Legislature(2015 - 2016)BARNES 124

02/29/2016 01:00 PM RESOURCES

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01:02:26 PM Start
01:03:08 PM HB247
03:04:02 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
- Alaska Oil & Gas Association (AOGA)
- Armstrong Oil & Gas
- Conoco/Phillips Alaska
- Caelus Energy Alaska
- Great Bear Petroleum
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
1:03:08 PM                                                                                                                    
CO-CHAIR NAGEAK announced  that the only order  of business would                                                               
be  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."                                                                    
1:03:49 PM                                                                                                                    
KARA  MORIARTY, President/CEO,  Alaska  Oil  and Gas  Association                                                               
(AOGA),  provided  a   PowerPoint  presentation  with  coinciding                                                               
written testimony [included in the  committee packet].  After her                                                               
initial introduction,  Ms. Moriarty paraphrased from  her written                                                               
testimony,  starting  at  the second  paragraph,  which  read  as                                                               
follows [original punctuation provided]:                                                                                        
          AOGA is a professional trade association whose                                                                        
     mission  is to  foster the  long-term viability  of the                                                                    
     oil and gas  industry in Alaska for the  benefit of all                                                                    
     Alaskans.  Thank you  for  the  opportunity to  testify                                                                    
     today on House Bill 247,  Governor Walker's oil and gas                                                                    
     tax policy proposal.                                                                                                       
     Slide 2                                                                                                                    
          AOGA represents the majority of oil and gas                                                                           
     producers,   explorers,   refiners,  transporters   and                                                                    
     marketers  in  Alaska.  Our  current  members  include:                                                                    
     Alyeska  Pipeline  Service Company,  BlueCrest  Energy,                                                                    
     BP,  Caelus   Energy,  Chevron,   ExxonMobil,  Hilcorp,                                                                    
     PetroStar,  Shell, and  Tesoro. Although  I am  here on                                                                    
     behalf of a  varied and diverse group  of companies, my                                                                    
     testimony today represents  the thoughts and sentiments                                                                    
     of each  and every member.  On matters related  to tax,                                                                    
     AOGA requires unanimous consent on testimony.                                                                              
          Before I address the bill before you, I believe                                                                       
     it is prudent  to discuss the current state  of the oil                                                                    
     and gas  industry in Alaska.  In order for each  of you                                                                    
     to  make  an  informed  decision, it  is  important  to                                                                    
     understand and  appreciate the industry from  a context                                                                    
     broader than mere tax revenue.                                                                                             
1:06:02 PM                                                                                                                    
REPRESENTATIVE HAWKER  noted that the administration  had advised                                                               
the legislature to get its analysis  of HB 247 from the industry.                                                               
He emphasized  the importance  of that advice  in serving  as the                                                               
basis  for understanding  how HB  247 would  impact the  [oil and                                                               
gas] industry.                                                                                                                  
1:07:03 PM                                                                                                                    
MS. MORIARTY  expressed her thanks  to Representative  Hawker and                                                               
related the degree to which  she takes the testimony seriously as                                                               
the  reason she  would exceed  her 20-minute  suggested time  for                                                               
testimony.  She  said she will discuss the impact  in broad terms                                                               
while many company representatives  will discuss specifically how                                                               
the proposed  legislation would impact  their company.   She then                                                               
directed  attention to  slide 3  and continued  paraphrasing from                                                               
her   written  testimony,   which  read   as  follows   [original                                                               
punctuation provided]:                                                                                                          
     Slide 3                                                                                                                    
          The state revenue depicted on this table                                                                              
     represents the total state  revenue generated in fiscal                                                                    
     year 2015,  restricted and unrestricted  state revenue.                                                                    
     The unrestricted  portion of the $2.3  billion was $1.7                                                                    
     billion,   representing  75%   of  the   state's  total                                                                    
     unrestricted revenues.                                                                                                     
          In addition, the industry paid $447 million in                                                                        
     property  taxes   to  local  governments.   Again,  for                                                                    
     greater  context, the  mining industry  generates $83.7                                                                    
     million in state revenue and  pays $18 million in taxes                                                                    
     to local governments.                                                                                                      
          It would be imprudent to discuss the oil and gas                                                                      
     industry's contributions  to Alaska  without mentioning                                                                    
     jobs.  Based  on data  from  the  most recent  McDowell                                                                    
     Group  report on  jobs and  wages in  the industry  and                                                                    
     data  in the  2015 Department  of Revenue  Sources Book                                                                    
     (RSB), the  oil and gas industry  is, without question,                                                                    
     a main driver in fueling Alaska's total economy.                                                                           
          When you combine jobs from direct industry                                                                            
     employers  like AOGA  members, plus  the jobs  provided                                                                    
     from indirect industry employers  such as the multitude                                                                    
     of  Alaska based  contractors,  plus  the induced  jobs                                                                    
     created  by those  employees  spending  money in  their                                                                    
     communities,  there are  51,000 private  sector Alaskan                                                                    
     jobs created by  the oil and gas  industry according to                                                                    
     the  McDowell  Group's  estimates. The  McDowell  Group                                                                    
     also modeled  the number of  state employees  and other                                                                    
     jobs   created  in   Alaska's  economy   through  state                                                                    
     spending, acknowledging that  the overwhelming majority                                                                    
     of that  spending is  attributable to  the oil  and gas                                                                    
     industry.  McDowell  Group  found  that  an  additional                                                                    
     60,000 public  sector jobs would not  exist without the                                                                    
     industry's   fiscal   contributions.  All   told,   the                                                                    
     McDowell Group  concluded that 111,000  jobs generating                                                                    
     $6.45  billion in  wages result  from the  oil and  gas                                                                    
     industry's  presence  in  Alaska.  By  comparison,  the                                                                    
     mining industry generates about 8,700 jobs in Alaska.                                                                      
     Slide 4                                                                                                                    
          To put it in more simple terms, more than 1/3 of                                                                      
     Alaska's jobs  are tied  to the  oil and  gas industry.                                                                    
     For  every   direct  job  the  industry   provides,  20                                                                    
     additional   jobs  are   created  throughout   Alaska's                                                                    
     economy.  The  McDowell  Group   found  that  no  other                                                                    
     industry comes close to that magnitude of multiplier.                                                                      
          Finally, you have undoubtedly read headlines                                                                          
     regarding the  industry being forced to  lay-off direct                                                                    
     employees in  this current,  low price  environment. It                                                                    
     is  not just  oil  industry families  that are  dealing                                                                    
     with  the adverse  effects of  downsizing, contractions                                                                    
     in  the  industry  are felt  across  Alaska,  as  every                                                                    
     dollar earned by  an oil and gas  employee generates $8                                                                    
     additional dollars in wages throughout the state.                                                                          
     Slide 5                                                                                                                    
          It is easy for the cynical to tell anecdotal                                                                          
     stories about getting  on an airplane next  to a worker                                                                    
     who lives out  of state coming or going  from the North                                                                    
     Slope. Although  the industry for a  variety of reasons                                                                    
     cannot   dictate  where   an   individual  must   live,                                                                    
     companies consistently strive to  hire as many eligible                                                                    
     Alaskans  as possible.  According  to  the most  recent                                                                    
     Department of Labor (DOL)  report the statewide average                                                                    
     for all  resident hire, across all  industries is about                                                                    
     80% Alaskan  hire. Many AOGA member  companies actually                                                                    
     have a higher rate of  resident hire than the statewide                                                                    
     average. For  example, Caelus Energy has  more than 85%                                                                    
     Alaska  hire and  over 400  contractors working  on the                                                                    
     Slope this  year. Alyeska has  a 94% Alaska  hire rate,                                                                    
     with  20% of  their  employees being  of Alaska  Native                                                                    
     heritage.  100%  of   BlueCrest  operations  staff  are                                                                    
     Alaska  residents,   while  70%  of   the  construction                                                                    
     workers  at   their  Cosmopolitan  project   are  state                                                                    
     residents. Petro Star boasts 97% Alaska hire.                                                                              
1:13:00 PM                                                                                                                    
          In 2014, BP spent $2.2 billion in Alaska, with                                                                        
     72%  of   that  spend   with  Alaska   companies;  they                                                                    
     currently have a 79% Alaska hire rate.                                                                                     
MS. MORIARTY  added that ExxonMobil Corporation  has engaged                                                                    
and  worked  with more  than  100  Alaska companies  in  its                                                                    
construction  of  Point Thomson,  80  percent  of which  are                                                                    
Alaskans.    She  continued paraphrasing  from  her  written                                                                    
testimony,  which  read  as  follows  [original  punctuation                                                                    
          89% of Hilcorp's workforce are Alaskans. In                                                                           
     addition, industry  supports scholarships  and training                                                                    
     programs to  increase the  resident hire.  For example,                                                                    
     Alyeska  alone spends  $2 million  each  year to  hire,                                                                    
     train and develop Alaska Native employees.                                                                                 
          Would the industry like to hire more Alaskans? Of                                                                     
     course  they would.  It makes  good  business sense  to                                                                    
     hire  Alaskans,  as  it  is  both  more  efficient  and                                                                    
     economical to do so.                                                                                                       
          What does not make good business sense is the                                                                         
     provision  in  Section 27  of  the  bill to  limit  the                                                                    
     repurchase of  refundable credits to just  a percentage                                                                    
     of the  certificate equal to that  company's percentage                                                                    
     of Alaska resident hire in  the previous calendar year,                                                                    
     including Alaska hire by  the company's contractor work                                                                    
          Basing the repurchase of tax credits on a                                                                             
     company's   local  hire   percentage   would  make   it                                                                    
     difficult,  if not  impossible, for  operators to  plan                                                                    
     and  evaluate  investments because  their  contractors'                                                                    
     and   subcontractors'  Alaska   hire  percentages   are                                                                    
     outside the operator's  control. This uncertainty will,                                                                    
     in turn, discourage potential new investment here.                                                                         
          In addition, a resident-hire limitation on the                                                                        
     amount   of  an   otherwise   well-earned  tax   credit                                                                    
     certificate  that   can  be  cashed  out   also  raises                                                                    
     significant issues under the  U.S. Constitution, and an                                                                    
     earlier   Alaska-hire   preference  attached   to   the                                                                    
     construction  of the  Trans-Alaska Pipeline  System was                                                                    
     struck down  by the U.S. Supreme  Court. The inevitable                                                                    
     legal  battle   would  drag  out  in   court,  and  the                                                                    
     unanswered  question would  cloud  Alaska's tax  system                                                                    
     with  uncertainty until  there  was a  ruling. We  note                                                                    
     that  the  U.S.  Supreme   Court  recently  heard  oral                                                                    
     arguments  involving  an  Alaskan issue,  the  Sturgeon                                                                    
     case, it  has taken  nine years for  that case  to wind                                                                    
     its way through  the legal system to  reach the highest                                                                    
     court. Does  Alaska want to create  further uncertainty                                                                    
     over local hire?                                                                                                           
          Finally, if it is good policy to put local hire                                                                       
     conditions on  how the oil  and gas industry  is taxed,                                                                    
     one   might   expect   similar  proposals   for   other                                                                    
     industries operating in  Alaska. But the Administration                                                                    
     isn't proposing  anything like  that, even  though some                                                                    
     industries  employ much  higher  rates of  non-Alaskans                                                                    
     than ours.                                                                                                                 
          As I already indicated, Alaska's oil and gas                                                                          
     industry is  a major  contributor to  state government,                                                                    
     both in  terms of revenue generated  for state spending                                                                    
     as well  as the jobs  created by the industry.  You can                                                                    
     see from this table that,  since statehood, oil and gas                                                                    
     has   been  the   source  for   85%   of  the   state's                                                                    
     unrestricted  revenue, totaling  $141 billion  dollars.                                                                    
     This figure has not been  adjusted for inflation, so in                                                                    
     the total in today's dollars would be far greater.                                                                         
     Slide 7                                                                                                                    
          As you discuss a change in Alaska's oil and gas                                                                       
     tax policy, this  slide is a reminder that  in the last                                                                    
     decade there have  already been 5 major  changes in tax                                                                    
     policy. As  the President of Hilcorp  stated last week,                                                                    
     "I started  in the oil  business right straight  out of                                                                    
     school, during the real boom  in the 7O's/early 80's in                                                                    
     Midland,  Texas. I'm  not aware  of  the fiscal  system                                                                    
     ever changing  in the  State of  Texas since  I've been                                                                    
     working  in the  oil  and gas  industry.  I've been  in                                                                    
     Alaska four years, and we've  debated it 3 or 4 times."                                                                    
     He  went onto  to  say, "More  than anything,  changing                                                                    
     rules and taxes every few years  is a sure way to scare                                                                    
     investment away."                                                                                                          
     Slide 8                                                                                                                    
          Of course, the last major change in tax policy                                                                        
     occurred three  years ago  with the  passage of  SB 21,                                                                    
     followed by  the referendum  to repeal  the new  law in                                                                    
     August 2014. Voters decided  the state's current fiscal                                                                    
     policy was  good for  Alaska, and  we would  agree that                                                                    
     Alaska has proved to be  competitive, has attracted new                                                                    
     jobs  and investment,  and  will  ultimately result  in                                                                    
     more production to the state.                                                                                              
          Since April 2013, when the bill passed the                                                                            
     legislature,  industry  has   announced  more  than  $5                                                                    
     billion in  additional spending across the  state. That                                                                    
     increased spending could not  have happened at a better                                                                    
     time, as the investments made  in the last 18-24 months                                                                    
     are  helping the  industry sustain  itself in  this low                                                                    
     price environment.                                                                                                         
1:19:00 PM                                                                                                                    
     Slide 9                                                                                                                    
          But what has the increased investment meant in                                                                        
     terms of  production? As you  can see from  this chart,                                                                    
     using data  from the Department of  Revenue, production                                                                    
     on  the North  Slope has  stabilized and  was basically                                                                    
     flat  from   2014  to   2015,  which   is  particularly                                                                    
     significant when considering an  historical trend of 5-                                                                    
     6% annual decrease.                                                                                                        
          The states own forecast shows the power of a                                                                          
     competitive fiscal system. The  blue line is historical                                                                    
     production  in Alaska  for the  last decade,  the black                                                                    
     line is  the forecast from  December 2013, and  the red                                                                    
     line is the forecast from just this past December.                                                                         
          If you look at the chart to the right, and look                                                                       
     out  a few  years to  the year  2020, and  compare this                                                                    
     year's forecast  to the forecast  released in  the Fall                                                                    
     of 2013,  after SB 21 had  passed but had not  yet been                                                                    
     enacted. After  approximately two years under  this tax                                                                    
     system,  you  will see  the  Department  of Revenue  is                                                                    
     forecasting 50,000 barrels per  day more than what they                                                                    
     were forecasting  in 2013. To provide  further context,                                                                    
     the  price  forecast  in  the  Fall  2015  forecast  is                                                                    
     $50/barrel  less  for 2020  than  it  was in  the  2013                                                                    
     forecast. Even with the much  lower price forecast, the                                                                    
     production  forecast is  still 50,000  barrels per  day                                                                    
     Slide 10                                                                                                                   
          There has been a lot of conversation about "new                                                                       
     oil"  or  oil  that   qualifies  for  the  gross  value                                                                    
     reduction  or "GVR".  The  purpose of  the  GVR was  to                                                                    
     lower the  effective tax  rate on  new production  as a                                                                    
     way to  incentivize new production. Some  have recently                                                                    
     asserted  that all  new oil  after 2002  will pay  zero                                                                    
     taxes  if  prices are  under  $70  per barrel.  I  will                                                                    
     discuss  government take  on  all  oil, including  GVR,                                                                    
     later in  the presentation, but  I would like  to point                                                                    
     out, that the DOR is  forecasting that GVR will average                                                                    
     about  8% of  our overall  production for  the next  15                                                                    
     years. So while  bringing on new fields and  new oil is                                                                    
     important to  Alaska's future,  our legacy  fields will                                                                    
     continue to provide the lion's  share of production for                                                                    
     years to come.                                                                                                             
     Slide 11                                                                                                                   
          Looking to Cook Inlet, you will see a tremendous                                                                      
     oil production  success story. The Division  of Oil and                                                                    
     Gas  Director Corri  Feige  mentioned these  statistics                                                                    
     during her  presentation last week.  You can  see there                                                                    
     has  been an  increase  of over  100%  since 2009.  The                                                                    
     investments  made  to  increase Cook  Inlet  production                                                                    
     have  made  a  significant   impression  on  the  local                                                                    
     economy.  Additionally,   our  member   company  Tesoro                                                                    
     refines every  barrel of oil possible  that travels the                                                                    
     short distance to their refinery.  A December 2015 Econ                                                                    
     One  study for  the Senate  Finance Committee  reported                                                                    
     that  Alaska  refineries  supply the  majority  of  the                                                                    
     State's  demand   in  the  Southcentral   and  Interior                                                                    
     regions. When  oil production was  lower in  Cook Inlet                                                                    
     the Tesoro  refinery was importing  oil to  refine from                                                                    
     as  far away  as Africa,  just to  meet these  in state                                                                    
     needs. Econ One  also went on to say  "We estimate that                                                                    
     the total  value added to  Alaska's economy by  the two                                                                    
     refiners currently in  operation (Tesoro and PetroStar)                                                                    
     is approximately $153 million per year.                                                                                    
1:23:32 PM                                                                                                                    
MS.  MORIARTY  added,  "In   comparison,  the  governor  recently                                                               
announced the  impact of  the [Alaska]  Marine Highway  System is                                                               
just under that,  at $100 million per year.   So the ferry system                                                               
has  an economic  impact of  $100  million and  our two  in-state                                                               
refineries  ...  [have]  the  benefit  of  $153  million."    She                                                               
continued paraphrasing from her  written testimony, which read as                                                               
follows [original punctuation provided]:                                                                                        
          The [refining] industry provided $23.2 million in                                                                     
     revenue annually  to the State  in the form  of revenue                                                                    
     in kind (RIK)  purchases over and above  the revenue in                                                                    
     value (RIV)  alternative and  $9.3 million  in property                                                                    
     and income taxes." Having a  local source of supply for                                                                    
     the refinery  is good for value  added manufacturing in                                                                    
     Slide 12                                                                                                                   
          It is impossible to have this conversation                                                                            
     without  acknowledging  the ominous  and  unprecedented                                                                    
     drop  in oil  prices.  Prices today  are  not only  the                                                                    
     lowest we've  seen in a  decade, but when  adjusted for                                                                    
     inflation, they  are the  lowest since  the mid-1980's.                                                                    
     In less than two years,  the industry has experienced a                                                                    
     70%  drop in  oil prices.  You  are well  aware of  the                                                                    
     impact this has had on  the State of Alaska's revenues.                                                                    
     You have  historically received 85-90% of  your revenue                                                                    
     from oil. As significant as  that is, it's important to                                                                    
     recognize  that  the  industry  receives  100%  of  its                                                                    
     revenue  based  on  the  market   prices  for  what  it                                                                    
     produces. As  my friends in other  industries will tell                                                                    
     you, we are price takers, we are not price makers.                                                                         
     Slide 13                                                                                                                   
          Every   industry   operating   in   Alaska   fully                                                                    
     understands   that   Alaska   is   an   expensive   and                                                                    
     logistically  challenging  place   to  do  business.  I                                                                    
     imagine  that  concept  was  expressed  by  the  mining                                                                    
     industry  last week,  and it  is particularly  true for                                                                    
     the oil and gas industry.                                                                                                  
          The following chart demonstrates that while oil                                                                       
     and  gas   development  costs  grew  90%   since  2000,                                                                    
     inflation  grew only  40% during  the  same period.  In                                                                    
     other words,  over the past  fifteen years,  costs have                                                                    
     surged more than two times  the rate of inflation. This                                                                    
     is   yet  another   compelling  factor   and  financial                                                                    
     stressor  on industry  in Alaska,  which compounds  the                                                                    
     difficult decisions  these companies are making  to cut                                                                    
     costs  and  increase   efficiencies  while  safely  and                                                                    
     reliably producing oil and gas.                                                                                            
     Slide 14                                                                                                                   
          Invariably, companies are forced to operate                                                                           
     despite  the current  oil price  environment; this  can                                                                    
     result in projects being  delayed and deferred. Perhaps                                                                    
     most painfully,  it also results in  Alaskan jobs being                                                                    
     lost.  This chart  shows the  relationship between  the                                                                    
     low price on  slide 11 and the high costs  on slide 12.                                                                    
     It looks  eerily similar  to the  charts you  as policy                                                                    
     makers are  reviewing in terms  of the  state's revenue                                                                    
     and expenses.                                                                                                              
          The oil and gas industry is cash flow negative,                                                                       
     as least as much as the state sees itself as being.                                                                        
     Slide 15                                                                                                                   
          As I alluded to before, the high cost environment                                                                     
     in  Alaska is  even more  difficult to  navigate during                                                                    
     this unprecedented low  price environment. According to                                                                    
     the  Department of  Revenue's  Fall  Sources Book,  the                                                                    
     estimated average cost of producing  a barrel of oil on                                                                    
     the North Slope  -before a company pays  even one penny                                                                    
     of tax  -is $52/barrel.  To reiterate,  companies spend                                                                    
     $52  to  produce  each  barrel   before  they  pay  any                                                                    
     corporate income  tax, property tax, or  production tax                                                                    
     in  Alaska. One  need  not be  an  economist or  Rhodes                                                                    
     scholar to  understand that,  in a  $30 a  barrel world                                                                    
     with  $52  costs, oil  companies  are  in an  untenable                                                                    
     position in Alaska.                                                                                                        
          Yet despite this, here we are, testifying about                                                                       
     legislation to add additional costs  to the industry by                                                                  
     raising the  production tax. It is  not surprising that                                                                    
     Department  of Oil  and  Gas  Director Feige  testified                                                                    
     last week  that companies  are gravely  concerned about                                                                    
     any  substantive changes  to  tax  policy. "Changes  in                                                                    
     taxes generally are lumped into  the bucket... of cost.                                                                    
     At  a time  when prices  are  low, that  sets off  some                                                                    
     alarm bells."                                                                                                              
1:29:00 PM                                                                                                                    
          Intuitively, it seems like poor long-term policy                                                                      
     to choose  to increase the  costs to the industry  at a                                                                    
     time when companies spending is  already out of balance                                                                    
     with their revenues by over  $20/barrel before they pay                                                                  
     the existing  taxes. If additional taxes  are levied on                                                                    
     the  industry, forcing  them  to be  even  more out  of                                                                    
     balance, you can  be sure that the  industry would have                                                                    
     to  make  more severe  cuts  in  expenditures that  are                                                                    
     needed to maintain and grown the state's production.                                                                       
          The Department of Revenue Tax Director suggested                                                                      
     to me a  few weeks ago that if industry  were to simply                                                                    
     eliminate all capital  expenditures, the industry would                                                                    
     be  able   to  "break  even"  at   these  prices.  This                                                                    
     astonishing suggestion  discounts the  significant role                                                                    
     that capital  investment plays for maintenance  and the                                                                    
     integrity  of  industry  operations.  Absent  continued                                                                    
     capital  spending, the  State can  say good-bye  to the                                                                    
     currently forecasted additional  50,000 barrels per day                                                                    
     in 2020.  As misguided  as that  line of  thought might                                                                    
     be, it  does highlight the fundamental  question at the                                                                    
     core of this  discussion. How badly are  you willing to                                                                    
     mortgage  Alaska's future  for  nominal and  short-term                                                                    
     gains today?                                                                                                               
          It will be very challenging for the industry to                                                                       
     reduce operating  expenses, without  further reductions                                                                    
     in the workforce.                                                                                                          
          Any increase in this environment will have a                                                                          
     negative  impact on  the industry  and  on the  state's                                                                    
     Slide 16                                                                                                                   
          As you weigh yet another change in tax policy,                                                                        
     there are policy questions that need to be answered:                                                                       
     -What effect  will the policy  have on overall  oil and                                                                    
     gas production in the state?                                                                                               
     -Will the  policy make Alaska more  competitive or less                                                                    
     on a global scale?                                                                                                         
     -Will the policy provide stability  to the industry and                                                                    
     the state of Alaska?                                                                                                       
     -Will  the policy  provide predictability  to companies                                                                    
     looking to make huge investment decisions?                                                                                 
          The Department of Revenue has frequently said                                                                         
     that  industry  will be  testifying  to  the impact  of                                                                    
     their  proposed  changes,  and I  have  no  doubt  each                                                                    
     company will do  that, but I encourage you  to ask each                                                                    
     individual  company over  the next  several days  their                                                                    
     view of these questions.                                                                                                   
     Slide 17                                                                                                                   
          The Administration's proposal represents the                                                                          
     sixth  major tax  change in  the last  11 years.  Prior                                                                    
     changes  came from  unprecedented high  oil prices,  or                                                                    
     endeavored to incentivize development  in the state and                                                                    
     make Alaska more competitive.                                                                                              
          However, the motivation behind this current                                                                           
     proposal is  not to improve  the fiscal system  for the                                                                    
     industry or  create incentives for  further development                                                                    
     and increased  production. Rather, it is  purely driven                                                                    
     by the state's desire for  more money, now. As Director                                                                    
     Alper said on  February 12th, "It is a  tax increase. I                                                                    
     don't think we are attempting to disguise that."                                                                           
     Slide 18                                                                                                                   
          Raising taxes when prices go up, and then raising                                                                     
     them  again when  prices go  down, undercuts  stability                                                                    
     and  predictability.  The  Administration  acknowledges                                                                    
     the  industry is  suffering  tough  economic times;  in                                                                    
     fact,  according  to  their  testimony  last  week,  if                                                                    
     prices   average  around   $40/barrel  for   2016,  the                                                                    
     industry  will suffer  more than  $1 billion  "loss" in                                                                    
     the state  of Alaska.  If the  state keeps  the current                                                                    
     structure and does nothing, spending  a $1 billion more                                                                    
     than industry is taking in  will have a negative impact                                                                    
     on Alaska's  economy, considering  the industry  is the                                                                    
     largest private economic driver in the state.                                                                              
          Yet it is clearly the intention of the state to                                                                       
     raise taxes on an  industry with negative cash flow-and                                                                    
     not  by  small  margins. To  add  another  half-billion                                                                    
     impact to the industry with  the passage of HB 247 will                                                                    
     only accelerate  cutbacks by  the industry,  which will                                                                    
     affect the  number of Alaskans  working, the  amount of                                                                    
     cash   that  circulates   through   the  economy,   and                                                                    
     ultimately,  the  future  health   and  growth  of  the                                                                    
1:34:25 PM                                                                                                                    
     Slide 19                                                                                                                   
          Under Governor Hammond, Alaska first established                                                                      
     an equitable  policy of  one-third government  take for                                                                    
     the state,  one-third for  the federal  government, and                                                                    
     the last  third for  industry. During the  ACES regime,                                                                    
     government take  climbed to a  higher level,  which, in                                                                    
     turn, led directly  to SB 21 in an  effort to normalize                                                                    
     total government take over a broad range of prices.                                                                        
          As Janak Mayer from enalytica explained last                                                                          
     week, with the  slide that Rep. Josephson  will hang on                                                                    
     his  door, government  take  is about  62%  in a  price                                                                    
     range from  $60-150, including  government take  on new                                                                    
     oil, or gross revenue reduction oil.                                                                                       
          Contrary to Director Alper's testimony two weeks                                                                      
     ago,  HB 247  increases government  take. In  fact, Mr.                                                                    
     Mayer demonstrated  and explained "that  the cumulative                                                                    
     impact of  the proposed  changes would  be to  shift up                                                                    
     government  take in  lower oil  prices.  In times  like                                                                    
     today, the effective government take exceeds 100%.                                                                         
          Rep. Josephson summarized it well by saying,                                                                          
     "Industry suffering  so much  -that we (the  State) are                                                                    
     getting all the money."                                                                                                    
     Slide 20                                                                                                                   
          Two weeks ago, AOGA submitted specific comments                                                                       
     for each section  of the bill that  causes the industry                                                                    
     concern two weeks  ago, and in the interest  of time, I                                                                    
     will not  belabor each and  every point. However,  I do                                                                    
     want to  comment on a  few of the  substantial concerns                                                                    
     we have with the bill.                                                                                                     
          The governor's proposal would increase the                                                                            
     minimum  gross  tax  from  4% to  5%.  Although  a  one                                                                    
     percentage point  increase might not  sound significant                                                                    
     to some,  [in] reality,  it represents  at least  a 25%                                                                    
     increase  for those  companies who  already pay  the 4%                                                                    
     minimum tax.                                                                                                               
          Additionally, the Governor's proposal would                                                                           
     forbid  companies from  using any  earned or  available                                                                    
     tax credits to reduce the  minimum tax below the new 5%                                                                    
     floor.  It  is likely  that  there  will be  companies,                                                                    
     large  and  small,  that  have  earned  "new  oil"  tax                                                                    
     credits or  exploration, drilling  or tax  loss credits                                                                    
     from prior year investments,  while also operating in a                                                                    
     loss  position  due  to  low   oil  prices.  For  those                                                                    
     companies,  using those  tax credits  is  the only  way                                                                    
     they  can also  continue to  invest in  the state.  The                                                                    
     proposal would delay, or  possibly deny, vital economic                                                                    
     recovery at the very time companies need it the most.                                                                      
          In other words, raising the minimum tax affects                                                                       
     everyone, and the proposed increase  is large enough to                                                                    
     cause substantial negative impacts  on all producers at                                                                    
     today's oil prices. It is  poor tax policy to engage in                                                                    
     nothing more than a flagrant  money grab at a time when                                                                    
     the State  should be  encouraging industry  to continue                                                                    
     making vital investments.                                                                                                  
          For smaller companies or newcomers to the state                                                                       
     who have  yet to  make a profit  in Alaska,  they don't                                                                    
     pay  the  4%  minimum  tax,  so  under  the  governor's                                                                    
     proposal, they would go from  paying zero in production                                                                    
     tax because  they don't make  a profit,  to immediately                                                                    
     being hit with a 5%  gross tax, a punitive tax increase                                                                    
     described by Director Alper as an "infinite increase."                                                                     
          Additionally, the proposal would change the way                                                                       
     the  minimum  tax is  determined  and  would prevent  a                                                                    
     producer from  taking the actual tax  credits available                                                                    
     for a  month to  the extent they  are greater  than the                                                                    
     initially estimated  amount. Both of  these incremental                                                                    
     changes amount to  a fundamental change in  how the tax                                                                    
     is calculated and will result in a tax increase.                                                                           
          Another major concern relates to the change in                                                                        
     the  net   operating  loss   (NOL)  tax   credits.  The                                                                    
     Administration has  testified that they  are preserving                                                                    
     the NOL credit,  but we contend that  under the current                                                                    
     proposal the NOL credits become virtually useless.                                                                         
          NOL tax credits are utilized both on the North                                                                        
     Slope  and  Cook Inlet  and  were  established to  help                                                                    
     level  the playing  field for  new companies  trying to                                                                    
     get  a  foothold  in Alaska  and  allow  all  companies                                                                    
     making  critical  investment  to truly  understand  the                                                                    
     economics  under  which  those investments  were  made.                                                                    
     Under SB 21,  NOLs provide an even  level of government                                                                    
     support for capital investments on the North Slope.                                                                        
1:39:48 PM                                                                                                                    
          HB 247 would prevent the use of NOL tax credits                                                                       
     to reduce the minimum tax.  This change is analogous to                                                                    
     the federal government not  allowing a company's losses                                                                    
     to  be  applied  against   its  corporate  income  tax.                                                                    
     Additionally,  the proposal  imposes a  ten year  limit                                                                    
     for a company to apply unused NOL credits.                                                                                 
MS. MORIARTY added  that even though the NOL  credits can be                                                                    
deferred,  it  essentially  changes   their  value  and  the                                                                    
deferral itself  is a tax  increase because the  company was                                                                    
not  expecting to  have to  pay that  same level  of tax  if                                                                    
prices dropped and  if the company defers the  NOL credit to                                                                    
be applied in  a future year it has to  pay the tax, though,                                                                    
in the  current year.   She continued paraphrasing  from her                                                                    
written   testimony,  which   read   as  follows   [original                                                                    
punctuation provided]:                                                                                                          
          Again,   the   proposed   changes   in   HB   247,                                                                    
     essentially eliminate the value  of the NOL tax credit.                                                                    
     Without question,  changing the  value of the  NOL will                                                                    
     have a  tremendous impact on companies  and effectively                                                                    
     discourage future investment.                                                                                              
          There are several other major changes proposed to                                                                     
     credits,  both  for the  North  Slope  and Cook  Inlet.                                                                    
     Setting arbitrary  limits of  $25 million  per company,                                                                    
     when even the "smallest" of  projects range in the $500                                                                    
     million -$1 billion range, is  unreasonable and will be                                                                    
     a   strong   disincentive    for   future   investment.                                                                    
     Eliminating or discouraging  cash rebates for companies                                                                    
     that may  not yet have production  or profits, strongly                                                                    
     disadvantages  new  companies,  especially  considering                                                                    
     that  they invested  in  good faith  based  on the  tax                                                                    
     policy in  place when  the investments  were committed.                                                                    
     For the  State to basically  say, after the  fact, that                                                                    
     it  is  not  going  to   fund  its  share  of  the  new                                                                    
     developments,  as originally  promised,  is just  wrong                                                                    
     and potentially  puts some of  these new  companies out                                                                    
     of business.                                                                                                               
          Eliminating two important credits for Cook Inlet                                                                      
     and "middle earth" is also  dangerous as the Cook Inlet                                                                    
     drilling tax credits were  unequivocally the driver for                                                                    
     several  key  investments  in   the  region  that  have                                                                    
     already  led  to  increased production  and  jobs.  The                                                                    
     state   has  benefitted   from  several   new,  smaller                                                                    
     companies into  the state, making new  discoveries that                                                                    
     would positively  increase the State's  future revenues                                                                    
     from royalties and taxes on  that new production. These                                                                    
     credits are  not a  "cost". They  are an  investment by                                                                    
     the state  with a  good return. Companies  have already                                                                    
     entered  into   contracts  and  made   large  financial                                                                    
     commitments for  spending over at least  the next year.                                                                    
     Abruptly  terminating  those  credits after  they  have                                                                    
     made   substantial    good   faith    investments   and                                                                    
     commitments  over the  next year  is bad  faith on  the                                                                    
     state's part and will chill  these types of investments                                                                    
     in the future.                                                                                                             
          And, we fundamentally disagree that Cook Inlet                                                                        
     has gas in  search of a market as has  been asserted by                                                                    
     the  Administration. DOR,  DNR and  enalytica have  all                                                                    
     testified that additional  investments are necessary to                                                                    
     meet  the  increasing  demand  of  Alaska's  residents.                                                                    
     Without  continued  investment,   gas  production  will                                                                    
     rapidly decline. Any decline  will inevitably result in                                                                    
     higher  utility rates  for consumers  and increase  the                                                                    
     likelihood of gas shortages.                                                                                               
          The proposed revisions in Section 39 of HB 247                                                                        
     define "outstanding liability to  the state" broadly as                                                                    
     "an  amount of  tax,  interest,  penalty, fee,  rental,                                                                    
     royalty,  or  other  charge for  which  the  state  has                                                                    
     issued  a demand  for payment  that has  not been  paid                                                                    
     when  due  and,  if  contested, has  not  been  finally                                                                    
     resolved  against the  state."  Thus,  the State  could                                                                    
     deny  or delay  tax credit  payments for  virtually any                                                                    
     outstanding  and   alleged  liability,   regardless  of                                                                    
     whether it  is pending adjudication. If  a taxpayer had                                                                    
     an existing  dispute with a  state agency  unrelated to                                                                    
     taxes, it  could be deemed an  outstanding liability to                                                                    
     the  state and  the  tax credit  used  to satisfy  that                                                                    
     liability; or if  an audit was pending,  the tax credit                                                                    
     could be delayed until the conclusion of the audit.                                                                        
1:44:46 PM                                                                                                                    
          This revision, absent further clarification or                                                                        
     modification, would  provide the  State with  the power                                                                    
     to  arbitrarily deny  or delay  any tax  credit, or  to                                                                    
     apply them  against unresolved and  unrelated disputes,                                                                    
     including  those utilized  by  in-state refiners.  This                                                                    
     could  have   a  major   impact  on   both  refineries.                                                                    
     According  to  a recent  report  by  Econ One  for  the                                                                    
     Department of  Natural Resources:  "Alaska's refineries                                                                    
     are  relatively  small   in  size  and  technologically                                                                    
     simple.   [This]   puts    Alaska's   refiners   at   a                                                                    
     disadvantage   relative  to   larger,  more   efficient                                                                    
     refineries  ... [which]  becomes greater  when refinery                                                                    
     utilization  outside  the  state  drops,  meaning  that                                                                    
     refiners  have spare  production capacity.  Refiners of                                                                    
     Alaska's size  and complexity  are generally  the first                                                                    
     to close or idle units in this environment."                                                                               
          It is extraordinary then that in this price                                                                           
     environment  and  the  challenges it  presents  to  our                                                                    
     instate  refineries,   Petro  Star  and   their  parent                                                                    
     company   Arctic   Slope   Regional   Corporation   are                                                                    
     investing over  $20 million on an  asphalt expansion in                                                                    
     North Pole, scheduled to come online this summer.                                                                          
          Creating    increased   uncertainty    with   this                                                                    
     provision causes understandable concern to my members.                                                                     
          Although there are plenty more aspects of this                                                                        
     proposal  that  warrants  further  discussion,  I  will                                                                    
     conclude  by addressing  the proposed  increase in  the                                                                    
     interest  rate.  AOGA  supports the  current  rate  and                                                                    
     believes  it  is reasonable,  particularly  considering                                                                    
     the lengthy statute of limitations that provides the                                                                       
     Department  of  Revenue  with  six  years  to  audit  a                                                                    
     company's  production  tax  return. As  Director  Alper                                                                    
     stated  on  February 12  in  front  of this  committee,                                                                    
     "When there is  a change in an oil and  gas tax return,                                                                    
     it  is  almost  always  in  the  State's  favor.  We're                                                                    
     looking for more money."                                                                                                   
     1:47:00 PM                                                                                                               
     Slide 21                                                                                                                   
          Stated succinctly and candidly, HB 247 fails to                                                                       
     encourage  increased production,  fails to  make Alaska                                                                    
     more competitive  for future  investment, and  fails to                                                                    
     provide  stability   and  predictability.   This  will,                                                                    
     without question, result in  lower long term production                                                                    
     and   revenues  to   the  state.   On   one  hand   the                                                                    
     Administration has said that  it "is not predicting new                                                                    
     or  lesser  activity  through  the  enactment  of  this                                                                    
     bill." On  the other hand, the  Administration has also                                                                    
     stated  that "It's  reasonable  to  say that  corporate                                                                    
     decisions  might be  made differently  if a  limitation                                                                    
     was put on that (tax credits)."                                                                                            
          Enalytica    agrees,   stating    that   "limiting                                                                    
     refundable  credits would  increase capital  needs." In                                                                    
     this   price  environment,   it   will  be   incredibly                                                                    
     challenging  to   find  funding  for   those  increased                                                                    
     capital needs. Enalytica went on  to say, "for projects                                                                    
     currently  under  development,  a July  effective  date                                                                    
     would have major adverse impacts."                                                                                         
          HB 247 makes a series of incremental changes that                                                                     
     could be  characterized by investors as  "quite scary."                                                                    
     And as  Mr. Mayer  explained last  week, "incrementally                                                                    
     taking more slivers without  fundamental changes to the                                                                    
     system which  can be  more concerning  than fundamental                                                                    
     changes  -because fundamental  changes can  be accepted                                                                    
     if   stable,  but   this   creates   'oh  dear',   when                                                                    
     environment  is tough,  folks are  going  to come  back                                                                    
     year after year to get another slice."                                                                                     
     Slide 22                                                                                                                   
          Raising taxes on companies that are reporting                                                                         
     losses  or  are  in  negative cash  flow  positions  is                                                                    
     neither a prudent nor  feasible long-term solution, and                                                                    
     is certainly not sound tax  policy. While we appreciate                                                                    
     the need  to close the  state's fiscal gap,  AOGA would                                                                    
     advise against  taking even more  from the oil  and gas                                                                    
     industry when  it is  more important  for the  state to                                                                    
     encourage these companies to  continue to make critical                                                                    
     investments in  our collective  future. To  cripple the                                                                    
     oil industry  is a misguided attempt  to address short-                                                                    
     term  concerns that  will  actually  result in  greater                                                                    
     long-term harm to the state's economy.                                                                                     
          Compounding the negative impact of the highly                                                                         
     burdensome changes in Governor  Walker's latest oil and                                                                    
     gas tax policy  proposal is the provision  that all but                                                                    
     one of these changes would  become effective on July 1,                                                                    
     2016, while one  is retroactive to January  1, 2016. It                                                                    
     is  now  [almost  March],  and  companies'  operational                                                                    
     plans for the full calendar  year have already begun to                                                                    
     be  implemented. Contracts  for  the  entire year  have                                                                    
     already  been entered  into,  work  has commenced,  and                                                                    
     financial commitments  have been made by  the companies                                                                    
     -all based  on the  existing tax structure.  Any sudden                                                                    
     reduction  in the  tax credits  and/or increase  in the                                                                    
     taxes  on  such short  notice  would  therefore be,  in                                                                    
     effect, a retroactive tax change.  This would result in                                                                    
     a  long-term   serious  impact  to  Alaska's   oil  and                                                                    
     industry, and have an intensely  negative impact on the                                                                    
     state's  reputation throughout  the global  banking and                                                                    
     financial community.                                                                                                       
1:50:41 PM                                                                                                                    
          Whether or not the Governor's proposal is                                                                             
     enacted, the  oil and  gas industry  will still  be the                                                                    
     largest annual contributor to state government by far.                                                                     
          The oil and gas industry will contribute 7.5                                                                          
     times more than the  Governor's proposed income tax, 50                                                                    
     times more  than the proposed revenue  from mining, and                                                                    
     37 times more than from commercial fishing.                                                                                
          When will it be time for the State to realize                                                                         
     that,  despite  the  rhetoric and  misconceptions,  the                                                                    
     industry  is   not  immune  from   financial  hardship?                                                                    
     Increasing taxes  on the industry  that is  the largest                                                                    
     contributor  to state  government  during  a time  when                                                                    
     that industry  is suffering  major financial  loss will                                                                    
     result  in  long-term  negative  repercussions  to  the                                                                    
     state's  overall  economy.   Forcing  the  industry  to                                                                    
     reduce investments  through excessive tax  increases in                                                                    
     today's economic  downturn will lead to  a reduction of                                                                    
     industry jobs,  a reduction of oil  and gas production,                                                                    
     and  a  certain reduction  in  future  revenues to  the                                                                    
     State, all of  which will only serve  to exacerbate the                                                                    
     revenue crisis  the state currently faces.  This is not                                                                    
     a sound  tax policy.  This is not  in the  State's best                                                                    
          In the spirit of "Let's pull together", and in                                                                        
     order  to   make  it   through  the   current  economic                                                                    
     downturn,  we  cannot  emphasize enough  that  imposing                                                                    
     significant  tax increases  and  eliminating access  to                                                                    
     critical   incentives   does    nothing   to   increase                                                                    
     production. It  creates more  harm to  Alaska's largest                                                                    
     industry and the state's economy as a whole.                                                                               
          The industry is not before you today asking for a                                                                     
     tax  decrease or  for relief  while we  struggle though                                                                    
     extraordinarily low  prices. We  do ask,  however, that                                                                    
     you  consider that  the industry  has supported  85% of                                                                    
     Alaska's revenue  since statehood,  and at  this trying                                                                    
     time, you do no harm  to the long-term viability of the                                                                    
     oil and gas industry in  Alaska, for the benefit of all                                                                    
1:53:01 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON remarked that when Ms. Moriarty had                                                                    
quoted him there should have been a question mark at the end of                                                                 
the quote, because he did  indicate some incredulity and surprise                                                               
at Mr.  Mayer's testimony  that because the  state has  a royalty                                                               
it's in an  arguably better position.  He said  he was not making                                                               
a statement  of fact,  but rather his  responding to  Mr. Mayer's                                                               
testimony.   He noted that  fundamentally his main  question was,                                                               
after   hearing  from   the  mining   and  alcohol   and  tobacco                                                               
industries,  each  industry could  make  the  same arguments  Ms.                                                               
Moriarty made.   Therefore, at  the end of  the day, even  if the                                                               
legislature used the  earnings reserve in some  beneficial way to                                                               
help the people of Alaska, the  legislature is left with nearly a                                                               
multi-billion dollar deficit.   He offered that  the only option,                                                               
in taking the  collective wisdom of all of the  industries, is to                                                               
impose  taxes  on Alaskans.    He  noted  that Ms.  Moriarty  had                                                               
discussed "pulling together," and he asked her to respond.                                                                      
MS.  MORIARTY  recognized  the   challenging  position  that  the                                                               
legislature is facing.  She stated  she was in agreement with the                                                               
mining testimony last  week because the points were  the same for                                                               
the oil and  gas industry:  In a low  commodity price environment                                                               
and when  industry is already  struggling, additional  taxes will                                                               
only make  a bad situation  worse.   She said taxing  the largest                                                               
economic drivers  for the  state "will  not increase  the feeling                                                               
that maybe  Alaska's going  into a recession."   She  noted there                                                               
has been  some speculation as  to whether or  not Alaska is  in a                                                               
recession, but  people are  nervous and  feeling that  things are                                                               
maybe not  going in the  right direction.   She stressed  the oil                                                               
and gas  industry is  saying that increasing  taxes on  them will                                                               
compound the problem in a different  way, in that it may help the                                                               
state   short-term   for  its   revenue,   but   there  will   be                                                               
repercussions.  She reminded the  committee that every direct job                                                               
impacts  20  more jobs  throughout  the  economy; therefore,  the                                                               
industry currently  creates 11 public  sector jobs for  every job                                                               
that it  creates.   She described  it as  a delicate  balance and                                                               
stated that  her testimony  advised the  committee of  the impact                                                               
[HB 247] would have on the oil and gas industry.                                                                                
1:56:28 PM                                                                                                                    
REPRESENTATIVE TARR  referred to the slide  depicting North Slope                                                               
production as  stable, to which  Ms. Moriarty had  commented that                                                               
the difference is  50,000 barrels, and asked about  the source of                                                               
that  number.   She reminded  the  committee that  the fall  2013                                                               
forecast was after the previous  administration decided to change                                                               
the  way  it  performs  forecasting   with  a  more  conservative                                                               
approach.  It  is not entirely genuine to use  those numbers, she                                                               
stated, in the way Ms. Moriarty suggested.                                                                                      
MS. MORIARTY  advised that  AOGA relies  on the  state's forecast                                                               
and said she cannot speak to  the methodology.  After Senate Bill                                                               
21 was  passed, while the  public considered the  referendum, the                                                               
forecast  for  2020  was  almost  400,000  barrels  per  day  and                                                               
currently the forecast  is for 460,000.  She opined  it was clear                                                               
that production has  stabilized, in that production  for 2015 was                                                               
approximately  519,000 barrels  per  day and  that  is the  exact                                                               
forecast for this fiscal year.                                                                                                  
REPRESENTATIVE TARR stated that that  is an issue to be revisited                                                               
with  Mr. Alper  because  that conversation,  under the  previous                                                               
administration and  the way it  was reported  in the news,  was a                                                               
methodology  [DOR] suggested  was  done in  partnership with  the                                                               
industry, and the industry did  actually have some influence over                                                               
that change.                                                                                                                    
MS. MORIARTY responded that the  industry always has input on the                                                               
forecast and she was not suggesting  it does not.  She emphasized                                                               
that  every administration  has  taken  the information  industry                                                               
shares with it  in order for [DOR] to determine  a forecast.  She                                                               
      I'm just saying if you used our production forecast                                                                       
     numbers, which we don't release because we don't talk                                                                      
      about it collectively because that would break anti-                                                                      
     trust ...  rules.  We  can't talk about  production and                                                                    
     price forecast.   That's why we rely  on the Department                                                                    
     of Revenue.   So,  they always  take what  the industry                                                                    
     tells them and makes a forecast.                                                                                           
REPRESENTATIVE   TARR   recalled   that   that   was   a   pretty                                                               
controversial  change and  there  were questions  about how  that                                                               
might be manipulated  and how the legislature  would review those                                                               
numbers going  forward.   She reiterated that  she would  like to                                                               
hear from the department on that as well.                                                                                       
1:59:45 PM                                                                                                                    
REPRESENTATIVE SEATON noted the diversity  in features of HB 247.                                                               
He expressed  particular concern  with tax  credits, specifically                                                               
state  expenditures   on  the  reimbursable  tax   credits.    He                                                               
explained the tax credits are  a direct expenditure from Alaska's                                                               
reimbursable cash  to companies  and that  the industry  cuts its                                                               
expenditures  when  they  are  having  financial  problems.    He                                                               
reiterated  Representative Hawker's  comment about  the committee                                                               
relying  on Ms.  Moriarty  to explain  the  specific impacts  the                                                               
elimination of  these credits would have  on individual projects.                                                               
He said  the Cook Inlet  credits are  the largest portion  of the                                                               
money being discussed and pointed  out that the state would never                                                               
even  recover its  capital expenditures  if the  credits were  on                                                               
expenditures over the entire life of the project.                                                                               
REPRESENTATIVE  SEATON mentioned  slide  16  from the  consultant                                                               
enalytica's  presentation   [to  the  House   Resources  Standing                                                               
Committee,   on  2/27/16],   explaining  that   in  the   current                                                               
constrained gas market  the net present value (NPV)  to the state                                                               
of those credits  ranges between negative $125  million to $50-60                                                               
million  in  net losses.    Another  insight from  enalytica,  he                                                               
related, was  that worldwide,  a natural gas  price of  $5-$6 per                                                               
thousand cubic  feet (Mcf) would  be sufficient to make  even the                                                               
most challenged gas deposit profitable  and economic.  He further                                                               
explained the state  is trying to figure out how  to proceed with                                                               
seemingly unneeded credits  in a high price  environment, such as                                                               
Cook Inlet  where the price is  about $7.  He  asked Ms. Moriarty                                                               
if  she could  explain what  the impacts  would be  on individual                                                               
projects if  those tax  credits were  eliminated while  there was                                                               
still a high priced gas market.                                                                                                 
MS. MORIARTY requested clarification of the question.                                                                           
2:03:29 PM                                                                                                                    
REPRESENTATIVE  SEATON said  there were  two portions  of support                                                               
for economic development  of [Cook Inlet] projects:   tax credits                                                               
and  high   priced  gas.     Both  the  administration   and  the                                                               
legislature's consultants  have advised that the  higher price of                                                               
gas would  be economically sufficient  to do the projects  and he                                                               
therefore  wanted to  know whether  the higher  price for  gas is                                                               
enough  to  make  projects  economic   and  what  the  effect  of                                                               
eliminating the tax credits would be.                                                                                           
MS. MORIARTY advised  that tomorrow there will  be testimony from                                                               
people operating in Cook Inlet  specifically and they will answer                                                               
that question.   She stated that categorically  from the industry                                                               
as  a whole,  the elimination  of the  tax credits  would have  a                                                               
negative  impact on  investments,  especially  with an  effective                                                               
date of July  1.  She opined that tomorrow  BlueCrest Energy will                                                               
discuss a  gas project  that is specifically  on hold  because of                                                               
the  uncertainty  surrounding whether  the  tax  credits will  be                                                               
available.   Regardless  of the  price environment  for gas,  she                                                               
said, the  industry as a whole  is still in a  negative cash flow                                                               
position; therefore,  making those  investments in  the timeframe                                                               
is still very challenging.  She  stated that the tax credits were                                                               
absolutely necessary  to bring  those companies  to Alaska.   She                                                               
added,  "You  wouldn't  have  had the  hundreds  of  millions  of                                                               
dollars  of  investment  over  the   last  six  years  that  have                                                               
increased  the  Kenai  Peninsula   Borough's  tax  revenues,  and                                                               
increased  the workforce  and property  values in  that community                                                               
without the tax credits."                                                                                                       
2:06:08 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON noted  he supported  "the Agrium  bill"                                                               
and that  even though it meant  a reduction to the  state, he saw                                                               
that the  case was  made.   He said he  also sees  Ms. Moriarty's                                                               
point of  view.   Notwithstanding that,  he recollected  that Mr.                                                               
Mayer, during his  testimony at a prior meeting,  had offered his                                                               
understanding that the  industry in Cook Inlet  believed that the                                                               
tax credits that exist in  the inlet are not sustainable, because                                                               
they are too  generous.  He asked for Ms.  Moriarty's response to                                                               
Mr. Mayer's comment.                                                                                                            
MS.  MORIARTY  responded   that  she  has  not   had  any  direct                                                               
conversation  with Mr.  Mayer  since two  sessions  ago, and  she                                                               
offered  her understanding  that he  did have  conversations with                                                               
individual  companies; therefore,  she encouraged  Representative                                                               
Josephson  to  ask the  Cook  Inlet  companies that  question  to                                                               
determine where [Mr. Mayer] may have obtained his information.                                                                  
2:07:38 PM                                                                                                                    
REPRESENTATIVE  HERRON  referenced  slide 20  regarding  specific                                                               
concerns with  the bill  and slide 16  regarding the  four policy                                                               
questions.   He advised that  when the governor's bill  makes its                                                               
way out  of committee it  won't be  the governor's bill  as there                                                               
will be  changes.  "Obviously there  must not be any  good points                                                               
that you've put  on that sheet," he said.   He asked Ms. Moriarty                                                               
to describe the  [most critical concerns] on  which the committee                                                               
should focus by highlighting which were bad and which were ugly.                                                                
MS. MORIARTY  replied it is  impossible to advise which  ones are                                                               
"evil, bad, and sort of  ugly," because for various companies the                                                               
proposals  will  have different  impacts  based  on the  company.                                                               
Therefore,  AOGA  is  saying, holistically,  that  all  of  these                                                               
changes  will have  a negative  impact on  every single  company.                                                               
For  example, when  increasing the  minimum  tax by  at least  25                                                               
percent.   A company that  is already  paying the minimum  tax is                                                               
faced with a 25  percent hit.  A company that  isn't paying a tax                                                               
right now  and has production,  but hasn't  made a profit  or was                                                               
given a  small producer exclusion, goes  from "zero to five."   A                                                               
company  that doesn't  pay tax  now has  an "infinite  increase."                                                               
The  point is,  she related,  that all  of these  changes have  a                                                               
different impact  based upon  the company, which  is why  each of                                                               
the companies will testify.                                                                                                     
2:10:02 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON referred to  the first couple slides and                                                               
speculated  that in  some respects  the industry  might like  the                                                               
fact that  the state  is trying to  wean itself  from dependence.                                                               
At the same  time, he said, he occasionally feels  as though each                                                               
time the  legislature tries to  be the 18-year-old moving  out of                                                               
the house,  the industry  wants to  remind the  legislature, "No,                                                               
you  can't leave,  you  must stay  with us."    He requested  Ms.                                                               
Moriarty to respond.                                                                                                            
MS. MORIARTY  agreed the  industry would "love  for the  state to                                                               
have  a diversified  economy, make  no  mistake about  it."   She                                                               
pointed out  that the industry  has been the  largest contributor                                                               
to state  government, not  by choice,  but by  the policy  put in                                                               
place  by the  state.   She stated  the industry  takes its  role                                                               
responsibly.    Its employees  are  good  corporate citizens  who                                                               
provide large amounts of community  service.  She reiterated that                                                               
the industry  would love to  have a diversified economy,  but she                                                               
opined that  increasing taxes as a  way to try to  solve a fiscal                                                               
crisis does  not provide  any stability  or predictability.   She                                                               
continued, "Because  all we see  as the  industry is:   you raise                                                               
taxes when  prices go up;  you raise  taxes when prices  go down;                                                               
what's  going to  happen next  year  if you  pass everything  and                                                               
you're still a  billion dollars short for whatever  reason?"  She                                                               
asked, "So, does that mean you're  going to come back to us again                                                               
and  again and  again?"   She reiterated  that HB  247 would  not                                                               
provide stability to the industry.                                                                                              
2:12:23 PM                                                                                                                    
REPRESENTATIVE JOHNSON  opined that  he looks at  this as  pay me                                                               
now or pay me later.  He  said [the state] can extract the wealth                                                               
from the  oil industry now and  lose it later because  of lack of                                                               
production in  those areas of  things, such as  exploration, that                                                               
the state would be missing out on.   He said he would like to see                                                               
effort spent regarding  the loss of production  versus taking the                                                               
money now,  some of  the balance  is missing.   He  indicated his                                                               
dilemma is  in answering the question:   "Do we take  it now when                                                               
we, quite  frankly, have more savings  than we will maybe  in ten                                                               
years  when the  lack  of  production really  catches  up and  we                                                               
really drop down and TAPS  [Trans-Alaska Pipeline System] becomes                                                               
an issue?"   He  requested an  analysis on  what the  state would                                                               
forego in  revenue by doing  this now based upon  exploration and                                                               
investment.   He said he  would like to  see an apples  to apples                                                               
comparison, including cost.                                                                                                     
MS. MORIARTY  noted that Representative Hawker  had remarked that                                                               
the  administration [had  advised  the legislature  to obtain  an                                                               
impact analysis from  the industry], and she  indicated that [the                                                               
industry  would provide  that information].    However, she  said                                                               
that  what Representative  Johnson was  discussing was  something                                                               
that the  industry cannot  really do.   She questioned  where the                                                               
credibility would  be if the  industry told the state  that under                                                               
HB 247  it would experience  a $50,000  loss.  She  explained the                                                               
industry  can take  the state's  projection and  make assumptions                                                               
but it would  be much better if it came  from a third-party, such                                                               
as  Econ One  or  Wood  Mackenzie, thus  AOGA  would encourage  a                                                               
third-party analysis.                                                                                                           
2:14:57 PM                                                                                                                    
REPRESENTATIVE   JOHNSON  noted   that  if   taxes  are   raised,                                                               
production will  drop; if  taxes are  not raised,  investment and                                                               
production will  go up.   He described it  as a timing  issue and                                                               
asked whether his assessment was accurate.                                                                                      
MS. MORIARTY  stated that Representative Johnson's  assessment is                                                               
not off  base in  that Janet  Weese, from BP  and the  AOGA board                                                               
chair, in January  discussed that tipping point and  where it may                                                               
lie.   Ms. Moriarty  agreed that  the legislature  could increase                                                               
taxes  on the  industry,  but questioned  how  that would  impact                                                               
investment decisions, which in turn  would impact production 4-15                                                               
years from  now.  She  warned that the  industry is already  at a                                                               
tipping  point  in  a  cash  negative  position;  therefore,  the                                                               
state's actions could have long-term consequences.                                                                              
2:15:59 PM                                                                                                                    
REPRESENTATIVE  HAWKER   referred  to  Ms.   Moriarty's  previous                                                               
testimony that the industry  participants themselves are actively                                                               
and regularly  engaged with the  Department of  Natural Resources                                                               
(DNR) and to  some degree the Department of Revenue  (DOR) in the                                                               
preparation of the Revenue Sources  Book by providing access to a                                                             
certain amount of confidential production  information.  He asked                                                               
whether the members of AOGA will  continue to work with the state                                                               
toward the spring update of  the Revenue Sources Book and provide                                                             
information  as  to the  potential  decreases  in production  the                                                               
legislature can expect to see if this legislation is enacted.                                                                   
MS.  MORIARTY agreed  that those  are confidential  conversations                                                               
the companies  have with  DOR and therefore  she cannot  speak to                                                               
those   questions.     She  said   the  companies   have  ongoing                                                               
relationships with  all regulatory agencies and  stated that that                                                               
is a good question for the companies.                                                                                           
2:17:07 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON referred to  concerns raised by DOR, and                                                               
possibly  others,  regarding the  statute  and  that the  current                                                               
operating budget  only funds 10  percent of the credits  that are                                                               
likely  to be  requested for  repayment.   He  asked whether  the                                                               
current statutory authority allowing the  governor to pay only 10                                                               
percent creates anxiety  that there should be  greater balance so                                                               
that the likelihood of payment is there for the industry.                                                                       
MS. MORIARTY  replied that  HB 247 does  not provide  any further                                                               
stability  to  that.    The  bill could  pass  with  all  of  the                                                               
problematic provisions,  such as the $25  million limit, in-state                                                               
hire,  companies with  gross revenues  of more  than $10  billion                                                               
can't pay, and  that it can't be against the  net operating loss.                                                               
All  those provisions  could  go  into place  and  next year  the                                                               
governor could  only put in $40  million for the tax  credit fund                                                               
if that  was the 10  percent number [of operating  budget funds].                                                               
From  AOGA's  standpoint,  HB  247   provides  no  stability,  no                                                               
predictability, and no certainty.                                                                                               
2:18:56 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that a production  increase of 8,000                                                               
barrels per  day in Cook  Inlet would equal 2,920,000  barrels of                                                               
increased production  for $400  million in tax  credits.   If the                                                               
credits  and that  production rate  continued, the  [cost to  the                                                               
state] would be  $136 per barrel.  He asked  whether, even with a                                                               
factor  of 10  percent, the  industry would  expect the  state to                                                               
continue that  kind of price  support by extending  credits based                                                               
on the amount of production received.                                                                                           
MS.  MORIARTY  responded  that  it  all goes  back  to  what  was                                                               
happening to  production before those  credits were in  place and                                                               
whether that is  the type of production the state  wants for Cook                                                               
Inlet and  the state.  She  pointed out that AOGA  is saying that                                                               
those  credits  have  been essential  in  increasing  production,                                                               
essential in providing more royalties  and property and corporate                                                               
income tax both to the state  and the local governments, and they                                                               
are providing  jobs.  The  industry will respond to  the policies                                                               
set by the legislature, she said.                                                                                               
REPRESENTATIVE  SEATON asked  whether the  industry would  expect                                                               
the state to give credit price  support of $136 per barrel, which                                                               
would  be  the  increased  production for  that  kind  of  credit                                                               
support seen in Cook Inlet.                                                                                                     
MS. MORIARTY reiterated that that  policy would be the purview of                                                               
the legislature and the industry  will respond to whatever policy                                                               
is in place.                                                                                                                    
REPRESENTATIVE SEATON stated:                                                                                                   
     I guess you're  in here testifying that  we should keep                                                                    
     the  credits  in place,  and  that  policy is  what  we                                                                    
     should keep in place  for credit support for additional                                                                    
     production in Cook  Inlet.  And I guess  if that's your                                                                    
     testimony, that's  ... fine. And if  you're just saying                                                                    
     we should  figure out what's  good for us and  ... just                                                                    
     take that ... policy decision, that's fine too.                                                                            
MS. MORIARTY interjected  that the policy in  place has increased                                                               
production,  and should  the  committee believe  that  is a  good                                                               
policy  that  should  be continued,  then  the  committee  should                                                               
probably keep the Cook Inlet tax  credits in place.  In the event                                                               
modifications should  be made to  the credits, the  industry will                                                               
modify  its  response,  which  will  likely  have  an  impact  on                                                               
investment and production.                                                                                                      
2:22:12 PM                                                                                                                    
REPRESENTATIVE  HAWKER stated  that  Ms.  Moriarty's response  to                                                               
Representative Seaton confused  him.  He said  he understands the                                                               
question as  Cook Inlet currently  producing an  additional 8,000                                                               
barrels per day and the  state having invested approximately $400                                                               
million  in frontend  credits.   He asked  whether many  of those                                                               
credits  are exploration  as well  as frontend-loaded  credits on                                                               
establishing a  level of production.   Investing that  much money                                                               
now will  result in  a long-term stream  of production  that will                                                               
continue  for  years and  will  not  require  an equal  level  of                                                               
support.    He  offered  his   understanding  of  Ms.  Moriarty's                                                               
response as  follows:  "No,  we have to  put that same  amount in                                                               
every year to get that same amount of production every day."                                                                    
MS.  MORIARTY  offered   her  understanding  that  Representative                                                               
Seaton had  asked her  whether she thinks  the amount  of credits                                                               
currently  being   given  are  sustainable,  to   which  she  had                                                               
responded  that   [those  credits]   have  "worked   to  increase                                                               
investments that will have an  increased production over the life                                                               
of  those  fields and  investments."    She  said she  could  not                                                               
predict "whether  it's $440 million  for another ...  six years,"                                                               
because the price  environment will self-correct.   In this price                                                               
environment people  are going to reduce  their investments, which                                                               
would  result  in a  reduction  on  the  amount of  credits  paid                                                               
whether or not the system is changed.  She continued:                                                                           
     I mean unfortunately  we'd like to keep  the same level                                                                    
     of spend but  when price is only $30  it's probably not                                                                    
     going  to be  the same  level of  spend.   ... Maybe  I                                                                    
     misunderstood  the question,  but  my point  was is  we                                                                    
     think  the credits  have been  very important  for Cook                                                                    
     Inlet production and investment.                                                                                           
2:24:29 PM                                                                                                                    
REPRESENTATIVE HAWKER  described the  discussions as  "apples and                                                               
oranges,"  and  said  he  would like  witnesses  to  address  the                                                               
frontloaded  nature  of  credits  and  the  long-term  nature  of                                                               
production arising  from those  credits.  He  noted that  he will                                                               
not be able  to attend some committee meetings and  he would like                                                               
someone to bring up that issue.                                                                                                 
2:24:58 PM                                                                                                                    
REPRESENTATIVE  TARR advised  that Hilcorp  made front  page news                                                               
for giving a  bonus of $100,000 to each of  its employees, to the                                                               
tune  of over  $100  million.   She asked  how  AOGA expects  the                                                               
Alaskan  public  to  react  to  that  information  and  then  the                                                               
response that Hilcorp is hurting.                                                                                               
MS.  MORIARTY  responded  that   the  company  made  a  five-year                                                               
commitment  to its  employees and,  even in  this tough  economic                                                               
time, decided  to honor that  commitment, which she  described as                                                               
the  company putting  forth that  it cares  about its  workforce.                                                               
With respect to the state being  in a deficit and AOGA asking for                                                               
no additional increases  on the industry, she  noted that Hilcorp                                                               
had purchased fields on the North Slope  and is part of the $52 a                                                               
barrel.  Currently Hilcorp has a  negative cash flow of about $22                                                               
per barrel,  and the legislature  is asking Hilcorp to  add costs                                                               
to that  at a  time that it  will cause an  impact to  either its                                                               
capital spend or operational spend.   Making a policy decision to                                                               
raise taxes  on an industry  that has  negative cash flow  is the                                                               
legislature's prerogative,  but the industry is  saying that that                                                               
policy will impact its investment and production.                                                                               
REPRESENTATIVE TARR  commented that her constituents  do not view                                                               
the company as having tough times  when they read about over $100                                                               
million in  employee bonuses.   She said, "That doesn't  ring the                                                               
alarm bells that ... bad things are happening to them."                                                                         
MS.  MORIARTY  said  the  industry is  hurting  and  stated  that                                                               
several hundreds of jobs have  been lost from ConocoPhillips, BP,                                                               
and others in the state.   She advised that with the continuation                                                               
of these prices combined with an  increase in taxes there will be                                                               
more job losses seen in Alaska.                                                                                                 
2:27:47 PM                                                                                                                    
REPRESENTATIVE  NAGEAK opined  that both  the private  and public                                                               
sectors honor their  commitment to their employees.   He declared                                                               
that the state gives raises every year even when money is low.                                                                  
REPRESENTATIVE  TARR commented  the  action  of the  legislature,                                                               
until the final  negotiations last year, was to  not honor those.                                                               
She opined that was probably not the best example.                                                                              
2:28:48 PM                                                                                                                    
The committee took an at-ease from 2:28 to 2:34.                                                                                
2:34:08 PM                                                                                                                    
BILL ARMSTRONG, President, Armstrong Oil  & Gas, explained he did                                                               
not  have a  prepared statement  or  a PowerPoint  today but  was                                                               
going to  speak "from  the heart."   He  explained he  wanted his                                                               
time before  the committee to  be a question and  answer session.                                                               
He  noted  things  he  wanted  to discuss  with  the  body  today                                                               
include:  where the  price of oil is and where  it is headed; the                                                               
recent  announcement of  his company's  new discovery;  state oil                                                               
tax policy,  specifically HB 247;  and the  Trans-Alaska Pipeline                                                               
System (TAPS).   Mr. Armstrong articulated he  wanted everyone to                                                               
know how  much he loves Alaska.   His company has  been in Alaska                                                               
for 15 years.   He opined the state and  his [current and former]                                                               
companies have worked well together  and that their ventures have                                                               
been mutually beneficial.   He mentioned he was the  first one to                                                               
independently own and operate a field  on the North Slope, and he                                                               
pointed out  it is the  sixth largest  field on the  North Slope.                                                               
He  further pointed  out the  second field  to ever  be put  into                                                               
production, which he noted is  now the fourth biggest field, also                                                               
originated  from his  office.   He  announced  that recently  his                                                               
company and its  Spanish partner, Repsol, found a  field that may                                                               
possibly be  the second  biggest field  on the  North Slope.   He                                                               
said Armstrong Oil & Gas is  a private company and he believes in                                                               
the state, both its potential and future.                                                                                       
2:38:24 PM                                                                                                                    
REPRESENTATIVE HAWKER  clarified that  Mr. Armstrong  is alluding                                                               
to  the high  prospectivity of  the Colville  Delta project.   He                                                               
reported that  some of the DNR  numbers he has heard  are 100,000                                                               
barrels a day and noted  this is an environmentally sensitive and                                                               
difficult area  to develop.   He requested Mr. Armstrong  to give                                                               
the committee  some sort of  confidence in the  company's ability                                                               
to overcome the environmentalists' objections.                                                                                  
MR. ARMSTRONG  replied the  discovery is named  Pikka, a  name he                                                               
hopes to change, and is located  between the Alpine Field and the                                                               
Kuparuk River  Unit.   He said  the Pikka discovery  is not  in a                                                               
massively sensitive  area such as  the Chukchi Sea or  areas that                                                               
have a very high profile.   ConocoPhillips and Atlantic Richfield                                                               
Company  (ARCO) already  have five  pads  in the  delta and  have                                                               
shown the  resources in  the area  can be  developed.   The first                                                               
three pads  at the  Pikka discovery  planned for  development are                                                               
east of the  river, not in the  delta.  The company  went with an                                                               
environmental   impact  assessment   (EIA)  as   opposed  to   an                                                               
environmental audit (EA).   He added he did not  feel the EIA was                                                               
necessary  but  it  was  done  at the  request  of  DNR,  Nuiqsut                                                               
Village,  and the  Native corporations.   He  said simple  gravel                                                               
roads will  be used, and  oil on vertical support  members, small                                                               
pads, and  long-reach wells and  therefore he didn't  expect much                                                               
in the way of environmental impact nor in objections.                                                                           
REPRESENTATIVE HAWKER congratulated Mr. Armstrong.                                                                              
MR. ARMSTRONG described  when he came to Alaska in  2001, all the                                                               
big  companies  had  essentially   written  off  Alaska  for  any                                                               
prospects; BP and Exxon decided they  were not going to drill any                                                               
more wildcat wells,  and the general thesis was that  all the big                                                               
fields had been  found.  He explained the  pipeline was declining                                                               
and had peaked out at 2 million  barrels a day and was on its way                                                               
down to something  noncommercial, but he did not  believe that to                                                               
be true.   He described the new field as  being shallow and "very                                                               
old fashioned."   He further described it has  multiple "pays," a                                                               
23 percent porosity,  150 feet of pay, and huge  oil columns.  He                                                               
explained it  has not been  fully appraised yet, but  the company                                                               
has already  found over 1  billion barrels.   He added  that "the                                                               
wells  are going  to  be  good, fast  production"  and said  this                                                               
discovery could "really add a big jolt to TAPS."                                                                                
Mr. Armstrong  declared that it  is getting difficult  to produce                                                               
and there are  discussions about "heating it up"  and adding more                                                               
pigs and  compressors, but  the best  way to  keep TAPS  going is                                                               
more oil.  In reference to  the decline curve from Ms. Moriarty's                                                               
presentation  he  proclaimed [his  company  and  Repsol] are  not                                                               
going to  flatten it, but increase  it.  The oil  field is really                                                               
good and will last a long time,  he said, and Armstrong Oil & Gas                                                               
and Repsol have  put a lot of  effort into it.   He reported they                                                               
have  seven penetrations  in one  zone and  four in  another that                                                               
have already  been appraised, and  multiple others.   He advised,                                                               
"As a group, as a state,  you have to get wells drilled," because                                                               
if wells  aren't drilled oil  won't be found.   There is  room to                                                               
find  more fields  like  his  and Repsol's  on  the North  Slope.                                                               
Easier access  to the  land and a  better permitting  process are                                                               
needed; it is not a diminishing asset, it can increase.                                                                         
2:45:53 PM                                                                                                                    
REPRESENTATIVE HAWKER  inquired how  Mr. Armstrong  would respond                                                               
to  someone  who  said  he  didn't  need  the  state's  financial                                                               
incentives because he was doing so well.                                                                                        
MR.  ARMSTRONG replied  that without  the  state's incentives  he                                                               
would  not  have  come  to  Alaska  in  the  first  place.    The                                                               
competition the  state has  is not with  other oil  companies, he                                                               
opined,  it's with  other regions.   He  declared this  price dip                                                               
won't last.   Pretty  much across the  globe, regions  are making                                                               
terms  better  by  giving  tax  incentives  or  re-trading  their                                                               
policies, he  said, with the exceptions  being Congo, Madagascar,                                                               
Tanzania, and  Alaska.   He posited, "To  make things  worse when                                                               
things are bad, you are kind of in rare company."                                                                               
2:48:42 PM                                                                                                                    
REPRESENTATIVE  HAWKER  requested   Mr.  Armstrong  to  identify,                                                               
specifically to  the North Slope, which  state incentives brought                                                               
him here  and which keep him  here.  He also  asked Mr. Armstrong                                                               
to talk about  his Cook Inlet experience and offer  advice on how                                                               
to keep it developing.                                                                                                          
MR. ARMSTRONG  answered that  Armstrong Oil &  Gas was  active in                                                               
Cook Inlet  for four or  five years because  of the credits.   He                                                               
said, "The  production in  the Cook [Inlet]  was dropping  like a                                                               
rock  and you  know exactly  what was  needed in  Southcentral to                                                               
keep the schools  heated and the hospitals open, and  there was a                                                               
day of reckoning  that was going to come within  a ... half dozen                                                               
years or  so and you all  put together a series  of very generous                                                               
tax credits."   He described  it as  the "greatest tax  regime on                                                               
the planet,"  and it  worked.   He explained he  was able  to put                                                               
together a project  with a field of about 100  billion cubic feet                                                               
(Bcf) and a  25 mile pipeline and sold into  the Southcentral gas                                                               
market.   He said  he didn't  have an  opinion about  the credits                                                               
because he  hasn't worked  there in  so long,  but that  they did                                                               
work.   As for  the North  Slope, he  said he  has had  the "dis-                                                               
privilege"  of  having five  different  tax  regimes since  2001,                                                               
something that is  extremely unusual.  The  economic limit factor                                                               
(ELF) was  the tax regime that  helped him come here,  because it                                                               
was  set up  for  developments  that didn't  have  a huge  field.                                                               
Following  ELF, Governor  Frank Murkowski  created the  petroleum                                                               
production   tax  (PPT),   which   was  the   beginning  of   the                                                               
"progressive quasi windfall  profits tax."  But,  he said, things                                                               
went completely off  the rails with Alaska's  Clear and Equitable                                                               
Share (ACES)  and he  left the  state at that  point.   He deemed                                                               
ACES as  ridiculous and  said no  one could  make any  money with                                                               
ACES in  play.   He said  he met with  Governor Sean  Parnell and                                                               
knew  he  would  reform  it   because  it  was  not  sustainable.                                                               
Governor Parnell did  reform it, with Senate Bill 21,  and it was                                                               
good  and  was working.    While  Senate  Bill 21  was  extremely                                                               
complicated it made Alaska competitive  with the continental U.S.                                                               
At that  time he came back  to Alaska, as did  Jim Musselman with                                                               
Caelus  and  Jeff Hildebrand  with  Hilcorp,  and it  marked  the                                                               
beginning of  people coming to Alaska.   He said the  lifespan of                                                               
Senate Bill 21 was during this  collapse.  He said no opinion can                                                               
be  said in  this current  financial environment.   Everybody  is                                                               
dropping rigs like crazy and in every exploratory region.                                                                       
2:55:18 PM                                                                                                                    
REPRESENTATIVE HAWKER  stated that he has  always appreciated Mr.                                                               
Armstrong's unabashed honesty.                                                                                                  
REPRESENTATIVE TARR  stated the legislature was  trying to figure                                                               
out the specific impact to  current projects if changes were made                                                               
right now.   She opined that in comparing  different tax regimes,                                                               
referencing Mr.  Armstrong's statement  that ACES was  bad, there                                                               
was concern about  companies like his because  of capital credits                                                               
being  structured  so  generous.    She  offered  her  assumption                                                               
capital  credits were  essentially  the same  as operating  loss.                                                               
She stated  the legislature is also  trying to figure out  if the                                                               
credits being used  incentivize wanted behaviors.   She asked Mr.                                                               
Armstrong,  with the  exception of  his previous  statement about                                                               
wanting people to  drill wells, to explain in the  context of his                                                               
work which credits does he believe to be favorable.                                                                             
MR.  ARMSTRONG  replied  the  big  one  is  the  35  percent  net                                                               
operating  loss  credit,  because  it  enables  the  industry  to                                                               
weather  the time  it takes  to  drill wells  and get  production                                                               
online.   He mentioned  he didn't  want to upset  any of  the oil                                                               
guys  in the  room, but  exploratory  credit "is  peanuts in  the                                                               
scheme of  things."   He shared  with the  committee there  is an                                                               
internal  name for  HB 247:   "Hell  bent 24/7  to run  every oil                                                               
company off the North Slope."                                                                                                   
2:58:29 PM                                                                                                                    
REPRESENTATIVE  OLSON expressed  his desire  to address  the Cook                                                               
Inlet  stampede.   He explained  it was  primarily "Tom  Wagner's                                                               
baby."   He  reported he  thought Mr.  Wagner was  crazy when  he                                                               
first discussed  it, but then  he started  to make more  and more                                                               
sense  and turned  it into  a real  asset.   He explained  to Mr.                                                               
Armstrong  it  didn't really  attract  a  lot of  attention  from                                                               
[companies  outside  of  Alaska],  with  the  exception  of  his.                                                               
Representative Olson  agreed with  Mr. Armstrong's  assessment of                                                               
HB  247.   He said  he had  heard that  the only  place HB  247's                                                               
tactics were being used was  in third world countries and thanked                                                               
Mr. Armstrong for confirming that information.                                                                                  
2:59:32 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  inquired as  to the historic  timing of                                                               
Mr.  Armstrong coming  to Alaska  and which  incentives he  found                                                               
attractive in 2001.                                                                                                             
MR. ARMSTRONG  responded that Alaska  is blessed with one  of the                                                               
best petroleum  systems in the  world.   All of the  problems are                                                               
above  ground -  permitting, environmental  extremism, tax  laws,                                                               
and facilities  access - but below  ground it is fantastic.   The                                                               
North Slope is  really not very "picked over,"  unlike most other                                                               
places in the  Lower 48, but is geologically terrific.   He asked                                                               
if  the  committee  remembered  the  charter  agreement  that  he                                                               
thought to be expired.  He  elaborated that it was the product of                                                               
the legislature's realization that  production peaked in 1990 and                                                               
was on  its way down.   Mr. Armstrong described that  at the time                                                               
there was  an oligopoly on  the North  Slope because BP  and ARCO                                                               
were pushing  people away by  not working with them  and limiting                                                               
seismic access,  well information, and  land trades.   These were                                                               
the series  of events  that led  to the  creation of  the charter                                                               
agreement, which was ostensibly an  "open for business sign."  In                                                               
answer to Representative Josephson's  question about what brought                                                               
him to  Alaska, he  indicated it had  been the  charter agreement                                                               
and all the business opportunities for oil and gas exploration.                                                                 
3:03:05 PM                                                                                                                    
REPRESENTATIVE HAWKER admitted he was not aware of any such                                                                     
agreement and asked whether Mr. Armstrong was referring to the                                                                  
BP/ARCO merger agreement.                                                                                                       
MR. ARMSTRONG answered no, and offered that it was only about                                                                   
four pages in length and was quite "loose."                                                                                     

Document Name Date/Time Subjects
HSE RES 2.29.16 @ 1 pm - AOGA Presentation.pdf HRES 2/29/2016 1:00:00 PM
HB 247
HSE RES 2.29.16 @ 1 pm Caelus Energy Alaska.pdf HRES 2/29/2016 1:00:00 PM
HB 247
HSE RES 2.29.16 @ 1 pm Conoco-Phillips.pdf HRES 2/29/2016 1:00:00 PM
HB 247