Legislature(2015 - 2016)SENATE FINANCE 532

04/13/2016 01:30 PM Senate FINANCE

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01:47:57 PM Start
01:48:48 PM SB130
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
<Pending Referral> Invited Testimony
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 130                                                                                                           
     "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                                                                      
1:48:48 PM                                                                                                                    
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
explained that  the governor's total  fiscal plan  had three                                                                    
components:  the  use  of earning's  reserve;  reduction  in                                                                    
expenditures;  and increased  revenues. He  stated that  the                                                                    
bill  would   address  two  of  the   three  components.  He                                                                    
explained  that the  bill  reduced the  size  of the  credit                                                                    
outlay on an  annual basis, and it also had  a provision for                                                                    
additional revenues related to  the "hardening of the floor"                                                                    
and the change  from the 4 percent to the  5 percent minimum                                                                    
tax.  He  stated  that the  administration  recognized  that                                                                    
Department  of Revenue  (DOR) could  not offer  stability to                                                                    
the industry  without necessary funds to  sustain the credit                                                                    
program.  He shared  that there  were  over thirty  meetings                                                                    
with various members of industry,  and with those within the                                                                    
financial community  in order to  understand the  impacts of                                                                    
the legislation and the veto from the year prior.                                                                               
Senator Dunleavy wondered if the  proposed legislation was a                                                                    
change to previously oil and  gas tax reform legislation [SB
21]. Commissioner  Hoffbeck replied  that the  "hardening of                                                                    
the floor", and the rate change  from 4 percent to 5 percent                                                                    
were related  to SB 21.  He explained  that that all  of the                                                                    
Cook  Inlet  credits  were related  to  Alaska's  Clear  and                                                                    
Equitable  Share  (ACES), not  SB  21.  He stated  that  the                                                                    
governor did  not want  to revisit  SB 21,  but there  was a                                                                    
consideration to raise the minimum tax rate.                                                                                    
Senator  Dunleavy queried  whether  the calculations  showed                                                                    
that  the   state  would  be   better  served   under  ACES.                                                                    
Commissioner  Hoffbeck  replied  that  the state  was  in  a                                                                    
unique  situation,  because  the net  operating  losses  had                                                                    
allowed tax  rates to move  to zero,  so there was  not much                                                                    
difference  between  SB  21  and  ACES-unless  there  was  a                                                                    
comparison related the number of credits.                                                                                       
Senator  Dunleavy  asked if  the  state  would better  under                                                                    
1:55:54 PM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
replied  that the  answer would  have  been affirmative  the                                                                    
year prior. He  explained that the minimum tax in  SB 21 was                                                                    
far  stronger than  ACES,  and the  state  was receiving  $3                                                                    
million to $4 million more than ACES.                                                                                           
Senator  Dunleavy surmised  that the  state was  not "better                                                                    
off" under  ACES. He wondered  if the state would  be better                                                                    
under ACES or SB  21, if the price of oil  resumed to $60 or                                                                    
$70 per  barrel. Commissioner Hoffbeck  replied that  as the                                                                    
prices increases,  the state  was still  in the  minimum tax                                                                    
regime. Therefore, the state was "better off" under SB 21.                                                                      
Senator Dunleavy asked if some  tax credits started prior to                                                                    
ACES. Commissioner Hoffbeck replied in the affirmative.                                                                         
Senator   Dunleavy  stressed   that  the   SB  21   was  not                                                                    
detrimental to the state.                                                                                                       
Co-Chair MacKinnon outlined the schedule for the meeting.                                                                       
Mr.  Alper  discussed the  presentation,  "Oil  and Gas  Tax                                                                    
Credit Reform -  CS SB 130(RES)," (copy on  file). He wanted                                                                    
to highlight the basic features  of the current and original                                                                    
version of the bill.                                                                                                            
Mr.  Alper  addressed  slide  2, "History  of  Oil  and  Gas                                                                    
Production Tax Credits":                                                                                                        
     FY 2007 thru 2015, $7.4 Billion in Credits                                                                                 
     North Slope                                                                                                                
       · $4.3 billion credits against tax liability                                                                             
             o Major producers; mostly 20 percent capital                                                                       
               credit in ACES and per-taxable-barrel credit                                                                     
               in SB21                                                                                                          
        · $2.1 billion refunded credits                                                                                         
             o New producers and explorers developing new                                                                       
     Non-North Slope (Cook Inlet and Middle Earth)                                                                              
       · $100 million credits against tax liability                                                                             
             o Another $500 to $800 million Cook Inlet tax                                                                      
               reductions (through 2013) due to the tax cap                                                                     
               still tied to ELF                                                                                                
        · $900 million refunded credits (most since 2013)                                                                       
2:01:09 PM                                                                                                                    
Mr.  Alper  discussed  slide  3, "History  of  Oil  and  Gas                                                                    
Production Tax  Credits," which showed a  regional breakdown                                                                    
of the  refunded credits. He  explained that it was  a North                                                                    
Slope-centered regime,  until the  Cook Inlet  Recovery Act.                                                                    
Over the  most recent  two years,  the regime  became mostly                                                                    
non-North Slope  operators. He stressed  that it  was mostly                                                                    
Cook Inlet, and there were  a limited number of Middle Earth                                                                    
credits  and  were  not  available   to  report  because  of                                                                    
Mr. Alper turned to slide 4,  "Forecast of O & G Revenue and                                                                    
Tax Credits."                                                                                                                   
Mr. Alper showed slide 5, "Work Done Since Last Session":                                                                       
        · Governor's line-item veto capped FY16 spending at                                                                     
          $500 million                                                                                                          
             o Temporary liquidity crisis; many meetings                                                                        
               with industry and others to help reassure                                                                        
        · Multiple presentations with history, current                                                                          
          practice, and possible changes                                                                                        
            o Joint Resources in Kenai, June 17                                                                                 
             o Three "regional" presentations to Senate                                                                         
               Working Group September through November                                                                         
             o All presentations on BASIS; we're prepared                                                                       
               to go through similar information for the                                                                        
        · Development of reform legislation including plan                                                                      
          for transition from current system                                                                                    
Co-Chair  MacKinnon  wondered  if the  referenced  documents                                                                    
were available  on the DOR  website. Mr. Alper  replied that                                                                    
the documents were available on BASIS.                                                                                          
Mr. Alper spoke to slide 6, "Major Bill Themes":                                                                                
        1. Reduce the state's annual cash outlay                                                                                
        2. Protect Net Operating Loss credits as a playing                                                                      
          field leveler between legacy producers and                                                                            
        3. Limit repurchases                                                                                                    
        4. Strengthen the minimum tax                                                                                           
        5. Be more open and transparent                                                                                         
        6. Honor and pay credits earned to  date and through                                                                    
          any transition period                                                                                                 
2:07:44 PM                                                                                                                    
Mr. Alper discussed slide 7, "Major Bill Concepts in                                                                            
Governor's Proposal":                                                                                                           
     1. Exploration Credits- sunset and transition                                                                              
     2. Cook Inlet Drilling Credits- phase out while                                                                            
     retaining operating loss credits                                                                                           
     3. Repurchase Limits- limit cash outlay                                                                                    
     4. Remove Exceptions / Loopholes                                                                                           
     5. Strengthen Minimum Tax- prevent certain credits                                                                         
     from going below the floor, plus increase to 5 percent                                                                     
     6. Other Provisions- technical cleanup, transparency,                                                                      
     interest rate reform                                                                                                       
Mr. Alper showed slide 8, "Changes made in Senate                                                                               
        · Kept  and improved  many of  the technical  fixes,                                                                    
          including inadvertent "double dip" credit for new                                                                     
          oil on the North Slope                                                                                                
        · GVR "new oil" reverts to legacy after 5 years                                                                         
        · Phased out  all Cook Inlet credits  in 2018, while                                                                    
          also establishing a zero tax on Cook Inlet oil                                                                        
          and gas                                                                                                               
        · Increased  repurchase  "cap"   to  $85  million  /                                                                    
          company / year without large company exclusion                                                                        
        · Removed   changes   to    minimum   tax   "floor,"                                                                    
          transparency provisions, and migrating credits                                                                        
        · 7 percent+Fed  / compounding  interest only  for 3                                                                    
        · Surety  bond  for  local  creditors  /  bankruptcy                                                                    
        · Alaska Hire precedence for credit repurchase                                                                          
Mr. Alper recounted that the Senate Resources Committee had                                                                     
passed out the bill the previous day.                                                                                           
2:14:14 PM                                                                                                                    
Mr. Alper presented slide 9, "Current Status of CSHB247                                                                         
(FIN) amended":                                                                                                                 
        · Also  kept  and  improved many  of  the  technical                                                                    
        · GVR "new oil" reverts to legacy after 7 years                                                                         
        · Reduced Cook  Inlet credits to NOL  only on faster                                                                    
          timeline; Cook Inlet tax working group                                                                                
        · Increased  repurchase  "cap"  to  $100  million  /                                                                    
          company / year without large company exclusion                                                                        
        · Partially  hardened   minimum  tax:   credits  can                                                                    
          reduce to 2 percent, retains 4 percent hard floor                                                                     
          for per-barrel credits                                                                                                
        · Removes   transparency   provisions  and   several                                                                    
          smaller provisions                                                                                                    
        · 5 percent+Fed  / compounding  interest only  for 4                                                                    
        · Surety  bond  for  local  creditors  /  bankruptcy                                                                    
        · Alaska Hire precedence for credit repurchase                                                                          
2:16:02 PM                                                                                                                    
Mr.  Alper moved  to slide  10, "Summary  of Fiscal  Impact"                                                                    
which  was   a  comparison  of  fiscal   notes  between  the                                                                    
governor's  original  bill,  the   House  version,  and  the                                                                    
current committee  substitute. He  remarked that  the actual                                                                    
fiscal note was  more detailed, and contained 15  or 20 line                                                                    
items  that addressed  individual  provisions  of the  bill.                                                                    
There was a yellow line on  the bottom that showed the total                                                                    
of  the revenue  increases and  the spending  decreases. The                                                                    
fiscal note would  be forthcoming with a  narrative later in                                                                    
the day. The  House version of the fiscal  note was amended,                                                                    
so  the  current  fiscal note  was  slightly  different.  He                                                                    
remarked  that  the bill  was  somewhat  smaller in  FY  17,                                                                    
primarily  because of  the  effective  date. The  governor's                                                                    
bill attempted  to do more  on July  1 of the  current year,                                                                    
but the committee  versions had adjusted most  changes to at                                                                    
least  January  of  2017.  He   stated  that  the  committee                                                                    
substitute  contained  approximately  $55 million  from  the                                                                    
elimination of the  Cook Inlet tax credits.  The $15 million                                                                    
of North Slope credits elimination  was due to the interplay                                                                    
of  the  gross  value  reduction, which  could  be  used  to                                                                    
increase the  size of  a net operating  loss to  create some                                                                    
artificially  high  NOL  credits.   The  House  version  had                                                                    
similar numbers  on those  provision, and  a floor-hardening                                                                    
revenue items  that added another $95  million in additional                                                                    
revenue in  FY 18 and  FY 19.  The governor's bill  was much                                                                    
larger  in  comparison,  because  of the  fully  hardened  4                                                                    
percent floor;  and the $25  million per company  cap, which                                                                    
would  have  material  impact  in  delaying  certain  credit                                                                    
2:18:17 PM                                                                                                                    
Mr.   Alper  discussed   slide   11,   "Content  of   Future                                                                    
     We have provided nine different presentations to three                                                                     
     prior committees; all are on BASIS                                                                                         
        · History and development of our credit system                                                                          
       · History and application of the minimum tax                                                                             
        · Various credits and how they have been used,                                                                          
          which ones haven't been, and what is sunsetting                                                                       
        · Current application status, impact of Spring                                                                          
          Revenue Forecast, and NOL Carry-forward issue                                                                         
        · Details and modeling of specific bill provisions                                                                      
        · Explanation of changes made in prior committees                                                                       
        · Life cycle modeling of typical new projects, with                                                                     
          impact of legislation                                                                                                 
2:20:32 PM                                                                                                                    
Vice-Chair  Micciche  referred  to slide  2,  and  expressed                                                                    
appreciation for  the outline of  the slide. He  queried the                                                                    
approximate  GF revenue  from  FY  07 to  FY  15. Mr.  Alper                                                                    
responded that the production  tax revenue was approximately                                                                    
$27 billion. The  total oil and gas revenue  was higher than                                                                    
that, and agreed to provide that information.                                                                                   
Vice-Chair  Micciche queried  the  non-North Slope  revenue.                                                                    
Mr. Alper stated  that the production tax would  be close to                                                                    
zero.  He  agreed  to  provide  specific  information  about                                                                    
royalties, but  surmised that it would  be approximately $10                                                                    
million to $20 million a year.                                                                                                  
Vice-Chair Micciche  wanted to  know the production  tax for                                                                    
2007 through 2015,  and the royalties for 2007  for 2015 for                                                                    
the two segments.                                                                                                               
Vice-Chair  Micciche  referred to  slide  4,  and stated  he                                                                    
would like to see the  graph calculated to include the years                                                                    
2007 through 2015.  He stressed the SB 21 had  nothing to do                                                                    
with  the $4.1  billion budget  gap, and  asserted that  the                                                                    
state was in  better shape than it would have  been. He felt                                                                    
that  eliminating royalty  caused speculation  about whether                                                                    
the administration  believed that  there were fields  in the                                                                    
state that would be so expensive  to produce where it may be                                                                    
appropriate to settle for royalty  rather than no production                                                                    
at all.  He queried further explanation  of that philosophy.                                                                    
Mr. Alper replied  that the information on  slide 4 included                                                                    
70 percent  of the royalty,  which was the royalty  that was                                                                    
subject to appropriation for use  in the annual budgets. The                                                                    
other  30  percent was  deposited  into  the corpus  of  the                                                                    
Permanent Fund and was  effectively "untouchable." He agreed                                                                    
that the  state received value  from the royalty.  He shared                                                                    
that,  before 2008  when the  prices spiked  in net  profits                                                                    
tax,  the  state made  more  from  royalty  than it  had  in                                                                    
production  tax.  He  shared   that  there  was  a  previous                                                                    
document that addressed where the  state received royalty in                                                                    
different ownership  statuses. He shared that  the state did                                                                    
not necessarily  receive royalty  if it  was not  from state                                                                    
land.  He  shared that  the  National  Petroleum Reserve  of                                                                    
Alaska (NPRA)  allowed for a restricted  one-half royalty to                                                                    
the state, but  was restricted to certain  community use. He                                                                    
explained that  private land  allowed for a  gross tax  of 5                                                                    
percent  of  the  royalty.  He   stated  that  the  possibly                                                                    
development of  the Arctic National Wildlife  Reserve (ANWR)                                                                    
would allow  for 90  percent of  the federal  royalty, which                                                                    
was unrestricted and the best  overall scenario. He stressed                                                                    
that it  was important to  recognize that the state  did not                                                                    
always receive  the royalty, but the  credit obligation fell                                                                    
to the state,  anywhere in the state  where the expenditures                                                                    
Vice-Chair Micciche  would like  to provide  a comprehensive                                                                    
view. He remarked that there was  a reduction of the cost of                                                                    
oil transportation in  locations where there may  be a lower                                                                    
proportion  of  royalty.  He  announced  that  he  had  many                                                                    
questions, but would wait to ask them.                                                                                          
Co-Chair  MacKinnon urged  Vice-Chair  Micciche  to put  his                                                                    
questions into the record.                                                                                                      
Vice-Chair  Micciche   stated  that   he  would   email  his                                                                    
2:25:41 PM                                                                                                                    
Senator Bishop commented  that the whole problem  was not an                                                                    
issue  of the  mechanics  of  SB 21,  but  rather the  issue                                                                    
related  to  the price  of  oil.  Mr. Alper  concurred,  and                                                                    
thought  if  there were  flaws  in  the  tax system  it  was                                                                    
related to  not contemplating what  would occur at  very low                                                                    
prices in the tax system.                                                                                                       
Senator Hoffman  wondered if  the administration  planned to                                                                    
address the  problem of "stackable  credits" in  the future.                                                                    
He  understood  that  those  credits  would  be  approaching                                                                    
almost $2  billion. He queried the  administration's plan to                                                                    
address those credits. He remarked  that the increase in oil                                                                    
price  would be  used to  fund  government, and  not to  pay                                                                    
credits.  Commissioner  Hoffbeck   agreed  to  provide  that                                                                    
information.  He  shared that  looking  beyond  a couple  of                                                                    
years  adjusted   the  forecast  on  credits,   because  the                                                                    
industry  plans  were  unknown.   He  agreed  to  provide  a                                                                    
forecast based on  the Revenue Sources Book.  He shared that                                                                    
the  appropriation  level  determined  the  availability  of                                                                    
funds to pay the credit.                                                                                                        
Senator  Hoffman  wondered  whether the  administration  was                                                                    
concerned about  the unpaid credits reaching  $2 billion. He                                                                    
specifically  asked if  the level  of unpaid  credits was  a                                                                    
concern, and  how those credits would  be paid. Commissioner                                                                    
Hoffbeck  stated  that the  backlog  of  credits was  a  big                                                                    
concern  of the  state.  He remarked  that  there were  also                                                                    
discussions regarding  the credit  payment limits  per year,                                                                    
which result in greater numbers of unpaid credits.                                                                              
Co-Chair  MacKinnon   stressed  that  the   legislature  had                                                                    
approved  more credits  to be  paid, but  the administration                                                                    
vetoed  those approval.  She  disagreed  with the  assertion                                                                    
that the legislature  did not fund the  credits, because the                                                                    
state owed $400  million more that would have  been paid and                                                                    
off the books.                                                                                                                  
Senator Dunleavy  thanked Mr.  Alper for  comments regarding                                                                    
the  unknown  oil  price  decrease.  He  stressed  that  the                                                                    
conversations around  SB 21 often focused  on the assumption                                                                    
that  the oil  price would  continue  to climb  to $140  per                                                                    
barrel.  He  wondered if  oil  production  was predicted  to                                                                    
increase   in  the   coming   year.  Commissioner   Hoffbeck                                                                    
responded in  the affirmative. He stated  that the following                                                                    
two years showed slight "uptick"  in production, and then it                                                                    
was predicted to fall after that.                                                                                               
2:30:24 PM                                                                                                                    
Co-Chair  MacKinnon  had  heard a  request  from  Vice-Chair                                                                    
Micciche and Senator Hoffman to  show consistent date ranges                                                                    
portrayed  in  the  slides.  She  looked  at  slide  2,  and                                                                    
wondered if there would be  a representation of 2007 to 2015                                                                    
credit pay out.  She looked at slide 3, and  noted a request                                                                    
to match  the same dates to  update it to 2007  to 2015. She                                                                    
also asked  for the same details  for slide 4 as  related to                                                                    
the stackable  credits. She wondered  if that was  a correct                                                                    
request  from Senator  Hoffman. Senator  Hoffman replied  in                                                                    
the affirmative.                                                                                                                
Co-Chair   MacKinnon  queried   a   list   of  the   current                                                                    
applications  for credit.  She also  wondered how  many were                                                                    
based  on the  vetoes, and  reiterated that  the legislature                                                                    
had approved payment of the  credits. She looked at slide 8,                                                                    
and noted the  indication that both bodies had  a $250,000 a                                                                    
surety bond  that was based  on paying Alaskans as  a result                                                                    
of   a   company's   behavior.   She   recalled   that   the                                                                    
administration  rationale  for  the veto  by  ensuring  that                                                                    
Alaskan's  debt was  paid first.  She queried  language that                                                                    
was  not  available as  inclusion  in  the bill.  Mr.  Alper                                                                    
stated that currently the state  could withhold a credit, if                                                                    
a company  owed taxes. He  furthered that the  bill expanded                                                                    
that  law  by stating  that  the  state could  withhold  the                                                                    
credit,  if the  company  owed a  royalty  or other  non-tax                                                                    
obligation. He felt  that it was a  technical provision that                                                                    
had  survived  in  a  modified   form  through  the  various                                                                    
versions of the bill.                                                                                                           
Co-Chair  MacKinnon felt  that the  provision should  not be                                                                    
considered  "technical",  because  companies  went  bankrupt                                                                    
from that impact.                                                                                                               
Co-Chair  Kelly recalled  a  presentation  that stated  that                                                                    
losing 8 to 10 percent of  production would result in a loss                                                                    
of  more royalties  that  the state  could  ever recover  by                                                                    
scaling  back the  tax credits.  He queried  an analysis  on                                                                    
that issue. Commissioner Hoffbeck replied in the negative.                                                                      
Co-Chair Kelly felt that the  state may lose royalty, if the                                                                    
state  was not  careful  in adjusting  the  tax credits.  He                                                                    
stressed  that  the  tax credits  were  created  to  enhance                                                                    
production. He queried  an estimate of the  gains and losses                                                                    
in  revenue  as related  to  the  tax credits.  Commissioner                                                                    
Hoffbeck  replied  that  there   was  a  difficulty  in  the                                                                    
analysis, because  there could  be a delay  as related  to a                                                                    
price increase and eventual oil production.                                                                                     
Co-Chair Kelly  stated that the  state had adjusted  its tax                                                                    
policy frequently, so the state  could adjust to price hikes                                                                    
and reductions based on his observation.                                                                                        
Co-Chair  MacKinnon asked  for  an analysis  to examine  the                                                                    
interplay of the tax credits.                                                                                                   
Co-Chair MacKinnon thanked the finance committee staff.                                                                         
2:36:00 PM                                                                                                                    
AT EASE                                                                                                                         
2:36:46 PM                                                                                                                    
Co-Chair Kelly asserted that Prudhoe  Bay was reducing three                                                                    
Senator Bishop offered to share the rig counts.                                                                                 
Co-Chair Kelly wondered if the  rig reductions were factored                                                                    
into the  future tax credits  and revenue. Mr.  Alper stated                                                                    
that the BP announcement had  been factored in to the spring                                                                    
revenue forecast,  and the others  were not included  in the                                                                    
Co-Chair Kelly queried any other  rig reductions. He thought                                                                    
ConocoPhillips had plans to reduce rigs.                                                                                        
Vice-Chair  Micciche remarked  that the  committee took  its                                                                    
time  in evaluating  SB 21.  He  wanted to  ensure that  the                                                                    
administration  kept resources  available. He  stressed that                                                                    
the discussion  related to many different  types of revenue.                                                                    
He wanted  to understand the  impacts of the changes  to the                                                                    
oil and gas  tax policy across the entire state.  He did not                                                                    
want  to make  any  hasty  decisions, and  result  in a  net                                                                    
negative to the state in the long run.                                                                                          
Co-Chair  Kelly did  not  think  ConocoPhillips was  "laying                                                                    
down a rig" rather they  stated that they were spending $400                                                                    
million less year to year.                                                                                                      
2:39:34 PM                                                                                                                    
AT EASE                                                                                                                         
2:44:05 PM                                                                                                                    
2:45:03 PM                                                                                                                    
KARA  MORIARTY,  PRESIDENT   AND  CHIEF  EXECUTIVE  OFFICER,                                                                    
ALASKA OIL  AND GAS  ASSOCIATION, stated  that AOGA  was the                                                                    
professional  trade   association  for   the  oil   and  gas                                                                    
industry. She  stressed that  her testimony  represented the                                                                    
thoughts  and sentiments  of each  member of  AOGA; and  the                                                                    
testimony was approved by  unanimous consent. She understood                                                                    
that  the legislature  faced a  tremendous challenge  in the                                                                    
economic times. She  stressed that the oil  and gas industry                                                                    
was  facing  similar challenges  such  as  loss of  revenue;                                                                    
budget  cuts;  and  employee layoffs.  She  noted  that  the                                                                    
legislature was asked for the  sixth time in eleven years to                                                                    
examine  and change  oil tax  policy. She  remarked that  no                                                                    
other  industry had  faced  so many  changes  to its  fiscal                                                                    
structure  in Alaska.  She  added that  there  was no  other                                                                    
jurisdiction in  the world that had  considered changing oil                                                                    
tax policy more  than Alaska. She felt that  the only reason                                                                    
that  the  tax policy  change  was  under consideration  was                                                                    
because of  oil prices.  The administration had  shared with                                                                    
AOGA that  the bill would  not have been introduced,  if the                                                                    
state did  not need  more money  to operate  the government.                                                                    
She stressed that  SB 130 did more than  reform credits. She                                                                    
asserted that  the bill increased  taxes on the  industry to                                                                    
generate  more money  for state  services; and  it redefined                                                                    
oil and gas taxes.                                                                                                              
Ms.  Moriarty  discussed  the presentation  "Senate  Finance                                                                    
Committee," (copy  on file). She displayed  slide 2, "Policy                                                                    
Questions for SB 130":                                                                                                          
        · What effect will the policy have on overall oil                                                                       
          and gas production in the state?                                                                                      
        · Will the policy make Alaska more or less                                                                              
          competitive 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                                                                             
Ms. Moriarty moved  to slide 3, "Alaska  has MORE production                                                                    
-  FIRST  time   since  2002,"  which  showed   a  graph  of                                                                    
historical and forecasted TAPS  throughput. She stated that,                                                                    
in  August 2014,  voters decided  that  the state's  current                                                                    
fiscal  policy was  good for  Alaska, and  AOGA agreed.  She                                                                    
stated  that the  oil and  gas industry  had announced  more                                                                    
than $5  billion of additional spending  across Alaska since                                                                    
April 2013.  The increased spending could  not have occurred                                                                    
at  a better  time, because  no  one knew  that prices  were                                                                    
going  to crash.  She stressed  that  those investments  had                                                                    
helped  the  industry  sustain  itself.  She  asserted  that                                                                    
Alaskans and  the state  as a whole  were better  because of                                                                    
those investments, as everyone  was attempting the low price                                                                    
environment.    She    understood   that    stability    and                                                                    
predictability  in any  business setting,  but more  oil and                                                                    
gas production  was the ultimate objective  for Alaskans and                                                                    
its oil and  gas industry. She announced that  for the first                                                                    
time  since  2002,  there was  a  production  increase.  She                                                                    
stated  that from  March 2015  to  March 2016  there was  an                                                                    
increase of  just over  4000 barrels a  day, which  was just                                                                    
under a 1 percent increase.  She also looked at the outlying                                                                    
years. She  stated that the  slide showed a chart  which was                                                                    
the  fall  forecast  from  2013,   and  the  current  spring                                                                    
forecast of 2016.  She noted that the industry  was on track                                                                    
to have production at around  520,000 barrels per day by the                                                                    
end  of the  fiscal year,  which was  an increase  of almost                                                                    
33,000  barrels over  the projection  from 2.5  years prior.                                                                    
She noted the 2013 fall  forecast showed the 2023 projection                                                                    
was around 400,000 barrels per  day. She remarked that, even                                                                    
in the  current low  price environment,  there was  a higher                                                                    
production  forecasted by  almost more  than 50,000  barrels                                                                    
per day in five years. She was  puzzled as to why she had to                                                                    
explain why  increased production  was positive  for Alaska.                                                                    
She shared  that some  people had  suggested that  the state                                                                    
was not  receiving value for its  oil, so it did  not matter                                                                    
that there  was increased production. She  wanted to explain                                                                    
how the  current tax structure  was generating  more revenue                                                                    
for the state, even in the low price environment.                                                                               
2:50:27 PM                                                                                                                    
Ms.  Moriarty   turned  to   slide  4,   "Hilcorp's  Monopod                                                                    
     January 2012                                                                                                               
     • Price: $95/barrel                                                                                                        
     • Production: 600 bpd                                                                                                      
     • Royalty to State: $90,000/month                                                                                          
     Today, April 2016                                                                                                          
     • Price: $35/barrel                                                                                                        
     • Production: 3,000 bpd                                                                                                    
     • Royalty to State: $500,000/month                                                                                         
     • Added 20+ years production life & 8 million barrels                                                                      
     of future production                                                                                                       
     Since Hilcorp's entrance in 2012:                                                                                          
     • Oil production doubled                                                                                                   
     • Oil royalty increased $70 million                                                                                        
Ms.  Moriarty discussed  slide 5,  "Importing foreign  crude                                                                    
for  Alaska refineries."  She remarked  that the  Cook Inlet                                                                    
Recovery Act  only focused on  gas, and the benefit  was not                                                                    
supposed to be  for oil fields. She remarked  that there was                                                                    
a value  added benefit to  increased production in  the Cook                                                                    
Inlet. She shared that the  slide was from a presentation by                                                                    
Tesoro in  2009 for  an AOGA legislative  education seminar.                                                                    
She  stated that,  in  2009, Cook  Inlet  production was  at                                                                    
"rock  bottom."  The  slide  illustrated  where  Tesoro  was                                                                    
importing oil in  2009. At that time,  Cook Inlet production                                                                    
was so low, and North  Slope Crude was not always available.                                                                    
She  shared that  Tesoro had  operated the  refinery on  the                                                                    
peninsula since  the 1960s. She  stressed that,  without the                                                                    
increase in oil production, Tesoro  would need to once again                                                                    
look outside Alaska  for oil to refine to meet  the needs of                                                                    
Alaska's   transportation   and  construction   needs.   She                                                                    
stressed that  the imported oil would  invariably cost more,                                                                    
because of transportation costs,  which would cause Alaskans                                                                    
to pay more for the Tesoro products.                                                                                            
Ms. Moriarty  showed slide 6,  "Low oil prices  taking their                                                                    
toll on jobs." She understood  the significance of the 85 to                                                                    
90 percent of the state  revenue from oil, she stressed that                                                                    
the  oil  and  gas  industry received  100  percent  of  its                                                                    
revenue based on  the market price of what  it produces. She                                                                    
asserted that the industry was  a "price taker" not a "price                                                                    
taker."  She  stated that  the  low  prices had  caused  the                                                                    
industry to be cash-flow negative.                                                                                              
Ms. Moriarty moved to slide  7, "At current prices, industry                                                                    
has negative cash flow before tax":                                                                                             
     Estimate Average March 2016 ANS Price     $38.11                                                                           
          Transportation Costs                      ($10.50)                                                                    
          Total Operating Expenditures              ($19.47)                                                                    
          Total Capital Expenditures                ($19.97)                                                                    
     Total Average Cost Per Barrel Before Tax ($49.94)                                                                          
2:56:20 PM                                                                                                                    
Ms. Moriarty showed slide 8, "CS Avoids Making Regressive                                                                       
System Even More So":                                                                                                           
     State of Alaska making negative production tax in                                                                          
     today's prices; but overall government take is still                                                                       
     Floor hardening of original bill shifts up government                                                                      
     take in lower oil prices                                                                                                   
     In times of high investment/low prices (as in 2016),                                                                       
     effective government take exceeds 100 percent.                                                                             
2:56:44 PM                                                                                                                    
Ms. Moriarty discussed slide 9, "Specific Concerns with CS                                                                      
for SB 130":                                                                                                                    
     Nuclear Bomb for Cook Inlet                                                                                                
     GVR Limits/Elimination = Lost value for projects                                                                           
     Changing Value of GVR/NOL                                                                                                  
     Set limits on credits-discouraging investments by                                                                          
     smaller company                                                                                                            
     Interest rates increase significantly                                                                                      
     Retroactivity provisions                                                                                                   
     Alaska Hire provisions                                                                                                     
Ms. Moriarty moved to slide 10, "Concerning provisions not                                                                      
in CS":                                                                                                                         
     Raising the minimum tax by at least 25 percent for                                                                         
     "Hardening" the floor                                                                                                      
     Confidentiality protections jeopardized                                                                                    
     Disguised tax increase through the change of the                                                                           
     application of Gross Value at the Point of Production                                                                      
Ms.  Moriarty showed  slide 11,  "Policy Changes  = Economic                                                                    
     AOGA is not asking for assistance from the state of                                                                        
     Alaska in this downturn, but does ask for careful                                                                          
     consideration of any policy changes.                                                                                       
     In this price environment, any change will have a                                                                          
     negative impact on industry and will result in                                                                             
     Alaskans losing jobs, less production, and less long-                                                                      
     term revenues for the state.                                                                                               
3:00:35 PM                                                                                                                    
Co-Chair Kelly referred to slide  3, but noticed that he was                                                                    
referencing the incorrect slide.                                                                                                
Vice-Chair Micciche  queried further detail on  slide 7. Ms.                                                                    
Moriarty agreed to provide further information.                                                                                 
Co-Chair Kelly  referred to slide  3, and surmised  that the                                                                    
fall forecast  was before a  change. Ms.  Moriarty explained                                                                    
that  the fall  forecast in  2013 was  created in  December,                                                                    
which was after the legislature had adopted SB 21.                                                                              
Co-Chair Kelly stated  that the bill in question  was not SB
21,  but  pointed  out  that  there  was  legislation  which                                                                    
changed how the production  estimates were viewed. He stated                                                                    
that  the  legislation  reverted   to  a  more  conservative                                                                    
production   estimate.   He   pointed   out   that   without                                                                    
normalizing,   there  may   be   an   "apples  to   oranges"                                                                    
comparison. Ms. Moriarty stated  that AOGA needed to utilize                                                                    
the public data  provided by DOR. Therefore, if  there was a                                                                    
change to the methodology, AOGA  would have no way to change                                                                    
the estimates.                                                                                                                  
Co-Chair Kelly asserted that the  estimates on the slide may                                                                    
have been normalized.                                                                                                           
Co-Chair MacKinnon  pointed out  that Mr. Alper  was nodding                                                                    
in the affirmative. She asked for further explanation.                                                                          
Co-Chair Kelly  wondered if  the estimates  were normalized.                                                                    
Mr. Alper stated that the  department had transistioned to a                                                                    
different  method of  forecasting, in  which they  applied a                                                                    
risk factor and probabilities.                                                                                                  
Senator Bishop asked if Mr.  Alper agreed with the change in                                                                    
methodology for accounting barrels of oil.                                                                                      
Mr.  Alper agreed  that  the risk  factors  made sense,  but                                                                    
there  were  some "hitches"  in  the  formula that  DOR  was                                                                    
looking to adjust going forward.                                                                                                
Senator Bishop noted that there  were some who had disagreed                                                                    
with the methodology changes.                                                                                                   
Co-Chair Kelly remarked the numbers  were normalized and the                                                                    
2013  numbers  were  more  conservative  compared  with  the                                                                    
current numbers.                                                                                                                
Co-Chair  MacKinnon shared  that  Co-Chair Kelly's  comments                                                                    
were directed at slide 3 of the presentation.                                                                                   
3:05:18 PM                                                                                                                    
AT EASE                                                                                                                         
3:06:48 PM                                                                                                                    
DAN SECKERS, TAX  COUNSEL, EXXONMOBIL CORPORATION, expressed                                                                    
concern  about  the  bill.  He stated  that  Alaska  was  an                                                                    
important  part  of  ExxonMobil's  worldwide  portfolio.  He                                                                    
announced  that  ExxonMobil  understood  the  difficulty  in                                                                    
attempting  to address  the  current  budget concerns  while                                                                    
maintaining  Alaska  as  a   competitive  place  to  conduct                                                                    
business. He felt that  tax decisions fundamentally impacted                                                                    
the economic  health of  the state,  and the  companies that                                                                    
conduct  business in  the state.  He stressed  that the  tax                                                                    
policy  decisions would  either move  Alaska toward  or away                                                                    
from its  vision of  long-term oil  and gas  development. He                                                                    
stated  that   maintaining  a  stable   fiscally  attractive                                                                    
environment  was possibly  the most  important issue  to the                                                                    
legislature. He  questioned whether increasing taxes  on the                                                                    
oil and gas industry at a  time when DOR had proven that the                                                                    
companies  were  losing   money  and  recording  significant                                                                    
losses  was consistent  with the  state's vision  and belief                                                                    
that there  would be more investment,  jobs, production, and                                                                    
long-term state revenues.                                                                                                       
Mr.  Seckers  thought the  CS  was  improved from  what  was                                                                    
originally introduced  by the governor. He  stated that AOGA                                                                    
endorsed Ms.  Moriarty's testimony.  Although the CS  was an                                                                    
improvement  from  the  original   version,  but  was  still                                                                    
extremely  troubling.  He  echoed Ms.  Moriarty's  assertion                                                                    
that the  CS represented another significant  examination of                                                                    
the tax  policy, which added  uncertainty to  the companies.                                                                    
He  felt  that  continued  changes led  to  instability  and                                                                    
investment  concerns. He  stated that  the tax  changes also                                                                    
increased the  interest rate. He  remarked that  the concept                                                                    
in  the CS  of increasing  the  interest to  7 percent  plus                                                                    
prime, and then stopping the  increase after three years was                                                                    
an  interesting concept.  He argued  that  the concept  only                                                                    
addressed  the symptom,  but not  the  problem. He  asserted                                                                    
that the problem was long length  of time of the DOR audits.                                                                    
He shared  that ExxonMobil  received its 2009  assessment on                                                                    
March 31, 2016, which was six  years after the filing of the                                                                    
return. He did  not believe that the bill  would move Alaska                                                                    
into   increasing   its   overall  investment   climate   or                                                                    
increasing jobs.  He announced  that ExxonMobil  opposed the                                                                    
committee substitute. He  explained that the CS  was only an                                                                    
improvement from  the original  version, because  it removed                                                                    
some  punitive sections:  1. Hardening  of  the minimum  tax                                                                    
floor. He  felt that  it was  a critical  piece of  the bill                                                                    
that  was removed.  He explained  that preventing  companies                                                                    
from realizing  the true economics of  their investments, by                                                                    
preventing critical  tax credits  from being used  to offset                                                                    
the  minimum tax  would have  represented  an immediate  and                                                                    
significant   tax  increase;   and   would  have   penalized                                                                    
companies  who  made prior  year  investments  and who  were                                                                    
considering  current  year  investments  from  making  those                                                                    
investments,  because the  economics  would  be damaged.  He                                                                    
stressed that  the large  or small  companies, who  may have                                                                    
new oil  tax credits,  small producer  credits, or  tax loss                                                                    
credits would  not be able to  use those credits in  the low                                                                    
price environment.                                                                                                              
3:11:17 PM                                                                                                                    
Mr.  Seckers felt  that  the  CS was  also  improved by  the                                                                    
removal of  the increase  of the  overall 25  percent, which                                                                    
was a significant tax on  gross revenues. He highlighted the                                                                    
change of the  substantive law in determining  how the gross                                                                    
value at  the point  of production  would be  determined. Hs                                                                    
remarked that, under  the original bill, the  gross value at                                                                    
the point of  production would have been  changed to reflect                                                                    
that it  could not  fall below zero.  He explained  that the                                                                    
production tax was  not a unit-by-unit tax, rather  it was a                                                                    
segment-by-segment tax:  Cook Inlet,  Middle Earth,  and the                                                                    
North  Slope. He  shared  that the  gross  value only  falls                                                                    
below zero because of the  decrease in price; and the marine                                                                    
transportation   and   pipeline   costs.  He   shared   that                                                                    
disallowing the  recovery of those  costs was  a substantive                                                                    
change in  the law and  an immediate tax increase  for those                                                                    
fields  affected.  He  stressed  that it  would  change  the                                                                    
economics of the  small fields. He addressed  the problem of                                                                    
"sliding"  credits month  to month.  He  disagreed with  the                                                                    
assertion  that it  would only  impact  the monthly  sliding                                                                    
scale tax for legacy fields.  He explained that the proposal                                                                    
would have affected  every tax credit. He  stressed that the                                                                    
tax was an annual tax, which  was a collection of the twelve                                                                    
estimates.  He felt  that, disallowing  credits  to be  used                                                                    
against  another   month  required  perfect   estimates.  He                                                                    
remarked that the law required  the use of annualized costs,                                                                    
so  there  were  no  actuals  at the  time  of  the  monthly                                                                    
3:14:42 PM                                                                                                                    
Mr.  Seckers  addressed  the issue  of  confidentiality.  He                                                                    
remarked   that    ExxonMobil   was   partners    with   BP,                                                                    
ConocoPhillips, and other companies  on the North Slope; but                                                                    
ExxonMobil also  remained competitors with  those companies.                                                                    
He stressed that ExxonMobil was  bound by federal law not to                                                                    
discuss or  disclose certain information;  and it  was bound                                                                    
by  its shareholders  not to  disclose or  discuss sensitive                                                                    
proprietary  information. He  stressed  that making  certain                                                                    
information  public was  damaging  to  companies, took  away                                                                    
competitive  advantages, and  was  unlawful. He  appreciated                                                                    
that  the  confidentiality  provision  was  removed  in  the                                                                    
current CS.  He restated  that the committee  substitute was                                                                    
an  improvement from  the  original bill,  but  was still  a                                                                    
concerning  piece  for  industry   in  the  Cook  Inlet.  He                                                                    
stressed   that  reintroducing   any   of  his   highlighted                                                                    
provisions  would   dramatically  reduce   Alaska's  overall                                                                    
global  competitiveness by  raising taxes  on companies.  He                                                                    
asserted  that the  legislation  was not  an  income tax  or                                                                    
property tax  bill. He stressed  that the legislation  was a                                                                    
production   tax  bill.   He   announced  that,   currently,                                                                    
producing  a  barrel  of  oil  on  the  North  Slope  caused                                                                    
ExxonMobil to  lose money. He  wondered if  taxing companies                                                                    
on an  activity that was  currently losing money was  in the                                                                    
long-term best interest of the state.                                                                                           
Chair Kelly  queried the impact  of hardening of  the floor,                                                                    
and how  the net operating  loss (NOL) related to  the floor                                                                    
hardening. Mr.  Seckers replied that  no one wanted  an NOL,                                                                    
because no company wanted to  invest money to lose money. He                                                                    
stressed that  the NOL was only  a loss. He stated  that the                                                                    
production tax was akin to  an income tax. He explained that                                                                    
the concept was to equate  or balance revenues and expenses.                                                                    
He stated that, under the  law, instead of carrying the loss                                                                    
forward, it automatically converted  to equal credit and was                                                                    
carried  forward.  The  companies  use it  to  fund  current                                                                    
3:20:14 PM                                                                                                                    
Co-Chair Kelly  requested an analysis  regarding substantive                                                                    
law.  Mr.  Seckers  mentioned substantive  changes  in  law,                                                                    
including  the  migration  of credits  back  and  forth.  He                                                                    
explained  that a  carried forward  credit would  be denied,                                                                    
because a company  may not be able to  appropriate number of                                                                    
credits. He  stated that another substantive  change was the                                                                    
gross value at  the point of production.  He explained that,                                                                    
under current law, the company  filed a segment consolidated                                                                    
return.  He did  not  feel that  the  change encouraged  the                                                                    
small field development.                                                                                                        
Co-Chair MacKinnon  remarked that  the presenters  had taken                                                                    
more than their allotted time.                                                                                                  
Senator Bishop  thought a low-priced environment  tested the                                                                    
quality of a partnership.                                                                                                       
Co-Chair  MacKinnon  stressed  that the  remaining  speakers                                                                    
would be given 10 minutes each.                                                                                                 
3:23:34 PM                                                                                                                    
J. PATRICK FOLEY, SENIOR  VICE PRESIDENT, ALASKA OPERATIONS,                                                                    
CAELUS, discussed  the presentation  "Senate Finance  SB 130                                                                    
Testimony," (copy on file).                                                                                                     
Mr.  Foley discussed  slide 2,  "Caelus  Energy Alaska:  Key                                                                    
Facts and Information":                                                                                                         
     Privately-held E&P company focused exclusively on                                                                          
     Alaska's NS                                                                                                                
     $2Bn capital investment in Alaska since 2002                                                                               
     Less $300MM 2016 capital budget                                                                                            
     Total Alaska workforce is equivalent to over 600 full-                                                                     
     time positions                                                                                                             
          Less 70 full-time Alaska employees                                                                                    
          Nearly 400 contractors on the North Slope today                                                                       
     Operational Highlights & Accomplishments:                                                                                  
          23MMBO gross cumulative production since 2008                                                                         
          4MMBO gross annual production 2015                                                                                    
          2015 best safety record, 0.65 OSHA recordable                                                                         
          injury rate                                                                                                           
          Longest Oooguruk well length to date: 23,209'MD                                                                       
          (ODS N-7i)                                                                                                            
     Direct Financial Benefits to the State:                                                                                    
          $67 MM paid in royalties to the State of Alaska                                                                       
          $60 MM paid to the State of Alaska / NSB in                                                                           
          property taxes                                                                                                        
     Proven and Potential Reserves:                                                                                             
          less than 85 MMBO remaining at ODS                                                                                    
          less than100 MMBO remaining at Nuna                                                                                   
     350,000 undeveloped State of Alaska leases on the                                                                          
     North Slope                                                                                                                
Mr. Foley  moved to  slide 3,  "North Slope  Exploration and                                                                    
Development Program,"  which showed  a map  depicting Caelus                                                                    
projects  on the  North  Slope. He  stated  that Caelus  had                                                                    
drilled  two  exploration wells  in  Smith  Bay. Caelus  had                                                                    
spent over $100  million on the wells in Smith  Bay, and was                                                                    
encouraged by the  results caused by those  wells, and hoped                                                                    
to  be back  the following  year with  more delineation.  He                                                                    
stated  that  the  program  earned   both  NOL  credits  and                                                                    
exploration  incentive credits.  He  stressed that,  without                                                                    
the  credits, the  wells  would not  have  been drilled.  He                                                                    
furthered that the Oooguruk Unit  was the cornerstone of his                                                                    
business, which  produced nearly 20,000 barrels  per day. He                                                                    
stated that Caelus  had recently been forced to  put the rig                                                                    
on standby. He stated that  Nuna was currently on hold until                                                                    
prices recover.  He stated that  Caelus also had a  block of                                                                    
exploration  leases in  the eastern  North Slope,  which was                                                                    
approximately  350,000 acres.  He stressed  that Caelus  was                                                                    
struggling to  survive in the current  price environment. He                                                                    
remarked  that Caelus  had been  operating in  the state  in                                                                    
2002, and had yet to make a profit.                                                                                             
3:28:17 PM                                                                                                                    
Mr.  Foley  turned  to  slide   4,  "Alaska:  An  Attractive                                                                    
Investment Opportunity?":                                                                                                       
     World Class Resources? Yes                                                                                                 
     Access to Substantial Leasehold of Interest? Yes                                                                           
     Access to G&G Data and Information - Yes                                                                                   
     Expert Contractor Community? Yes                                                                                           
     Hospitable Regulatory Environment? Yes                                                                                     
     Access to Existing Infrastructure? Yes                                                                                     
     Favorable Logistics? No - remote, harsh conditions,                                                                        
     seasonal limitations                                                                                                       
     Favorable Fiscal Regime? Yes, under SB21. No, under                                                                        
     proposed system changes                                                                                                    
     Stable Fiscal Regime? No, 5 significant changes in a                                                                       
     Lender and Equity Provider's Confidence?                                                                                   
          Historically low participation and experience                                                                         
          Confidence in stability is low                                                                                        
          Apollo has backed Caelus                                                                                              
          Other equity providers are "watching"                                                                                 
          Bank of America committed but spooked by change                                                                       
          ING backed out when changes began                                                                                     
         Wells Fargo disengaged when changes began                                                                              
Mr.  Foley  spoke to  slide  5,  "Alaska  Oil Tax  Policy  -                                                                    
Integrated  Tax  System."  He  stated  that  the  slide  was                                                                    
borrowed  from  enalytica. He  looked  at  the dashed  line,                                                                    
which  represented the  government take.  He explained  that                                                                    
the government take  was the percentage of  profits that the                                                                    
government received, and one-minus  government take was what                                                                    
the company  was entitled.  He noted that,  on the  far left                                                                    
side at  $40 per  barrel, there  was 100  percent government                                                                    
take. He  announced that the slide  represented "the beauty"                                                                    
of SB 21, and showed  an absolute flat 65 percent government                                                                    
take over  a very  broad range of  prices. He  believed that                                                                    
the past  tax policies  were created without  the assumption                                                                    
that prices would be so low.                                                                                                    
Mr. Foley  discussed slide 6,  "CS SB 130  (RES) AM /  CS HB
247 (FIN)am":                                                                                                                   
     Current Bill Provision(s)                                                                                                  
          CS SB 130 (RES) AM                                                                                                    
               LIMITS GVR to 5 years                                                                                            
               CAPS earned credits to $85 MM per company                                                                        
               Min Tax: No change from current law                                                                              
          CS HB 247 (FIN) AM                                                                                                    
               LIMITS GVR to 7 years                                                                                            
              CAPS earned credits to $100 MM                                                                                    
               NEW Alaska hire provision of 80 percent                                                                          
               HARD 2 percent floor                                                                                             
Mr. Foley moved to slide 7, "CS  SB 130 (RES) AM / CS HB 247                                                                    
(FIN) AM":                                                                                                                      
    5-year GVR limit has major impact on project value                                                                          
          Project is marginal at $60/bbl; elimination of                                                                        
         GVR can wipe out all value at that price                                                                               
          Because most tax liability occurs after end of                                                                        
          major spending, short GVR limit provides little                                                                       
          5-year GVR limit destroys over 60 percent of                                                                          
          project value at $60/bbl, relative to status quo                                                                      
          Impact of 10 year limit much lower; 15 year limit                                                                     
         preserves almost all of status quo value                                                                               
3:33:15 PM                                                                                                                    
Mr. Foley showed slide 8, "Nuna: A Project on the Bubble":                                                                      
     First oil Late 2018 IF Prices recover and confidence                                                                       
     in favorable / stable fiscal terms exist                                                                                   
          Caelus holds 100% interest                                                                                            
          100+ MMBO 2P reserves                                                                                                 
          20,000 to 25,000 BOPD peak production in 2021                                                                         
     Economically Benefits Alaska                                                                                               
          300 FTE contractor construction jobs for two                                                                          
          300 FTE contractor drilling jobs for 4 to 5 years                                                                     
          $1.75 Bn in future payments to the State of                                                                           
                    $900MM in future royalty payments*                                                                          
                    $500 MM in future NPSL payments*                                                                            
                    $250 MM in future production tax                                                                            
                    $100 MM in future Ad Valorem taxes                                                                          
          $250MM in future NOL cash payments from the State                                                                     
          of Alaska                                                                                                             
     *Values are undiscounted based upon a Flat $70/bbl                                                                         
     Brent Price Assumption                                                                                                     
Mr. Foley spoke to slide 9, "Closing thoughts":                                                                                 
     Alaska has Great Resource Potential                                                                                        
          Alaska needs more exploration & production                                                                            
          companies   to   fully   develop   its   petroleum                                                                    
          Caelus continues to be very optimistic on Alaska                                                                      
          SB 21 is a balanced system that is working for                                                                        
               10 - 15 years                                                                                                    
          Credit caps                                                                                                           
               Greater than $100 mm                                                                                             
          Minimum Tax Floors                                                                                                    
               Allow small producers to use credits against                                                                     
          Thoughtful policy considerations:                                                                                     
               Will policy increase production?                                                                                 
               Short- and Long-Term Vision                                                                                      
3:35:16 PM                                                                                                                    
Senator Bishop addressed slide 8,  and noted the concerns of                                                                    
the confidentiality  provisions in the bill.  He queried the                                                                    
number of  credits for the  project. Mr. Foley  relayed that                                                                    
the work  was done at  a $70  per barrel price.  He stressed                                                                    
that  it  was  not  the   current  price,  but  it  was  the                                                                    
environment required  to move the  type of  project forward.                                                                    
He  remarked that  the upfront  assistance  provided by  the                                                                    
state was  $250 million.  He furthered  that the  revenue to                                                                    
the state was $1.75 billion when the project moved forward                                                                      
Senator  Bishop  felt  that   the  general  public  did  not                                                                    
understand oil and gas tax  credits; and personally found it                                                                    
difficult   to  understand   the  analytical   portions.  He                                                                    
understood  the  desire  to  get  a  portion  of  over  $1.5                                                                    
billion.  Mr.  Foley replied  that  the  state's return  was                                                                    
nearly a six times multiple.                                                                                                    
Senator Bishop  remarked that  the state  should be  able to                                                                    
see the basic principles.                                                                                                       
Mr. Foley was  fearful that he was portrayed as  part of the                                                                    
problem, but he  believed that he was part  of the solution.                                                                    
He argued that  the state's short term  cost investment, but                                                                    
would  help  to  set  up  a future  of  jobs,  royalty,  and                                                                    
production  taxes that  would  be six  times  more than  the                                                                    
value of the credits.                                                                                                           
Co-Chair  MacKinnon wondered  if Caelus  has reduced  costs.                                                                    
Mr.  Foley  replied that  the  company  had eliminated  some                                                                    
staff,  which  had  eliminated  the  general  administrative                                                                    
costs by approximately 25 percent.  He furthered that Caelus                                                                    
had also reduced capital. The  capital that was intended for                                                                    
spending in 2016 had been reduced by nearly one-third.                                                                          
3:39:36 PM                                                                                                                    
JOE  REESE, ALASKA  TAX  MANAGER,  BP (via  teleconference),                                                                    
supported  the testimony  provided  by AOGA  earlier in  the                                                                    
meeting. The success of Alaska's  oil and gas tax policy was                                                                    
critical to BP, the AKLNG  project, and to the many Alaskans                                                                    
who  benefit directly  and  indirectly  from the  successful                                                                    
exploration,  development, and  production  of Alaska's  oil                                                                    
and  gas.  He  remarked  that a  durable,  predictable,  and                                                                    
administrable oil  and gas  tax policy must  be in  place to                                                                    
unlock the benefits. He shared BP  saw a durable policy as a                                                                    
tax policy that  was the same tomorrow and  today. He stated                                                                    
that  BP  saw  predictable  as the  ability  to  model  with                                                                    
reasonable  certainty  the outcome  of  the  tax policy.  He                                                                    
shared that BP saw administrable  as the ability to file the                                                                    
taxes and tax  returns in an accurate and  timely manner. He                                                                    
stressed  that  BP  was committed  to  maintaining  a  safe,                                                                    
compliant,  and sustainable  business  in  Alaska. He  noted                                                                    
that  in two  years,  there was  a 70  percent  drop in  oil                                                                    
price. He shared  that, in 2015, BP  paid approximately $263                                                                    
million  in  royalties  and  taxes,   which  resulted  in  a                                                                    
financial loss of $194 million.  He announced that under the                                                                    
current  market   conditions,  BP's  Alaskan   business  was                                                                    
spending more cash than it was  bringing in. As a result, BP                                                                    
had undertaken a 17 percent  reduction of workforce; and the                                                                    
Prudhoe Bay working centers had  reduced activity levels. He                                                                    
remarked that  Prudhoe Bay economics  were at a  point where                                                                    
tax increases  in the cost  structure would result  in lower                                                                    
activity  levels and  would be  detrimental  to its  Alaskan                                                                    
business.  He  shared  that  a 1  percent  increase  in  the                                                                    
minimum taxes  was equal  to approximately  6 months  of rig                                                                    
work  on Prudhoe  Bay. He  stressed that  operating under  a                                                                    
predictable,  durable, and  administrable  oil  and gas  tax                                                                    
policy was  essential to maintaining  the activity  level at                                                                    
Prudhoe Bay  and long-term viability  of the  AKLNG project.                                                                    
He  stressed that  BP was  committed to  complying with  tax                                                                    
laws  in  a reasonable  manner,  and  to  have an  open  and                                                                    
constructive relationship with tax policy makers.                                                                               
3:42:46 PM                                                                                                                    
Mr.  Reese stressed  that one  of  the major  costs to  BP's                                                                    
business in  Alaska was oil  production tax. He  shared that                                                                    
while BP  was currently  taxed for  negative, it  still paid                                                                    
oil  production  tax,  because  some  investments  were  not                                                                    
deductible  for  oil  production tax  purposes.  At  current                                                                    
prices,  Prudhoe  Bay did  not  attract  oil production  tax                                                                    
credits.  He  remarked  that,  while  Prudhoe  Bay  did  not                                                                    
currently  receive the  oil production  tax credits,  BP did                                                                    
not support limiting the production  tax credits provided in                                                                    
SB 21,  because it would  negatively impact the oil  and gas                                                                    
industry  as  a whole.  He  understood  that the  state  was                                                                    
facing  severe budget  shortfalls at  the same  time as  the                                                                    
industry was struggling to make  any profit. He did not feel                                                                    
that  it  was  not  the  time to  make  changes  that  would                                                                    
increase taxes  and further  inhibit the  industry's ability                                                                    
to maintain  its activity  level at  Prudhoe Bay.  The near-                                                                    
term changes to  the state's oil and gas  tax policies would                                                                    
have long-term consequences for everyone.                                                                                       
Mr. Reese  remarked that  four of six  of his  concerns with                                                                    
the  legislation were  removed in  the committee  substitute                                                                    
from the  Senate Resources  Committee. He  would acknowledge                                                                    
those  issues.  He  remarked  that  the  administration  had                                                                    
proposed an  increase to the  minimum tax, and BP  felt that                                                                    
it  was  a  25  percent   tax  increase  and  would  have  a                                                                    
"chilling"  effect  on  additional investment.  He  remarked                                                                    
that the  provision had been  removed in the current  CS. He                                                                    
shared  that the  administration had  imposed an  artificial                                                                    
limitation  on the  use of  credits within  a year,  and Mr.                                                                    
Seckers  had  addressed some  examples  with  the issue.  He                                                                    
acknowledged the provision's removal  in the CS. He stressed                                                                    
that  SB 130  was a  tax  increase, which  meant less  money                                                                    
available for investment.                                                                                                       
3:47:12 PM                                                                                                                    
DAVE  WILKINS,   SENIOR  VICE  PRESIDENT,   HILCORP  ENERGY,                                                                    
ANCHORAGE  (via teleconference),  agreed with  the testimony                                                                    
by  AOGA president,  Kara Moriarty.  He shared  that Hilcorp                                                                    
operated  in  both  Cook  Inlet  and  the  North  Slope.  He                                                                    
announced  that Hilcorp  had over  500 full-time  employees,                                                                    
and  over  90  percent   of  those  employees  were  Alaskan                                                                    
residents.  He stated  that  Hilcorp operated  approximately                                                                    
53,000 gross barrels  of oil per day, and  produced and sold                                                                    
150  million cubic  feet of  gross  gas sales  per day  from                                                                    
approximately 500 producing wells.  The total net production                                                                    
to   Hilcorp  of   approximately  57,000   barrels  of   oil                                                                    
equivalent   per  day.   Hilcorp's   overall  success   came                                                                    
primarily  from acquiring  and operating  older fields  with                                                                    
extensive production  histories; and steady  and predictable                                                                    
performance that  carry opportunity for retrieving  more oil                                                                    
and  gas out  of the  ground safely  and responsibly,  while                                                                    
extending  the   production  life  through   efficiency  and                                                                    
thousands of smaller scale projects.  He felt that the state                                                                    
needed to attract more companies  like Hilcorp as the fields                                                                    
and infrastructure  in Alaska continue  to age.  He asserted                                                                    
that    Hilcorp's   production    in   Alaska    represented                                                                    
approximately 40 percent of  what was produced company-wide,                                                                    
so the success  in Alaska was critical  to Hilcorp's overall                                                                    
3:58:56 PM                                                                                                                    
ED  KERR,  DIRECTOR,  ARMSTRONG OIL  AND  GAS,  DENVER  (via                                                                    
teleconference),   felt  that   the  discussion   should  be                                                                    
conducted  in  a  conversational   manner.  He  shared  that                                                                    
Armstrong Oil and Gas was  operational in Alaska since 2001,                                                                    
both  in the  North Slope  and  Cook Inlet.  He shared  that                                                                    
there  were various  developed  fields  that were  currently                                                                    
producing in Alaska.                                                                                                            
Mr. Kerr  felt that  SB 21 was  working. The  development by                                                                    
Armstrong provided  for 120,000 barrel per  day facility. In                                                                    
other   words,  Armstrong   anticipated  producing   120,000                                                                    
barrels of oil per day.  The result of that production would                                                                    
be jobs,  significant revenue to the  state, and significant                                                                    
revenue for the North Slope  Borough. He stressed that there                                                                    
was a  partnership with the  state to develop  the reserves.                                                                    
He  stressed  that  any  tax  policy  change  would  have  a                                                                    
profound  and long  lasting impact  beyond  what anyone  can                                                                    
contemplate. He  stressed that  keeping the  tax law  in its                                                                    
current  state  was  the  best   option.  He  remarked  that                                                                    
investment drives production,  and production drives revenue                                                                    
for  the entire  industry. He  understood that  everyone was                                                                    
affected by  the low  oil prices. He  felt that  leaving the                                                                    
tax  policy unchanged  would have  a greater  effect on  the                                                                    
state's revenue  interest than changing  the tax  policy. He                                                                    
stressed that the main focus should be on investment.                                                                           
4:05:13 PM                                                                                                                    
Mr. Kerr expressed  his desire to work  with the legislature                                                                    
to fix  the problem.  He noted that  currently there  was no                                                                    
focus on  the small producer credit  and exploration credit.                                                                    
He remarked  that the  current leases  had a  higher royalty                                                                    
than the  legacy leases,  so that  was already  an increased                                                                    
revenue stream for  the state, but was an  impediment on his                                                                    
company.  He  shared  that  there were  limits  on  the  NOL                                                                    
credits  that could  be purchased.  He  noted the  interplay                                                                    
between the  GVR and  NOLs, and  the sunset  of the  GVR. He                                                                    
stressed  that  should  that state  keep  a  consistent  tax                                                                    
policy in the form of SB 21, everyone would benefit.                                                                            
4:12:33 PM                                                                                                                    
PETE  STOKES, PRESIDENT,  ALASKA SUPPORT  INDUSTRY ALLIANCE,                                                                    
ANCHORAGE  (via teleconference),  shared  that the  alliance                                                                    
had  600   member  companies   that  employed   over  30,000                                                                    
Alaskans, but had recently declined  due to the layoffs as a                                                                    
result of the  low price of oil. He opposed  both SB 130 and                                                                    
HB 247, because it would  result in decreased investment and                                                                    
decreased future  production from the industry.  He stressed                                                                    
that there were many questions  to industry about what could                                                                    
be weathered  in a tax  increase. He  felt that the  type of                                                                    
question  reflected a  goal to  raise  revenue, rather  than                                                                    
maintain a  tax policy that incentivized  investment to lead                                                                    
to  increases in  production and  provided a  steady revenue                                                                    
stream to the state for a long period of time.                                                                                  
Co-Chair  MacKinnon appreciated  the  responsiveness of  the                                                                    
testifiers. She discussed the following meeting's agenda.                                                                       
SB  130  was  HEARD  and   HELD  in  committee  for  further                                                                    

Document Name Date/Time Subjects
HB 247 CSSB130-Updated Comparison Chart-DOR Tax Div-4-12-2016.pdf SFIN 4/13/2016 1:30:00 PM
HB 247
SB 130
HB 247FIN-Fiscal Analysis-DOR-4-12-2016.pdf SFIN 4/13/2016 1:30:00 PM
HB 247
SB 130 AOGA Presentation SFIN 04 13 16 FINAL.pdf SFIN 4/13/2016 1:30:00 PM
SB 130
SB 130 BlueCrest Senate Finance Testimony Slides 04-13-2016.pdf SFIN 4/13/2016 1:30:00 PM
SB 130
SB 130 comment - Oil Production Tax Credits - Hanson.pdf SFIN 4/13/2016 1:30:00 PM
SB 130
SB 130 CSSB130-Updated Comparison Chart-DOR Tax Div-4-12-2016.pdf SFIN 4/13/2016 1:30:00 PM
SB 130
SB 130RES -Fiscal Analysis-DOR- 4-12-16.pdf SFIN 4/13/2016 1:30:00 PM
SB 130
SB130 DOR Overview for SFIN 4-13-16.pdf SFIN 4/13/2016 1:30:00 PM
SB 130
SB 130 CAELUS Presentation Sen Finance Apr 13.pdf SFIN 4/13/2016 1:30:00 PM
SB 130