Legislature(2015 - 2016)BUTROVICH 205

04/04/2016 03:30 PM RESOURCES

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03:30:17 PM Start
03:31:29 PM SB130
03:32:30 PM Continuation of Enalytica Overview of Alaska's Oil and Gas Tax System
04:16:05 PM Continuation of Dor Overview of Alaska Oil and Gas Tax Reform
05:35:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Pending Referral>
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
        [Contains discussion of companion bill HB 247.]                                                                       
3:31:29 PM                                                                                                                    
CHAIR  GIESSEL   announced  consideration  of  SB   130  and  the                                                               
continuation of enalytica's overview of  Alaska's oil and gas tax                                                               
regime that started on Saturday.                                                                                                
^Continuation of enalytica  overview of Alaska's oil  and gas tax                                                               
3:32:30 PM                                                                                                                    
JANAK   MAYER,   Chairman   &  Chief   Technologist,   enalytica,                                                               
Washington,   D.C.,  said   he   would   recap  the   substantial                                                               
differences between the  North Slope and Cook  Inlet revenues and                                                               
credits.  The credits  for the  North Slope  are integral  to the                                                               
overall  tax  system and  only  two  credits are  remaining:  the                                                               
dollar-per-barrel credit and the  net operating loss (NOL) credit                                                               
for  which producers  with less  than  50,000 barrels  a day  can                                                               
receive cash  payments. The dollar-per-barrel  credit is  a means                                                               
of shaping the overall  tax rates and the NOL credit  is a way of                                                               
deducting  costs that  are being  incurred against  revenues when                                                               
the  costs exceed  the revenues  that  exist at  the moment.  Two                                                               
things  can happen  with that:  either the  costs can  be carried                                                               
forward and  be deducted against  future revenues or they  can be                                                               
deducted today as a cash payment from the state.                                                                                
3:34:28 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
MR. MAYER said  whether the credits are paid out  today or in the                                                               
future has  a fiscal impact  on the state, particularly  in times                                                               
of low  prices. However,  this credit is  fundamental to  the tax                                                               
system  rather than  being some  incentive  to try  to achieve  a                                                               
particular outcome.                                                                                                             
3:35:26 PM                                                                                                                    
SENATOR STOLTZE joined the committee.                                                                                           
MR.  MAYER said  the Cook  Inlet revenue/credit  picture is  very                                                               
different. It  has no  production tax  on oil,  a very  low fixed                                                               
gross  production  tax on  gas,  and  a very  substantial  credit                                                               
regime: 25 percent NOL credits,  a 20 percent capital credit, and                                                               
a subclass  of capital credit  called the well  lease expenditure                                                               
credit, which goes  up to 40 percent  for well-related intangible                                                               
drilling costs.                                                                                                                 
Slide 6 illustrated the overall  picture. One can see that almost                                                               
all  the revenue  comes  from the  North Slope,  but  only a  few                                                               
credits  went to  it,  but  it's exactly  the  opposite for  Cook                                                               
Inlet. It's hard to see the Cook Inlet regime as sustainable.                                                                   
3:37:59 PM                                                                                                                    
He  said slide  14 focused  on historical  levels of  activity in                                                               
Cook Inlet and showed several  cycles of activity since the 1950s                                                               
and a  substantial peak  in exploration since  2010. The  pace of                                                               
development drilling  activity since the Cook  Inlet Recovery Act                                                               
was passed  has picked up  substantially, but that  success comes                                                               
at  a significant  cost, and  that is  what he  would talk  about                                                               
3:39:41 PM                                                                                                                    
MR. MAYER said it's important  to distinguish between oil and gas                                                               
production (on slide 15) in  Cook Inlet. Oil production peaked at                                                               
about a quarter  of a million barrels  a day in 1970  with a very                                                               
sharp decline going through the  1980s, a shallow drop during the                                                               
90s  down to  very low  production in  the last  decade until  in                                                               
2009, only  7,500 barrels  a day were  produced. Since  2010, oil                                                               
production  has  substantial  rebounded  and Cook  Inlet  is  now                                                               
producing about 18,000 barrels a day.                                                                                           
The gas side  of the equation looks very different  in terms of a                                                               
much  longer, flatter  plateau of  gross  production through  the                                                               
mid-90s. Some of  that gas was reinjected into  the Swanson River                                                               
field and its production resulted  in a plateau that went through                                                               
to the  late years of  the last decade.   The reason for  that is                                                               
even though gross production  had started declining substantially                                                               
a full  decade prior,  but because  no reinjection  was happening                                                               
there, that added  to the net amount of  production through 2005.                                                               
Since then  there has been  a substantial decline, but  where oil                                                               
production  turned  around, gas  didn't.  It  has stabilized  and                                                               
plateaued at about  a quarter of billion cubic feet  a day in the                                                               
last several years.                                                                                                             
3:42:47 PM                                                                                                                    
MR. MAYER  said slide 16  looked a  little closer at  the drivers                                                               
that enabled  the remarkable turnaround  in Cook Inlet.  It comes                                                               
from  two different  sources: from  new wells  being drilled  and                                                               
from  work-overs   on  existing  wells.  The   oldest  wells  are                                                               
producing more now than they were at the end of the last decade.                                                                
3:45:06 PM                                                                                                                    
SENATOR MICCICHE asked  why the spike in gross  oil production by                                                               
well  vintage (1965  through  1978) (slide  15)  compared to  new                                                               
production  (slide  16)  is  unusual in  its  steepness  in  both                                                               
MR. MAYER  answered that a couple  of big fields were  brought on                                                               
line very quickly, but the decline  while it is steep, in general                                                               
fits a  sort of  hyperbolic decline curve  one would  expect with                                                               
the legacy wells.                                                                                                               
NIKOS TSAFOS,  President & Chief Analyst,  enalytica, Washington,                                                               
D.C., added that  most of the increasing production  in the early                                                               
70s came  from five fields that  went from 0 to  30,000 barrels a                                                               
day  at the  same  time, but  McArthur River  went  from zero  to                                                               
112,000 barrels  a day. And  the decline rate isn't  unusual with                                                               
such a  steep increase,  since no  other fields  came on  line to                                                               
back-fill the production.                                                                                                       
SENATOR MICCICHE asked  if he saw any other issues  that might be                                                               
more promising in the future.                                                                                                   
3:49:11 PM                                                                                                                    
MR. MAYER said the two graphs  on slide 17 show gas production by                                                               
well vintage and by field.  The older vintages mostly decline and                                                               
almost  all of  the new  production is  from wells  drilled after                                                               
2011. So,  the plateau in  gas production  in the last  couple of                                                               
years  is from  ongoing drilling  in the  existing fields  rather                                                               
than extensive work-over  work one sees on the oil  side. The by-                                                               
field  graph  indicates that  one  substantial  field has  turned                                                               
around, the Kenai  Loop. A few others - Beaver  Creek and Swanson                                                               
River - have  smaller amounts of increase, and there  may be more                                                               
production from Furie's Kitchen Lights unit in the future.                                                                      
3:51:11 PM                                                                                                                    
Slide 18 puts  that picture in context and has  the outlook going                                                               
forward. An  amazing turn  around happened on  the oil  side that                                                               
went from  7.5 thousand barrels day  (mb/d) in 2009 to  almost 18                                                               
mb/d today, and  gas production stabilized in  recent years after                                                               
several  years of  steady decline.  He  said the  gas market  has                                                               
undergone  a   major  transition   in  supply,   demand,  prices,                                                               
seasonality, competition, and  expectations. In particular, prior                                                               
to the  time of this  turn around  a couple of  major established                                                               
(harvesting mode)  players - Marathon  and Chevron - exited  to a                                                               
new player,  Hilcorp, who  is focused  on reinvestment  and work-                                                               
over activity and  new drilling, a very standard  cycle to happen                                                               
in all hydrocarbon basins all around the world.                                                                                 
A couple  of other things  were going on  at the same  time. Cook                                                               
Inlet   used  to   be  a   relatively   low-priced  gas   market,                                                               
particularly compared  to Henry Hub  - that  for a long  time was                                                               
viewed in  Alaska as a very  premium price that couldn't  be paid                                                               
here. Indeed  at that time  a Henry Hub  pricing case was  put to                                                               
the  RCA  based  on  that  and   it  was  turned  down  as  being                                                               
potentially  excessive. Now  Cook  Inlet gas  has  a much  higher                                                               
price  ($6/mcf  going  up  to  much  higher  levels  for  certain                                                               
contracts)  both through  the consent  decree that  happened when                                                               
Hilcorp came in  and through subsequent RCA  decisions. Now Henry                                                               
Hub looks low.                                                                                                                  
3:54:04 PM                                                                                                                    
MR. MAYER  said the credits  have had an extraordinary  effect in                                                               
Cook Inlet  on both the  oil side and the  gas side, but  part of                                                               
the reason  is also  about broader  structural changes  that have                                                               
occurred.  The  DNR published  estimates  say  about 1.2  tcf  is                                                               
remaining  in  proven  or  probable  reserves.  If  one  adds  in                                                               
Cosmopolitan  and  Kitchen  Lights  (that  has  seen  substantial                                                               
development  on  the gas  side  and  is  starting to  produce  at                                                               
relatively low  levels so  far) they  estimate an  additional 400                                                               
bcf, therefore  1.6 tcf in  total, although there  is substantial                                                               
uncertainty as to the size of the resource.                                                                                     
He explained  that instate  demand is about  80 bcf/year  and the                                                               
total Cook  Inlet gas production is  over 100 bcf right  now. One                                                               
might think that is 10 years  of gas supply, but the problem with                                                               
that is that  hydrocarbons aren't produced at the  same flat rate                                                               
indefinitely. Fields all go into  decline at some point, but with                                                               
substantial additional drilling and  investment one might see the                                                               
gas plateau  extended out another  six years. But at  some point,                                                               
there will be a decline again.  When that happens the question is                                                               
what the  new resources look  like, how well-developed  they are,                                                               
and  how  well-equipped  the  companies   are  to  contribute  an                                                               
incremental  portion  to  meet  the ongoing  gas  demand  in  the                                                               
3:56:38 PM                                                                                                                    
To answer the question of  fundamental challenges for keeping the                                                               
Southcentral gas market well supplied  into the future, Mr. Mayer                                                               
said   he  did   some   modeling  looking   at  three   different                                                               
hypothetical  fields  and  assumptions.   The  first  project  he                                                               
modeled was  on slide 19,  a market-constrained  development with                                                               
large upfront  investment. One sees  the economics  of developing                                                               
something that would  optimally be a much larger  development - a                                                               
large gas  resource that could  in principle produce  100 bcf/day                                                               
of gas for several years at  a plateau rate. The problem is there                                                               
isn't  a market  at the  moment in  Southcentral Alaska  for that                                                               
much gas, short of substantial exports or other alternatives.                                                                   
One can  look at the  market and see  an increase in  demand over                                                               
the  next four  or  five  years. So,  if  one  drills wells  that                                                               
produce 15-18,000 million cubic feet a  day of gas at a peak rate                                                               
and then  it declines, one  could see  how a single  platform and                                                               
well could be developed at a time over the course of a decade.                                                                  
3:59:55 PM                                                                                                                    
The  problem  with having  a  substantial  resource that  one  is                                                               
trying  to work  into  a larger-scale  gas  development is  money                                                               
spent  on  big  facilities.  He   noted  that  one  producer,  in                                                               
particular,  has talked  about spending  several hundred  million                                                               
dollars on  a platform, pipelines,  and all  the rest -  and just                                                               
looking  at the  cash flow  chart  one can  tell this  is a  very                                                               
challenged development.                                                                                                         
4:00:43 PM                                                                                                                    
MR. MAYER  said slide 20  looks at exactly the  same development,                                                               
but if it weren't subject  to the very difficult constraints that                                                               
the Cook  Inlet market is subject  to. It would require  a change                                                               
in supply/demand  dynamics, which most  likely would come  from a                                                               
substantial export  customer. If  that could  be done,  one could                                                               
produce at 100 or  close to 140 million cubic feet  a day of gas.                                                               
One could drill three wells a  year for the first three years, or                                                               
drill nine wells in the first  three years and then drill another                                                               
well every year for the  next decade to maintain production. This                                                               
would  look like  a very  different development.  The cash  flows                                                               
look more similar  to the sorts of cash flows  one expects to see                                                               
on  any  number of  gas  developments  around  the planet.  As  a                                                               
result,  it  is  a  much healthier  development  that  can  exist                                                               
probably with or without credits.                                                                                               
He  modeled a  third project  using the  same assumptions  around                                                               
well productivity,  the cost  of drilling a  well, and  the same-                                                               
type  curves,  but,  if  not   making  that  substantial  initial                                                               
investment  in upfront  facilities, pipelines  and all  the rest.                                                               
Here under  the current Alaska  fiscal regime without the  25 NOL                                                               
credit (because an  existing mature field has  enough revenues to                                                               
not be in an NOL position),  but with a 20 percent capital credit                                                               
and 40  percent credit  applying to  well-related work,  the very                                                               
minimal initial  upfront costs to  do that drilling results  in a                                                               
very quick  return and correspondingly  very high  and attractive                                                               
4:03:25 PM                                                                                                                    
MR. MAYER said slide 22  graphed the three different projects one                                                               
could  imagine either  in the  real  world or  in a  hypothetical                                                               
unconstrained  world in  the Cook  Inlet. One  can see  that even                                                               
with  benefits  of  essentially  no or  little  tax,  20  percent                                                               
capital credits, and 40 percent  credits for drilling costs, that                                                               
in the  first two  cases of  a new development  by a  new company                                                               
with a  25 percent NOL  credit, the economics remain  really very                                                               
strained  and difficult  to make  work (because  of the  enormous                                                               
amount of  capital required  and the  small amount  of production                                                               
revenue that  comes from it).  Internal rates of return  (IRR) of                                                               
5-15 percent at  the very highest gas prices  is not particularly                                                               
desirable economics when one considers  the benefits of all those                                                               
credits.  And  when one  looks  at  the  spilt  of value  to  the                                                               
company, the federal government and  the state, it is nothing but                                                               
a pure  subsidy situation from the  state government perspective,                                                               
even in the highest price gas scenarios.                                                                                        
So, the company with the  economics that look great at prevailing                                                               
Cook Inlet prices of $6 mcf, with  maybe just a little bit of net                                                               
present value,  in an  unconstrained environment,  looks suddenly                                                               
very  different. The  economics are  transformed solely  by being                                                               
able to  actually develop  this field in  an optimal  manner. The                                                               
IRR goes from 20  to 40 percent at the same  price levels and all                                                               
of  the  different players  are  in  positive net  present  value                                                               
territory.  Companies   are  doing  best  here   and  the  state,                                                               
relatively speaking,  is taking  the least  value of  the overall                                                               
equation, because of  the mixture of the 12.5 royalty  and a very                                                               
small gross production tax on the gas.                                                                                          
Looking  at the  scenario of  additional drilling  in the  mature                                                               
fields  that is  even more  the  case, particularly  with the  40                                                               
percent well  drilling credit, and  IRR from  50 to north  of 100                                                               
percent. The  idea here isn't  to say  that this is  a definitive                                                               
picture of  any actual  company's economics;  it's simply  to say                                                               
that drilling in mature fields  is not substantial economic work,                                                               
especially because  with no credits  at all, they are  looking at                                                               
25 to  85 percent ROR. It  does seem that drilling  in the mature                                                               
fields is likely  to be a substantially  economic activity across                                                               
a wide range of assumptions.                                                                                                    
4:08:34 PM                                                                                                                    
MR. MAYER  said the question then  comes back to the  big picture                                                               
of what the aim of the  Cook Inlet credit regime is. One possible                                                               
answer is that it exists as  a gas supply to Southcentral Alaska.                                                               
If that's  the case, based  on the  resource base, it  looks like                                                               
the current  plateau can be  maintained for another four  or five                                                               
years at  current rates. At  some point, though, that  will start                                                               
declining again and new resources  will have to be found. Despite                                                               
very challenged  economics, Furie  has developed  a gas  phase at                                                               
Kitchen  Lights  with some  initial  production,  and the  coming                                                               
years will reveal a market and the dynamics of a new entrant.                                                                   
In thinking  about the  role for state  support, Mr.  Mayer said,                                                               
the  one  thing  that  is  highly  challenged  to  make  work  is                                                               
development  of substantial  new facilities,  infrastructure, and                                                               
entirely  new  projects given  the  constraints  of the  domestic                                                               
market. There  is a role  for ongoing targeted support  simply to                                                               
ensure  that as  mature fields  begin  to decline  there isn't  a                                                               
difficult transition. One  could just say leave that  to the free                                                               
market and  that might  work, but  the decline  could set  in and                                                               
only  at a  point the  deflected transition  would result  in the                                                               
rolling brown-outs of a few years  ago. Then one gets to a point,                                                               
again,  where  there  is enough  unmet  demand  that  substantial                                                               
development of  a new project  actually looks desirable  in terms                                                               
of economics.                                                                                                                   
So,  he said,  to enable  a smoother  transition, some  degree of                                                               
support might be warranted, but  it could look very different and                                                               
be  much more  targeted than  the credit  regime, which  covers a                                                               
wide  range  of  activities.  A  lot  of  data  is  protected  by                                                               
confidentiality,  but it  seems safe  to conclude  that a  lot of                                                               
work-over  work and  new drilling  is  on-going on  the oil  side                                                               
rather than on  the gas side, but that won't  necessarily put new                                                               
gas behind pipe  any time soon, and  it is a small  subset of the                                                               
total piece of work.                                                                                                            
4:13:07 PM                                                                                                                    
SENATOR STEDMAN said  he hoped the committee  didn't get enamored                                                               
with hypothetical  projects and  doesn't stop to  take a  look at                                                               
the  state's  checkbook, which  could  very  easily be  empty  in                                                               
January. It would  also be nice to have some  cash flow work done                                                               
on Cook Inlet,  so they have a concise view  over the next couple                                                               
of days. He knew that the  DOR had created some analytical models                                                               
of  Cook Inlet  over the  last several  years that  the committee                                                               
might see.                                                                                                                      
CHAIR  GIESSEL  thanked  Mr.  Mayer   for  his  presentation  and                                                               
transitioned to the DOR presentation.                                                                                           
4:14:25 PM                                                                                                                    
SENATOR COSTELLO joined the committee.                                                                                          
4:15:21 PM                                                                                                                    
At ease                                                                                                                         
^Continuation of DOR overview of Alaska oil and gas tax reform                                                                  
4:16:05 PM                                                                                                                    
CHAIR  GIESSEL called  the  meeting back  to  order and  welcomed                                                               
Department  of  Revenue  Commissioner Hoffbeck  to  continue  his                                                               
overview of Alaska's oil and gas  tax credit system. She noted he                                                               
would start  on slide 20,  which was  the beginning of  a section                                                               
called "Work Over the Last Interim."                                                                                            
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
Juneau,  Alaska, said  since last  session,  the Governor  vetoed                                                               
$200 million  in tax credits  that created a  temporary liquidity                                                               
crisis  within the  oil  and gas  industry that  led  to him  and                                                               
Director  Alper to  spending the  next month  talking to  various                                                               
companies and  lending institutions to  assure them that  all the                                                               
credits would be  paid and that their concern  that these credits                                                               
were not  valuable collateral for  loans was unfounded.  They had                                                               
over  30  meetings  with   industry  and  financial  institutions                                                               
getting a much  broader understanding of how credits  are used to                                                               
leverage   additional    assets   versus   just    being   direct                                                               
reimbursements for work.                                                                                                        
He  said that  multiple hearings  were heard  over the  summer by                                                               
Senator Giessel's  Senate Oil  and Gas  Tax Credit  Working Group                                                               
that added  depth to their knowledge  of the issues the  state is                                                               
facing, and creating a basis  for today's legislation. The Senate                                                               
Working Group provided a good anchor for the discussion.                                                                        
4:19:17 PM                                                                                                                    
COMMISSIONER HOFFBECK  said the Working  Group and the  state saw                                                               
most of  the issues in a  similar fashion, but maybe  some of the                                                               
solutions  not quite  exactly the  same. The  Working Group  felt                                                               
gradual change  was the right way  to change the oil  and gas tax                                                               
credits  and   the  administration   felt  more   urgency  driven                                                               
primarily  by looking  at the  state checkbook.  However, gradual                                                               
implementation, if it's available, is  a better way to make these                                                               
type  of  changes,   if  one  has  the  luxury  to   do  so.  The                                                               
administration felt constrained by how  much the credits cost and                                                               
how  much revenue  the  state  had, so  they  wanted  to be  more                                                               
aggressive with implementing changes.                                                                                           
He  said  the Working  Group's  report  considered timelines  and                                                               
sector  impacts  very  strongly,  and  while  the  administration                                                               
looked at  those, they  had a  different interpretation  of where                                                               
the impacts  would be.  Because there was  a strong  statement to                                                               
protect local vendors  in the case of bankruptcy that  was not in                                                               
the  original legislation,  the  bonding component  was added  in                                                               
House  Resources,  and the  administration  felt  it was  a  good                                                               
addition. They  both saw  the need  to protect  some form  of the                                                               
minimum  tax  floor  within  the  analysis  and  to  protect  the                                                               
Frontier Basin  tax breaks, because  it is still a  very immature                                                               
basin. Finally,  they looked  at enhanced  reporting requirements                                                               
to have enough  transparency to have an open dialogue  on some of                                                               
the issues  so that when  they are making these  tough decisions,                                                               
everyone  can see  the  data  and know  what  issues  need to  be                                                               
4:21:03 PM                                                                                                                    
COMMISSIONER  HOFFBECK said  the state  put together  its thought                                                               
process on how  to deal with the various  credit issues cognizant                                                               
of  what they  felt  were the  resources  available for  offering                                                               
those  credits. It  became very  clear that  they couldn't  offer                                                               
stability  to the  oil and  gas  industry if  the state  couldn't                                                               
afford its credit program. He added  that for the next four years                                                               
the state  will have a substantial  draw down on its  savings and                                                               
its ability  to fund  government services,  and a  credit program                                                               
that is costing  $700 million a year is a  substantial draw down.                                                               
They asked  themselves how  to balance this  so that  they didn't                                                               
completely  crater  the  oil  and  gas  industry  when  they  are                                                               
struggling with low oil prices, as well.                                                                                        
4:23:13 PM                                                                                                                    
He  said they  saw  the credits  in  three different  categories.                                                               
First,  the credits  that really  just didn't  work the  way they                                                               
were supposed to.  A series of credits weren't  even applied for,                                                               
and it  didn't make much  sense to leave  those on the  books, so                                                               
their legislation  proposes repealing  those. Another  credit was                                                               
put   in  place   because  of   energy  security   issues  within                                                               
Southcentral and  focused on  developing gas  in Cook  Inlet, but                                                               
they were equally  applied to oil production, which  is where the                                                               
profits really  are long term. And  it was the focus  of what the                                                               
Cook Inlet Recovery  Act was supposed to do. So,  they looked for                                                               
a way to  structure the credits to focus more  on the development                                                               
of gas resources.                                                                                                               
COMMISSIONER HOFFBECK  said the  second category was  the credits                                                               
that did  work but  had maybe  served their  purpose. One  of the                                                               
things one  sees all across  the board within government,  and he                                                               
assumed  the same  in  business as  well, is  that  a program  is                                                               
started  and funded;  the program  gets up  and running  and it's                                                               
successful. But  then it's  hard to determine  when it's  time to                                                               
stop. That  is may be what  is being seen in  the credit program:                                                               
energy security  was needed in  Southcentral; they put in  a very                                                               
robust credit  program in order  to obtain that  energy security;                                                               
and now that  has been accomplished. When the  credit program was                                                               
put in place, there was a market  looking for gas; and now gas is                                                               
looking for a  market, and the question now is  if the Cook Inlet                                                               
had  been incentivized  sufficiently to  have achieved  the goals                                                               
they had set out to achieve.                                                                                                    
COMMISSIONER HOFFBECK said the reality  is that the market can be                                                               
over-incentivized.   Enalytica   has    said   in   their   prior                                                               
presentations  that the  price point  for  gas in  Cook Inlet  is                                                               
sufficient to look for and develop  gas anywhere in the world. If                                                               
the  market  continues  to be  incentivized  and  additional  gas                                                               
floods  the market,  the price  will get  pushed down  more. Then                                                               
they  must incentivize  again.  He  said a  second  way to  over-                                                               
incentivize is if  energy security is their big goal  - and it is                                                               
-  is to  incentivize projects  that can  only find  a market  by                                                               
exporting. But those are policy questions.                                                                                      
4:25:53 PM                                                                                                                    
SENATOR STOLTZE  pointed out that Commissioner  Hoffbeck referred                                                               
opaquely  to  different  kinds  of useful  credits,  as  well  as                                                               
credits past their useful life.  He asked if the department could                                                               
put out a credit rating score  card to help legislators make good                                                               
COMMISSIONER  HOFFBECK  said  DOR  doesn't  have  a  report  card                                                               
format, but  their presentation talks  about those things  and he                                                               
would be happy to provide more context.                                                                                         
SENATOR STOLTZE commented that the  public would be better served                                                               
by an  assessment of various  credit's usefulness,  their ranking                                                               
in terms  of how  each credit best  serves the  state's financial                                                               
SENATOR WIELECHOWSKI  said the information  they are  looking for                                                               
is the rate  of return (ROR) and return on  investment (ROI) from                                                               
the credits for the state.                                                                                                      
COMMISSIONER  HOFFBECK  said  confidentiality  makes  looking  at                                                               
specific  projects difficult,  therefore  the department  created                                                               
life  cycle models,  based  on  general data  not  specific to  a                                                               
particular company, that he could provide.                                                                                      
4:30:14 PM                                                                                                                    
The last category of credit is  the one of credits that should be                                                               
maintained,  primarily the  NOL credit  that is  a playing  field                                                               
leveler,  but it's  also  the hardest  one  to control.  Director                                                               
Alper would explain the provisions on how to cap some of those.                                                                 
4:31:17 PM                                                                                                                    
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
Juneau,  Alaska, said  their initial  presentation walks  through                                                               
the various components of the  bill and how they affect different                                                               
sectors of the industry, what  kind of changes the department was                                                               
trying to  make and the  fiscal impacts. The  second presentation                                                               
has the date of April 4  and drills much deeper into the modeling                                                               
of some specific sections of the  bill and deals with some fairly                                                               
complicated  statutory language  that he  wants the  committee to                                                               
understand. In  some ways  it answers questions  that came  up in                                                               
the first committee  of referral in the  House. That presentation                                                               
goes  into the  life  cycle modeling  that Commissioner  Hoffbeck                                                               
talked about - how  it is now and how it  would perform given the                                                               
changes  proposed  in  SB  130.  The third  part  of  the  second                                                               
presentation answers a couple of  specific questions that came up                                                               
in the earlier Senate Resources hearing on Saturday.                                                                            
4:32:54 PM                                                                                                                    
MR.  ALPER  said  slide  23  is  the  big  picture  of  what  the                                                               
commissioner   just  said:   the  process   was  driven   by  the                                                               
understanding  that the  state no  longer  has the  cash flow  to                                                               
support the  credit program  as it  currently stands.  That spend                                                               
needs to be reduced one way  or another. The idea gelled upon the                                                               
NOL credit  as "the mother credit,"  the one that is  the playing                                                               
field leveler,  especially on  the North  Slope, between  the new                                                               
comer and the incumbent producers that  pay a net profits tax and                                                               
receive value for  every dollar they reinvest or  spend in Alaska                                                               
by reducing  their taxable  net income. Reducing  it by  a dollar                                                               
reduces their taxable  net income by 35 cents. The  NOL credit is                                                               
how the  developer of a  new field gets  that 35 cent  value from                                                               
the same dollar spent.                                                                                                          
The third  major theme  of the  bill is  to limit  repurchases of                                                               
credits. That is not quite the  same as reducing the cash outlay.                                                               
Many  of the  credits were  initially designed  with the  idea of                                                               
them being intended to be  used against taxes or carried forward,                                                               
to be used against taxes, and  only later did they become more of                                                               
an  open-ended  repurchase.  So they  are  looking  at  deferring                                                               
payments in  some cases by rolling  them into a future  year when                                                               
the state  might have better  a fiscal situation to  be absorbing                                                               
them as offsets against taxes.                                                                                                  
A fourth component  of the bill is strengthening  the minimum tax                                                               
ensuring the state does, in fact,  get the value of the statutory                                                               
floor that was  put in place in  the PPT regime and  has not ever                                                               
worked to its full intent.                                                                                                      
Number five  is be more open  and transparent to be  able to talk                                                               
about what the  state is doing and how state  resources are being                                                               
shared  in  different development  projects.  And  of course,  as                                                               
changes  are made  to  honor and  pay all  the  credits that  are                                                               
earned to date and through the transition period.                                                                               
MR. ALPER  said the bill also  has a fairly large  fiscal note of                                                               
$900 million  to endow a  fund to  put additional money  into the                                                               
Tax Credit Fund so that  should the system face dramatic changes;                                                               
anything earned before  the effective date would be  paid and not                                                               
subject to question.                                                                                                            
SENATOR WIELECHOWSKI  said the operating budget  appropriates $73                                                               
million  for tax  credits in  FY17 and  asked if  he is  advising                                                               
producers of that.                                                                                                              
COMMISSIONER   HOFFBECK  answered   that  they   are  encouraging                                                               
producers to  track the legislation.  But if only $73  million is                                                               
appropriated,  that is  all  they can  spend.  However, there  is                                                               
still a ways to go.                                                                                                             
4:36:26 PM                                                                                                                    
MR. ALPER said  the major bill components  more thematically deal                                                               
with exploration  credits, the Cook  Inlet drilling  credits, the                                                               
repurchase limits  and implementation  of them,  removing certain                                                               
exceptions and  loopholes in existing statute,  strengthening the                                                               
minimum tax, and other provisions on technical language.                                                                        
4:37:24 PM                                                                                                                    
Starting   with   the   exploration    credits,   he   said   the                                                               
administration's policy is to let  the exploration credits sunset                                                               
on  their own  accord. Specifically,  the alternative  credit for                                                               
exploration  is scheduled  to end  on July  1, 2016  in both  the                                                               
North Slope  and the Cook  Inlet areas. That has  been previously                                                               
extended in the Middle Earth  until 2022 in prior legislation and                                                               
the  intension is  for that  to still  happen. They  want to  get                                                               
these credits  off the table,  because they, among  other things,                                                               
have led  to some  historically very high  support. On  the North                                                               
Slope the NOL credit increased to  45 percent from 25 percent for                                                               
the last two years  after the passage of SB 21.  Those can now be                                                               
stacked with an exploration credit of  up to 40 percent and there                                                               
are  circumstances, especially  for seismic  shoots on  the North                                                               
Slope,  where  the  state  is   actually  paying  85  percent  of                                                               
companies' costs in 2014 and 2015.                                                                                              
SENATOR  WIELECHOWSKI asked  what the  success rate  is of  using                                                               
credits for jack-up  rigs and the Frontier Basins.  Did the state                                                               
get an appropriate return on  that investment? Should they expire                                                               
or will it cause a further crisis in the gas situation?                                                                         
MR. ALPER  answered those two  credits, referred to as  the super                                                               
credits, have actually  rarely been used. The  jack-up rig credit                                                               
hasn't been claimed and only one  or two smaller claims have been                                                               
made  in  the Frontier  Basin.  Producers  found that  the  other                                                               
credits,  especially in  Cook  Inlet, that  were  already on  the                                                               
books were more  valuable. The 65 percent money was  in some ways                                                               
more valuable  than the 100  percent jack-up rig credit  that had                                                               
depth  and additional  data  sharing requirements  as  well as  a                                                               
paying back  of half the  credit once they came  into production.                                                               
Producers decided to never apply for  it, so there is no downside                                                               
in  letting it  sunset. The  frontier  credit is  80 percent  for                                                               
development drilling costs  and 75 percent for seismic,  and a 65                                                               
percent credit remains  in place for normal  circumstances in the                                                               
Middle Earth  area. So, there  really isn't that  much difference                                                               
between the normal credits and the super credits.                                                                               
4:40:08 PM                                                                                                                    
SENATOR WIELECHOWSKI  said a jack-up  rig did come to  Cook Inlet                                                               
and asked if that  was just a coincidence or did  it come up with                                                               
the intent of being used and  then they determined they could get                                                               
more credits through  other means? Are there plans  for anyone to                                                               
apply for a jack-up rig credit?                                                                                                 
MR. ALPER answered  that he heard that one company  may seek that                                                               
credit, but the work  has to be done by July 1,  2016. As for why                                                               
they came,  the jack-up  rig credit  was part of  SB 309  in 2010                                                               
that had  several credit  stimulants in the  Cook Inlet  area. It                                                               
happened in  some ways as  a companion bill  to HB 280,  known as                                                               
the  Cook  Inlet  Recovery  Act  that also  passed  in  the  2010                                                               
session.  That   bill  contained   the  40  percent   well  lease                                                               
expenditure credit.                                                                                                             
4:41:19 PM                                                                                                                    
SENATOR STEDMAN  remarked that when PPT  credits escalated beyond                                                               
25 percent,  consultants were very  concerned about  getting into                                                               
goldplating and distorting economic  behavior, and asked when the                                                               
state will face  erratic behavior driven by  credits versus sound                                                               
COMMISSIONER  HOFFBECK  answered that  he  wasn't  sure he  could                                                               
answer that question without specifics,  but they felt there were                                                               
some largely  undercapitalized companies  that took  advantage of                                                               
the  high credit  regime and  came to  Alaska and  if they  found                                                               
something, they did  well; if they didn't, he knew  that at least                                                               
two went  bankrupt. The credits  probably have  incentivized some                                                               
activity  that maybe  would not  have been  otherwise undertaken,                                                               
but he couldn't say what the goldplating threshold was.                                                                         
4:43:21 PM                                                                                                                    
MR.  ALPER  continued that  an  unexpected  spike in  exploration                                                               
credit claims  came in  for last  year that  might have  been for                                                               
some work  that was done  in advance  of when it  otherwise would                                                               
have  been done,  but  the  companies wanted  to  do  it to  take                                                               
advantage of the 85 percent credit that was about to sunset.                                                                    
He said the exploration sections of  SB 130 attempted to clean up                                                               
a  couple  of  older  credits  (one that  can  be  taken  against                                                               
royalty) that  hadn't been  used in decades.  The thought  was to                                                               
preemptively repeal  them so they  don't get resurrected  in some                                                               
way and go against the broader intent of the administration.                                                                    
MR. ALPER  said that within  the exploration statutes there  is a                                                               
requirement for  data sharing -  primarily well bore data  - with                                                               
DNR  as a  condition of  receiving  the credits.  The state  gets                                                               
great use  out of that data  to better understand and  market the                                                               
state's resources. They were hoping  to reattach that language to                                                               
the remaining NOL credit by referencing that old language.                                                                      
4:44:52 PM                                                                                                                    
Slide  26 talks  about the  Cook Inlet  drilling credits.  SB 130                                                               
repeals AS 43.55.023(a), the qualified  capital expenditure or 20                                                               
percent  QCE  credit, and  .023(l),  the  40 percent  well  lease                                                               
expenditure or  WLE credit. The  idea here is during  the passage                                                               
of  SB 21,  there  seemed  to be  a  direction against  rewarding                                                               
spending  without production.  The  spending  based credits  were                                                               
repealed on  the North  Slope and a  comparable system  was being                                                               
extended to  Cook Inlet and other  areas of the state.  They also                                                               
want to  make sure especially  given the  tax caps in  Cook Inlet                                                               
that  the  producer  who  is  not in  a  loss  situation  (simply                                                               
drilling wells  and selling oil  and gas and hopefully  earning a                                                               
profit) and  not paying  tax, is not  receiving cash  credits for                                                               
it, which  they are under the  current system through the  20 and                                                               
40 percent  credits. They don't  feel that is an  appropriate use                                                               
of state funds, especially at this time.                                                                                        
MR. ALPER added  that all of this is in  some ways temporary, and                                                               
they understand  that the Cook  Inlet needs a  more comprehensive                                                               
tax reform  between now and 2022.  If the tax caps  that exist in                                                               
statute were  to sunset  tomorrow there is  no stable  tax regime                                                               
underpinning them. They have bits  and pieces of different taxes:                                                               
a 35 percent  net tax from SB  21, but not per  barrel credit nor                                                               
GVR benefit,  a 25 percent NOL  "a little bit of  a hodge podge."                                                               
The House Resource CS has a  working group towards that end; it's                                                               
not in the legislation that is before them now.                                                                                 
In general,  Mr. Alper said,  their broad  goal is to  reduce the                                                               
general level  of state support  for Cook Inlet from  the roughly                                                               
50-60 percent that it is now  to the 25 percent level through the                                                               
remaining NOL credit.                                                                                                           
4:46:56 PM                                                                                                                    
SENATOR STEDMAN  said the 25 percent  NOL in Cook Inlet  has been                                                               
around for a  while and asked if  it used to be  25 percent north                                                               
of 68 and now it's 35 percent.                                                                                                  
MR. ALPER said, yes, that's correct.                                                                                            
He said the idea behind the  repurchase limits on slide 27 is not                                                               
what credits are earned but the  method by which the state repays                                                               
those  credits. Currently,  any company  who presents  the credit                                                               
for  repurchase  is eligible  with  the  exception of  those  who                                                               
produce more  than 50,000  barrels a  day. That  has historically                                                               
meant the three  major producers, although now  Hilcorp has added                                                               
themselves to the  50,000 barrel club. The bill adds  a couple of                                                               
restrictions to  getting cash  for credits. First,  if you  are a                                                               
large  company (global  revenue in  excess of  $10 billion)  then                                                               
maybe you  can afford to  keep those  credits on your  own books,                                                               
save them  until such time  as you  have tax liability  (when you                                                               
are  producing) and  then use  those credits  to offset  your own                                                               
taxes. For those  companies that don't meet that  threshold - the                                                               
great bulk  of them - they  would institute a cap  of $25 million                                                               
per company per  year, the limit that used to  be in place during                                                               
the  2006 PPT  bill that  was eliminated  with the  ACES bill  in                                                               
SENATOR  MICCICHE asked  if he  thought about  adjusting the  $25                                                               
million cap that  went away in '07 for inflation  or did he think                                                               
the same cap was an appropriate number.                                                                                         
MR. ALPER  answered that  they put  in the  historic number  as a                                                               
starting point expecting that to be part of a robust discussion.                                                                
SENATOR STEDMAN  asked if any  of the non-refundable  credits and                                                               
the NOL credits accumulate any carrying costs to the state.                                                                     
4:50:37 PM                                                                                                                    
MR. ALPER  answered that there  are no provisions in  statute for                                                               
earning  interest or  gaining value  on credit  that are  carried                                                               
SENATOR STEDMAN said that is a  point that hadn't been touched on                                                               
much and he expected billions of dollars in carry forward costs.                                                                
SENATOR  COSTELLO  asked  if  other  oil-producing  regimes  have                                                               
something like  the requirement  that it  applies to  any company                                                               
with a  global annual  revenue greater than  $10 billion  a year.                                                               
Would  it  affect  investment  decisions  across  projects  which                                                               
normally are reserved for that specific location in investment?                                                                 
MR. ALPER  answered that  he didn't know  if he  could adequately                                                               
answer that question,  but there are very few  regimes that offer                                                               
cash reimbursements  the way Alaska  does. The idea of  putting a                                                               
cap on  large companies was in  some ways germinated over  a year                                                               
ago in doing  some modeling for the House  Resources Committee on                                                               
a  potential ANWR  development.  They found  that  no matter  how                                                               
robust it  looked to  the state,  once it was  up and  going, the                                                               
first 10  years were potentially  catastrophic with $2  billion a                                                               
year  in  credit liability.  Realizing  that  it would  be  large                                                               
companies  coming in,  they  had to  find a  way  to protect  the                                                               
state's interest while still allowing  projects to go forward. He                                                               
didn't know  if there was  anything comparable in  other regimes,                                                               
but they thought  internally that there was  a difference between                                                               
the type  of smaller  independents they were  trying to  bring to                                                               
Alaska  and the  large international  companies who  already have                                                               
business in Alaska.                                                                                                             
4:53:05 PM                                                                                                                    
SENATOR STOLTZE  said he wanted  a better  idea of the  team that                                                               
put this  legislation together. Were  other departments,  such as                                                               
the Department of Natural Resources involved?                                                                                   
COMMISSIONER HOFFBECK answered that  it varied at different times                                                               
within  the   process.  The  initial  research   on  credits  was                                                               
primarily driven  by the DOR.  They held the meetings  and talked                                                               
to the various players. Then  they took the information about the                                                               
credit liability  that the  state was facing  to the  governor as                                                               
well as  some ideas about ways  to mitigate it. Involved  in that                                                               
was the  governor, the chief  of staff, the  DNR, and the  DOR; a                                                               
team actually helped formed the  entire fiscal plan. It came back                                                               
to the DOR  for refining and then was taken  to the Department of                                                               
Law (DOL)  for the language. It  was finally brought back  to the                                                               
governor in  a room  that had  almost half  the cabinet  plus the                                                               
governor  where the  governor  said. "That  one,  that one,  that                                                               
4:55:16 PM                                                                                                                    
CHAIR  GIESSEL  pointed  out  that   she  met  with  Commissioner                                                               
Hoffbeck  early   in  December  to   talk  about  ideas   he  was                                                               
considering and  recalled that DNR  was in that meeting,  and DNR                                                               
said it was the first they had seen of any ideas.                                                                               
SENATOR STOLTZE  said a lot  of things  that happen on  the third                                                               
floor  aren't  very public  and  asked  Commissioner Hoffbeck  to                                                               
describe the role of the chief of  staff on this. Is he a passive                                                               
observer or one of the drivers?                                                                                                 
COMMISSIONER HOFFBECK replied  that he is just one  of the voices                                                               
in the room.  The governor wants to hear from  all sides of every                                                               
issue  before  he makes  a  decision.  He  pointed out  that  DNR                                                               
Commissioner Myers was in some of those prior meetings.                                                                         
SENATOR WIELECHOWSKI asked if there  were meetings outside of the                                                               
cabinet - industry or outside  organizations - in the crafting of                                                               
this legislation.                                                                                                               
COMMISSIONER HOFFBECK  replied not in  the crafting of  the bill,                                                               
but they met with all of the  players and got their input on what                                                               
was  critical and  what areas  they thought  needed modification.                                                               
They were open  and frank about what they  thought was necessary.                                                               
Structuring of the bill was internal within the state.                                                                          
COMMISSIONER HOFFBECK  apologized and  said he  had to  leave for                                                               
another meeting.                                                                                                                
4:57:47 PM                                                                                                                    
SENATOR  MICCICHE asked  if the  administration went  through the                                                               
exercise of evaluating what kind  of production has been the most                                                               
beneficial to  the people of  Alaska and  what kind will  be most                                                               
beneficial in  the future, because  the state has invested  a lot                                                               
of money  in credits in companies  that are no longer  in Alaska,                                                               
and that is where most of  the credit liability lies. Why do they                                                               
look at  big company-good  versus little  company-bad and  try to                                                               
reward  accordingly as  opposed to  what has  the most  potential                                                               
benefit for the general fund (GF).                                                                                              
MR. ALPER said that is a  good question. He answered there was no                                                               
intent to  say small companies-good  and big  companies-bad. This                                                               
provision  is  the  only  place where  they  made  a  distinction                                                               
between  the sizes  of companies;  their  modeling showed  fairly                                                               
little difference  in the net  effect between the zero  limit and                                                               
the $25 million  limit for the larger fields.  They didn't really                                                               
contemplate  the larger  companies  involving  themselves in  the                                                               
smaller fields anyway. Companies have  left the state, but in the                                                               
scope of all of  it they are not most of  the liability; they are                                                               
a  relatively small  fraction. He  was more  concerned about  the                                                               
companies  that  stayed  and  left,   because  they  didn't  find                                                               
anything worth  developing. If there  is a discovery that  is not                                                               
being developed  from some reason,  maybe it gets developed  in a                                                               
future era.  He hoped there  would be some increased  interest in                                                               
Alaska no matter what they do  here when the price recovers. It's                                                               
just hard to develop our "challenged basin" in low prices.                                                                      
What  projects get  developed isn't  so  much a  function of  the                                                               
credit system as of the resource,  Mr. Alper said. The big fields                                                               
have been found; they are  hoping people will develop the smaller                                                               
fields that  might be  a little more  challenging. Some  needed a                                                               
little more exploration;  some needed to be found.  They were not                                                               
trying to play  favorites either in the credit system  or in what                                                               
they  are trying  to  modify it  to; they  are  simply trying  to                                                               
shrink the footprint a little bit.                                                                                              
CHAIR GIESSEL invited Deputy Commissioner  Burnett to come to the                                                               
table and fill  in for the commissioner who had  to go to another                                                               
5:00:50 PM                                                                                                                    
SENATOR   MICCICHE  repeated   his   question   of  whether   the                                                               
administration  evaluated what  type of  production has  been the                                                               
most valuable  to the  GF in  the past,  separate from  what size                                                               
company  provided that  benefit.  This was  in  reference to  the                                                               
graph on slide 27, and how  the credits and risk exposure seem to                                                               
be   disproportionately  going   to  smaller,   under-capitalized                                                               
JERRY BURNETT, Deputy Commissioner,  Department of Revenue (DOR),                                                               
Juneau, Alaska, answered  the issue here of  limiting credits for                                                               
companies with  a larger amount  is to  make sure they  deal with                                                               
companies  that  are  not capital  constrained  differently  than                                                               
companies that were more likely  to be capital constrained and he                                                               
would  have to  go back  and  look at  that question  separately.                                                               
Historically, smaller companies  have provided significantly less                                                               
money to the GF over time.                                                                                                      
5:02:54 PM                                                                                                                    
MR.  ALPER said  there are  two additional  restrictions: one  is                                                               
tied to the percentage of  Alaska resident hire. Conceptually, if                                                               
a company  has a  $10 million certificate  that they  are looking                                                               
for repurchase  of and in the  previous year they had  80 percent                                                               
Alaska hire, the state could cash  out only $8 million. The other                                                               
$2  million would  remain a  company asset  that they  would role                                                               
forward  and  use  in  a  future year  or  against  their  taxes.                                                               
Finally, just to  protect the state's interest in  the long term,                                                               
those would expire after 10 years.                                                                                              
CHAIR GIESSEL  asked if he had  conferred with the DOL  as to the                                                               
constitutionality of the provisions in  the bill regarding Alaska                                                               
resident hire.                                                                                                                  
MR. ALPER  answered yes. The DOL  was unsure, but believed  it is                                                               
possible, and the main reason is  because the state is not taking                                                               
the  credit itself  away from  them. Everyone  will get  the full                                                               
value  of their  credit.  It  was just  a  matter  of the  policy                                                               
choices as  to whether the state  would offer a full  amount or a                                                               
partial amount of cash for it.  This is an idea that the governor                                                               
introduced  into the  mix, but  it  will inevitably  get a  legal                                                               
challenge if this survives and becomes law.                                                                                     
SENATOR  COSTELLO asked  industry's  response to  the local  hire                                                               
part of the bill.                                                                                                               
5:05:19 PM                                                                                                                    
MR. ALPER  answered that industry  was dubious as several  on the                                                               
committee  are,  and it  is  largely  outside of  their  control,                                                               
because the  way the bill  is written,  it also extends  to their                                                               
subcontractors,  which they  have  less influence  over. All  the                                                               
companies testify  that they seek  to maximize their  state hire,                                                               
and  he takes  them at  their word.  Another issue  they had  was                                                               
uncertainty. If  they don't  know how much  of their  credit they                                                               
are  going to  get  paid until  a year  later,  it's harder,  for                                                               
example, to borrow money against that expected payment.                                                                         
CHAIR GIESSEL  asked if the  carry forward loss credits  apply to                                                               
cash only or to all the NOL credits.                                                                                            
MR. ALPER  replied that the NOL  credit is the only  one that can                                                               
be carried  forward; all  the other  cashable credits  are either                                                               
being repealed or are sunsetting.                                                                                               
He said  slide 28 was about  some of the unusual  phenomenon they                                                               
discovered  in statute  that led  to larger  credits than  should                                                               
have  been going  out  the  door that  they  want  to correct  or                                                               
The idea behind  the gross value reduction (GVR) for  new oil was                                                               
that the  company would  earn a production  tax value,  a profit,                                                               
and it  would be reduced  by a percentage  of the gross  value at                                                               
the  point  of production  to  reduce  the  taxable profit  in  a                                                               
synthetic  calculation.  Effectively,  the same  35  percent  tax                                                               
would be  collected but charged  to a smaller number.  That works                                                               
fine until the company in question  has an operating loss. If the                                                               
company  in question  instead of  paying taxes  is losing  money,                                                               
which could  happen in a low  price scenario, it could  also lose                                                               
money in a  high price scenario, for example, in  the early years                                                               
of operation for  a new field if a company  is still drilling new                                                               
wells and building out its infrastructure.                                                                                      
Well, Mr.  Alper said,  the statute  never contemplated  how that                                                               
might play  out, and what  has happened is  one could take  a GVR                                                               
and  subtract  it from  the  operating  loss  and that  on  paper                                                               
appears as  a larger operating  loss, and  it earns a  35 percent                                                               
credit NOL. This has led to  credits well in excess of 35 percent                                                               
and, in a couple of cases, over  100 percent of the amount of the                                                               
loss.  It's completely  legal, but  DOR  feels that  was not  the                                                               
intent. So,  they are looking  to clarify that the  GVR, although                                                               
it can  be subtracted from a  company's profit, it can't  be used                                                               
to increase the size of its loss.                                                                                               
SENATOR STEDMAN said it would be  nice to see what the 35 percent                                                               
tax would be  if there were no  GVR to see how  it interacts with                                                               
the minimum tax.                                                                                                                
5:09:32 PM                                                                                                                    
MR. ALPER said in a little  while he would talk about the minimum                                                               
tax provisions  that would  touch upon the  new eligible  oil. In                                                               
today's price  environment it doesn't  matter much; the  state is                                                               
not  getting  a lot  of  production  tax revenue  anyway.  Should                                                               
prices recover, 9  percent of production from the  North Slope is                                                               
currently eligible for the gross value reduction (GVR).                                                                         
SENATOR STEDMAN  said the whole mechanism  has some peculiarities                                                               
that weren't recognized at the  time. He asked for a quantifiable                                                               
analysis about what a "medium  price range" is for the assessment                                                               
of the GVR.                                                                                                                     
MR.  ALPER responded  that the  primary difference  today in  the                                                               
revenue  received for  that 9  percent of  the oil  on the  North                                                               
Slope versus the  other 91 percent is that the  legacy fields are                                                               
paying at  the minimum tax  level of 4  percent. And the  $8 per-                                                               
barrel,  sliding-scale credit  gets  cut off  once  they butt  up                                                               
against  the minimum  tax -  unless it's  happening for  a second                                                               
year in a row and there is  an operating loss credit (part of the                                                               
floor hardening  provisions is will review  later). Meanwhile the                                                               
$5  a-barrel credit  can drive  the new  GVR oil  fields down  to                                                               
zero. In 2015 the state got taxes  from old oil but none from new                                                               
oil. In 2016, it's not getting much from either.                                                                                
CHAIR GIESSEL said that isn't a  factor of the tax policy as much                                                               
as the low price.                                                                                                               
MR. ALPER  agreed, but added  that in 2016  it's a factor  of the                                                               
fact that one  or more of the producers in  2015 had an operating                                                               
loss  and  that credit  could  be  used  to  go below  the  floor                                                               
beginning in the early months of 2016.                                                                                          
CHAIR GIESSEL said  that raises the policy question  of if people                                                               
are losing money, should the state be taxing them.                                                                              
SENATOR STEDMAN said when they look  at the GVR in 2017 that 9.27                                                               
percent  of the  oil  at  35 percent  credit  is  more like  $3.9                                                               
million.  It  takes that  tax  to  zero  and leaves  another  $26                                                               
million of  the GVR that goes  beyond the tax amount.  He pointed                                                               
out by  contrast, that in  the minimum tax environment,  the per-                                                               
barrel credit listed earlier was a pure mathematical exercise.                                                                  
MR. ALPER said  he wasn't sure what document  Senator Stedman was                                                               
looking at, but  he wanted the opportunity to go  through it with                                                               
him to understand what he was saying.                                                                                           
He said the second loophole-type  provision SB 130 straightens up                                                               
is when a  municipality owns its own gas field  and burns most of                                                               
it in its own utility, that  itself is not a taxable transaction;                                                               
but  there are  circumstances where  that municipal  entity might                                                               
sell some  fraction of  its gas  to a  third party,  because they                                                               
have surplus  production. That  sale is  taxable income,  but the                                                               
question is what the offset is;  is it a lease expenditure? Using                                                               
a  literal  interpretation of  the  law  are circumstances  where                                                               
companies can subtract  all of their expenditures against  2 or 3                                                               
percent of  their revenue and  thus create some  fairly synthetic                                                               
operation losses that  qualify for credits. That  is not terribly                                                               
controversial, but it is something  that is getting cleaned up in                                                               
SB 130.                                                                                                                         
5:15:19 PM                                                                                                                    
SENATOR STOLTZE asked what "loophole" means.                                                                                    
MR. BURNETT answered that slide  28 says exemptions/loopholes and                                                               
some people  consider it a "peculiarity."  It is a term  where no                                                               
one  is suggesting  that there  is bad  behavior on  the part  of                                                               
Municipal Light  and Power (ML&P),  for example, when they  get a                                                               
cash credit for something that the law allows.                                                                                  
SENATOR WIELECHOWSKI asked  how much money has  been lost through                                                               
this loophole.                                                                                                                  
MR. ALPER replied that he didn't  have a number, because very few                                                               
plausible entities  could benefit  and the data  is confidential.                                                               
It's not  a gigantic portion of  the overall pie. Based  upon his                                                               
reading of  the legal  track record,  it appears  to be  truly an                                                               
unforeseen circumstance  of statute  and there is  some consensus                                                               
that it wasn't intended to be written that way.                                                                                 
SENATOR WIELECHOWSKI said  it's not a secret that  it will impact                                                               
ML&P,  which  happens to  be  in  many legislative  districts  in                                                               
Anchorage.  That will  result in  an increase  in rates,  because                                                               
they  would  be  getting  less money  back.  ML&P  has  expressed                                                               
concern to  him about this  provision and  he will be  looking at                                                               
this one  carefully to make  certain that his rate  payers aren't                                                               
impacted severely.                                                                                                              
CHAIR GIESSEL asked where this provision is in SB 130.                                                                          
MR. ALPER answered that he thought  it was in section 27, towards                                                               
the back of the bill.                                                                                                           
SENATOR STEDMAN  said the resources  are owned by the  public and                                                               
the state is  not structured for one particular group  to have an                                                               
advantage over  or a  first call versus  another group,  and when                                                               
they   get    into   the    intricacies   of    this   particular                                                               
exemption/credit, it  will be hard  for utilities to  justify the                                                               
credits they  put in to  try to  drive more oil  production where                                                               
the state has no ability to  recoup. The credits are put in place                                                               
to move cash flow in time  to make marginal projects viable. It's                                                               
just gotten totally out of  hand. He wanted some discussion about                                                               
the folks  in the gas belt  versus the folks that  are sitting in                                                               
the oil  furnace belt  where his  constituents heat  their homes.                                                               
He wants to be fair around the state.                                                                                           
CHAIR GIESSEL  said she was  under the impression that  his folks                                                               
had hydro dams that the state had built for them.                                                                               
SENATOR STEDMAN responded that about  80 percent of people in his                                                               
district heat with oil, because  electricity too expensive at 12-                                                               
13 cents a kilowatt.                                                                                                            
5:20:17 PM                                                                                                                    
MR. ALPER  said it was up  to the chair  how far he would  go and                                                               
the last two  portions of the bill are  strengthening the minimum                                                               
tax,  which is  in several  different provisions  in SB  130. The                                                               
main and  most important one,  the biggest dollar value,  is that                                                               
you can't  use an  operating loss  credit specifically  to reduce                                                               
payments below  the 4 percent  floor. So,  that is the  one where                                                               
the major producers  who might have lost money in  one year would                                                               
still have to continue to pay  the gross tax the next year, which                                                               
is comparable  to the gross  tax paid  in other states  that have                                                               
purely  a gross  tax. Also  the exploration  credit would  not be                                                               
able to be used to go below the floor for the small producer.                                                                   
The  other provision  extends the  4  percent floor  to new  oil,                                                               
meaning the cutoff  for the GVR ($5 barrel credit)  would also be                                                               
limited by  the 4 percent rather  than the zero. They  have asked                                                               
that those two changes and the  section that describes them to be                                                               
retroactive  to January  1, 2016,  a controversial  decision. The                                                               
idea being because they know  of a specific circumstance where an                                                               
entity with an operating loss  is offsetting its taxes this year,                                                               
but if  they truly want  to harden  the floor, they  should begin                                                               
doing it with the beginning of  the present year they are working                                                               
on. In addition  to all the changes to how  the floor is treated,                                                               
they are  looking to  raise the level  of the floor  to a  flat 5                                                               
percent at all price points.                                                                                                    
5:22:24 PM                                                                                                                    
SENATOR STEDMAN  asked what the  NOL loss and credit  amounts are                                                               
for  north of  latitude 68  for major  producers in  this current                                                               
fiscal year.                                                                                                                    
MR. ALPER answered  that the tax is a calendar  year tax, so part                                                               
of  it would  have to  be estimated.  He wouldn't  be comfortable                                                               
talking  about  2015  numbers because  it's  one,  possibly  two,                                                               
companies, whereas in  2016 he expects all three to  have a loss.                                                               
The DOR forecast talks about $1  to $1.5 billion of loss: and NOL                                                               
credits  in the  neighborhood of  $.5 billion:  a couple  hundred                                                               
million of  that being used  to offset minimum tax  liability and                                                               
the  other  $300  million being  incremented  to  the  previously                                                               
carried forward NOLs.                                                                                                           
SENATOR STEDMAN said  he thought those losses  were $1.9 billion.                                                               
Isn't  the  credit  40  percent  because of  the  tail  from  the                                                               
transition  amount laid  out in  SB 21,  and the  NOL calculation                                                               
straddles two different calendar  years with two different rates?                                                               
It's a significant amount of money.                                                                                             
MR. ALPER  said he wasn't  certain where the $1.9  billion figure                                                               
came from,  but he  didn't doubt  it. He  was trying  to describe                                                               
FY2016, which is half in CY15 and half in CY16.                                                                                 
SENATOR STEDMAN  said if he  is interpreting the  Revenue Sources                                                               
Book correctly  it's $1.9 billion  in loss carry forwards  and 40                                                               
percent credits of $770 million.   It's a significant amount this                                                               
year. He also wanted a guesstimate of CY16/17 numbers.                                                                          
CHAIR GIESSEL said  they certainly do recognize  the magnitude of                                                               
the numbers as well  as the fact that three rigs  out of five are                                                               
being laid  down on the North  Slope, because they can  no longer                                                               
be supported in this price environment.                                                                                         
SENATOR WIELECHOWSKI said every time  he had been involved in oil                                                               
taxes,  they  had  comparatives   with  other  states  and  other                                                               
jurisdictions  around   world.  He   hoped  to  see   an  overall                                                               
comparison of how  Alaska's tax and royalty  structure at current                                                               
dollars  compares with  North Dakota,  Texas,  and Louisiana  and                                                               
other comparable jurisdictions around the world.                                                                                
MR. ALPER  responded that he  would provide to the  committee the                                                               
latest  Competitiveness  Review  Board comparison  document  that                                                               
compares Alaska with others. It is  reasonable to say that in the                                                               
current price  environment Alaska is a  very low regime -  and it                                                               
offers credits. It  is a system that is designed  to collect more                                                               
money  at  higher  prices  with the  counterpart  to  that  being                                                               
getting  less at  low  prices.  Now that  people  are looking  at                                                               
several  years in  a row  of lower  prices, that  logic is  being                                                               
rethought. One  advantage North Dakota  and Texas have  for their                                                               
own revenue  is a  fixed gross  tax. They  get a  certain percent                                                               
whether the price of oil is high  or low; the downside of that is                                                               
when the price goes to $100,  they aren't capturing all that they                                                               
could. Part of the balance that  has always been before this body                                                               
is how much  can the state can  take at the high  end in exchange                                                               
for what it gives back at  the low end, and that consensus hasn't                                                               
been truly reached. Alaska has a kind of hybrid.                                                                                
CHAIR  GIESSEL  asked him  to  highlight  the difference  in  the                                                               
revenue  collection  under ACES  and  SB  21  in this  low  price                                                               
5:28:18 PM                                                                                                                    
MR.  ALPER responded  that  the  number in  June  using the  best                                                               
available information was that SB  21 would have been bringing in                                                               
$300  to $400  million  a  year more,  the  difference being  the                                                               
minimum tax,  itself, based  on $50-odd  oil. About  $400 million                                                               
would come in the minimum tax  whereas under ACES the minimum tax                                                               
calculation would  be offset, effectively  zeroed out, by  the 20                                                               
percent  capital  credit -  based  on  known amounts  of  ongoing                                                               
spending. As the price goes  further down, the delta will shrink.                                                               
In 2015,  he would think the  difference would be more  like $150                                                               
million, because  that is about  how much production  tax revenue                                                               
the state got. It would be close to the same in 2016 and 2017.                                                                  
5:29:22 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  for numbers more or less  on what the                                                               
state would have made if SB 21 was in place during ACES.                                                                        
MR. ALPER answered  that a previous analysis is in  memo form and                                                               
he could  forward it  to the  committee, but  over the  six years                                                               
that ACES was  in place between FY08 through January  1, 2014, it                                                               
brought in  $27 billion  in net  production tax  and SB  21 would                                                               
have  brought in  about $18  or $19  billion. The  revenue spikes                                                               
came from  those years  of very  high prices  when ACES  had very                                                               
high progressivity.                                                                                                             
CHAIR  GIESSEL  remarked  that   Alaskans  have  been  incredibly                                                               
fortunate: it  raised taxes tremendously  before the  largest oil                                                               
price spike  in history, then  instituted a higher base  tax with                                                               
more  protection  on   the  downside  before  one   of  the  most                                                               
precipitous  drops of  oil prices  in history.  "We did  well not                                                               
because of our brains, but because of our good luck."                                                                           
SENATOR COSTELLO  asked in this  low commodity  price environment                                                               
is Alaska the only state that is revising its tax credits.                                                                      
MR. ALPER  replied that he  didn't know off-hand, and  when there                                                               
was an  answer, it wasn't  the group Alaska wants  to necessarily                                                               
be associated with.  Nigeria and Venezuela are  thinking about it                                                               
now probably.  Alaska does have  the reputation of doing  it more                                                               
often  than  other  states.  However,  this  bill  is  not  being                                                               
characterized as  a change to the  oil taxes; it is  considered a                                                               
reform to  some of the excesses  of the tax credit  regime around                                                               
the edges  of the core tax  system that they are  trying hard not                                                               
to get into.                                                                                                                    
5:31:52 PM                                                                                                                    
Slide 30  is a little  bit of a  catch-all, he said.  It includes                                                               
interest  rate reform.  A  technical error  in  SB 21  eliminated                                                               
compound  interest and  put all  assessments on  delinquent taxes                                                               
not just  for oil  and gas, but  for all of  Alaska's taxes  on a                                                               
simple interest footing. They are  hoping to restore that as well                                                               
as increase the interest rate to  something more akin to what the                                                               
state earns on  its savings on the Permanent Fund  to reflect the                                                               
opportunity cost  involved. If  taxes aren't  paid one  year, but                                                               
get paid  two years later,  and the  state draws from  savings to                                                               
make up that difference, the state  wants to get paid back at the                                                               
rate  that  the  savings  themselves might  have  earned  in  the                                                               
Next is  a confidentiality waiver,  a relatively  narrow increase                                                               
but  it is  important. DOR  doesn't  want to  talk about  company                                                               
profits and  how much taxes  they pay;  they simply want  to list                                                               
the names of companies who receive  tax credits and how much they                                                               
get. Another is that a small  and subtle provision that has to do                                                               
with the gross value at point  of production not going below zero                                                               
has  a  couple   of  technical  issues  as  well   as  some  more                                                               
substantial policy issues.                                                                                                      
Finally, Mr. Alper explained, right  now if someone owes taxes to                                                               
the  state, at  the  moment they  file to  get  their tax  credit                                                               
certificate the  tax gets paid. The  department could effectively                                                               
hold back  credit to  pay taxes, but  it has  found circumstances                                                               
where  a company  might  not owe  taxes but  owe  to other  state                                                               
departments - a  royalty, a lease payment, fines to  an agency or                                                               
something like that  - and is trying to broaden  in statute their                                                               
ability to use  credit money to satisfy other  obligations to the                                                               
state, not just taxes, before the credit is paid.                                                                               
CHAIR GIESSEL  said currently, transportation costs  can't reduce                                                               
gross  value  below  zero,  so  as  production  declines  tariffs                                                               
(transportation costs) will go up and  asked if he is saying they                                                               
can't deduct that any further.                                                                                                  
MR.  ALPER replied  a model  of transportation  costs across  the                                                               
North Slope indicates they are  in the neighborhood of $10 barrel                                                               
and that  number will go  up. But  the number varies  wildly from                                                               
field to  field depending on  how far  they are from  the center.                                                               
Her  question becomes  if one  particular field  has a  well head                                                               
value of  less than  zero, can  that negative  number be  used to                                                               
offset  positive  numbers  coming   from  other  fields  for  tax                                                               
purposes, and  that is  a totally  legitimate policy  debate that                                                               
one might disagree  with. Although this won't lead  to a negative                                                               
royalty  because  that  is a  separate  calculation,  it  doesn't                                                               
impinge upon the  new gross tax on private royalties  that are on                                                               
the books (if  someone pays a 5 percent tax  based on gross value                                                               
at the point of production, at  the very least the state needs to                                                               
ensure that can't become a negative number.                                                                                     
CHAIR  GIESSEL  said  she  looked  forward  to  discussing  that.                                                               
Finding no  further questions  for the  department, she  said the                                                               
presentation would continue tomorrow beginning on slide 31.                                                                     

Document Name Date/Time Subjects
SB 130 Presentation +DOR Presentation to SRES-4-2-2016.pdf SRES 4/4/2016 3:30:00 PM
SB 130
SB130 ver A.pdf SRES 4/4/2016 3:30:00 PM
SB 130
SB130 Sponsor Statement - Governor's Transmittal Letter.pdf SRES 4/4/2016 3:30:00 PM
SB 130
SB130 Fiscal Note-0609-DOR-TAX-01-13-16.pdf SRES 4/4/2016 3:30:00 PM
SB 130
SB130 Fiscal Note-0609-DNR-DOG-01-11-16.pdf SRES 4/4/2016 3:30:00 PM
SB 130
SB130-DOR Presentation to SRES 4-4-16.pdf SRES 4/4/2016 3:30:00 PM
SB 130
enalytica presentation to SRES-4-2-2016.pdf SRES 4/4/2016 3:30:00 PM
SB 130