Legislature(2015 - 2016)BUTROVICH 205

04/06/2016 03:30 PM RESOURCES

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
03:30:20 PM Start
03:30:48 PM SB130
03:31:54 PM Dnr Overview
04:56:00 PM Dor Second Presentation: Additional Modeling and Scenario Analysis
05:32:29 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Pending Referral> -- Invited Testimony Only --
Heard & Held
-- Testimony <Invitation Only> --
Department of Natural Resources
Department of Revenue
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
        [Contains discussion of companion bill HB 247.]                                                                       
3:30:48 PM                                                                                                                    
CHAIR GIESSEL  announced consideration  of SB 130.  The committee                                                               
would  first  hear  from  the  Department  of  Natural  Resources                                                               
followed  by the  Department of  Revenue (DOR).  She invited  Dr.                                                               
Paul Decker, Petroleum Geologist,  and Alex Nouvakhov, Commercial                                                               
Analyst, both  with the  Division of Oil  and Gas,  Department of                                                               
Natural Resources (DNR), to testify via teleconference.                                                                         
3:31:47 PM                                                                                                                    
SENATOR STOLTZE joined the committee.                                                                                           
^DNR Overview                                                                                                                   
3:31:54 PM                                                                                                                    
PAUL  DECKER,  Petroleum  Geologist,  Resource  Evaluation  Team,                                                               
Division of Oil  and Gas, Department of  Natural Resources (DNR),                                                               
Anchorage, Alaska, introduced himself.                                                                                          
ALEX NOUVAKHOV, Commercial  Analyst, Commercial Section, Division                                                               
of Oil and Gas, Anchorage, Alaska, introduced himself.                                                                          
MR. DECKER  said his slides  and presentation are an  overview of                                                               
oil and  gas industry activity  in Alaska  today and how  the tax                                                               
credits interact with the Department of Revenue.                                                                                
3:32:59 PM                                                                                                                    
SENATOR MICCICHE joined the committee.                                                                                          
MR. DECKER  said slide 2  looks at  the North Slope,  Cook Inlet,                                                               
and  the  Interior  basins that  are  sometimes  called  Frontier                                                               
basins.  The   resources  and  reserves   for  those   areas  are                                                               
considered along with current activity  and new developments, who                                                               
the  players   are,  and  some   of  the  leasing   activity  and                                                               
exploration licensing.                                                                                                          
MR.  DECKER said  slide 3  is  a North  Slope resources  overview                                                               
showing  land ownership  in  the Alaska  Arctic.  Areas in  green                                                               
represent  permanently protected  federal lands:  national parks,                                                               
national  monuments,  and  the Arctic  National  Wildlife  Refuge                                                               
(ANWR),  all of  which are  basically  in the  Brooks Range.  Two                                                               
regions  are between  the  Brooks Range  and  the shoreline:  the                                                               
Foothills  and  the Coastal  Plain.  In  the west,  the  National                                                               
Petroleum  Reserve-Alaska (NPR-A),  is managed  by the  Bureau of                                                               
Land Management  (BLM); it  is just  about the  same size  as the                                                               
State  of Indiana.  The Arctic  National  Wildlife Refuge  (ANWR)                                                               
1002  area,   on  the  right,  is   not  necessarily  permanently                                                               
protected against oil  and gas leasing; an act  of Congress could                                                               
make that  either open to  leasing or a federal  wilderness area.                                                               
It's in sort-of a limbo status.                                                                                                 
The  state lands  are in-between  the NPR-A  and ANWR.  The state                                                               
offers lease sales there every  year in November. The North Slope                                                               
areawide lease  sale is in  the Central North Slope  onshore. The                                                               
Beaufort Sea areawide  lease sale is north of  that, between zero                                                               
and three  miles offshore. The  state's Foothills  areawide lease                                                               
sale  is in  the  south. The  Arctic  Slope Regional  Corporation                                                               
(ASRC) also owns lands in the Foothills).                                                                                       
MR.  DECKER said  that most  of the  oil and  gas development  is                                                               
strung  along  the shoreline  and  is  coming from  a  subsurface                                                               
feature that  traps oil and gas  called the Barrow Arch,  a major                                                               
subsurface  ridgeline that  traps oil  and gas.  Another belt  of                                                               
mostly gas field accumulations is  located near the northern edge                                                               
of the  Foothills; most  of them are  small gas  discoveries that                                                               
have never been commercialized.                                                                                                 
3:37:28 PM                                                                                                                    
MR. DECKER said another thing to  be aware of is the 639 existing                                                               
exploration  wells,  even  though exploration  density  is  still                                                               
pretty  low  across large  parts  of  the  North Slope.  Slide  4                                                               
displayed  federal estimates  - United  States Geological  Survey                                                               
(USGS)  and Bureau  of Ocean  Energy Management  (BOEM) -  of the                                                               
undiscovered technically recoverable  conventional resources that                                                               
could  be   lurking  out  there   in-between  the   various  well                                                               
penetrations  in Arctic  Alaska  consisting of  about 40  billion                                                               
barrels of oil and about 207  trillion cubic feet of gas. The gas                                                               
in the  Outer Continental  Shelf (OCS) and  the state  waters and                                                               
onshore areas is a rough  equivalent at around 100 trillion cubic                                                               
feet (tcf)  of gas. There  is about  16 billion barrels  (BBO) of                                                               
undiscovered  onshore and  in-state  waters oil  versus about  24                                                               
billion barrels in the OCS.                                                                                                     
3:38:58 PM                                                                                                                    
MR.  DECKER said  slide 5  displayed  Arctic Alaska  oil and  gas                                                               
reserves, and that  30 tcf of natural gas is  associated with the                                                               
oil in the North Slope developed  oil fields, most of which is at                                                               
Prudhoe Bay  and Point  Thomson. However,  without a  pipeline in                                                               
place, most  of that gas is  not really in the  reserves category                                                               
and is  best described as  "contingent resource,"  the difference                                                               
being that  without a  pipeline, it's  not connected  to markets.                                                               
So, most of that gas can't  be monetized until that connection is                                                               
made. Of that 30  tcf/gas about 5.9 tcf is believed  to be in the                                                               
reserves  category (connected  to  a local  market  on the  North                                                               
Slope) that  can be converted  into natural gas liquids  and sold                                                               
to the TransAlaska  Pipeline and minor sales  to manufacturers of                                                               
miscible injectant  that can  be exported to  other units.  So, a                                                               
small fraction  of gas is in  reserves, but for the  most part it                                                               
is still contingent resource.                                                                                                   
On  the  oil  side,  Mr.  Decker  said,  the  Energy  Information                                                               
Administration (EIA)  in 2014  carried an  estimate of  about 2.8                                                               
billion barrels of  proved oil reserves on the  North Slope. That                                                               
is a difficult  number for the department  to actually determine,                                                               
because  it  implies  a  lot   of  knowledge  about  a  minimally                                                               
commercial production rate.                                                                                                     
3:41:02 PM                                                                                                                    
MR. DECKER  said that slide 6  is about current activity  and new                                                               
developments  on  the  North  Slope   in  alphabetical  order  by                                                               
operator. Accumulate  Energy is  a relatively  new player  on the                                                               
North Slope;  it is an  Australian organization that  backed into                                                               
an  agreement  with Burgundy  Exploration  that  had bought  some                                                               
leases. Then they came to the  state's last lease sale and bought                                                               
quite a  few more. They are  evaluating the shale trend  south of                                                               
Prudhoe Bay  and Kuparuk,  very near the  Dalton Highway  and the                                                               
pipeline. Accumulate Energy drilled the  Icewine 1 well last year                                                               
and was encouraged with the  results. They are conducting seismic                                                               
acquisition on their extensive lease acreage this winter.                                                                       
Arctic  Slope  Regional  Corporation's (ASRC)  AEX,  drilled  the                                                               
Placer 3 well this year in  the Placer Unit just west of Kuparuk,                                                               
looking at a Kuparuk sea sand  reservoir.  It's finished, but the                                                               
results are still confidential.                                                                                                 
BP, the  operator at Prudhoe  Bay Unit,  in 2015 completed  8 new                                                               
grass  roots  (starting  at  surface)  wells,  conducted  46  new                                                               
sidetracks to  different target locations they  haven't yet fully                                                               
gained, and  conducted about  420 well  workovers in  the Initial                                                               
Participation  Area  (IPA)  at   Prudhoe  Bay  alone.  They  also                                                               
completed  the first  wells in  the  Lisburne IPA  that had  been                                                               
drilled in 9 years. They  also completed a 3D seismic acquisition                                                               
program called  the North Prudhoe  Survey, partially  onshore and                                                               
partially offshore, along the northern edge of a big unit.                                                                      
3:43:35 PM                                                                                                                    
Caelus (slide 7)  is the operator that took over  from Pioneer at                                                               
the  Oooguruk  Unit.  They  have   been  diligent  about  ongoing                                                               
development of  a Jurassic Nuiksut sandstone  reservoir and drill                                                               
4-5  wells a  year, all  of them  long extended  horizontal wells                                                               
with  sometimes multiple  stage fractures  to exploit  what could                                                               
normally  be  considered  a  fairly  tight  reservoir.  They  are                                                               
undertaking the Nuna  Project, but with the current  low price of                                                               
oil,  they have  ratcheted back  from  some of  their plans.  So,                                                               
right  now  the  first  production is  expected  from  the  Torok                                                               
formation reservoir at  Nuna in late 2018, if  all goes according                                                               
to plans.                                                                                                                       
Caelus is also  exploring in state waters in Smith  Bay, half way                                                               
west from the state lands  towards Barrow along the northern edge                                                               
of  the NPR-A.  They have  drilled  two wells  whose results  are                                                               
still confidential.                                                                                                             
3:45:23 PM                                                                                                                    
ConocoPhillips has  been busy on  at least two  different fronts:                                                               
the  Coleville River  Unit  and the  Greater  Mooses Tooth  (GMT)                                                               
Unit. They kicked  off first production in October,  2015, at the                                                               
Colville River  Unit CD  5 well  which is  mostly in  NPR-A. That                                                               
project is  expected to  peak around 16,000  BBO/day in  the next                                                               
two or  three years, if not  already. They plan a  total of eight                                                               
new wells this year in the field near the Colville River Unit.                                                                  
ConocoPhillips sanctioned  a $900 million Greater  Mooses Tooth 1                                                               
on the  federal NPRA  and that  is expected  to produce  in 2018,                                                               
reaching an  expected peak of 30,000  BBO/day shortly thereafter.                                                               
They also  have plans to drill  two wells in the  western edge of                                                               
the GMT Unit.                                                                                                                   
CHAIR GIESSEL asked if CD5 production is considered new oil.                                                                    
MR. DECKER  answered that a  large part of it  is, if not  all of                                                               
it,  but  there  are  some  interesting  complications  regarding                                                               
metering that  he isn't the best  at answering. He wanted  to get                                                               
back to her on whether it would qualify.                                                                                        
CHAIR GIESSEL asked if DNR or DOR makes that determination.                                                                     
MR. DECKER replied that the DNR  works alongside DOR to make that                                                               
CHAIR GIESSEL said  the GMT 1 is on federal  land, so the state's                                                               
royalty will be different and asked  him to explain what it would                                                               
MR.  DECKER replied  that the  state  gets a  50 percent  revenue                                                               
sharing  on things  like lease  and  royalty revenue  on the  BLM                                                               
lands  of NPR-A,  with the  caveat  that the  state revenue  from                                                               
there all  goes to the  stakeholder groups that are  impacted, in                                                               
this case,  Native shareholders on  the North Slope. It  does not                                                               
go to the  General Fund (GF). On the other  hand, he believed the                                                               
state still receives  its full value in production  tax. He would                                                               
work to have that information confirmed.                                                                                        
SENATOR  STEDMAN asked  if the  royalty was  privately negotiated                                                               
for CD5 and if the state's credits are applicable there.                                                                        
3:49:35 PM                                                                                                                    
MR. DECKER  answered that the  CD5 area is largely  controlled by                                                               
ASRC subsurface.  For clarification,  he was  earlier referencing                                                               
activity  that  was  occurring  exclusively  on  Bureau  of  Land                                                               
Management areas. So, the royalty  on CD5 barrels will be mostly,                                                               
if  not entirely,  tied  to  ASRC. The  portion  of  CD5 that  is                                                               
affected by different  royalty rates may be on a  tract basis and                                                               
he didn't know  off the top of  his head if that  is 12.5 percent                                                               
or 16.66 percent. He would clarify that for the committee.                                                                      
3:50:49 PM                                                                                                                    
He  continued that  ConocoPhillips, on  slide 8,  in the  Kuparuk                                                               
River  Unit,  kicked  off  a  new  drill  site,  Drill  Site  2S,                                                               
following  up on  good delineation  well results  at Shark  Tooth                                                               
that  was drilled  a  couple  years ago.  That  came  on line  in                                                               
October, 2015.  They also have significant  drilling planned this                                                               
year for the Kuparuk, Tarn, and  the West Sak reservoirs. At West                                                               
Sak they  plan new production at  Drill Site 1H News  and that is                                                               
planned to  come on line according  to plan in late  2017 with an                                                               
expected peak of 8,000 BBO/day.                                                                                                 
3:51:45 PM                                                                                                                    
ExxonMobil  completed the  initial production  system (IPS)  that                                                               
was lined  out in the  Point Thomson Settlement Agreement.  A big                                                               
portion of that  was drilling their West Pad well  and the PTU 17                                                               
well  that  are both  complete.  They  also completed  a  22-mile                                                               
liquid  hydrocarbon pipeline  from  Point Thomson  to the  Badami                                                               
junction,  which  connects  to the  TransAlaska  Pipeline  System                                                               
(TAPS). Startup activity  is already in progress  this week. They                                                               
are not shipping oil  or condensate all the way out  of a unit on                                                               
any sustained basis,  but they expect to do that  in the weeks if                                                               
not a  month ahead of time.  By mid-May they should  be producing                                                               
10,000 BB/day of condensate from that gas pipeline project.                                                                     
Great  Bear  Petroleum  has  been  an  active  lease  holder  and                                                               
explorer over  the last few years  in the shale trend  just south                                                               
of Prudhoe Bay.  They also have some  conventional prospects that                                                               
they want to  understand better. They are not  drilling this year                                                               
or testing, but  they are acquiring a 450  square-mile 3D seismic                                                               
survey and  might be out  at their  Alkaid well that  was drilled                                                               
last year to see how that pans out.                                                                                             
3:53:33 PM                                                                                                                    
MR. DECKER turned  to slide 9, and said Hilcorp  is now an active                                                               
operator on  the North Slope  both at Northstar and  Milne Point.                                                               
At  Northstar  they have  brought  two  shut-in wells  back  into                                                               
production  this past  year,  and at  Milne  Point, they  drilled                                                               
three new wells and have started  construction of a new grind and                                                               
injection waste  facility. Hilcorp  plans to  drill 10  new wells                                                               
and  complete 16  workovers  in  the year  ahead.  They are  also                                                               
applying currently to  expand the unit to  encompass an essential                                                               
waste disposal well along the northern fringe of that unit.                                                                     
Repsol and Armstrong  are partners in the Pikka  Unit and working                                                               
hard towards  developing the Nanushuk  Project. People  there are                                                               
familiar with  some of the  estimates that  have come out  in the                                                               
media of  contingent resource  that if  it's sanctioned  would go                                                               
into  the  reserve  category.  Last   year,  they  drilled  three                                                               
exploration  wells and  sidetracked  one. Since  2012, they  have                                                               
actually drilled 12 new wells of  sidetracks in the Pikka Unit as                                                               
well as some  others in nearby areas. They  commenced the project                                                               
Environmental   Impact  Statement   (EIS)   under  the   National                                                               
Environmental Policy  Act (NEPA)  last summer,  and it  will take                                                               
about three years for that EIS  to reach fruition and a record of                                                               
decision.  They  plan  to drill  one  additional  exploration  or                                                               
delineation well in 2017 that will  help them decide on the scale                                                               
of  development   there.  It's  all  very   promising,  with  the                                                               
potential for  125,000 barrels a  day in average  production, and                                                               
he hopes to see it move forward.                                                                                                
3:55:37 PM                                                                                                                    
In  the   2004-2014  time  period,  110   exploratory  wells  and                                                               
sidetracks were drilled in the  north Alaska region as opposed to                                                               
1,646  development  and  service  wells and  sidetracks.  On  the                                                               
seismic front, about 870 line miles  of 2D and about 9,945 square                                                               
miles of  3D data has been  acquired; most of these  surveys were                                                               
acquired with  tax credits.  This is the  onshore and  shore fast                                                               
ice zone  where land acquisition  techniques are used  as opposed                                                               
to seismic vessels in the summer time offshore.                                                                                 
3:56:49 PM                                                                                                                    
CHAIR  GIESSEL said  she understands  there  are seismic  library                                                               
companies who  come to Alaska and  don't have leases, but  get an                                                               
exploration license and go out  and shoot seismic. They gain data                                                               
which they can get exploration  credits for (because they have an                                                               
exploration license). They  take the data they  have obtained and                                                               
sell  it to  multiple  companies  over time.  She  asked if  that                                                               
understanding was correct so far.                                                                                               
MR. DECKER answered that was  pretty much right. One distinction,                                                               
however,  is  that  seismic  libraries   do  something  a  little                                                               
different  than   acquiring  an  exploration  license   from  the                                                               
department. They  acquire a permit, usually  a miscellaneous land                                                               
use  permit, to  acquire the  data. They  don't need  to have  an                                                               
exploration license or a lease  to shoot seismic data. Anyone can                                                               
do that whether they are a  leaseholder or not, and that is often                                                               
how they decide whether they want to bid on leases.                                                                             
CHAIR GIESSEL asked  if the state has claim to  the seismic data,                                                               
as it does under certain other permits.                                                                                         
MR. DECKER  answered the state  would not  own the data,  but the                                                               
libraries  are  required   to  submit  it  to   the  state  under                                                               
conditions of their land use permit (LUP).                                                                                      
CHAIR GIESSEL  asked if that  data remains confidential  with DNR                                                               
for the 10-year time frame.                                                                                                     
MR. DECKER answered  that seismic data such as  this, in general,                                                               
has no fixed confidentiality period.  So, this data would be held                                                               
confidential in perpetuity. Other than  the fact that now most of                                                               
the data is being acquired under  the tax credit program, that is                                                               
where the 10-year release to the public gets attached.                                                                          
In the  case of  the Frontier  Basin credits,  AS 43.55.025(a)(7)                                                               
has a  two-year period  of confidentiality  after which  the data                                                               
can be released.                                                                                                                
4:00:12 PM                                                                                                                    
CHAIR  GIESSEL  asked if  the  seismic  libraries pay  the  state                                                               
corporate  income  tax  since  they   sell  the  data,  sometimes                                                               
multiple times, to different companies.                                                                                         
MR. DECKER said  he would defer that answer to  the Department of                                                               
Revenue (DOR).                                                                                                                  
CHAIR GIESSEL asked  him if there was any  other information they                                                               
should have.                                                                                                                    
MR. DECKER answered  not without any other  specific questions he                                                               
wouldn't  know where  to begin.  It's good  news to  see so  much                                                               
SENATOR  WIELECHOWSKI asked  what  percentage of  the tax  credit                                                               
these companies get.                                                                                                            
MR. DECKER answered  that it varies by credit, and  once they get                                                               
down into  the slides  about DNR's participation  in the  DOR tax                                                               
credit programs, slide 31 summarizes  them. They would range from                                                               
30 to 40 percent in most cases.                                                                                                 
CHAIR  GIESSEL asked  which credit  would be  the one  they could                                                               
MR. DECKER  answered AS  43.55.025(a)(4) has been  a big  one. AS                                                               
43.55.025(a)(7) is  the Frontier basin  credit that ranges  up to                                                               
75 percent or $10 million, whichever  is the lesser. Under the AS                                                               
43.55.023(a)(2)  and (l)(2)  there  are 20  percent credits  that                                                               
have  been applied.  The (a)(2)s  have applied  to a  lot of  the                                                               
North Slope shoots and the  (l)(2) well lease expenditure credits                                                               
have applied to  quite a lot of Cook Inlet  projects. So, credits                                                               
are 20 to 40 to 75 percent for various seismic programs.                                                                        
SENATOR  COSTELLO  referenced  slide  12  that  lists  the  small                                                               
independents  and  asked to  get  the  dates  for those  and  the                                                               
midsize  companies  with the  years  that  they started  work  in                                                               
MR. DECKER said he could do that.                                                                                               
SENATOR  COSTELLO  said  the  idea  is  to  see  if  any  of  the                                                               
incentivizing legislation they have  passed actually ties in with                                                               
their entrance into Alaska.                                                                                                     
4:04:28 PM                                                                                                                    
MR. DECKER said  slides 11 & 12 break down  the companies working                                                               
on   the   North  Slope   according   to   large  majors,   large                                                               
independents, midsized companies,  and smaller independents. They                                                               
used  an arbitrary  market capitalization  cutoff  for the  large                                                               
majors   at    $40   billion;   these   include    BP,   Chevron,                                                               
ConocoPhillips,   Eni,   ExxonMobil,   and   Shell.   The   large                                                               
independent  and  midsized  companies  are  Armstrong,  Anadarko,                                                               
British  Gas  (BG)  Alaska  (now  absorbed  into  Shell),  Caelus                                                               
Natural  Resources,  Halliburton  (teamed up  with  Great  Bear),                                                               
Hilcorp Alaska and Repsol.                                                                                                      
4:05:58 PM                                                                                                                    
Slide 12 listed  38 small independents, nine or ten  of which are                                                               
actually  exploring currently.  Most of  them have  bought leases                                                               
and  have working  interest in  leases, but  are not  necessarily                                                               
actively exploring. One more should be on the list: Linc Energy.                                                                
MR. DECKER  said they have a  histogram for each of  the northern                                                               
Alaska  area-wide  sales.  Slide  13  displayed  a  histogram  of                                                               
areawide leasing activity  on the North Slope  (the central North                                                               
Slope onshore  in the  Barrow Arch region).  Since 1998  when the                                                               
state first began  areawide lease sales, he pointed  out that 140                                                               
tracts  were offered  in 2011,  but  in 2010,  117 tracts  (shale                                                               
acreage)  were purchased  largely  by Great  Bear.  That was  the                                                               
first entrance  of anyone  looking at shale  on the  North Slope,                                                               
and it  caused the DNR  to reexam  some of its  leasing thinking.                                                               
So, in  2011 DNR restructured its  lease sale in the  shale trend                                                               
area,  and for  a large  part of  the central  North Slope  lease                                                               
sale,   they began offering  tracts that were one-fourth the size                                                               
of  the previous  tracts.  That was  basically  to safeguard  the                                                               
state's  interest  so  that  companies couldn't  hold  a  lot  of                                                               
acreage by drilling  one well on each lease where  it wouldn't be                                                               
able to  drain more than a  fraction of that lease.  The point is                                                               
that more leases  were bought in 2011, but less  acreage was sold                                                               
in that  sale. The  state still  has that  same structure  in the                                                               
shale play area.                                                                                                                
Another standout  year is 2014,  Mr. Decker said, when  more than                                                               
100 full-sized tracts  were picked up by Caelus  along the Barrow                                                               
Arch near the shoreline east  of the Dalton Highways heading over                                                               
the  Point Thomson  Unit. Armstrong  and the  shale players  also                                                               
picked up acreage in that sale.                                                                                                 
In  2015,  131  leases  sold;  121 were  in  the  shale  play  by                                                               
Accumulate Energy teamed up with Burgundy Xploration.                                                                           
SENATOR  MICCICHE asked  for a  comparison  of Alaska's  previous                                                               
average tract size  and the split up tract sizes  to other states                                                               
for 2014 and 2015.                                                                                                              
MR. DECKER answered that most states  don't have a lot of mineral                                                               
rights to  offer in their lease  sales. Most of the  places where                                                               
the shale plays have been  active like North Dakota, south Texas,                                                               
and the East Coast  are private lessees and a lot  of work is put                                                               
into  rounding up  enough leases  to aggregate  acreage there  to                                                               
drill on.  It's widely  recognized that  shale wells  can't drain                                                               
anything  like the  size  of Alaska's  ordinary  three by  three,                                                               
nine-square mile tracts.                                                                                                        
4:10:41 PM                                                                                                                    
SENATOR MICCICHE  asked if he  could compare it  to the OCS  or a                                                               
similar jurisdictional controlled area.                                                                                         
MR.  DECKER answered  that the  three-by-three-mile, nine-square-                                                               
mile tracts in most areas  of onshore Alaska compare very closely                                                               
to typical OCS tracts, which are in kilometers.                                                                                 
SENATOR COSTELLO asked him to  explain the significance of single                                                               
and multiple bids. Does "multiple"  mean it's more attractive and                                                               
what is the significance of comparing the year 2013 to 2014?                                                                    
MR. DECKER answered that it's just  a reflection of the fact that                                                               
DNR  offers tracts  for  competitive bidding.  In  a majority  of                                                               
lease  sales,  the  majority  of tracts  sold  are  sold  without                                                               
competition,  meaning nobody  actually competes  in the  bidding.                                                               
The  lion's  share of  the  activity  they  have seen  in  recent                                                               
decades has been  a single company pursuing any  given tract, and                                                               
he wasn't ready to compare  and contrast the competition from one                                                               
year to the next. That is just what it is, so to speak, he said.                                                                
4:12:51 PM                                                                                                                    
Slide 14  displayed Beaufort  Sea areawide sales  in the  zero to                                                               
three-mile belt. In  2006, he said, the state sold  50 leases, 30                                                               
of them in  Smith Bay (the area half-way to  Barrow) where Caelus                                                               
is exploring right  now. The other 20 leases sold  that year were                                                               
basically in  the vicinity  of the  Liberty Unit,  which is  in a                                                               
little pocket  of the OCS  that is partially surrounded  by state                                                               
waters, and at  that time, BP had plans to  develop Liberty. That                                                               
helped focus interest in that general area.                                                                                     
Another standout  year was  2011 when  68 leases  were sold  to a                                                               
different company, more  of them in Smith Bay,  but Harrison Bay,                                                               
too, which is  just north of northeast NPR-A. There  were lots of                                                               
speculator  bids  (operators  or lessees  that  aren't  typically                                                               
associated with actual  seismic or well drilling)  in the eastern                                                               
part of  the North Slope over  towards Point Thomson and  no bids                                                               
were  taken  in  the  Beaufort   area  in  2016,  most  likely  a                                                               
reflection of the current oil price.                                                                                            
MR.  DECKER said  that  slide 15  displayed  the gas-prone  North                                                               
Slope  Foothills  areawide  sales.   A  huge  surge  of  interest                                                               
happened in the  Foothills in 2001/02 when  the producers started                                                               
talking publically about  the North Slope gas  line. That project                                                               
basically stalled out in the next  few years. The gas line didn't                                                               
look  like it  was moving,  and so  bidding slowed  down in  this                                                               
region, as well, not to mention  the fact that many of the leases                                                               
that people thought were prospective were already held.                                                                         
In  2006, there  was  a revival  in the  gasline  hopes with  the                                                               
Alaska  Gasline Inducement  Act  (AGIA). However,  a  lot of  the                                                               
acreage was already held, so there  wasn't that much to be picked                                                               
up in  that sale. In the  more recent years, there  has been more                                                               
of  a   wait-and-see  attitude  about   the  gasline,   and  more                                                               
relinquishments have been seen as opposed to purchases.                                                                         
4:15:52 PM                                                                                                                    
MR.  DECKER  said  slide  16   displayed  a  USGS  2011  Resource                                                               
Assessment  of the  Cook Inlet  Basin. It  includes undiscovered,                                                               
technically-recoverable oil and gas. USGS  sees about 600 million                                                               
barrels of  yet to be  discovered conventional oil, on  the order                                                               
of 14 tcf of conventional gas,  and unconventional gas - in tight                                                               
sandstones  or coalbed  methane -  of just  over 5  tcf. It's  an                                                               
optimistic  view  of  the  basin,   and  he  reminded  them  that                                                               
technically recoverable estimated gas and  oil is not the same as                                                               
commercial, for which  each discovery would have  to be evaluated                                                               
on its own.                                                                                                                     
From a  reserves standpoint,  the Division of  Oil and  Gas (DOG)                                                               
released a  study in which  it estimates  1.18 tcf of  proved and                                                               
probable gas  reserves in the  Cook Inlet Basin. That  number has                                                               
not changed  a lot since  they did a  study in late  2009/10. The                                                               
fact  that it  hasn't  dropped  much, in  fact  it has  increased                                                               
slightly,  is because  of active  exploration and  delineation of                                                               
the  existing fields.  The old  fields  still have  life left  in                                                               
them. There is  1.2 tcf of additional  mean undiscovered resource                                                               
from the Bureau  of Ocean Energy Management's  (BOEM) estimate of                                                               
Lower Cook Inlet.                                                                                                               
He said slide 17 is an  alphabetical listing of who is doing what                                                               
in Cook  Inlet now.  Apache has  been very  active over  the last                                                               
several  years with  seismic and  drilling a  well, but  they are                                                               
planning  to cease  all their  activity for  now due  to low  oil                                                               
prices.  They  do intend  to  hold  most  of their  leases  until                                                               
expiration  and are  maintaining an  office in  Anchorage with  a                                                               
skeleton crew, hoping for the price to turn around.                                                                             
MR. DECKER related that ConocoPhillips  said their main fields in                                                               
the basin  have been  the Beluga  River Unit  and the  North Cook                                                               
Inlet Unit,  but recently they  agreed to sell their  interest in                                                               
the Beluga  River Unit. Municipal  Light and Power (ML&P)  took a                                                               
large chunk of that, increasing  their interest from one-third up                                                               
to 57  percent. Chugach Electric  took on 10 percent  and Hilcorp                                                               
kept their  one-third percent interest,  and became  the operator                                                               
He  said Furie  has  been  making great  progress  over the  last                                                               
couple of years in the Kitchen  Lights Unit; they set the monopod                                                               
platform last  year and currently  have one well  producing about                                                               
4-6  bcf/year,  which  is  being sold  under  contract  to  Homer                                                               
Electric. They  also completed their  onshore gas  facilities and                                                               
pipeline for that production to happen,  and that went on line in                                                               
December. In addition,  Furie has just recently  brought a second                                                               
jack-up rig, the Randolf Yost, into  the basin, and it will drill                                                               
two development wells this year.                                                                                                
4:20:08 PM                                                                                                                    
BlueCrest Energy, Inc.,  at the Cosmopolitan Unit,  plans to take                                                               
delivery of its new land-based  drill rig for oil development any                                                               
time now and plans first oil  in mid-2016. That has just recently                                                               
kicked off  from one well in  the last few days.  Hopefully, they                                                               
will also  get around to using  the Spartan jack-up rig  to drill                                                               
some offshore  wells into the  gas cap of the  Cosmopolitan field                                                               
where  there is  both onshore  development of  oil through  long-                                                               
reach  horizontal  and long  departure  wells.  However, the  gas                                                               
being shallower,  would have  to be  accessed from  offshore. So,                                                               
their plan is to drill with  the jack-up rig and then place small                                                               
monopod  platforms very  similar to  what Furie  is doing  at the                                                               
Kitchen Lights Unit.                                                                                                            
4:21:02 PM                                                                                                                    
MR.  DECKER  said  slide  18  shows that  Hilcorp  is  the  major                                                               
operator in  the basin. Some  examples are completion of  two new                                                               
wells in the  Cannery Loop Unit with a couple  more being planned                                                               
for this  year, a new  well in the Deep  Creek Unit and  plans to                                                               
drill a  second this coming  year. Hilcorp also  continues adding                                                               
pads  at  the Ninilchik  Unit  and  expanding it  with  extensive                                                               
lateral and  vertical production. They also  focused on work-over                                                               
jobs in the  Trading Bay Unit in 2015 and  are planning three new                                                               
wells  in  2016.  They  also   purchased  XTO  Energy,  Inc.,  an                                                               
ExxonMobil asset (also known as  Cross Timbers), and may bring it                                                               
on at  some point. Hilcorp  has a projected investment  this year                                                               
of about $120  million in the basin, which is  similar to what it                                                               
spent over the last few years.                                                                                                  
4:22:16 PM                                                                                                                    
Slide  19 summarized  Cook  Inlet activity  since  it started  to                                                               
rebound (reflecting the Cook Inlet  Recovery Act) in 2010 with 24                                                               
exploratory wells  and sidetracks and 65  development and service                                                               
wells and sidetracks.  This has resulted in  the reserve increase                                                               
he just talked about. In addition,  lots of seismic data has been                                                               
acquired: 725  line miles  of 2D  onshore/offshore and  about 660                                                               
square  miles  of  3D  onshore/offshore.  Mr.  Decker  said  this                                                               
statistic is from 2004-2014 tax credit data.                                                                                    
4:23:21 PM                                                                                                                    
Slide 20  listed who  is working  in [Cook  Inlet]. He  said that                                                               
Cook  Inlet is  becoming  a mature  basin with  a  lot of  legacy                                                               
fields being initially developed by  some of the larger producers                                                               
(slide 21).  Until recently, Chevron  and Marathon  operated most                                                               
of  the  fields  there.  They  have sold  those  to  Hilcorp  and                                                               
Hilcorp, having  a different cost  structure and  business model,                                                               
is able to make those things profitable.                                                                                        
4:24:01 PM                                                                                                                    
CHAIR GIESSEL  noted that slide  21 was missing from  their slide                                                               
MR. DECKER  apologized and said  he would amend  the presentation                                                               
and turn the missing slide in to the committee later.                                                                           
CHAIR GIESSEL said  slide 22 was a bar graph  labeled "Cook Inlet                                                               
Leasing Activity  Trends, areawide lease sale  results 1999-2015"                                                               
and asked him to describe what was on slide 21.                                                                                 
MR. DECKER  said he  would make  sure they got  slide 21,  but it                                                               
shows that  Cook Inlet  is a  maturing basin  and that  as things                                                               
mature,  one gets  away from  the  large multinational  companies                                                               
towards mid-size companies like Apache  and Hilcorp. A lot of the                                                               
smaller players  are picking up  acreage, too, but they  are very                                                               
sensitive to  oil prices, so  their level  of activity is  not as                                                               
insulated  from price  as  some of  the  bigger companies.  Also,                                                               
because  the  smaller  companies  try to  be  more  nimble,  that                                                               
requires  an  intensive administrative  effort  from  the DNR  in                                                               
processing applications, lease transfers, and such.                                                                             
4:26:41 PM                                                                                                                    
SENATOR MICCICHE  clarified that  slide 20  was about  Cook Inlet                                                               
and not the North Slope.                                                                                                        
Slide 22  displayed the Cook  Inlet leasing activity  trends from                                                               
1999 to  2015. The one big  standout is the 106  leases that sold                                                               
to Apache  when it entered the  basin in 2011. Their  plan was to                                                               
buy a lot  of open acreage and shoot large-area  3D surveys, both                                                               
onshore and  offshore, and look  for the kinds of  prospects that                                                               
would not yet have been found  on 2D data. They have drilled only                                                               
one well to date and that is on hold.                                                                                           
4:28:24 PM                                                                                                                    
Slide 23 displayed  a location map of all  the sedimentary basins                                                               
in  the state  and many  of the  Interior basins  that are  often                                                               
referred to  as Middle Earth.  In other cases there  are specific                                                               
distinctions  like where  the Frontier  Basin  tax credits  would                                                               
apply. In  the upper left  is a comment box  - 43.55.025(a)(6-7),                                                               
the super credits - of 6 for wells  and 7 for seismic.  Those are                                                               
sunsetting in June 2016, but they  have been available in the six                                                               
red  circles. He  said the  Kotzebue  area, the  Yukon Flats  and                                                               
Nenana Basins,  the Copper  River Basin, and  down on  the Alaska                                                               
Peninsula  have   credits  to  encourage  exploration   in  those                                                               
Slide 24 is  a "boiled down" assessment of the  mean resource for                                                               
oil and gas in the various parts  of the state. The USGS has only                                                               
been  partially  assessed  the   Interior  basins;  it  has  done                                                               
detailed assessments  of the Yukon  Flats Basin and a  scoping of                                                               
the Kandik Basin  only. So, things like  Nenana, Kotzebue, Copper                                                               
River, Holitna,  and Susitna have not  been numerically assessed,                                                               
although they  are recognized to  have potential.  Basically most                                                               
of  the  Interior  basins  don't  have  a  lot  of  oil  resource                                                               
associated with  them, but a bit  more on the gas  side. They all                                                               
need  further   exploration  to  really  understand   their  full                                                               
4:30:28 PM                                                                                                                    
SENATOR  MICCICHE  asked  if the  USGS  applies  a  probabilistic                                                               
number to  partially assessed basins,  and said it would  be nice                                                               
to see  the conversion from  what they  believe is there  to real                                                               
numbers with further development.                                                                                               
MR. DECKER  said that is his  wording, and not all  of the basins                                                               
in the  Interior have been  assessed. The 234 million  barrels of                                                               
oil estimate  applies to  the sum of  their assessment  for Yukon                                                               
Flats  added   together  with  the  Kandik   Basin.  The  Nenana,                                                               
Kotzebue,  Copper River,  and  so forth  have  not been  assessed                                                               
numerically at  all. Senator Micciche  was right that all  of the                                                               
USGS assessments are  probabilistic. They give a mean  case, a 50                                                               
percentile case, a  5 percentile, and a 95  percentile case. USGS                                                               
understands  there  is  a  great  deal  of  uncertainty  even  in                                                               
undiscovered technically recoverable estimates.                                                                                 
4:32:00 PM                                                                                                                    
Slide  25  is  a  brief   sketch  of  what  constitutes  the  DNR                                                               
exploration license program, which is  a way of supplementing the                                                               
state's oil  and gas leasing efforts,  encouraging exploration on                                                               
state  lands  outside  of the  established  producing  areas.  He                                                               
explained that  every April the department  accepts new proposals                                                               
to look  at exploration  outside of the  existing sales.  If they                                                               
receive a  proposal in a  certain area, the DNR  commissioner can                                                               
issue,  at   his  discretion,  a  notice   encouraging  competing                                                               
proposals.  Anyone   who  participates   would  have   to  submit                                                               
proposals for  how much they  would plan  to spend for  a certain                                                               
number of years and it  would become a competitive bidding event,                                                               
in that case, based on  work spending commitments. To date, three                                                               
exploration  licenses have  satisfied their  spending commitments                                                               
and  opted over  to  convert  to leases.  Those  are Susitna  II,                                                               
Copper  River,  and the  Nenana  Basin;  the Nenana  Basin  being                                                               
pretty much  the "poster  child" for  how the  department intends                                                               
land activity there to go.                                                                                                      
4:33:26 PM                                                                                                                    
MR. DECKER  said slide 26  indicates who is working  the Frontier                                                               
basins, which largely consists of  the Native corporations. Ahtna                                                               
is active on the Tolsona  exploration license in the Copper River                                                               
Basin.  It  has  reprocessed  2D  seismic  and  acquired  new  2D                                                               
specific to  their prospect. They  plan to drill their  Tolsona 1                                                               
gas exploration  well sometime  in the first  half of  this year.                                                               
They are in a bit of a rush  to get that well done to qualify for                                                               
the Frontier  Basin credit.  This is going  to be  an exploration                                                               
follow-up to  the Ahtna 1-19  sidetrack well that was  drilled by                                                               
Rutter & Wilbanks.  Normally, he said he wouldn't  have made that                                                               
comment  about Ahtna  being in  a hurry  to qualify  for the  tax                                                               
credit  had they  not already  announced  that as  part of  their                                                               
goal, because that information is confidential.                                                                                 
MR. DECKER  said Doyon has drilled  a couple of wells:  Nunivak 1                                                               
and  2.  They  have  acquired  2D  and  3D  seismic,  geophysics,                                                               
airborne  geophysics  like  gravity and  magnetics,  and  lakebed                                                               
geochemical surveys looking for  micro-type carbon seepages. They                                                               
converted  their exploration  license  to a  series  of leases  a                                                               
couple of  years back and  are shooting additional 3D  this year.                                                               
They  have plans  to spud  the Toghottele  well in  that vicinity                                                               
this summer.                                                                                                                    
4:35:11 PM                                                                                                                    
Doyon is  also looking at  the Yukon  Flats Basin (slide  27), he                                                               
said, and  doing similar kinds  of work there,  but it is  not so                                                               
far  along.  The land  is  entirely  owned  by  Doyon and  it  is                                                               
checker-boarded with National Wildlife Refuge lands.                                                                            
Nana is evaluating and marketing  prospects in the Kotzebue Basin                                                               
based on legacy  industry seismic collected back in  the 1970s by                                                               
SoCal and Chevron. They would love to explore for gas or oil.                                                                   
Usibelli  Coal  Mine, Inc.  has  secured  a gas-only  exploration                                                               
license  in the  Healy area  and  they have  drilled one  shallow                                                               
exploration well in 2014 looking for that.                                                                                      
4:36:07 PM                                                                                                                    
Slide  28  displayed Frontier  Basin  wells  drilled and  seismic                                                               
acquired: a  total of seven  exploratory wells and  well branches                                                               
between 2004 and 2014 and 1220  square miles of 2D and 340 square                                                               
miles of 3D seismic. The Toghottele  well is based on some of the                                                               
3D data, so that should be a well-mapped prospect at this point.                                                                
4:36:39 PM                                                                                                                    
Slide  29 graphed  Frontier Basin  Exploration licenses  that had                                                               
been issued. A total of five  are listed as active, but since the                                                               
slide was made,  Cook Inlet Energy announced  plans to relinquish                                                               
the Susitna 5 license. Healy  is the Usibelli Company, Nenana has                                                               
Doyon as an operator, southwest  Cook Inlet is Cook Inlet Energy,                                                               
Tolsona is  Ahtna, and  the Susitna  5 is  Cook Inlet  Energy, as                                                               
4:37:22 PM                                                                                                                    
Slide  30  is about  DNR's  involvement  in  the DOR  tax  credit                                                               
programs,  Mr.  Decker  said. DNR's  involvement  is  limited  to                                                               
projects  that  yield  geological, geophysical,  and  engineering                                                               
data (GG&E),  mainly exploration  wells and seismic  surveys. DNR                                                               
collects  and  adjudicates  all   the  data  generated  by  these                                                               
projects and does what needs to  be done to make it available for                                                               
the  public  according to  the  specified  schedule, working  out                                                               
things like  private land holder and  ownership restrictions. DNR                                                               
has no  role in credits that  do not require data  submission (AS                                                               
43.55.023(a)(1)   capital  expenditures   work  for   development                                                               
projects and the AS 43.55.023(b) NOL projects).                                                                                 
MR. DECKER  said certain  people believe  that DNR  has a  lot of                                                               
discretion  about  which  credits  they  actually  authorize  for                                                               
approval, but the statues don't give  it much ability to do that,                                                               
which is a good  thing. He would not want to be  in a position of                                                               
picking winners and losers, setting  the state up for appeals and                                                               
lawsuits  from  the  various companies  by  having  approved  one                                                               
credit  and  not another.  The  criteria  are "pretty  black  and                                                               
white"   as   opposed   to   subjective.    The   bulk   of   the                                                               
prequalification steps the department goes  through are mostly to                                                               
ensure that  the credit  is really  for new  exploration (wildcat                                                               
4:39:58 PM                                                                                                                    
He  said  slide   31  contains  the  complicated   table  of  DNR                                                               
adjudication  requirements for  exploration  tax  credits on  one                                                               
page.  It's become  a  fairly complicated  system  of credits  to                                                               
manage, a  key point to keep  in mind in any  efforts to simplify                                                               
CHAIR GIESSEL  thanked Mr. Decker  for "the beautiful  chart that                                                               
is actually quite readable." Finding  no questions, she said they                                                               
would keep  looking it over  and know where  to find him  if they                                                               
come up with some.                                                                                                              
4:41:35 PM                                                                                                                    
MR. DECKER said some of  the credits have a prequalification step                                                               
and  that  process was  displayed  on  slide 32.  Ordinarily  the                                                               
operator that intends to do the  work makes a presentation to the                                                               
DNR prior to any of the work  being done. The DNR makes sure that                                                               
the dates are  consistent with the dates intended  in the statute                                                               
and  that the  location relative  to pre-existing  wells fulfills                                                               
the distance requirements from other  wells and units. A big part                                                               
of  this is  demonstrating that  they are  looking at  a separate                                                               
trap - a separate subsurface  container or potential container of                                                               
oil  and gas  - for  many of  the credits.  There are  additional                                                               
factors   for  Frontier   Basin  wells   and  seismic   that  the                                                               
commissioner can  weigh. Once they  reach their  conclusion after                                                               
the presentation,  the division briefs the  commissioner who then                                                               
issues a decision that gives them  some assurance that as long as                                                               
the operation  is conducted according  to plan they  will receive                                                               
their credit.                                                                                                                   
4:42:43 PM                                                                                                                    
SENATOR COSTELLO asked  if the decision made  by the commissioner                                                               
can be delegated.                                                                                                               
MR.  DECKER answered  that  the decision  letter  comes from  the                                                               
commissioner's hands,  but he  relies on  division staff  to make                                                               
the determination.                                                                                                              
4:43:34 PM                                                                                                                    
He  said  most  of  the credits  go  through  a  post-exploration                                                               
follow-up  process, but  DNR gets  all of  data (slide  33). That                                                               
needs  to  be  adjudicated  in terms  of  inventory  and  quality                                                               
control,  quite  an  extensive   operation  that  consumes  "huge                                                               
computer resources."  In many  cases, the  department also  has a                                                               
post-exploration  or  post-seismic processing  presentation  that                                                               
looks at things like the  dates the operations were conducted are                                                               
actually consistent  with what the department  was told initially                                                               
and  what  the  technical  findings are.  Then  the  commissioner                                                               
issues a decision letter. Finally,  after all this is done, there                                                               
is a  lot more  data management to  do: it has  to be  loaded for                                                               
internal use  and what can  be released to  the public has  to go                                                               
out. It  has to  be archived  and a release  mechanism has  to be                                                               
worked out.                                                                                                                     
CHAIR GIESSEL asked when the  exploration drilling cores actually                                                               
come  into DNR's  possession  and get  archived  in the  Geologic                                                               
Materials Center (GMC).                                                                                                         
MR. DECKER answered that for the  most part, core material is not                                                               
submitted  entirely to  the DNR.  The state  is entitled  only to                                                               
poker-chip size chips of every foot  of core and that goes to the                                                               
Oil and  Gas Conservation  Commission (AOGCC).  When the  well is                                                               
released,  after two  years, the  AOGCC  normally releases  their                                                               
exploration well  files. At  that same  time, they  would release                                                               
those core  chips and rock cuttings  and the ground up  rock that                                                               
comes out  of the well when  they are not coring  (the equivalent                                                               
of rock sawdust).                                                                                                               
He said  Senator Giessel  may be thinking  of the  extensive core                                                               
repository, a lot of which has  been donated by companies and the                                                               
United States  Geological Survey  (USGS) from  the many  wells in                                                               
NPR-A.  For  the  most  part,  the  conventional  cores  are  the                                                               
property  of the  companies  that  drill the  wells  and are  not                                                               
turned over to the state. However,  the state does have access to                                                               
those cores for examination as part of the tax credit deal.                                                                     
4:47:12 PM                                                                                                                    
MR.  NOUVAKHOV continued  the  presentation on  slide  34 on  the                                                               
DNR's   Royalty  Modification   Program  that   falls  into   two                                                               
categories: the  first is under  AS 38.05.180(j),  royalty relief                                                               
that is  granted based on  economic conditions prevailing  at the                                                               
time;  the  second  is  under  AS  38.05.180(f),  royalty  relief                                                               
specifically  targeting Cook  Inlet basin,  and it's  effectively                                                               
given out based on technical and regional considerations.                                                                       
He  explained  under  slide  34 that  the  DNR  commissioner  may                                                               
provide  modification of  royalty under  certain conditions,  the                                                               
first one being  to allow production from a field  or a pool that                                                               
has  not  been  previously  produced,   and  in  that  case,  the                                                               
reduction of royalty could be all  the way down to 5 percent. The                                                               
second  case  would allow  royalty  modification  to prolong  the                                                               
economic life of  a field or a pool, which  is already producing,                                                               
and  in that  scenario, the  royalty rate  could go  as low  as 3                                                               
percent.  The third  case is  for  re-establishing production  of                                                               
shut-in  oil  or  gas,  and  that  scenario  also  allows  for  a                                                               
reduction down to 3 percent.  Importantly, under the (j) program,                                                               
the commissioner grants the royalty  modification when the lessee                                                               
makes a clear and convincing  showing that the modification meets                                                               
the  established  criteria,  that  it  is  in  the  state's  best                                                               
interest, and shows that the  development would not occur without                                                               
providing  this  royalty  modification.  That  this  kind  of  an                                                               
underlying economic  condition will make  a project viable  is an                                                               
important distinction  between this  provision and  the following                                                               
provision, which affects the Cook Inlet Basin.                                                                                  
4:50:17 PM                                                                                                                    
MR.   NOUVAKHOV  said   the  state   has   not  granted   royalty                                                               
modification under  the (j) provision  very much (slide  35); the                                                               
three  times it  did are  5 percent  for Oooguruk  to Pioneer  in                                                               
2005, 5  percent and  a price  trigger for  Nikaitchuq to  ENI in                                                               
2008,  and 5  percent until  $1.25 billion  of gross  revenue for                                                               
Nuna Torok to Caelus in 2014.                                                                                                   
4:51:39 PM                                                                                                                    
The Cook  Inlet discovery royalty  is covered under  AS 38.05.180                                                               
(f)(4) (slide  36), and that  is more technical in  nature. Under                                                               
this statute, the lessee of a  discovery well shall pay 5 percent                                                               
royalty  on all  oil  and  gas production  from  a  pool that  is                                                               
attributable to  the discovery lease  for 10 years  following the                                                               
date of  discovery. It's  available only for  leases in  the Cook                                                               
Inlet Sedimentary Basin. To obtain  that, the lessee will have to                                                               
first prove  that the discovery  is from a  previously discovered                                                               
oil or  gas pool and  also get certification  for a well  that is                                                               
capable of producing in paying quantities.                                                                                      
Furie has  applied under this  program for  KLU 3 in  its Kitchen                                                               
Lights Unit  and has received  a discovery royalty  reduction for                                                               
four  previously discovered  gas  pools. The  lessee  will pay  5                                                               
percent of production  from those four pools until  2023 when the                                                               
royalty rate  will revert back  to 12.5 percent. Other  than this                                                               
instance, this royalty reduction has not been utilized.                                                                         
4:53:13 PM                                                                                                                    
Other  royalty   relief  statutes  are  AS   38.05.180(f)(5),  AS                                                               
38.05.180(f)(6)  and   AS  38.05.180(n)(2).   AS  38.05.180(f)(5)                                                               
automatically grants 5 percent royalty  for 10 years for specific                                                               
Cook  Inlet fields  identified in  statute: Falls  Creek, Nicolai                                                               
Creek,  North Fork,  Point  Starichkof  (not producing),  Redoubt                                                               
Shoal, and  West Foreland-all currently  pay 12.5  percent (slide                                                               
AS  38.05.180(f)(6) reduces  royalty  for  specific platforms  in                                                               
Cook  Inlet  if  production  falls below  certain  levels.  Lower                                                               
production based  on reservoir conditions  cannot be  "the result                                                               
of  short-term production  declines  due to  mechanical or  other                                                               
choke-back factors,  temporary shutdowns or  decreased production                                                               
due  to   environmental  or   facility  constraints,   or  market                                                               
AS  38.05.180(n)(2) allows  reduced annual  rent and  royalty for                                                               
nonconventional natural gas to $1 per acre and 6.25 percent.                                                                    
CHAIR GIESSEL thanked  both Mr. Decker and Mr.  Nouvakhov for the                                                               
^DOR  Second  Presentation:   Additional  Modeling  and  Scenario                                                               
4:56:00 PM                                                                                                                    
CHAIR GIESSEL announced the second  presentation from the DOR Tax                                                               
Division Director  Alper entitled  "Department of  Revenue Second                                                               
Presentation:  Additional Modeling  and Scenario  Analysis" dated                                                               
April 4, 2016.                                                                                                                  
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
Juneau, Alaska,  said the presentation  covers three  subjects: a                                                               
couple  of follow-up  slides  answering  questions from  previous                                                               
presentations,  slides digging  into the  specific details  of SB
130 and  how the math works,  then the scenario analysis  and the                                                               
life-cycle modeling.                                                                                                            
4:57:09 PM                                                                                                                    
He said slide 4 is  a dense slide presenting alternative historic                                                               
spending on  tax credits  and its  relationship to  the statutory                                                               
formula for  how much money  could/should have gone into  the Tax                                                               
Credit Fund per language in AS  43.55.028 and how that might play                                                               
out into the future.                                                                                                            
CHAIR GIESSEL asked him to cite where this is in statute.                                                                       
MR.  ALPER  answered  that AS  43.55.028(b)(c)  and  the  broader                                                               
statute called "028"  creates the Tax Credit Fund.  That fund was                                                               
created in the  bill known as "ACES" (HB 2001  from the fall 2007                                                               
special session).  This analysis  begins with FY09,  because that                                                               
was the  first budget cycle after  the passage of that  bill. The                                                               
.028 statute  creates a new  fund from  which tax credits  can be                                                               
repurchased and establishes guideline  language about what can be                                                               
appropriated into  it in the  (b) and (c) sections.  That formula                                                               
is based  on the price  of oil tied  to 10  or 15 percent  of the                                                               
production tax revenue received under ".011."                                                                                   
SENATOR  COSTELLO asked  for information  on production  for both                                                               
the actual and the forecasted  sections. She was trying to figure                                                               
out  whether  knowing the  past  would  help make  more  accurate                                                               
projections in future years.                                                                                                    
4:59:30 PM                                                                                                                    
MR. ALPER responded  that he would provide an  updated version of                                                               
the slide to the committee. The  statute says 10 or 11 percent of                                                               
the amount  collected under .011, which  in both the ACES  and SB
21 regimes  means the tax, itself.  It's a number that  the state                                                               
never sees, because there are  other subsections in AS 43.55 that                                                               
calculate the  so-called credits  against liability  (the capital                                                               
credit,  the  per  barrel  credit,  small  producer  credit,  and                                                               
various credits that the producers  subtract before they actually                                                               
physically pay their  taxes to the state). So,  the third column,                                                               
labeled "Actual  Production Tax" is  the revenue received  by the                                                               
state: $3.1  billion in  FY09, peaking at  $6.1 billion  in FY12,                                                               
and  the  much  smaller  numbers  received  today  with  the  low                                                               
commodity price.                                                                                                                
The column after that labeled  "Credits Against Liability" is the                                                               
taxes  that were  never received  by  the state  because for  one                                                               
statute  or another  the companies  who paid  taxes were  able to                                                               
reduce their  taxes by that  amount. That is a  calculated figure                                                               
of  AS  43.55.011  revenue  (state's  gross  revenue  before  the                                                               
subtraction of any  credits against liability) and  the number to                                                               
which the formula in the statute is applied.                                                                                    
The next  column is labeled "Price  of Oil" and the  reason it is                                                               
placed there  is because a  bifurcation in the formula  says that                                                               
if the price of oil is above $60  use 10 percent; if the price of                                                               
oil is below $60 use 15 percent.                                                                                                
The next  column, labeled  "Credit Cap  per AS  43.55.028(c)," is                                                               
the amount  that would have  been appropriated -  the alternative                                                               
reality  -  what  would  have happened  if  the  legislature  had                                                               
appropriated money to that cap  going back to the beginning. What                                                               
would have happened  in the early years between 2011  and 2013 is                                                               
that the  fund would  have effectively  been endowed.  The column                                                               
labeled "End Year  Fund Balance" indicates the  fund balance. The                                                               
$150  million in  that fund  column is  what is  left over  after                                                               
credits of  $193 million were claimed  at the end of  FY09 with a                                                               
cap of $343 million.                                                                                                            
5:01:51 PM                                                                                                                    
SENATOR COSTELLO asked  if a company earns a  credit, aren't they                                                               
owed that credit. How can it be capped?                                                                                         
MR. ALPER  answered that  the repurchase fund  was not  about the                                                               
earning  of  the  credit  but  the  state's  role  in  physically                                                               
repurchasing the credits. The expectation  is were the fund to be                                                               
short-funded, then there would be  companies carrying the credits                                                               
to the next  year where the fund would be  over-funded (as in the                                                               
early years).                                                                                                                   
SENATOR  STEDMAN  clarified  that  the "End  Year  Fund  Balance"                                                               
column is hypothetical.                                                                                                         
MR.  ALPER said  that  was  right. He  added  that the  operating                                                               
budget going  back to FY09 and  through FY15 was written  with an                                                               
open-ended appropriation.  The language always said  something to                                                               
the tune of "the amount  presented for repurchase for tax credits                                                               
under AS 43.55  is appropriated from the General Fund  to the Tax                                                               
Credit Fund,  .028." In  other words, the  DOR was  authorized to                                                               
spend  the amount  of money  that was  presented for  repurchase.                                                               
There  was an  estimate of  whatever the  forecasters thought  it                                                               
might be at the time the  operating budget was being written, and                                                               
then the actual  appropriation would be done to  match the actual                                                               
claim for credits. That is how  it has been done and the estimate                                                               
never  hits  it  exactly.  The   actual  number  was  the  actual                                                               
appropriation in  the early years  simply because of the  way the                                                               
budget was constructed.                                                                                                         
Carrying that forward  into the alternative reality,  had it been                                                               
to the Cap  End of Year Fund  Balance, by FY13 the  fund has $655                                                               
million. Beginning in FY14, the  amount spent on credits was more                                                               
than the  revenue coming in  and the fund would  have effectively                                                               
been spent  down. At  the end  of FY15,  where it  says "negative                                                               
$112 million"  the fund would  have been  out of money  and there                                                               
would be no money to carry forward for FY16.                                                                                    
MR.  ALPER reminded  them of  the debate  last session  about $91                                                               
million being the right amount going  into the fund and said that                                                               
number was based on the  spring 2015 latest available information                                                               
that would  have led  to this  calculation at  the time  the last                                                               
budget was written. The most  recent information reduced that $91                                                               
million to  $32 million for  FY16. Regardless, the  actual number                                                               
that was appropriated by the Governor was $500 million.                                                                         
MR.  ALPER said  part of  the  story is  that had  the fund  been                                                               
appropriated the  other way  over the last  number of  years, the                                                               
state  would have  been in  roughly the  same place  last session                                                               
(spent down  the fund for FY16),  but there may have  a different                                                               
expectation in  industry that the  state was going to  have open-                                                               
ended  participation  and  the repurchase  of  tax  credits.  The                                                               
standard would  have been in  the appropriations being tied  to a                                                               
share  of revenue  rather than  being open-ended.  The state  may                                                               
have erred in some ways  in creating that open-ended expectation,                                                               
because it leads to a more  difficult time in doing credit reform                                                               
amid limited resources.                                                                                                         
5:06:45 PM                                                                                                                    
CHAIR GIESSEL  said for  completeness doesn't .028  go on  to say                                                               
"plus appropriated funds."                                                                                                      
MR. ALPER answered, "Unquestionably."  The language that was part                                                               
of the  ACES bill was  "guideline language." The idea  behind the                                                               
guideline  language at  the  time  was to  prevent  this sort  of                                                               
problem, to  put some sort of  parameter around it. But  it leads                                                               
to some  inconvenience and  it could lead  to short  funding, and                                                               
the state didn't  have cash flow problems  during the intervening                                                               
years.  It was  simply easier  and  more convenient  to write  it                                                               
open-ended like that.                                                                                                           
SENATOR  COSTELLO  asked  if  he   is  suggesting  that  previous                                                               
legislatures should have predicted this low price environment.                                                                  
MR.  ALPER answered  that  he wouldn't  go  that far.  Obviously,                                                               
lower prices  could happen eventually,  but what would  happen to                                                               
tax  credits in  a low  price  scenario didn't  enter into  their                                                               
forecasts. The  DOR, like the most  of the rest of  the industry,                                                               
thought  that the  prices were  going  to continue  higher for  a                                                               
longer period of time.                                                                                                          
He said  that gets through  everything in the actual  section. In                                                               
answer the Senator  Giessel's question about what  happens if the                                                               
legislature  simply  appropriates  at that  statutory  cap  going                                                               
forward that the  credit claims are estimated to  be $775 million                                                               
beginning in  FY17 and the  final version of the  spring forecast                                                               
is  below  that,  and  then  there  are  the  relatively  limited                                                               
appropriations under  the credit  cap, because of  the relatively                                                               
low  production tax  revenues of  between  $19 to  $32 million  a                                                               
year. So, the state would be  running a shortfall of $200 to $400                                                               
million a  year, and the End  Year Fund Balance in  this scenario                                                               
would be  $3.4 billion  in accrued credits  owed to  companies in                                                               
2025. This is not a  practical possibility simply because the end                                                               
of FY16  number is more  likely to be  no more than  $200 million                                                               
(or really zero because of the  $775 million that was rolled into                                                               
FY17).  So  about  $2.8  billion  is how  much  the  state  could                                                               
theoretically  accumulate  in  credit  obligations  to  companies                                                               
between  now  and  2025  if  the  system  is  unchanged  and  the                                                               
legislature only appropriates to the statutory guideline.                                                                       
SENATOR STEDMAN commented that the  magnitude of the $450 million                                                               
in  credits was  a bit  of  a surprise  when  it came  in in  the                                                               
beginning  of the  2009/10/11 period,  but the  cap numbers  were                                                               
fairly in line  with what was going on, so  there wasn't really a                                                               
lot  of   alarms  bells   going  off.   Also,  he   advised  that                                                               
historically some of  the language in both the  operating and the                                                               
capital budgets gets  inherited into the next  year pretty easily                                                               
without a lot of review.                                                                                                        
SENATOR STEDMAN  asked for  help on where  the state  actually is                                                               
now on the Year End Fund Balance  so he can get a better grasp on                                                               
FY15/16/17, and it would be helpful to get it in a table format.                                                                
5:11:28 PM                                                                                                                    
MR. ALPER said, "Certainly." The End  of the Year Fund Balance at                                                               
the end  of FY16 is  for all intents and  purposes going to  be a                                                               
zero, and that  will be the starting point.  Five hundred million                                                               
was moved  to the Tax Credit  Fund early in this  fiscal year and                                                               
that is  getting spent.  It will  all be  spent and  then credits                                                               
that  are not  repurchased  will  be calculated  as  part of  the                                                               
estimated $775 million  claim in FY17. There is  no carry forward                                                               
in  this  form  the  way  it  was  written.  However,  he  hadn't                                                               
discussed the two  columns on the right referred to  as the "non-                                                               
cashable carried  forward." They  are the operating  loss credits                                                               
earned by  the major producers who  are not eligible to  get cash                                                               
for their credits.                                                                                                              
He explained that  the End of Year Fund Balance  for FY16 is zero                                                               
with  accrued  non-cashable  carried   forward  credits  of  $385                                                               
million, and that  becomes $632 million in FY17.  The first thing                                                               
major companies can do with NOL  credits that they can't get cash                                                               
for, because  of existing statutory limitations,  is offset their                                                               
minimum  tax, taking  it  effectively down  to  zero. Credits  in                                                               
excess of  what it  takes to  go to zero  can be  carried forward                                                               
into  the following  year. That  number builds  up to  about $700                                                               
million, and  then in  roughly FY20/21/22,  gets brought  down to                                                               
zero, because in  those years, the price of oil  goes up a little                                                               
bit further and the additional  production tax, rather than being                                                               
paid to  the state, is offset  with this backlog of  NOL credits.                                                               
The state gets  relatively low taxes as it works  its way through                                                               
the NOL  credits backlog until by  2025 it is out  of that world,                                                               
and hopefully everyone is at  least profitable again. The problem                                                               
is that by that point, depending  on other changes to the system,                                                               
there  might  be  a  large   backlog  of  carry-forward  cashable                                                               
credits, which  may have been  statutorily deferred,  that depend                                                               
on the funds that are put into the Tax Credit Fund.                                                                             
CHAIR GIESSEL said  this also illustrates the  statement that the                                                               
major producers are bleeding cash at this point.                                                                                
MR. ALPER admitted that is true as  the price of oil is less than                                                               
what it costs to get it out of Alaska.                                                                                          
SENATOR COSTELLO asked  if Mr. Alper was  assuming companies that                                                               
experience several  years in a  row of net operating  losses will                                                               
stick around.                                                                                                                   
MR.  ALPER   answered  that  the   department  hadn't   made  any                                                               
fundamental  changes  to the  forecast  based  on continuing  low                                                               
prices; they only know the  production figures the companies tell                                                               
them. But if  the price of oil  stays at this level -  in the low                                                               
$40s and  high $30s  for the next  three or four  years -  he was                                                               
sure all manner of changes in behavior would be seen.                                                                           
5:16:41 PM                                                                                                                    
SENATOR COSTELLO said then that  the presentation he is providing                                                               
is focused solely  on the budget of the state  government and not                                                               
on the economic impact to the state's economy as a whole.                                                                       
MR. ALPER  answered that he  wasn't sure  of how to  answer that.                                                               
They  have known  production and  price  forecasts. For  example,                                                               
companies have  told them when  they are cutting back  on certain                                                               
behavior - drilling  certain wells or shutting  down certain rigs                                                               
-  and that  does impact  future production.  But the  production                                                               
doesn't shut off  simply because the wells already  exist and are                                                               
functioning, and  those existing  wells are,  for the  most part,                                                               
profitable  to  continue operating.  So,  they  assume a  certain                                                               
amount of  oil will continue  coming based on what  companies say                                                               
no matter how bad the price of oil remains.                                                                                     
SENATOR  COSTELLO  asked  if  he saw  a  difference  between  the                                                               
state's budget and the state's economy.                                                                                         
MR. ALPER answered, "Of course; the  two are linked. The state is                                                               
an important  part of  our economy...;"  the state's  spending is                                                               
part of the overall state economy's health.                                                                                     
SENATOR  COSTELLO noted  that today's  paper had  an announcement                                                               
that  several  companies  are  cutting  employees  and  that  she                                                               
includes affected  families and jobs  in the economy as  a whole,                                                               
not solely the government's budget.                                                                                             
CHAIR GIESSEL  said she appreciated  that and said she  would add                                                               
another column  to this chart:  three rigs being shut  down, each                                                               
rig representing 100 jobs - so,  300 jobs right off the bat. Then                                                               
they talk about  support industries that are  laying off workers.                                                               
The registrar  at a school in  her district said that  in January                                                               
five families  withdrew from  the school; four  of them  were oil                                                               
company-supported families who had lost  their jobs. In her years                                                               
as a  registrar, she had  never seen that many  families withdraw                                                               
from the school in a single month.                                                                                              
5:19:24 PM                                                                                                                    
SENATOR STEDMAN referred to the $385 million non-cashable carry-                                                                
forward  credits for  FY16 that  can't exceed  expenditures in  a                                                               
calendar  year,   but  the  Revenue  Sources   Book,  which  most                                                               
legislators use,  uses a  fiscal year. The  challenge is  how the                                                               
DOR  helps  policy  makers  make  that  conversion  so  they  can                                                               
understand  the magnitude  of the  credit -  good or  bad with  a                                                               
numeric that matches the correct timeframes.                                                                                    
MR. ALPER  said he  agreed that the  department is  often dealing                                                               
with issues of translation between  fiscal and calendar years and                                                               
how to present  them to the legislature. He  said this particular                                                               
number is an odd one, because  the end of FY16 happens this June,                                                               
but none of  the NOLs are going  to exist in a  legal sense until                                                               
next  December, because  it's the  end of  the calendar  year for                                                               
taxes. So, they  estimated half a year's worth of  NOLs, but they                                                               
don't  actually exist  and are  not eligible  for a  credit until                                                               
halfway  into FY17.  For illustrative  purposes  the credits  are                                                               
being shown as they are being accrued by the companies.                                                                         
SENATOR STEDMAN  said he  wasn't faulting one  way or  the other,                                                               
but just  wants everyone to be  able to understand the  same data                                                               
set. For  instance, the  Revenue Sources  Book uses  FY16 numbers                                                               
and  non-deductible  operating  and   capital  expenses  of  $1.9                                                               
billion,  and in  that year  most of  the credits  belong to  the                                                               
majors who will have to carry  it forward. But part of the number                                                               
might be  able to be  put to the  treasury quicker than  a multi-                                                               
year carry forward, which it looks  like the industry is going to                                                               
get. He asked if there was any  way Mr. Alper could parse that or                                                               
help legislators  with a benchmark.  Is it possible that  the GVR                                                               
barrels might  be outside of  this, and apply that  percentage of                                                               
GVR eligible credits?                                                                                                           
5:24:47 PM                                                                                                                    
MR.  ALPER said  he  would  try to  answer  that. Presuming  $1.9                                                               
billion  in  excess  lease expenditures  at  a  weighted  average                                                               
credit  of  40  percent,  they are  talking  roughly  about  $800                                                               
million worth  of NOL credit  value out there.  His understanding                                                               
is  that those  non-deductible  lease expenditures  are from  the                                                               
majors  as well  as  the companies  that  don't have  production.                                                               
Those  are the  cashable NOLs  that  are already  in the  state's                                                               
credit system  and that is  the number  ($400 million a  year) he                                                               
used for FY17. He thought the  state would pay about half of that                                                               
credit  obligation and  the  other half  would  become the  carry                                                               
forward credits for the majors.                                                                                                 
SENATOR STEDMAN  asked Mr.  Alper if he  could parse  that number                                                               
for FY15/16/17,  because it is  a fairly immediate  timeframe and                                                               
they are real numbers. His concern  is with knocking out the $600                                                               
million,  the remainder  is still  $2  billion in  FY18. At  some                                                               
point, he  assumed the committee would  have some forward-looking                                                               
presentations  on  how  the  credits   will  impact  the  revenue                                                               
collection when oil  goes up north of $70. He  advised "the folks                                                               
at home"  that carrying losses  forward is a common  practice and                                                               
that "this  is not something  that the legislature dreamed  up to                                                               
benefit the industry."  This is similar to  the federal corporate                                                               
income tax and its ability to carry losses.                                                                                     
The discussion  point comes down  to either carrying  forward the                                                               
aggregate of credits or giving  companies a credit calculation of                                                               
35 or 45  percent. Normally that credit would  be somewhere along                                                               
the lines  of a company's  marginal tax  rate, but from  a policy                                                               
perspective, the concern is that the  marginal tax rate is not 35                                                               
percent  and  under  the  PPT,  the carry  forward  rate  was  25                                                               
percent.  So the  impact, while  subtle, when  the credit  number                                                               
starts going up the carry forward has significant impact.                                                                       
MR. ALPER  said the  issue of  the NOL credit  being tied  to the                                                               
base oil tax  rate became a bigger deal about  two weeks ago when                                                               
the department started seeing the  impact of the spring forecast.                                                               
There  is no  magic; it  doesn't  automatically tie  to the  base                                                               
rate. The  ACES base rate was  25 percent, but the  effective tax                                                               
rate  was generally  higher with  progressivity. The  NOL was  25                                                               
percent with  SB 21.  The base  tax rate is  35 percent,  but the                                                               
effective rate is generally lower,  because the primary credit is                                                               
a  subtraction  mechanism  rather  than  a  progressive  addition                                                               
mechanism.  So,  the  NOL  is  higher  than  the  effective  rate                                                               
throughout the price  ranges. Back in PPT, the base  tax rate was                                                               
23.5  percent and  the credit  was  20 percent,  so they  weren't                                                               
automatically  linked to  each other  then.  Therefore, there  is                                                               
historic precedent  for not  having the  NOL rate  being directly                                                               
pegged  to  the  base  tax  rate, but  maybe  with  these  "giant                                                               
numbers," now  is the time  for the conversation  about adjusting                                                               
the NOL rate going forward.                                                                                                     
5:29:47 PM                                                                                                                    
SENATOR  COSTELLO  said   numbers  haven't  historically  matched                                                               
equally, but  asked if  they should be  in the  ballpark, because                                                               
the  difference   between  20   and  22   percent  is   not  that                                                               
significant.  If it  gets to  a  10 percent  difference, at  what                                                               
point would the administration say it's not going to work?                                                                      
MR.  ALPER said  the difference  is the  NOL was  generally lower                                                               
than  the effective  tax rate  throughout both  ACES and  PPT, in                                                               
some cases dramatically lower. There  were times in 2008 when the                                                               
tax rate for  a couple of months  got up over 50  percent and the                                                               
NOLs  for  those  companies  that  were doing  the  work  was  25                                                               
percent. Right  now the NOL is  a little bit higher  than the tax                                                               
rate even  at $100 oil,  but they never contemplated  the minimum                                                               
tax before.  With a minimum  tax, the  effective tax rate  can be                                                               
greater  than 100  percent; then  again  it depends  on how  it's                                                               
calculated. The  35 percent  operating loss  credit as  the taxes                                                               
themselves  get smaller  and smaller  does  seem to  grow out  of                                                               
balance, but he didn't quite know how to fix that.                                                                              

Document Name Date/Time Subjects
SB 130-DNR-DOG-Presenation to Senate Resources-4-6-2016.pdf SRES 4/6/2016 3:30:00 PM
SB 130