Legislature(2015 - 2016)BARNES 124

03/02/2016 06:00 PM RESOURCES

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06:02:23 PM Start
06:03:13 PM HB247
06:53:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
6:03:13 PM                                                                                                                    
REPRESENTATIVE NAGEAK  announced that the only  order of business                                                               
is  HOUSE  BILL  NO.  247,   "An  Act  relating  to  confidential                                                               
information  status and  public record  status of  information in                                                               
the  possession  of  the  Department   of  Revenue;  relating  to                                                               
interest applicable to delinquent  tax; relating to disclosure of                                                               
oil  and  gas  production  tax credit  information;  relating  to                                                               
refunds for  the gas storage  facility tax credit,  the liquefied                                                               
natural gas  storage facility tax  credit, and the  qualified in-                                                               
state  oil  refinery   infrastructure  expenditures  tax  credit;                                                               
relating to the  minimum tax for certain oil  and gas production;                                                               
relating to  the minimum tax calculation  for monthly installment                                                               
payments  of  estimated  tax; relating  to  interest  on  monthly                                                               
installment payments  of estimated  tax; relating  to limitations                                                               
for  the application  of tax  credits;  relating to  oil and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to   limitations  for   nontransferable  oil   and  gas                                                               
production  tax   credits  based   on  oil  production   and  the                                                               
alternative tax credit  for oil and gas  exploration; relating to                                                               
purchase  of tax  credit certificates  from the  oil and  gas tax                                                               
credit fund; relating  to a minimum for gross value  at the point                                                               
of  production; relating  to lease  expenditures and  tax credits                                                               
for  municipal  entities;  adding  a  definition  for  "qualified                                                               
capital  expenditure";  adding   a  definition  for  "outstanding                                                               
liability  to  the  state"; repealing  oil  and  gas  exploration                                                               
incentive credits;  repealing the  limitation on  the application                                                               
of credits against tax liability  for lease expenditures incurred                                                               
before  January  1, 2011;  repealing  provisions  related to  the                                                               
monthly installment  payments for estimated  tax for oil  and gas                                                               
produced  before  January 1,  2014;  repealing  the oil  and  gas                                                               
production  tax credit  for  qualified  capital expenditures  and                                                               
certain well expenditures; repealing  the calculation for certain                                                               
lease  expenditures applicable  before  January  1, 2011;  making                                                               
conforming amendments; and providing for an effective date."                                                                    
6:04:07 PM                                                                                                                    
MARLEANA HALL,  Executive Director, Resource  Development Council                                                               
for Alaska  (RDC), noted she  has been  with RDC for  almost nine                                                               
years, but  this is her  first opportunity to testify  before the                                                               
committee.  Originally  from Nome, she said she is  a graduate of                                                               
the University of Alaska Anchorage.   She lives in Anchorage with                                                               
her husband  and son and  their hope is  live and work  in Alaska                                                               
for the rest of their lives.                                                                                                    
MS. HALL  related that  RDC is  a statewide  business association                                                               
comprised  of individuals  and companies  from  Alaska's oil  and                                                               
gas, mining,  forest products,  fishing, and  tourism industries.                                                               
Membership consists of nearly 400  corporate members and hundreds                                                               
of  individuals,  and  includes   12  land-owning  Alaska  Native                                                               
corporations, local  communities, organized labor,  and industry-                                                               
support firms across  the entire economy, all of  which depend on                                                               
a healthy  oil and gas  industry.  She  said RDC's purpose  is to                                                               
encourage a strong,  diversified private sector in  Alaska and to                                                               
expand  the   state's  economic  base  through   the  responsible                                                               
development of the state's natural resources.                                                                                   
MS. HALL stated  that RDC members are the  life-blood of Alaska's                                                               
economy.   The best approach  to expand the economy  and generate                                                               
new revenues for  the state is to produce more  oil, attract more                                                               
tourists, harvest more fish, and  mine more minerals.  Increasing                                                               
taxes on  Alaska's natural resource industries  will not increase                                                               
production for the Trans-Alaska  Pipeline System (TAPS), will not                                                               
attract  more tourists,  will not  encourage  the development  of                                                               
more  mines, and  will  not increase  investment  in the  fishing                                                               
industry.  Higher taxes in  this low-priced commodity environment                                                               
will likely  deter investment  and lead  to lower  state revenues                                                               
and a weaker private sector in the long run.                                                                                    
6:06:44 PM                                                                                                                    
MS. HALL, in  regard to HB 247, maintained that  raising taxes on                                                               
companies that  are reporting record  losses and are  in negative                                                               
cash flow  is not sound fiscal  policy.  According to  the Energy                                                               
Information  Administration, oil  prices today  are not  only the                                                               
lowest seen  in a  decade, when adjusted  for inflation  they are                                                               
the  lowest since  the mid-1980s.   In  less than  two years  oil                                                               
prices have fallen 70 percent.   This has impacted state revenues                                                               
and also  impacted the  industry, which  receives 100  percent of                                                               
its revenue  based on the commodity  price.  This is  clearly not                                                               
the  time  to raise  taxes  on  the  primary engine  of  Alaska's                                                               
economy.  The oil industry is  struggling with low oil prices and                                                               
tight capital markets.  Companies  are cutting budgets and making                                                               
tough investment decisions.  Increasing  taxes on the industry at                                                               
this  time  will compound  a  bad  situation and  jeopardize  new                                                               
investment, further  damaging the state's private  sector economy                                                               
and shrinking the economic pie for everyone.                                                                                    
MS.  HALL said  the oil  industry is  the foundation  of Alaska's                                                               
economy, and keeping  it strong is key to  sustaining the private                                                               
sector, Alaskan jobs, state government,  and the overall economy.                                                               
A  healthy and  strong  oil and  gas industry  is  also vital  to                                                               
progressing the  Alaska liquefied natural gas  (LNG) megaproject.                                                               
To sustain its economy Alaska  needs to encourage new investment,                                                               
jobs,  and production  by maintaining  a stable,  competitive tax                                                               
structure.  When something is  incentivized, the more it of there                                                               
will be.   The  current tax policy  has brought  new exploration,                                                               
jobs, and continued  investment to the state.   It has stabilized                                                               
North Slope production and has  somewhat shielded Alaska from the                                                               
massive  cutbacks that  have occurred  elsewhere.   Following the                                                               
enactment of  the new tax law  in 2013, Alaska saw  $5 billion in                                                               
new  investment across  the state  from legacy  companies to  new                                                               
companies that have made big  investments in good faith under the                                                               
current regime.   The sudden and dramatic drop in  oil prices has                                                               
slowed progress  as companies struggle  with low cash  flows, but                                                               
Alaska  is   in  a   much  better   position  because   of  those                                                               
investments.   The tax policy  has done  what it was  supposed to                                                               
do:   increase  investment.   Conversely, HB  247 would  move the                                                               
state in the  wrong direction.  It would be  Alaska's sixth major                                                               
tax change in  the last eleven years.  Raising  taxes when prices                                                               
go up, and then raising them  again when prices are down, creates                                                               
instability   and  fails   to  provide   investors  with   fiscal                                                               
certainty.   The  bill  would make  Alaska  less competitive  for                                                               
global investment and  risks future projects that  would put more                                                               
oil  in  TAPS, which  should  be  the  state's number  one  goal.                                                               
Alaska needs a plan that grows the pie bigger for everyone.                                                                     
6:10:16 PM                                                                                                                    
MS. HALL said  RDC's members are not only the  oil companies that                                                               
would be directly  impacted by HB 247, but also  companies in the                                                               
support  industries and  Native corporation  ventures.   Alaska's                                                               
Native  corporations  (ANCs)  are,   and  will  continue  to  be,                                                               
economic engines  in Alaska.   A  large part  of the  ANC success                                                               
seen today is a result of  purchases or joint ventures of oil and                                                               
gas support industry companies in  Alaska.  These investments not                                                               
only  create  jobs  for Alaska  Native  shareholders,  but  often                                                               
result in  job training, education,  and opportunities  where few                                                               
others exist.   In addition to these benefits,  oil production on                                                               
Native-owned land  directly benefits  the shareholders of  all 12                                                               
land-owning ANCs  and some 220  village corporations.   Other RDC                                                               
member  companies  will  further  explain to  the  committee  the                                                               
negative  impacts that  HB  247 would  have  on their  companies.                                                               
These  companies, both  big  and  small, rely  on  a healthy  and                                                               
stable oil and gas industry.                                                                                                    
MS. HALL  related that  another concern  RDC has  with HB  247 is                                                               
that the administration has not  conducted a risk analysis on the                                                               
bill's  impact on  the  oil industry.   The  effect  of this  tax                                                               
proposal  must be  fully  reviewed  and unintended  consequences,                                                               
including potential impacts on  future investment and production,                                                               
must be considered.  She said  RDC's members are not asking for a                                                               
tax decrease during this time  of low commodity prices like other                                                               
states  and countries  are considering.   But,  RDC does  request                                                               
that as the state considers changes  to tax policy, it do no harm                                                               
to the  state's largest industry, an  industry facing significant                                                               
economic hardship.   Otherwise, it  may soon be learned  that the                                                               
more  Alaska taxes  companies,  the less  likely  a company  will                                                               
invest  in the  state, and  the more  likely its  limited capital                                                               
will go to jurisdictions that do encourage investment.                                                                          
MS. HALL expressed  RDC's concern that HB 247,  if enacted, would                                                               
force industry to reduce investments,  leading to reduced oil and                                                               
gas production  and ultimately resulting  in less revenue  to the                                                               
state, exacerbating the revenue crisis.   She concluded by noting                                                               
it is  important to  remember that  the oil  industry is  a major                                                               
revenue  producer for  the State  of  Alaska and  is the  largest                                                               
producer  of revenue  for the  North Slope  Borough, the  City of                                                               
Valdez, and the Kenai Peninsula Borough.                                                                                        
6:13:26 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
6:14:49 PM                                                                                                                    
ROY TANSY,  JR., Executive Vice  President, Ahtna  Netiye', Inc.,                                                               
Ahtna, Incorporated,  provided a PowerPoint  presentation titled,                                                               
"FRONTIER BASINS TAX CREDITS."   He explained that Ahtna Netiye',                                                               
Inc., is the holding company  of Ahtna, Incorporated.  Turning to                                                               
slide  2,  "FRONTIER  BASINS EXPERIENCE,"  he  expressed  Ahtna's                                                               
concerns  in regard  to the  tax credits  in Alaska  Statute (AS)                                                               
43.55.025(a)(6) and  (7), which  are currently  set to  expire on                                                               
June 30, 2016.   Ahtna has ongoing exploration  projects on lands                                                               
adjacent to  its lands and  is currently using these  tax credits                                                               
for its incentive to do this  work.  The legislature's intent was                                                               
to incentivize  oil and gas exploration  in underexplored basins,                                                               
reduce  the  risk  of  development   of  local  rural  energy  to                                                               
Alaskans, create a  local energy source for  rural residents, and                                                               
reduce or eliminate the Power Cost Equalization subsidies.                                                                      
MR.  TANSY  addressed  slide 3,  "FRONTIER  BASIN  TAX  CREDITS,"                                                               
noting that  under AS 43.55.025(a)(6)  the first  two exploratory                                                               
wells  drilled  inside  each  of the  six  Frontier  Basins  will                                                               
receive  80 percent  credits or  up to  $25 million  of qualified                                                               
expenditures.    Under  AS   43.55.025(a)(7)  the  first  seismic                                                               
project performed  inside each  of the  six Frontier  Basins will                                                               
receive  75 percent  credit or  up to  $7.5 million  of qualified                                                               
expenditures.   Ahtna has already  used the seismic  tax credits,                                                               
about  $2.4   million  on  a   $3  million  seismic   tax  credit                                                               
investment.  Ahtna  would not be actually  doing this exploration                                                               
if the tax credits were not there.                                                                                              
6:17:20 PM                                                                                                                    
MR.   TANSY  displayed   slide   4,   "SPECIFIC  FRONTIER   BASIN                                                               
REGULATIONS."   He outlined the specific  regulations as follows:                                                               
pre-qualification  approval   for  seismic  and  well   from  the                                                               
Department  of Natural  Resources (DNR),  Division of  Oil &  Gas                                                               
(DOG);  various well  depths and  setbacks  from previous  wells;                                                               
submission of all data to DNR  prior to credit award; public data                                                               
disclosure  of all  data  after two  years;  must provide  energy                                                               
source  for  rural  energy  needs;  and no  stacking  of  the  AS                                                               
43.55.025(a)(6) and  (7) tax credits as  can be done with  the AS                                                               
43.55.023 credits.                                                                                                              
MR. TANSY  moved to slide  5, "EXPLORATION PROGRAM HISTORY."   He                                                               
provided  a  historical review  as  follows:   April  2012  Ahtna                                                               
applied for a  State of Alaska exploration license;  May 2012 the                                                               
legislature  approved Senate  Bill  23; and  December 2013  Ahtna                                                               
received the Tolsona exploration license.                                                                                       
6:18:26 PM                                                                                                                    
REPRESENTATIVE TARR inquired whether the  bill was Senate Bill 23                                                               
or Senate Bill 21.                                                                                                              
JOE  BOVEE,   Vice  President  of  Land   and  Resources,  Ahtna,                                                               
Incorporated,  replied Senate  Bill 23  [passed in  2012, Twenty-                                                               
Seventh Alaska  State Legislature]  was prior  to Senate  Bill 21                                                               
[passed in 2013, Twenty-Eighth Alaska State Legislature].                                                                       
6:18:35 PM                                                                                                                    
MR. TANSY  continued the historical  review provided on  slide 5:                                                               
June   2014   Ahtna   received  the   DNR   commissioner's   pre-                                                               
qualification approval for  the seismic.  He added  that from the                                                               
very  beginning Ahtna  has been  very diligent  in trying  to get                                                               
things going  in its  region under this  program.   He continued:                                                               
December  2014  Ahtna  completed   40  miles  of  two-dimensional                                                               
seismic  over the  exploration area;  April 2015  Ahtna completed                                                               
reprocessing  of  seismic data  identifying  12  square miles  of                                                               
potential  oil and  gas trap;  May 2015  Ahtna submitted  seismic                                                               
data to the Division of Oil  & Gas; September 2015 Ahtna received                                                               
the  DNR  commissioner's  pre-qualification approval  for  a  new                                                               
well,  the Tolsona  #1 well;  February 2016  the majority  of the                                                               
permits had  been approved;  and March 2016  the final  stages of                                                               
the new well engineering and design are set to be complete.                                                                     
MR. TANSY  brought attention  to slide  6, "COPPER  RIVER BASIN."                                                               
He reported that right now Ahtna  is looking at a project located                                                               
on state lands  adjacent to Ahtna lands that has  a proposed well                                                               
depth  of 4,500  feet to  find  gas.   The targeted  area is  the                                                               
structure  of the  Nelchina sandstone.   Eleven  wells have  been                                                               
drilled in the basin since the  1960s and all of these wells have                                                               
had  some type  of gas  showing.   At the  time these  wells were                                                               
drilled the  target was oil,  and gas would  have been more  of a                                                               
nuisance.    In  the  last  30 years  there  has  only  been  one                                                               
exploration development project in the  region.  That was done on                                                               
Ahtna lands  from 2005-2007  and was called  the Ahtna  119 well.                                                               
Unfortunately  the well  did not  get to  the formation;  gas was                                                               
found but the driller was unable to  test it.  That gas showed at                                                               
94 percent  methane and  Tolsona #1  well has  a potential  for a                                                               
great local source of fuel.                                                                                                     
6:20:55 PM                                                                                                                    
MR. TANSY turned to slide 7,  "PURPOSE AND NEED FOR GAS IN COPPER                                                               
RIVER BASIN," saying that the  community and economic development                                                               
benefits are  immense.  Benefits  include:  a huge  potential for                                                               
local  employment; expanding  local businesses;  lowering of  the                                                               
high  costs of  this rural  economy; reducing  out-migration; and                                                               
building infrastructure in the region.   Right now, he continued,                                                               
the region  has had a number  of schools closed, the  majority of                                                               
shareholders have  moved to  the Matanuska-Susitna  and Anchorage                                                               
area,  restaurants have  closed  in Glennallen  leaving only  one                                                               
restaurant open year round in the entire basin area.                                                                            
MR. TANSY  displayed slide 8, "Project  Overview," and elaborated                                                               
that  Ahtna did  the 40  miles of  new seismic  in the  winter of                                                               
2014/2015.   The majority of it  is on state land,  although some                                                               
was on private  land.  The current location  includes an easement                                                               
that goes from south to north.   Ahtna is going to expand on that                                                               
easement  and  then  move  off  of  it  to  build  a  pad.    The                                                               
exploration will be  on state lands and  royalties and production                                                               
tax  will be  paid  to  the state  if  production is  successful.                                                               
There will be improvement to public access of recreational area.                                                                
MR. TANSY drew  attention to slide 9,  "PROJECT TEAM," specifying                                                               
that Ahtna subsidiaries will constitute  the project team.  Ahtna                                                               
Construction will  be playing a  major part of  the construction;                                                               
HXR Drilling Services  is doing the majority  of the engineering;                                                               
and Restoration  Science & Engineering  is doing  the permitting.                                                               
Multiple Alaskan  companies are  lending a  hand to  the project,                                                               
and a number of state,  local, and federal agencies are partaking                                                               
in  making  the  project  possible.    Agency  support  has  been                                                               
tremendous; for example, the director  of DNR's Division of Oil &                                                               
Gas has visited the region and the project site.                                                                                
6:23:09 PM                                                                                                                    
MR.  TANSY showed  the  project schedule  outlined  on slide  10,                                                               
"PROJECT  SCHEDULE (Very  tight)!"   He noted  it goes  from June                                                               
2015 through  August 2016 and  includes the starting of  the pre-                                                               
drilling  program,  the  procurement  process  continuing  to  be                                                               
ongoing,  submitting of  the  U.S. Army  Corps  of Engineers  404                                                               
Permit and the Plan of Operations  Permit.  Right now Ahtna is at                                                               
the beginning  of the civil site  work and hopes to  have the rig                                                               
there within the next few months  to do work.  The critical point                                                               
is July 1 when the Frontier Tax Credits expire.                                                                                 
MR.  TANSY ended  his presentation  with slide  11, "CONCLUSION,"                                                               
saying it is critical to  Ahtna's project that the Frontier Basin                                                               
Tax Credits in  AS 43.55.025(a)(6) and (7) be  extended from June                                                               
30, 2016,  to a future date.   He said Ahtna  recommends the year                                                               
2022 to  coincide with other  tax credit expiration dates.   This                                                               
would greatly  help the Tolsona  Project that is underway  with a                                                               
committed investment  and a very  tight schedule.  He  added that                                                               
Ahtna  also  supports  keeping  in place  the  Middle  Earth  Tax                                                               
Credits in AS  43.55.023 and .025(a)(1-4) as an  incentive to the                                                               
Frontier  Basin  exploration  and   development  efforts  by  the                                                               
explorers  that  have taken  the  risk  and committed  investment                                                               
based on these incentives.  He  displayed slide 12, "THANK YOU TO                                                               
OUR GOOD  PARTNERS," and  thanked the  committee members  for the                                                               
opportunity to  share Ahtna's  experience.   He also  thanked the                                                               
Alaska State Legislature, Governor Walker  and his staff, and the                                                               
citizens of  the state  for their support  for development  of an                                                               
affordable energy resource in Ahtna's region.                                                                                   
6:25:11 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON offered  his  understanding that  there                                                               
are  some situations  where  pre-qualification  is required,  but                                                               
that for  most situations it is  not.  He inquired  whether Ahtna                                                               
has found that to be cumbersome or difficult.                                                                                   
MR. BOVEE responded that there  are two different issues with the                                                               
permitting.    One  is  the   actual  land  use  permitting,  the                                                               
regulatory permitting  that goes along  with any kind  of project                                                               
in the state of Alaska.  They  are cumbersome and many take up to                                                               
six months, although some can be done in 30 days.  As far a pre-                                                                
qualification with  DNR's Division  of Oil  & Gas,  Ahtna submits                                                               
its findings,  intent, cost  schedule, and  so forth  and usually                                                               
the  division responds  with a  yay or  nay within  two or  three                                                               
months; it has been as short as 30 days and as long as 3 months.                                                                
REPRESENTATIVE JOSEPHSON related that the  intent of HB 247 is to                                                               
be more conservative  and less liberal with  credits, but allowed                                                               
that  all  things are  possible  and  the  committee is  here  to                                                               
listen.  Regarding the credits set  to expire [on June 30, 2016],                                                               
he asked what  would not get done that would  have qualified were                                                               
the credits to expire summer 2017 instead of this coming summer.                                                                
MR. TANSY  answered that Ahtna  would potentially be  pushing the                                                               
deadline  to  get  the  rig  out   into  the  region.    The  rig                                                               
constitutes the majority  of the costs for  the drilling program,                                                               
probably  $120,000  a  day  for rig  costs  and  other  essential                                                               
services.  So,  if this project gets pushed out  to where it sits                                                               
on top of  that July 1 date,  anything after that July  1 date is                                                               
going  to be  heavily impactful  to Ahtna's  program.   Right now                                                               
Ahtna  expects a  $9.4-$10 million  investment  on this  drilling                                                               
project.  With  the AS 43.55.025(a)(6) and (7)  tax credits Ahtna                                                               
would receive  roughly 73 percent,  $6.9-$7.3 million,  in return                                                               
in tax credits on that investment.                                                                                              
REPRESENTATIVE  JOSEPHSON  inquired as  to  how  many of  Ahtna's                                                               
exploration sites are on state land and how many not.                                                                           
MR.  TANSY replied  that at  this  point all  of the  exploration                                                               
drilling will  occur on state land.   He offered his  belief that                                                               
the formation itself is 100 percent under state land.                                                                           
6:28:55 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
6:30:13 PM                                                                                                                    
JIM  JANSEN, Chair,  Lynden Incorporated;  Co-Chair, Keep  Alaska                                                               
Competitive Coalition,  related that  Lynden is an  Alaska truck,                                                               
marine, and  air transportation company that  operates throughout                                                               
Alaska with about 1,000 Alaska  employees and hundreds of service                                                               
partners  throughout  the state.    He  explained that  the  Keep                                                               
Alaska  Competitive Coalition  ("Keep") was  founded as  the Make                                                               
Alaska Competitive  Coalition in 2011  to advocate for  change in                                                               
Alaska's oil  tax policy to  encourage investment in Alaska.   He                                                               
noted that production  declined by more than  200,000 barrels per                                                               
day  under the  uncompetitive tax  policy of  Alaska's Clear  and                                                               
Equitable Share (ACES) [passed in  2007, House Bill 2001, Twenty-                                                               
Fifth Alaska State Legislature].   Keep is a broad-based group of                                                               
about  8,000   Alaskans,  including  Alaska   businesses,  Native                                                               
corporations, individuals,  and organized  labor.   Keep receives                                                               
no  funding from  the  oil industry.   After  the  defeat of  the                                                               
Senate Bill 21 referendum, members  thought they could retire the                                                               
coalition, but  here the coalition  is - facing  another proposed                                                               
change that would send Alaska backward in oil tax policy.                                                                       
MR. JANSEN  said he  came to  Alaska in 1967  and Alaska  was his                                                               
home  before North  Slope oil.   He  operated a  trucking company                                                               
through the  pipeline construction era  and has led  Lynden since                                                               
the mid-1980s  recession.  He and  his wife Vicki have  lived the                                                               
dream  in this  great state  from  both a  business and  personal                                                               
perspective, fueled  by a strong  economy, driven by  the state's                                                               
resource industries.   He is now  nearing the end of  his working                                                               
career  and spending  much  of  his energy  and  time working  on                                                               
behalf of  future generations of  Alaskans.   He said he  is here                                                               
today because he is afraid that  Alaska may revert to the economy                                                               
that he faced in 1967.   An economy without the North Slope would                                                               
be devastating for Alaska and Lynden.   Lynden would be forced to                                                               
make  massive  layoffs of  its  outstanding  employees as  things                                                               
speeded toward  economic ruin.   He doesn't scare easily,  but he                                                               
fears for the state and  Lynden's people if the legislature tries                                                               
to solve Alaska's fiscal problems  by imposing unreasonable taxes                                                               
on  the state's  resource  industries.   How  the state's  fiscal                                                               
challenge  is  dealt  with  will  determine  whether  the  Alaska                                                               
enjoyed since  development of  Prudhoe Bay  is retained.   Alaska                                                               
needs to  adjust and live  within its  means, but this  cannot be                                                               
done on the  backs of the state's resource  industries.  Alaskans                                                               
may  have  to  sacrifice  a   portion  of  their  permanent  fund                                                               
dividends (PFDs) and may need to pay taxes.                                                                                     
6:34:24 PM                                                                                                                    
MR. JANSEN  acknowledged the  current situation of  oil at  $30 a                                                               
barrel and  said everyone knows  the size of the  current deficit                                                               
and that  it needs  to be  dealt with  sooner rather  than later.                                                               
The state is  facing a massive fiscal crisis unseen  in more than                                                               
30 years.   He thanked the  legislators and the governor  who are                                                               
willing  to  put  Alaska's long-term  economic  future  ahead  of                                                               
short-term politics.   Nothing  is more  important for  the state                                                               
than  to  solve  the  budget  deficit  and  build  a  sustainable                                                               
economic future, but it cannot be  done on the backs of an ailing                                                               
industry that  already pays most of  Alaska's bills.  He  said he                                                               
agrees conceptually  with much  of the governor's  plan:   use of                                                               
the permanent  fund earnings, reduction of  the dividend program,                                                               
reducing the  operating budget, and  instituting some  new taxes.                                                               
The part  of the governor's  plan that concerns him,  however, is                                                               
the proposal for yet another change to oil tax policy.                                                                          
MR.  JANSEN outlined  three main  points  he wants  to make  this                                                               
evening.  First,  increasing oil taxes and reducing  credits at a                                                               
time  when the  industry  is losing  money  on Alaska  production                                                               
sends the  wrong message to  an industry that has  responded well                                                               
to  the   state's  desire  to   see  more  investment   and  more                                                               
production, especially at  a time when oil  prices have declined.                                                               
Second, maintaining  a healthy oil  and gas industry is  vital to                                                               
Alaska's future if  it is wanted to keep oil  flowing through the                                                               
pipeline  and keep  alive any  serious prospects  for a  gasline.                                                               
Third, as  the painful economic  transition caused by  low prices                                                               
is  dealt  with,  people  need  to  be  mindful  to  protect  the                                                               
viability  of  all  the  state's   resource  industries  as  they                                                               
continue  to be  the major  source  of employment  and income  to                                                               
Alaskans, not to mention important taxpayers.                                                                                   
MR. JANSEN said the [current]  tax structure under Senate Bill 21                                                               
does a better  job of protecting revenues at low  oil prices than                                                               
would  have the  prior [ACES]  tax  structure.   However, HB  247                                                               
would raise the  gross tax from 4 percent to  5 percent and would                                                               
eliminate  loss  credits,  which  would   add  a  burden  to  the                                                               
petroleum industry at a time  when it is losing approximately $22                                                               
per barrel  produced on  the North Slope.   Changing  the credits                                                               
would effectively be  a tax increase.  The  state wanted industry                                                               
to produce  oil that is  expensive to get  out of the  ground and                                                               
industry was  promised an  incentive to do  that.   And, industry                                                               
did just  that.  Despite  these sobering times, the  industry has                                                               
upheld the commitment it made  when the legislature passed Senate                                                               
Bill 21.  Industry pledged to  increase investment and it did, to                                                               
the  tune  of $5  billion.    That  investment  has led  to  more                                                               
production  and leveling  off of  the production  decline through                                                               
the pipeline.  Industry is  still investing substantially more in                                                               
Alaska than  in other regions  because Senate Bill  21 encourages                                                               
investment.  Compare  Alaska to North Dakota,  Texas, Canada, and                                                               
most other  provinces in  the world and  people can  be extremely                                                               
thankful to be living and working in Alaska today.                                                                              
6:38:24 PM                                                                                                                    
MR.  JANSEN  asserted that  an  increased  tax on  the  petroleum                                                               
industry today would send a  terrible message, namely that Alaska                                                               
is a  high-risk tax  environment and  an unreliable  partner that                                                               
does not  live up to  its commitments.   A natural  response from                                                               
the industry  would be to  curtail its investments and  move them                                                               
to a more stable and profitable  oil province.  What would happen                                                               
if  Lynden told  an oil  company today  that it  was raising  its                                                               
freight rates  by 25 percent?   The  oil company would  shift its                                                               
business to Lynden's competitors.   Alaska, like Lynden, competes                                                               
for  investment and  this is  the wrong  time to  increase rates.                                                               
Passage of HB  247 would mark the sixth major  change in taxes in                                                               
eleven years.   Attracting investment requires a  fair and stable                                                               
tax structure.   Tax credit  policy should  not be a  whipsaw for                                                               
filling the  budget deficit, it  should be a  thoughtful approach                                                               
to a stable and growing economy.                                                                                                
MR. JANSEN  noted that Alaska's  oil production peaked at  over 2                                                               
million per  day and is  now approximately  500,000 per day.   To                                                               
keep a minimum  flow in the pipeline, and to  obtain the value of                                                               
what oil  remains in  the state,  there needs  to be  an industry                                                               
that continues drilling  and investing and that  has enough faith                                                               
in the state as predictable  and reliable partners to invest $50-                                                               
$60  billion in  a gasline.   Continually  changing Alaska's  tax                                                               
structure makes  the state predictable  in the wrong sense.   The                                                               
oil and  gas industry,  like the  mining and  fishing industries,                                                               
provides  a  major source  of  good-paying  jobs in  the  state's                                                               
economy  and hopefully  will  continue  to do  so  well into  the                                                               
future.   The tough choices  that need to  be made to  reduce the                                                               
state's deficit  must be done in  a way that minimizes  the shock                                                               
to  Alaska's  economy in  the  next  several  years and  must  be                                                               
mindful of the economic base that is needed in the future.                                                                      
MR. JANSEN  said Alaska is  fortunate to have almost  $60 billion                                                               
in savings to help with the transition toward an investment-                                                                    
based budget.   He urged that  this be started by  using earnings                                                               
of those savings, as suggested  by the governor, Senator McGuire,                                                               
Representative Millett,  and Representative Hawker, along  with a                                                               
reduced budget  and carefully considered  taxes and user  fees to                                                               
close  the  gap.    Everyone  knows that  taxes  on  the  state's                                                               
resource industry are politically easier  than to tax the state's                                                               
residents.  But  the resource industries are the  last place that                                                               
should be looked  at for quick tax revenue.   Resource industries                                                               
are  the  backbone  of  Alaska's  economy and  the  oil  and  gas                                                               
industry is  swimming in an ocean  of red ink.   Raising taxes on                                                               
resource industries is  the surest way to  drive away investment,                                                               
which is the only way that Alaska can grow its economy.                                                                         
MR.  JANSEN  said  Alaska  is fortunate  to  have  the  financial                                                               
resources to survive  and to prosper.  What is  needed now is the                                                               
courage to responsibly  continue to drive down the  cost of state                                                               
government and  utilize the  permanent fund  as intended  to fund                                                               
state services.   Residents  will need  to pay  taxes.   The last                                                               
place  to look  for  new  revenue is  to  unfairly  tax the  very                                                               
industries  that drive  Alaska's economic  future.   If they  are                                                               
pushed away  the state's  economic future is  hopeless.   This is                                                               
the time for Alaskans to support responsible fiscal policy.                                                                     
6:42:33 PM                                                                                                                    
REPRESENTATIVE  SEATON offered  his  appreciation for  everything                                                               
Lynden has  done and worked for  in the industry.   He noted that                                                               
as  currently  scheduled, the  state  will  owe $623  million  in                                                               
refundable cash  payments for credits  this next year.   Reducing                                                               
each  of the  630,000 permanent  fund dividends  by $1,000  would                                                               
come to a total of $630,000.   However, that would not reduce the                                                               
state's  budget at  all if  there  is not  some form  of HB  247.                                                               
Therefore, he continued,  he is trying to figure out  how to do a                                                               
responsible job of shepherding and  reforming the state's budgets                                                               
if spending  at this high rate  of tax credits is  continued.  He                                                               
asked where to get that money.                                                                                                  
MR. JANSEN  recognized the difficulty  that legislators  face and                                                               
said it  is very  critical that  it be  done right.   He  said he                                                               
doesn't claim to be an expert  on tax credits and cannot tell the                                                               
committee that every  tax credit is appropriate  and that members                                                               
should be looking at some of that.   But he urged that members be                                                               
very  cautious of  increasing taxes  on the  industry that  is so                                                               
desperately needed to keep Alaska's economy strong.                                                                             
REPRESENTATIVE  SEATON asked  whether  Mr. Jansen's  part of  the                                                               
service industry considers  the tax credits that are  paid out in                                                               
cash as being the same thing  as the tax increase included in the                                                               
bill or  whether Mr. Jansen would  look at those as  two separate                                                               
portions that should be considered differently.                                                                                 
MR. JANSEN replied he thinks  they are separate components within                                                               
the  bill and  all  components should  be looked  at.   The  most                                                               
important thing  to him is  to not  have increased hard  taxes on                                                               
the producing industry.   Tax credits are important,  they are an                                                               
investment, he  continued.  It  is not just throwing  money away,                                                               
the state is investing in  future production and legislators must                                                               
be very careful when talking about eliminating them.                                                                            
6:45:56 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
6:46:28 PM                                                                                                                    
MIKE  SALZETTI,   Manager,  Fuel  Supply  and   Renewable  Energy                                                               
Development,  Homer Electric  Association, Inc.  (HEA), explained                                                               
HEA provides  power to the  western half of the  Kenai Peninsula.                                                               
Its  service  area  is  a   combination  of  remote  communities,                                                               
industrial complexes, small urban centers,  and rural areas.  The                                                               
service area  runs south  to Port Graham  and Seldovia,  north to                                                               
Nikiski, and  east to  Sterling.   Like most  Southcentral Alaska                                                               
utilities,  HEA  generates about  90  percent  of its  power  via                                                               
natural gas fired generation.   While HEA is working to diversify                                                               
its  generation  portfolio with  smart  renewables,  such as  its                                                               
proposed  5 megawatt  (MW) hydroelectric  project at  Grant Lake,                                                               
the  Battle  Creek Diversion  into  Bradley  Lake, and  potential                                                               
landfill gas project, the fact is  that HEA will continue to rely                                                               
upon natural gas for a vast majority of its power generation.                                                                   
MR.  SALZETTI   reported  that  HEA   recently  became   its  own                                                               
generation entity.  Prior to that,  HEA had to design and build a                                                               
generation portfolio.   It  was an  exciting time  at HEA,  but a                                                               
scary time to  be entering the Cook Inlet gas  market as a buyer.                                                               
Gas prices were rising precipitously,  the Cook Inlet Natural Gas                                                               
Storage Alaska  (CINGSA) facility  was being constructed  to help                                                               
Southcentral  gas and  electric utilities  address deliverability                                                               
issues  and to  mitigate  risk, and  Southcentral utilities  were                                                               
conducting extensive  due diligence  on the  possible importation                                                               
of LNG to provide for future gas supply needs.                                                                                  
6:48:30 PM                                                                                                                    
MR. SALZETTI  related that the advent  of the Cook Inlet  Oil and                                                               
Gas  Production Tax  Credits saw  a number  of new  producers and                                                               
activities  in the  Cook Inlet.   That  included Hilcorp  Alaska,                                                               
LLC,  Furie Operating  Alaska, LLC,  BlueCrest Energy,  Inc., AIX                                                               
Energy  Inc., NordAq  Energy Inc.,  Cook Inlet  Energy, LLC,  and                                                               
Apache  Corporation.   Southcentral  gas  and electric  utilities                                                               
were able  to sign  firm gas contracts  through 2018  and beyond.                                                               
The  LNG export  facility  on the  Kenai  Peninsula continues  to                                                               
operate, as  does the Tesoro refinery.   The recent signing  of a                                                               
gas  contract between  HEA and  Furie saw  the first  significant                                                               
decline  in  firm  Cook  Inlet  gas  prices  in  recent  history.                                                               
Contracts  for  base  load  gas supply  based  upon  the  Hilcorp                                                               
Consent Decree  prices are set  at $7.42 per thousand  cubic feet                                                               
(Mcf) for 2016 [signed November  2012 between State of Alaska and                                                               
Hilcorp].   When its contract with  Furie begins on April  1, HEA                                                               
will be paying $6.50/Mcf.  Through  the term of the contract, HEA                                                               
will  realize a  12-22 percent  discount to  recently agreed-upon                                                               
base load gas contracts.                                                                                                        
MR.  SALZETTI said  the Cook  Inlet  Oil and  Gas Production  Tax                                                               
Credits  appear  to  be  working.    Homer  Electric  Association                                                               
encourages  policy  that  ensures  a  tax  regime  that  provides                                                               
stability and  predictability for  Cook Inlet producers  and that                                                               
encourages  exploration, development,  and  production that  will                                                               
ensure a  long-term supply of  natural gas for the  utilities and                                                               
provide for economic prosperity for HEA's member owners.                                                                        
MR.  SALZETTI concluded  by  stating that  while  HEA is  excited                                                               
about  the price  of  $6.50 for  the  gas that  it  will soon  be                                                               
purchasing  from  Furie, the  Henry  Hub  price for  spot  market                                                               
natural gas was $1.78 per  million British Thermal Units (MMBtu).                                                               
So, there  is a long way  to go before Southcentral  Alaska's gas                                                               
prices are  on par with  the Lower 48.   He said  HEA appreciates                                                               
the efforts of legislators in achieving  a Cook Inlet oil and gas                                                               
renaissance  and  looks  forward  to  policy  that  provides  for                                                               
continued oil and gas activity in the Cook Inlet.                                                                               
6:50:56 PM                                                                                                                    
REPRESENTATIVE  SEATON  understood  the  Hilcorp  Consent  Decree                                                               
price was $7.42 for 2016 and  that on April 1 HEA's firm contract                                                               
will go in at $6.50.  He asked whether the April 1 date is 2016.                                                                
MR. SALZETTI confirmed it is 2016.                                                                                              
6:51:36 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
6:52:24 PM                                                                                                                    
CO-CHAIR  NAGEAK  announced  that  this  concludes  the  industry                                                               
testimony this  week and offered the  committee's appreciation to                                                               
the presenters.                                                                                                                 
REPRESENTATIVE  TARR understood  the  committee is  not going  to                                                               
hear  presentations  from  Doyon,   Limited,  and  NANA  Regional                                                               
Corporation, but has letters from both corporations.                                                                            
CO-CHAIR  NAGEAK replied  yes, and  reaffirmed that  members have                                                               
letters from the two corporations.                                                                                              
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 3.2.16 HB 247 AHTNA.pdf HRES 3/2/2016 6:00:00 PM
HB 247
HSE RES 3.2.16 HB 247 Doyon written testimony.pdf HRES 3/2/2016 6:00:00 PM
HB 247
HSE RES 3.2.16 HB 247 NANA Written Testimony.pdf HRES 3/2/2016 6:00:00 PM
HB 247
HSE RES 3.2.16 HB 247 Keep Alaska Competitive Jim Jansen.pdf HRES 3/2/2016 6:00:00 PM
HB 247