Mr. Mayer  pointed out that [at wellhead  gas prices between                                                               
about $5 and $7/Mcf] this project  over its lifespan would be net                                                               
present  value negative,  value destroying;  and at  prices [over                                                               
$7/Mcf]  such a  project  would be  net  present value  positive,                                                               
value creating  for the  company.   The federal  government would                                                               
always be  well protected.  The  State of Alaska, across  all the                                                               
depicted  prices for  this project,  would be  in a  pure subsidy                                                               
zone, the state  in-net would be handing over cash.   The credits                                                               
are always  greater than the  combination of the royalty  and the                                                               
mineral production  tax, the state  would in-net be  handing over                                                               
cash on  a net present  value basis  in order to  incentivize gas                                                               
development, essentially it would be a subsidy.                                                                                 
10:43:01 AM                                                                                                                   
MR.  MAYER,  continuing on  slide  16,  reviewed the  two  charts                                                               
depicting the  economic summary of  what HB  247 would do  in the                                                               
Project #1  scenario of  a constrained market.   Rather  than the                                                               
45-65 percent in credits, there would  only be the 25 percent Net                                                               
Operating Loss Credit.   In those years  before production occurs                                                               
and assuming the company does  not already have production and is                                                               
able to  claim a Net Operating  Loss Credit, the impact  would be                                                               
to further reduce internal rates of  return.  The return would go                                                               
down into  the low single digits  at the lowest prices  and would                                                               
only get above a 10 percent rate  at the highest prices.  At most                                                               
of the depicted  prices, government take would be in  the zone of                                                               
50 percent  rather than 40 percent,  and would get up  towards 60                                                               
percent  at the  [highest  prices].   The  state  would be  value                                                               
negative at  some prices  and value positive  at others,  and the                                                               
company would only look value  positive in the highest prices and                                                               
would be loss making in all the rest.                                                                                           
MR. MAYER  turned to the two  charts for Senate Bill  21 with the                                                               
GVR,  explaining that  the  charts  are included  here  not as  a                                                               
recommendation, but simply as an  interesting point of comparison                                                               
for how things  would look if the North Slope  regime for new oil                                                               
was extended  to the  Cook Inlet.   In this  case there  would be                                                               
high  government take  of around  60 percent  across all  prices,                                                               
which  is  pretty much  what  that  regime  was designed  to  do.                                                               
Compared to the  internal rates of return under  the existing tax                                                               
structure but with only 25  percent net operating loss, the rates                                                               
of return don't  look all that different.  They  are a little bit                                                               
lower, but  relative to  the difference  in government  take they                                                               
are not much lower  and the reason is that this  is a regime with                                                               
a 35 percent  net operating loss rather than the  25 percent.  On                                                               
the other  hand it is  a regime with  an actual tax  liability at                                                               
the end  when a  company is  producing cash.   The basic  idea is                                                               
that if a company is a  smaller producer that cares in particular                                                               
about  internal rate  of return  rather  than the  value that  is                                                               
created over  the life  of the  project, a  higher credit  at the                                                               
outset has a bigger impact than the  cash in the tail.  That is a                                                               
different  set of  priorities than  would apply  to a  larger and                                                               
better capitalized company.  The basic  story here is that when a                                                               
company  is facing  market constrained  demand and  has to  spend                                                               
hundreds of millions of dollars  on a new facility, the economics                                                               
look really, really  tough even with credits at this  level.  The                                                               
basic  impact  of the  credits  is  to  make  what isn't  a  very                                                               
marginal investment maybe just possible.                                                                                        
10:45:36 AM                                                                                                                   
MR. MAYER moved to slide  17, "PROJECT #2:  MARKET UN-CONSTRAINED                                                               
(ASSUMPTIONS),"  and posed  a second  hypothetical scenario  with                                                               
the same resource base as  Project #1.  For hypothetical purposes                                                               
he stated the assumptions of 600  Bcf of gas, that there would be                                                               
a plateau  rate, and that the  resource would be developed  in an                                                               
optimal manner of about 130 Mmcf/d  of gas.  Rather than drilling                                                               
one  well every  couple of  years, three  wells a  year would  be                                                               
drilled for  the first  three years to  reach that  plateau rate.                                                               
To maintain  the plateau rate  of production, another one  well a                                                               
year would be drilled for the  next many years.  Referring to the                                                               
right-hand chart,  "CASHFLOW AND COMPONENTS: $6/MCF,"  he pointed                                                               
out that  this change  in drilling  profile looks  much healthier                                                               
for cash flow  and is more recognizable as the  cash flow profile                                                               
of an oil and gas investment.                                                                                                   
10:46:37 AM                                                                                                                   
MR.  MAYER  turned  to  slide   18,  "PROJECT  #2:    MARKET  UN-                                                               
CONSTRAINED  (RESULTS)," to  look at  the six  charts summarizing                                                               
the  economic  results  for  this  second  hypothetical  project.                                                               
These numbers  all look  much healthier, he  said.   The internal                                                               
rate of return  under the status quo would range  from 20 percent                                                               
[at a  wellhead gas price of  $5/Mcf] to 40 percent  [at $9/Mcf],                                                               
making this  a very attractive  investment, and the split  of net                                                               
present value would  be positive for everyone.   Under the status                                                               
quo, the company would be  highly positive relative to the state,                                                               
a function  of a  fiscal regime with  only 50  percent government                                                               
take at those  prices along with the substantial  credits.  Those                                                               
credits, he  continued, are  clearly essential  to get  a project                                                               
that is  constrained by  market demand to  happen; if  the market                                                               
constraint was solved the credits are much less necessary.                                                                      
MR. MAYER next looked at the  summary charts for Project #2 under                                                               
a scenario of HB  247 with only a Net Operating  Loss Credit.  He                                                               
noted the rates  of return would be  substantially reduced, going                                                               
from 15  percent [at  $5/Mcf] to  30 percent [at  $9/Mcf].   If a                                                               
company could  make a development  look like that,  had certainty                                                               
when it  started the initial  investment, and was  capitalized to                                                               
do  so, "it's  hard  to see  that that  wouldn't  be an  economic                                                               
investment sort of  under that sort of  structure," he continued,                                                               
he  said.   Regarding what  Project #2  would look  like under  a                                                               
scenario of  Senate Bill  21 with  the GVR,  he advised  that the                                                               
same sort  of lesson would apply.   The upfront credits  would be                                                               
slightly higher, but there would also  be higher take in the tail                                                               
years.   Again,  lower total  value  for the  company and  higher                                                               
total  value  for the  state,  but  not fundamentally  dissimilar                                                               
internal rates of return.                                                                                                       
10:48:27 AM                                                                                                                   
REPRESENTATIVE HAWKER observed hypothetical  Project #1 assumes a                                                               
very constrained  marketing ability,  limiting the  frequency and                                                               
number of  wells that  can be pursued.   Hypothetical  Project #2                                                               
assumes  an  unconstrained gas  market  where  wells are  drilled                                                               
every  single year  and keeping  growing production,  clearly the                                                               
economic differential.   When Cook  Inlet had the  consumption by                                                               
Agrium  and the  operating/production buffer  of exports,  it was                                                               
essentially a completely  unrestrained market, he said.   As much                                                               
gas could be moved out of the  inlet as could be produced.  Today                                                               
there  is not  the  luxury  of that  regular  export.   He  asked                                                               
whether  Mr. Mayer  has any  suggestions for  how today's  market                                                               
could be unconstrained  or whether export or a  new anchor client                                                               
are the only choices.                                                                                                           
MR. MAYER replied that to  truly unconstrain the market he thinks                                                               
export or  a new  anchor client generally  are the  only choices.                                                               
He added that there is possibly  some degree of a chicken and egg                                                               
problem in that an export  anchor client would need a substantial                                                               
degree  of certainty  of supply  before  it would  be willing  to                                                               
invest  substantial  money  in   reopening  a  facility  and  the                                                               
developer  of new  gas would  need to  know that  that demand  is                                                               
going to be there to make  the investments required to prove that                                                               
the gas  can be  delivered.  There  is a role  in that  world for                                                               
government to  bridge that  gap, he advised,  whether it  is with                                                               
credits  or  loan  guarantees  or  other  things  that  can  come                                                               
together and make that happen.   But at the moment, he continued,                                                               
there is  substantial spending  on a  very targeted  and tailored                                                               
set of things in Cook Inlet through the credit program.                                                                         
10:50:13 AM                                                                                                                   
REPRESENTATIVE HAWKER said another element  that might be at play                                                               
here is  prospectivity.   Until a few  years ago,  producers were                                                               
operating off the  five major gas domes, essentially  all it took                                                               
to get gas was to punch  down another straw in those major domes.                                                               
However, those major  domes are now approaching  or are depleted.                                                               
While  the argument  is made  that there  are trillions  of cubic                                                               
feet of gas  in the inlet, it is an  entirely different effort to                                                               
go find it.   He asked whether the committee  should consider the                                                               
prospectivity factor.                                                                                                           
MR. MAYER responded  that that is absolutely  an excellent point.                                                               
For the  next decade  or decade  and a half  of gas  security for                                                               
Southcentral Alaska,  he said, it  seems that  overwhelmingly the                                                               
biggest  challenge  is  simply   development  of  the  known  but                                                               
undeveloped resource  base.  But,  looking out beyond  that [time                                                               
period], it is always important to keep that in mind as well.                                                                   
10:51:21 AM                                                                                                                   
REPRESENTATIVE OLSON related that  the value-added plant, Agrium,                                                               
was shut down six or seven years  ago, but in the summers of 2013                                                               
and 2014  the company looked  at the plant  to see what  it would                                                               
take to bring  it back online.   The plant was found  to be quite                                                               
deteriorated  and  without  state   assistance  in  one  form  or                                                               
another, he said, he doesn't think the plant will be re-opened.                                                                 
MR. MAYER answered  that he understood and pointed  out that part                                                               
of what  makes the  next level  of analysis  really tricky  is to                                                               
understand the  cost-benefit analyses.   If targeted  measures of                                                               
government support  are wanted to  enable and  ensure development                                                               
of these resources to provide  gas supply to Southcentral Alaska,                                                               
what  is the  most  effective and  efficient  means of  providing                                                               
that?   Is that effectively  subsidizing one or  two developments                                                               
to ensure that  even though they would  otherwise be uneconomical                                                               
they can  happen without a  gas anchor tenant for  additional gas                                                               
demand?  Is  it providing instead a different  measure of subsidy                                                               
to enable an  anchor client?  What are the  costs and benefits of                                                               
some  of those  things?    Those are  very  difficult and  tricky                                                               
questions that are major programs for analysis.                                                                                 
10:52:53 AM                                                                                                                   
REPRESENTATIVE SEATON  stated that the  unconstrained assumptions                                                               
would  be a  situation in  which  supply was  available so  there                                                               
would be  competition for contracts.   When the Agrium  plant was                                                               
operating it  relied on low-cost  gas, he recounted.   In looking                                                               
at the export costs previously given  by Mr. Mayer, if the export                                                               
market after  liquefaction and transportation  is the  same price                                                               
or  less than  the domestic  supply market,  then that  means the                                                               
only way a company  could do that is to have its  own gas or else                                                               
it would  lose money.   He  inquired as  to how  much of  what is                                                               
being talked  about with adding  somewhat massive credits  into a                                                               
system, is intentionally disrupting  the supply and demand market                                                               
to get  cheap gas to enable  a project to go  forward that cannot                                                               
stand on its own economic feet.                                                                                                 
MR. MAYER replied those are  excellent points and good questions.                                                               
Regarding role of  pricing versus role of credits,  he said there                                                               
clearly  is some  interchangeability  between  these two  things.                                                               
The  lower prices  are, the  more  things require  credits to  be                                                               
viable; the less there are credits  in this scheme, the more that                                                               
higher  prices are  needed  instead.   Looking  at  the curve  of                                                               
internal rate of  return in the world of full  credits versus the                                                               
world  of only  a Net  Operating  Loss Credit,  he advised  there                                                               
would not  be many  investors willing to  do projects  this risky                                                               
for a  10 or 15 percent  rate of return.   However, he continued,                                                               
imagining that as  possible, there is ultimately a gas  price - a                                                               
higher gas price  - that is capable of  delivering the equivalent                                                               
return as in  the world of full credits.   Therefore, the credits                                                               
allow  a project  to  go forward  at  a gas  price  at which  the                                                               
project otherwise would not have happened.                                                                                      
10:55:53 AM                                                                                                                   
REPRESENTATIVE SEATON said he is  trying to ascertain whether the                                                               
high amounts of  credits to get an  unconstrained market actually                                                               
distort and  lower the price  so that the effectiveness  of lower                                                               
price goes away unless legislation  or regulation are used to fix                                                               
a higher  price in order not  to diminish that incentive  for all                                                               
of the other players.                                                                                                           
MR. MAYER responded  that that depends on a lot  of factors.  The                                                               
gas price in  Cook Inlet is currently one of  the few commodities                                                               
in  the  world that  hasn't  fallen  dramatically over  the  last                                                               
several  years, a  nice environment  to  be in.   Suddenly,  some                                                               
initial  contracts have  been signed  between  utilities and  new                                                               
sources  of supply  at  slightly lower  prices  than the  consent                                                               
decree  pricing   that  has  governed   the  majority   of  those                                                               
contracts.  That  said, when it comes to the  question of exports                                                               
and export availability,  all of those prices remain  on the high                                                               
side as compared  to the export pricing for LNG  to Japan that is                                                               
seen on  slide 12.   So, at  least until LNG  into Asia  or other                                                               
export uses of  gas have a much  higher value, it is  hard to see                                                               
that prices in the Cook Inlet  are artificially low.  Relative to                                                               
the rest of the world, they remain artificially high.                                                                           
10:58:07 AM                                                                                                                   
REPRESENTATIVE  SEATON  clarified he  is  trying  to get  to  the                                                               
interaction between the credits which  have the goal to stimulate                                                               
production that  isn't sold  locally and so  is exported  or used                                                               
industrially.   That excess supply  is going to change  the price                                                               
throughout the market, because more  players having more gas will                                                               
lower  [the price].   "I  would think  that you  would have  that                                                               
market condition,"  he said,  "but it  seems like  we're changing                                                               
the market condition solely with by applying the credits."                                                                      
MR. MAYER  answered that if it  were possible to develop  some of                                                               
these resources at substantial scale  and there were nowhere else                                                               
for that gas  to go, that would clearly have  an impact on market                                                               
pricing.   The  bigger  question  is whether  it  is possible  to                                                               
develop these resources without  a substantial external source of                                                               
demand in the  first place.  He deferred to  his colleague, Nikos                                                               
Tsafos, to further answer the question.                                                                                         
10:59:22 AM                                                                                                                   
NIKOS TSAFOS,  President &  Chief Analyst,  enalytica, Consultant                                                               
to the Legislative  Budget and Audit Committee,  explained how he                                                               
looks at  the supply and demand  picture by turning to  slide 14.                                                               
Recalling  the  constrained  and unconstrained  market  scenarios                                                               
previously discussed, he  said it is clear  that an unconstrained                                                               
market would  be great  and all these  things would  be economic.                                                               
Alaska is sort of stuck in this  world of having a lot of credits                                                               
but also  pretty high prices relative  to the rest of  the world.                                                               
On the  one hand  it is being  said that Alaska  has to  get this                                                               
market going.  The challenge  with that proposition, he said, and                                                               
to which he does  not yet have an answer, is  that if AGDC thinks                                                               
there is market  demand in the state that could  go up to 115-130                                                               
Bcf/year once  some of  the potential demand  in the  Interior is                                                               
added,  plus another  50-60 Bcf/year  of nitrogen  demand, it  is                                                               
hard to reconcile that demand  picture with the supply picture of                                                               
1,600 Bcf.   It  is almost  like saying if  the demand  was there                                                               
this resource  could be  developed now, but  if this  resource is                                                               
developed now  it would  probably run out  much sooner  and maybe                                                               
not have the supply security for  someone like Agrium.  Agrium is                                                               
not  going to  reopen the  plant on  the basis  of five  years of                                                               
supply,  Agrium  would probably  need  longer-term  supply.   The                                                               
question  goes back  to what  Mr. Mayer  asked about  whether the                                                               
right  number is  this  1,600 Bcf  or 1,800  or  1,200 or  2,000.                                                               
Drawing attention  to the bottom  half of slide 14  about timing,                                                               
Mr.  Tsafos discussed  how this  market would  ultimately develop                                                               
under the assumption that both  the supply and demand picture are                                                               
correct.   The base market  would be  pretty well covered  by the                                                               
resource and the existing fields with  new wells would be able to                                                               
meet demand.  At  some point that will run out  and will create a                                                               
wedge  for new  fields to  be able  to come  in and  capture that                                                               
demand.   It is similar to  discussions about the Alaska  LNG (AK                                                               
LNG) Project,  which is that  the project couldn't be  brought on                                                               
line  now, but  looking out  to 2024-2025,  some of  the existing                                                               
supply will  have fallen, some of  the new demand will  have come                                                               
in, and there will be a window.                                                                                                 
MR. TSAFOS said  if the aforementioned numbers  are correct, that                                                               
would be  the market way to  resolve this.  Essentially  there is                                                               
stranded gas, gas  that doesn't have a clear market  right now to                                                               
come in but is not big enough to  create that market.  It is more                                                               
than  just  a  chicken  and  egg thing,  there  is  also  a  time                                                               
component which  makes it  a little more  complicated.   Going to                                                               
Representative Seaton's  question, there  is clearly  some market                                                               
inconsistency and inefficiency here -  there is only a handful of                                                               
buyers and  there is  only a  handful of sellers  and there  is a                                                               
price discovered  process and  there is a  time process  and that                                                               
can get messy.  If this is  the resource base, it is difficult to                                                               
see how it would  be said to bring in all  this demand, unless it                                                               
was  thought that  by virtue  of  bringing this  demand it  would                                                               
incentivize   exploration  that   gets   into  the   undiscovered                                                               
resource.  Folks looking at this  market right now would say that                                                               
there is  nowhere to sell  the gas  that they might  find because                                                               
they would  be fourth in  line, whereas if  a new market  for the                                                               
gas is  created then maybe  those folks would  think differently.                                                               
So, that is the only dynamic aspect to that.                                                                                    
11:04:05 AM                                                                                                                   
MR. MAYER  added that a  big part  of the aforementioned  is what                                                               
the nature is of the known  but undeveloped resource base.  If it                                                               
is the size of DNR's current  estimate, then it is really talking                                                               
about mechanisms to aid the  economics of developing the resource                                                               
in a constrained  gas market because it is  not really sufficient                                                               
to provide long-term supply at the  level of demand that would be                                                               
had, for instance,  with the reopening of  the nitrogen facility.                                                               
If it  is substantially  bigger than that,  and the  operators of                                                               
those  places have  made some  claims that  are much  higher than                                                               
DNR's  numbers,  then  higher levels  of  production  and  export                                                               
demand start  to make  sense.   What is  the optimal  solution to                                                               
that problem  depends a lot  on what is  the nature of  the known                                                               
but undeveloped resource base.                                                                                                  
11:05:04 AM                                                                                                                   
REPRESENTATIVE SEATON stated  he is trying to get to  the crux of                                                               
the question,  which can be  seen in the  top left chart  for the                                                               
status  quo on  slide 16.   In  every price  scenario shown,  $5-                                                               
$10/Mcf  wellhead  gas price,  the  State  of  Alaska has  a  net                                                               
present  value loss,  meaning the  state's credits  are so  large                                                               
that the  state will  never recover  its investment.   It  may be                                                               
that   some  additional   production  could   be  stimulated   by                                                               
subsidizing all  of that production.   In other words,  the state                                                               
is paying an  unknown amount per Mcf for production  that will go                                                               
somewhere other than  to the local supply base.   It is switching                                                               
profitability  from the  state to  an exporter,  whether exported                                                               
through industrial use or through  LNG.  Those credits are giving                                                               
the state  a net present value  loss for the entire  value of the                                                               
project even  at the highest  prices, and that is  what committee                                                               
members  are  here  considering  -  are  the  credits  needed  in                                                               
addition to the  price being the highest price in  the world?  If                                                               
a price of $5-$6 is sufficient  to develop the highest priced gas                                                               
fields in  the world, as  stated by  Mr. Mayer, should  the state                                                               
double up when  the entire double up on the  credit system in the                                                               
status quo is a total net loss  to the state and not necessary to                                                               
achieve the goals  of even higher priced gas  development?  These                                                               
slides get to  the crux of that question, he  opined, and he sees                                                               
that  as the  only  question that  the committee  is  here is  to                                                               
answer:  Have  the credits done their job and  are they necessary                                                               
though for future  production unless the state is  just trying to                                                               
help some  private export project?   It is fine  if [legislators]                                                               
want to do that,  he said, but the credits are  not showing up as                                                               
necessary for domestic production.                                                                                              
11:08:13 AM                                                                                                                   
REPRESENTATIVE  OLSON   commented  that   when  Cook   Inlet  was                                                               
operating most  efficiently it wasn't  really relying on  the tax                                                               
incentives or  anything else.   It was  a situation where  one of                                                               
the major producers  in the inlet owned the urea  plant for 20 or                                                               
25 years, the producer always had  enough gas one way or another,                                                               
and the producer always made money  on both sides.  It worked out                                                               
really  well  until  the producer  started  shutting  assets  and                                                               
Agrium picked  up the property for  five years and was  unable to                                                               
do the same thing.  There  was also additional demand coming from                                                               
the Anchorage utilities at that point  in time.  It was extremely                                                               
profitable  without a  whole  lot of  assistance  because it  was                                                               
basically a  monopoly on the  stranded gas with the  exception of                                                               
the export.  He said he  thinks Agrium, then the export, and then                                                               
the Anchorage  utilities was  the way  the pie  was divided.   It                                                               
worked extremely  efficiently, he  opined, but it  probably won't                                                               
be seen again and it probably wouldn't be allowed by the state.                                                                 
11:09:22 AM                                                                                                                   
REPRESENTATIVE  HAWKER inquired  whether enalytica's  modeling is                                                               
of exact circumstances and specific  cases that actually exist in                                                               
the Cook Inlet or is of hypothetical cases.                                                                                     
MR. MAYER  replied they  are very much  hypothetical models.   He                                                               
quoted statistician George  Box who said, "All  models are wrong,                                                               
some  models  are useful."    Continuing,  Mr. Mayer  said  these                                                               
models are definitely  wrong, but he hopes they are  useful.  The                                                               
models are  not based  on any confidential  detail of  any actual                                                               
existing project.   They are a set of educated  assumptions as to                                                               
what various scenarios  might look like and are  intended to give                                                               
a directional idea as to  the nature of certain circumstances and                                                               
the  basic directional  conclusion that  says market  constrained                                                               
development  is   very,  very  difficult.     Market  constrained                                                               
development may  well be NPV  negative for  the state, but  it is                                                               
effectively  a subsidy  to make  a development  possible that  is                                                               
still  only barely  possible with  that  subsidy.   Unconstrained                                                               
development certainly  looks a lot  more viable,  and potentially                                                               
viable,  without the  degree of  support.   Pure drilling  within                                                               
mature fields is generally quite  economic in most circumstances.                                                               
That, he  said, is the high  level nature of the  conclusion that                                                               
should be drawn from these.                                                                                                     
11:11:07 AM                                                                                                                   
REPRESENTATIVE  HAWKER compared  slide  15,  "PROJECT #1:  MARKET                                                               
CONSTRAINED (ASSUMPTIONS),"  to slide  19, "PROJECT  #3: DRILLING                                                               
IN  EXISTING FIELD  (ASSUMPTIONS),"  and surmised  that the  same                                                               
data set for production and drilling is used for both slides.                                                                   
MR. MAYER  responded that he  used a lower assumption  on initial                                                               
production from a  well.  The key differences,  he explained, are                                                               
no upfront capital spend and  lower initial production from wells                                                               
from mature fields versus wells in completely new reservoirs.                                                                   
MR.  MAYER then  addressed slide  19, "PROJECT  #3:   DRILLING IN                                                               
EXISTING FIELD  (ASSUMPTIONS)," stating  the final idea  here was                                                               
to make  exactly those two  changes.  What  does it look  like if                                                               
there is  no upfront  capital spend  of $400  million and  if the                                                               
well  productivity is  reduced somewhat  because they  are mature                                                               
reservoirs with less reservoir pressure?   He reiterated that the                                                               
modeling is not anyone's actual  infill drilling program; rather,                                                               
it is  a series of very  level assumptions.  It  ignores entry or                                                               
acquisition  costs and  treats those  as sunk.   People  actually                                                               
owning these  assets entered  at some  point, paid  a substantial                                                               
amount  of money  for  those assets,  and  made those  investment                                                               
decisions based on  a tax regime and a tax  regime extending into                                                               
the future, he said, and those are all important provisos.                                                                      
11:12:57 AM                                                                                                                   
MR. MAYER moved  to slide 20, "PROJECT #3:   DRILLING IN EXISTING                                                               
FIELD (ASSUMPTIONS)," to  look at the six  charts summarizing the                                                               
economic   results   for   this   third   hypothetical   project.                                                               
Addressing the  bottom left chart, "INVESTMENT  METRICS," for the                                                               
status  quo, he  pointed out  that the  internal rates  of return                                                               
would be  enormously high.  Once  a 50 percent rate  of return is                                                               
exceeded, he explained, those numbers  are no longer particularly                                                               
meaningful because it is really just  about the nature of a small                                                               
initial upfront capital  investment and the cash  flow that comes                                                               
afterwards.  No one should quote  these as knowing what the rates                                                               
of return are for additional drilling  in Cook Inlet; that is not                                                               
the purpose of  this.  Enalytica's conclusion  from testing these                                                               
assumptions   over  a   wide  range   of  drilling   costs,  well                                                               
productivities,  and the  other key  variables, and  treating the                                                               
past as  sunk and looking solely  towards the future, is  that it                                                               
is  hard to  see circumstances  under  which drilling  additional                                                               
wells  in  mature fields  in  Cook  Inlet isn't  profitable  even                                                               
without credit support.                                                                                                         
11:14:08 AM                                                                                                                   
MR. MAYER  showed slide 21, "THE  COOK INLET OIL AND  GAS MARKET:                                                               
A SCORECARD," to summarize his  presentation.  Oil production has                                                               
turned around dramatically and gas  production has stabilized but                                                               
not  turned  around,  he  said,  and  part  of  that  is  due  to                                                               
constrained demand.   There has been a major change  in the basic                                                               
structure   of   supply,   demand,   prices,   competition,   and                                                               
expectations in  the Cook Inlet  market.  Looking at  the future,                                                               
in most circumstances and  particularly circumstances under which                                                               
the known but  undeveloped resource could be  developed, there is                                                               
a degree  of security of supply  for the next decade  and beyond.                                                               
But, understanding how  to ensure that resource  is developed and                                                               
best developed requires a better  sense of how substantial is the                                                               
resource base and whether it  is best incentivized by credits, or                                                               
by  other means  of  subsidizing the  development,  or trying  to                                                               
provide access to a substantial  external source of demand.  Lots                                                               
of these variables  depend on better understanding  the nature of                                                               
that resource  base in terms of  how it can be  best incentivized                                                               
for development.   Enalytica's final conclusion is  that based on                                                               
the amount  of revenue  currently generated  from Cook  Inlet and                                                               
the amount  spent on  credits, it's  hard for  anyone to  look at                                                               
that  and think  it is  a long-term  sustainable picture.   Plus,                                                               
additional uncertainty  was injected  into the picture  last year                                                               
through the  line-item veto and  all the rest.   Currently, there                                                               
is  enormous uncertainty  over  the future  of  what this  regime                                                               
looks  like, how  bankable  these credits  are,  and what  actual                                                               
economics to apply even to  something like additional drilling in                                                               
existing fields, because  it is unknown what the  tax regime will                                                               
be next year or the year after.   That more than anything else is                                                               
possibly the biggest inhibitor to  ongoing investment and ongoing                                                               
development.   Finding  a way  to  set a  stable and  sustainable                                                               
system that investors  know will stay as the regime  for the next                                                               
decade plus is crucial and absolutely paramount.                                                                                
11:16:33 AM                                                                                                                   
REPRESENTATIVE HERRON, regarding the  statement on slide 21, "Gas                                                               
production  has  stabilized  after years  of  steadier  decline,"                                                               
interpreted   "steadier"   to   mean  no   fluctuation   decline.                                                               
Regarding  the analysis  of  HB  247 related  to  Cook Inlet,  he                                                               
inquired what  is good about  this proposed legislation,  what is                                                               
bad that should be discarded, and what is ugly that needs work.                                                                 
MR. MAYER answered that on the good  side he would say it is time                                                               
to be  having a serious  conversation about Cook Inlet  credits -                                                               
what the state's policy aims  are through those credits, what the                                                               
most efficient  way to  achieve those aims  are, and  whether the                                                               
current credits fulfill that aim.  He  said it is hard for him to                                                               
see that  there aren't potentially  more efficient ways  of doing                                                               
that than  the existing system.   On the bad side,  he continued,                                                               
he  would say  removing the  Capital  Credits that  exist at  the                                                               
moment,  and particularly  making  that effective  July 1,  2016,                                                               
seems like a rash decision given  there are a number of producers                                                               
at the moment  that have committed to drilling  programs for this                                                               
year and those drilling programs rely  on the credit system as it                                                               
currently exists  being in place.   A  number of those  cases are                                                               
developments that  one would really like  to see go ahead  and he                                                               
thinks July  1 is  probably inadequate lead  time to  enable that                                                               
adjustment.   Regarding the ugly  side, Mr. Mayer noted  that the                                                               
proposal in  HB 247 is  to leave  everything as it  currently is,                                                               
which includes sunsetting of the  regime in 2022, taking away the                                                               
Capital  Credit, and  leaving  in place  the  Net Operating  Loss                                                               
Credit.   He said the fundamental  question here is, What  is the                                                               
optimal fiscal  regime for the  Cook Inlet  in the long  term and                                                               
what is the optimal means?   If subsidies are necessary to enable                                                               
certain  activities  to  occur,  what is  the  optimal  means  of                                                               
delivering that?  Being worried  about the outflow of credits and                                                               
simply  saying to  get rid  of  the Capital  Credit because  that                                                               
mostly goes  towards some  of the  ongoing development  of mature                                                               
fields rather than  to new development is a crude  answer to that                                                               
question.  More analysis and  a more refined approach is possibly                                                               
required to say  not just what can  be cut now so  the state will                                                               
be okay, but to say what  is actually necessary to provide by way                                                               
of subsidy and how to  target those as intelligently as possible.                                                               
How to craft,  not a regime that sunsets in  2022, but an ongoing                                                               
stable and sustainable regime for  the inlet that achieves all of                                                               
these measures?                                                                                                                 
11:19:56 AM                                                                                                                   
REPRESENTATIVE  SEATON   said  he   is  trying   to  get   to  an                                                               
understanding that  an unconstrained  market is  not going  to be                                                               
created in the immediate term.  He continued:                                                                                   
     And if we don't and if we  spend a lot of state cash on                                                                    
     credits to  allow greater  production, are  we actually                                                                    
     turning around and saying, "Okay,  we are going to make                                                                    
     a surplus  that has  no market in  Cook Inlet  to drive                                                                    
     down   prices   which   are  actually   going   to   be                                                                    
     counterproductive in incentivizing  other well drilling                                                                    
     programs  or  other  supply  programs  that  have  been                                                                    
     effective  around the  world  of  having higher  prices                                                                    
     actually  meaning  the   market  conditions  drive  the                                                                    
     exploration instead  of us artificially trying  to come                                                                    
     in and basically pick winners  and losers, whether it's                                                                    
     going to  be old fields  or new fields, ...  and giving                                                                    
     cash  to  it....   Can  the  effect of  supplying  huge                                                                    
     amount of  credits be that  we distort the  market into                                                                    
     an  effect  so that  we  don't  get additional  market-                                                                    
     driven drilling and exploration?                                                                                           
MR. MAYER deferred to Mr. Tsafos for an answer.                                                                                 
11:21:45 AM                                                                                                                   
MR. TSAFOS  responded that he and  Mr. Mayer have spent  the last                                                               
month pouring over data and he  still has no clear answer to some                                                               
of these  questions.   What happened in  Cook Inlet  is something                                                               
that happens in a  lot of places:  big basin,  big export, then a                                                               
decline starts,  and then it  transitions to mostly  local supply                                                               
of market from big companies to  small companies.  That is pretty                                                               
typical around  the world.  Having  said that, it is  also pretty                                                               
clear that  some of the more  natural market forces that  come in                                                               
to help  make that  transition didn't quite  work here.   Whether                                                               
talking about having  a contract between a buyer  and seller that                                                               
is  not   approved  by  the  regulator   and  therefore  creating                                                               
uncertainty for  both sides  about what  the price  structure is,                                                               
for some  reason getting  new players  to come  in and  take over                                                               
assets  from bigger  companies,  something that  happened in  the                                                               
United  Kingdom (UK)  and  Norway, happened  a  little bit  later                                                               
here.   There is a  pretty clear need to  think about how  to get                                                               
this  market  to  work  better  as a  market.    Regarding  price                                                               
signals, Cook  Inlet has very  high pricing  but it is  not clear                                                               
that there is  enough liquidity of competition  that these prices                                                               
are as dynamic or send as much of a signal as would be liked.                                                                   
MR. TSAFOS said  enalytica has been thinking about,  but does not                                                               
yet have an  answer to, the question of, How  can a better market                                                               
be made?   This is  followed by the  question of, How  can policy                                                               
interventions be  made along  the way  to correct  distortions in                                                               
the market?   The distortions  over time  seem to have  been more                                                               
important  than the  core market  mechanisms,  he continued,  and                                                               
that makes  it difficult to  figure out exactly what  that market                                                               
would look  like.  The  market answer  would be that  [the inlet]                                                               
has stranded  gas that doesn't  get developed  and that is  not a                                                               
really good answer.   It may be the answer, but it  is not a very                                                               
pleasant or  satisfactory answer to  come to because  people have                                                               
been incentivized to come in and  spend money and then it is said                                                               
that nothing can be done with this gas.                                                                                         
MR.  TSAFOS stated  that figuring  out  the answer,  which he  is                                                               
still trying  to do, goes back  to the core principles  of how to                                                               
build a  real market here,  how to reinforce the  market approach                                                               
of this.   As was  stated by Mr. Mayer,  the taking away  of some                                                               
credits would  raise the equilibrium  price at which  things make                                                               
sense.   The current  price is fairly  good for  some investments                                                               
and not  particularly good for  others.  The question  is whether                                                               
there is enough of the luxury on  the resource base to see how it                                                               
could play  out for a  few years, to which  he does not  know the                                                               
answer because  there is an  enormous amount of  uncertainty over                                                               
the  resource base.    He said  it  seems there  is  enough of  a                                                               
cushion for  a few  years to  see how  those market  forces could                                                               
play out and  whether there is a pricing system  that could bring                                                               
both  the  buyers  and  the  sellers  together  to  find  a  nice                                                               
compromise and enable some of  these investments.  He offered his                                                               
general  agreement with  Representative Seaton  that rather  than                                                               
trying to  just artificially  prop up a  market that  isn't quite                                                               
working, to  try to think more  generally about how to  make this                                                               
market work better.                                                                                                             
11:26:18 AM                                                                                                                   
REPRESENTATIVE HAWKER  pointed out  that in  looking at  the real                                                               
market today, Cook Inlet has  one really significant player and a                                                               
few smaller players around the  edge.  The one significant player                                                               
has been  operating under  essentially government  price controls                                                               
that  came about  through the  consent decree  in order  to enter                                                               
this  market.   Regarding creating  distortions in  a market,  he                                                               
said he  is wondering whether  it is  really known how  the inlet                                                               
would work today or if it  is being distorted by those government                                                               
imposed  price  controls in  the  consent  decree.   He  inquired                                                               
whether  the  market  would  be  different  without  those  price                                                               
controls and, if so, how different would it be.                                                                                 
MR. TSAFOS replied that Representative  Hawker's question is what                                                               
he was  saying before:  there  are enough factors getting  in the                                                               
way of  what would normally  be thought of as  a well-functioning                                                               
market, there  just aren't  have enough buyers  and sellers.   In                                                               
the Cook Inlet's  case, an overwhelming majority  supplier in the                                                               
market is  not going to  lead to a very  well-functioning market.                                                               
But,  going  back  to  basic  economics, if  a  higher  price  is                                                               
ultimately  being charged  then  other folks  would  come in  and                                                               
undercut that  major supplier.   As  has been  seen, some  of the                                                               
recent contracts  are below the  consent decree, so in  some ways                                                               
that  response  is  happening  although not  very  speedy.    The                                                               
biggest  challenge is  that  the market  signals  and the  market                                                               
forces are  there but they  are just not operating  very quickly.                                                               
The evolution  must be seen  before some of these  distortions or                                                               
restrictions can  be corrected.   Representative Hawker  is right                                                               
that in  the current structure it  is not clear that  there would                                                               
be  a much  different  system based  on the  reality  of who  the                                                               
buyers and  the sellers are and  how the market is  structured in                                                               
Cook  Inlet.   The  question  is how  to  go  beyond the  current                                                               
structure and  think about  what could  be a  different structure                                                               
that doesn't  require the same  level of state support  but still                                                               
has a goal of a well-functioning gas market in the inlet.                                                                       
MR. MAYER  added that clearly one  of the biggest impacts  of the                                                               
consent  decree has  been to  substantially raise  the gas  price                                                               
that has  been paid over that  period.  Activity levels  were low                                                               
before that.    The higher  prices of the consent  decree and the                                                               
changes included in  the Cook Inlet Recovery Act for  how the RCA                                                               
assesses pricing decisions,  have all been key  and as important,                                                               
if not more so, as the credits  in the level of activity that has                                                               
been  seen since  then.   Because it  is one  large supplier  and                                                               
because  it  is  an  essentially immovable  and  regulated  price                                                               
decision, it is not one  that necessarily responds well to market                                                               
forces and it is hard to see,  other than through some of the new                                                               
contracts that have  been signed, what sort  of underlying market                                                               
signaling that might be.                                                                                                        
11:30:28 AM                                                                                                                   
REPRESENTATIVE  HAWKER  noted  that   this  discussion  is  about                                                               
distorted markets,  market inefficiency created with  the limited                                                               
buyers  and  limited sellers,  and  the  unknown impacts  of  the                                                               
consent decree.   He recalled that Mr. Tsafos spoke  about a need                                                               
to relook at the tax structure and  system in the Cook Inlet.  He                                                               
posited that  the Cook Inlet  not currently operating in  truly a                                                               
free market  would argue that  [legislators] ought to  be careful                                                               
about making  systemic changes now and  to look at what  needs to                                                               
be  done  sometime, say,  after  2018  when things  actually  are                                                               
working in a free market environment.   Care must be taken not to                                                               
throw a  disruption into a  market that  will be changing  by the                                                               
expiration of  that agreement  and how  that might  affect buyers                                                               
and sellers.                                                                                                                    
MR.  MAYER   answered  that   Representative  Hawker   raises  an                                                               
excellent point and enalytica would  say that any changes need to                                                               
be crafted with a view of not  just looking at the tax system but                                                               
the  overall  functioning  of  the market  and  how  the  overall                                                               
functioning  of  the  market  can   be  improved  and  that  that                                                               
particular point  in time is  clearly key.   In a range  of price                                                               
environments and  price mechanism  scenarios, there  are probably                                                               
better  and more  efficient ways  of targeting  state support  to                                                               
achieve  the aim  of security  of  gas supply  than the  existing                                                               
system.  But  it is important to take time  to think through what                                                               
that  optimal system  is,  he  continued, and  set  that for  the                                                               
future  rather than  make immediate  tweaks today  simply because                                                               
one  can and  because one  is  concerned about  the cash  outflow                                                               
which  is substantial.    This needs  to be  thought  about as  a                                                               
holistic package of reforms rather than a one-time change.                                                                      
11:32:44 AM                                                                                                                   
REPRESENTATIVE  HERRON, following  Representative Hawker's  train                                                               
of thought,  noted that  HB 247  proposes to  make some  of these                                                               
adjustments.   So, following Representative Hawker's  comment, he                                                               
requested examples  of pitfalls  in HB  247 about  those proposed                                                               
MR. MAYER  answered the  biggest pitfall comes  from the  July 1,                                                               
2016, effective date.   He presumed there will  be testimony over                                                               
the  coming  weeks  of investment  programs  that  are  currently                                                               
committed to  by companies on  the basis of the  existing credits                                                               
and  are programs  that one  would like  to see  carried forward.                                                               
Because in  principle it is  thought that this can  be withdrawn,                                                               
and therefore it should happen  on July 1, poses some substantial                                                               
risks in his opinion.                                                                                                           
REPRESENTATIVE HERRON thanked Mr. Mayer for that reinforcement.                                                                 
11:34:00 AM                                                                                                                   
REPRESENTATIVE JOHNSON stated he is  troubled by this whole plan.                                                               
However, something that he keeps  thinking about and that has not                                                               
been  discussed, is  that to  pay  these credits  [the state]  is                                                               
actually  borrowing the  money.   No  one has  talked about  that                                                               
opportunity loss, the cost of  borrowing that money whether it is                                                               
from the permanent fund, earnings  reserve, or the Constitutional                                                               
Budget Reserve  (CBR).  If the  state had the money  on hand that                                                               
would be one thing, but this  is going into savings to pay these,                                                               
and  so he  is troubled  by  changing it  and he  is troubled  by                                                               
having to borrow to continue with  it.  It is very perplexing and                                                               
not an  easy decision to be  looking at.  He  said consistency is                                                               
probably the most  important thing the state could  offer, but he                                                               
hates  to  borrow the  money  to  be  consistent, because  it  is                                                               
leveraging the state's  future, which is what is  being done with                                                               
the tax credits anyway.  It is therefore concerning.                                                                            
MR. MAYER  agreed those are  very difficult choices to  make, not                                                               
only  in and  of themselves,  but also  in terms  of the  way the                                                               
broader  market sees  what  is  going on  and  responds.   It  is                                                               
difficult to see  that set of choices and think  that the current                                                               
system is stable  or sustainable for any  significant period into                                                               
the future.   All of those things are reasons  to be thinking now                                                               
about all of  the detailed analysis that needs to  occur to set a                                                               
sustainable regime for the future and  to try to make that happen                                                               
sooner rather than  later.  That may not necessarily  be the same                                                               
thing as making an immediate cut to a credit this year.                                                                         
11:36:02 AM                                                                                                                   
REPRESENTATIVE SEATON posited that  there are two forces intended                                                               
to disrupt the market - the  consent decree and the credits.  The                                                               
question  is whether  they conflict  with each  other.   Based on                                                               
enalytica's examples of the net  present values and what works in                                                               
the  three [hypothetical]  examples, it  seems it  is being  said                                                               
that under almost no scenario  are the credits needed for infield                                                               
drilling; that those  can be supported and  are economic entirely                                                               
on  their own  without those  credits.   He inquired  whether the                                                               
following is what Mr. Mayer is suggesting would make more sense:                                                                
     ... if we  are looking at ... changing  that credit, we                                                                    
     do a timing  so that such as infield  credits which ...                                                                    
     can  be supported  on their  own, are  economic, aren't                                                                    
     relying on  the credits  to make the  project economic.                                                                    
     That those  could be  July 1  and then  at a  later set                                                                    
     date  we could  be  looking at  certain other  projects                                                                    
     that are  already sanctioned and going  forward and the                                                                    
     credits through  that to  a certain  date, not  ... too                                                                    
     long in the  future, but through the  projects that are                                                                    
     already sanctioned.                                                                                                        
MR. MAYER  replied he would  place a  nuance around that.   While                                                               
enalytica's  analysis suggests  it is  hard to  see circumstances                                                               
under which  ongoing drilling  in mature  fields is  not economic                                                               
even without credit support, a number  of other things need to be                                                               
taken into account  in thinking about that.  One  of those is the                                                               
sheer degree of uncertainty that  exists around the future of the                                                               
entire  tax  regime  and  what   that  means  for  anyone  making                                                               
investment  decisions even  in terms  of drilling  in the  mature                                                               
fields.  What are the other  impacts of credits on that activity?                                                               
If  more  than  60  percent  of  a  company's  drilling  cost  is                                                               
effectively  borne by  the state,  the timeframe  the company  is                                                               
looking  at in  terms of  measuring those  economics is  probably                                                               
short enough that it doesn't really care  if in a year or two the                                                               
entire fiscal  system changes  because relatively  speaking there                                                               
is so little upfront cash that  the company is worried about.  If                                                               
that  is not  the case,  the company  probably cares  a lot  more                                                               
about what happens in year two,  three, four, five, and beyond of                                                               
this system.  If he had  a concern about withdrawing credits from                                                               
those activities,  it would  be that  to ensure  those activities                                                               
continue  one would  want  to know  that  a stable,  competitive,                                                               
sustainable  fiscal regime  was in  place that  applied to  those                                                               
activities that  when companies  made investment  decisions about                                                               
what they  were doing, they were  doing it based on  that regime,                                                               
not  on a  wildly  risked  set of  assumptions  because they  are                                                               
simply not sure about what the future looks like.                                                                               
11:39:54 AM                                                                                                                   
REPRESENTATIVE SEATON  argued that  if the  consent decree  is in                                                               
place  through 2018,  then  there is  certainty  among the  price                                                               
support.   If the price  support was sufficient around  the world                                                               
to get that, especially if some  of these are being offered lower                                                               
but some much higher price contracts  for gas, why would there be                                                               
an expectation that  that price support which  is being sustained                                                               
throughout the domestic market would go away, he asked.                                                                         
MR. MAYER responded that his problem  is less about pricing as it                                                               
is  about the  rest  of  the fiscal  structure.    Is a  producer                                                               
running  its   economics  assuming  the  ongoing   system  of  no                                                               
production tax on oil  and $.17 on gas?  Or  is a producer saying                                                               
it has  no idea  what next  year or the  year beyond  this fiscal                                                               
system looks  like?  Is the  producer having to make  a series of                                                               
assumptions as  to what it  could be and  a series of  worst case                                                               
assumptions as to what it could  be as opposed to knowing what it                                                               
actually looks like and the  economics of that activity look very                                                               
different in those two scenarios?                                                                                               
11:41:07 AM                                                                                                                   
MR.  TSAFOS  added that  high  prices  and strong  state  support                                                               
provide a double  support for this system.   So, intuitively, one                                                               
would say that less of either  of those two things could be done.                                                               
But, regarding the  economics that enalytica ran on  the last few                                                               
slides, there  is a  big disclaimer  on slide 19  that it  is all                                                               
point-forward.   For a company to  be drilling at a  field it has                                                               
to be in  the field - it  has to have platforms,  the assets, and                                                               
the people to do that to begin  with - and the major producers in                                                               
Cook Inlet  came in recently based  on a fiscal system  that they                                                               
were  modeling  and  they  were  expecting.    While  enalytica's                                                               
modeling  is ignoring  those costs  that are  sunk, they  are not                                                               
sunk from  the perspective  of the  company and  what it  is that                                                               
brought  them  here.   Going  back  to  Representative  Johnson's                                                               
comment, it  is really  tough because  if nothing  is done  it is                                                               
clear it is  unsustainable and it is clear everyone  agrees it is                                                               
unsustainable.  No  one can make an investment  decision based on                                                               
this  system because  no one  believes  this system  is going  to                                                               
last.   Not doing  anything creates  an enormous  uncertainty and                                                               
just pushes it down the line.  At  the same time it is not really                                                               
clear what kind  of interventions or changes would be  best.  But                                                               
it  is clear  that [the  state] must  come to  something that  is                                                               
going to be seen as durable  and sustainable.  Cook Inlet is much                                                               
more difficult  than the  North Slope  to begin  with, especially                                                               
from the gas side.  So, it is  not hard to see how the enthusiasm                                                               
of  folks in  the  Cook  Inlet disappears  very  quickly if  some                                                               
substantial changes are made to the system.                                                                                     
MR. TSAFOS reiterated that the  transition from big international                                                               
players  to smaller  players probably  took a  little bit  longer                                                               
than it  took other places.   That could  have been based  on the                                                               
market's perception of Alaska, the  risk profile, the opportunity                                                               
set.  These things matter.   Investors are looking closely around                                                               
the world  about who is raising  taxes and who is  cutting taxes.                                                               
The UK has come out with a  tax break.  Russia was thinking about                                                               
raising taxes  and chose to raise  some and not to  raise others.                                                               
Rio de  Janeiro came out  recently with a  tax hike.   In today's                                                               
global  environment investors  are  super  sensitive to  thinking                                                               
about what kind of  changes Alaska is making.  It  is going to be                                                               
a  very tough  balance.   Something  has to  be done  to make  it                                                               
sustainable, otherwise  no one  believes it.   At the  same time,                                                               
whatever is done  must be grounded in enough  analysis and reason                                                               
to do  as little harm  as possible.   It is  going to be  a tough                                                               
balance.   Even with all  the time spent analyzing  these things,                                                               
enalytica is not quite there yet.                                                                                               
11:45:20 AM                                                                                                                   
REPRESENTATIVE  SEATON  said  he  hopes [the  state]  gets  there                                                               
sometime  because it  is spending  $400  million a  year that  it                                                               
doesn't have  and a decision must  be made someplace as  to where                                                               
that goes.   Whether the high gas price is  the consent decree or                                                               
what people  are willing to pay,  he continued, he has  not heard                                                               
from  his  constituents  any  objection to  the  price  they  are                                                               
paying,  which is  $1 more  per Mcf  than elsewhere  in the  Cook                                                               
Inlet basin  in order to  support the building of  a transmission                                                               
line down to  Homer and Anchor Point.  He  said he challenges the                                                               
idea of  needing to  stimulate to  get a lower  price on  gas for                                                               
domestic  use.   Maybe  people  in  Anchorage are  telling  folks                                                               
different  things,  but  he  has  not  heard  any  complaints  or                                                               
concerns  on   the  gas  heating  bills   being  received  within                                                               
Southcentral.   He  said he  does  not know  where the  pressure,                                                               
other  than  oversupply, would  be  to  drastically lower  prices                                                               
unless oversupply is driven.  If  these credits are used to drive                                                               
oversupply  and drive  down prices,  that would  cause all  those                                                               
smaller  players to  not  participate in  the  inlet and  further                                                               
concentrate the  supply in  one person.   He noted  the committee                                                               
has requested more analysis from  enalytica regarding more of the                                                               
policy decision  and exactly how  those intermingle.   He offered                                                               
his appreciation for all of the testimony.                                                                                      
11:47:40 AM                                                                                                                   
REPRESENTATIVE JOHNSON  stated he hasn't disagreed  with anything                                                               
that has  been said.   However,  he said, he  would like  for the                                                               
focus from  the administration or  future presentations to  be on                                                               
the  consequences   of  now,  the  consequences   of  later,  the                                                               
realities of now, and long term  versus short term.  Right now he                                                               
is not convinced  that the legislation before  the committee will                                                               
accomplish the  things that  the committee has  heard need  to be                                                               
done.   He would therefore  like to  concentrate on what  some of                                                               
those solutions are  and concentrate on the doable  as opposed to                                                               
the presented that  is in front of the committee.   He urged that                                                               
the  committee focus  on ways  to touch  this that  do the  least                                                               
damage and  that solve the problems  so this does not  have to be                                                               
revisited by future legislatures.                                                                                               
11:49:12 AM                                                                                                                   
CO-CHAIR  TALERICO spoke  in regard  to Mr.  Mayer's point  about                                                               
making a change when the state  has made a promise and people are                                                               
locked into  a system.   He  posed a scenario  in which  a person                                                               
with a  home mortgage  is told  by the  lender that  the lender's                                                               
fiscal situation  has changed  and so now  the lender  is raising                                                               
the interest  rate despite  the starting agreement.   He  said he                                                               
sees that as  being a horrible image for the  State of Alaska and                                                               
it will make  the state look unstable.  He  recounted that he has                                                               
looked into  the criteria  the state has  structured in  order to                                                               
bring  investors into  the region.    Although he  wasn't in  the                                                               
legislature then, it appears from  the history that consideration                                                               
was given  to ensuring everyone  was treated fairly.   There have                                                               
been some failures  in Cook Inlet that have cost  the state money                                                               
as well as the private sector.   He asked how important Mr. Mayer                                                               
thinks it  is for the  state to establish particular  criteria to                                                               
get  a stable  and sustainable  system  that goes  out in  future                                                               
years.  He further asked  whether tightening that up is something                                                               
that Mr. Mayer definitely recommends.                                                                                           
MR. MAYER answered enalytica would  certainly say that no one can                                                               
look at the amount of cash  outflow and think it is a sustainable                                                               
program.   It is very  difficult to look  at the sheer  amount of                                                               
cash outflow also compared to what  probably is, in most cases, a                                                               
relatively limited cash need to  assist development of resources.                                                               
If the overwhelming  public policy purpose of this  program is to                                                               
stabilize and provide security of  supply to Southcentral gas, it                                                               
is a  much smaller subset of  needs than the cash  currently goes                                                               
to.  Precisely because of  the uncertainty that exists around the                                                               
future  regime  and  precisely  because  of  the  difficult  cash                                                               
position that  the state finds itself  in, it is worth  trying to                                                               
do as  much analysis sooner  rather than  later to try  to figure                                                               
out what that regime  is.  It is also better to  take the time to                                                               
do that  analysis and  set a sustainable  regime for  the future,                                                               
rather than  to make changes as  soon as possible because  one is                                                               
concerned about the cash and everything else is secondary.                                                                      
11:52:45 AM                                                                                                                   
CO-CHAIR NAGEAK  said the aforementioned  discussion needs  to be                                                               
taken into  consideration.  He  requested Mr. Mayer to  follow up                                                               
in this  regard and thanked  Mr. Mayer  and Mr. Tsafos  for their                                                               
CO-CHAIR  NAGEAK  apologized to  the  Department  of Revenue  for                                                               
running  out  of  time  for  the  department's  presentation  and                                                               
announced another time will be scheduled in the near future.                                                                    
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 2.26.16 enalytica Cook Inlet February 2016.pdf HRES 2/27/2016 10:00:00 AM
HSE RES HB247 DOR Fiscal Details and Scenario Modeling (Part 2a) 2-26-16.pdf HRES 2/27/2016 10:00:00 AM
HRES 3/7/2016 1:00:00 PM
HRES 3/7/2016 6:00:00 PM
HRES 3/8/2016 1:00:00 PM
HB 247