Legislature(2015 - 2016)BUTROVICH 205

04/11/2016 03:30 PM RESOURCES

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03:30:58 PM Start
03:31:38 PM SB130
03:32:25 PM Continuation of the Second Presentation: Additional Modeling and Scenario Analysis by Dor
08:08:34 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> --
Scheduled but Not Heard
-- Public Testimony --
Scheduled but Not Heard
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
      [Contains discussion of the companion bill HB 247.]                                                                     
3:31:38 PM                                                                                                                    
CHAIR GIESSEL announced consideration of  SB 130 and advised that                                                               
the   Department   of   Revenue   would   continue   the   Second                                                               
Presentation: "Additional  Modeling and Scenario  Analysis" dated                                                               
April 4, 2016, starting on slide 17.                                                                                            
3:31:55 PM                                                                                                                    
SENATOR MICCICHE joined the committee.                                                                                          
3:32:01 PM                                                                                                                    
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
introduced himself.                                                                                                             
^Continuation  of the  Second  Presentation: Additional  Modeling                                                               
and Scenario Analysis by DOR                                                                                                    
3:32:25 PM                                                                                                                    
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
Anchorage, Alaska, introduced himself  and explained that he went                                                               
back to slide 16, because  it refreshes the conversation they are                                                               
in.  Going forward  the  next  several changes  would  be on  the                                                               
subject of what they mean  when they "strengthen" or "harden" the                                                               
floor on the minimum tax.                                                                                                       
He explained that the carry  forward NOLs present three different                                                               
policy questions (slide 16). The  first about the major producers                                                               
that  can't get  cash  for their  NOLs as  opposed  to the  small                                                               
producers who can. They have  discovered that those NOLs could be                                                               
carried forward  into the  next year  and be  used to  offset the                                                               
minimum  tax, effectively  bringing  tax payments  down to  zero.                                                               
Preventing that from happening is  one component of hardening the                                                               
floor  where the  producers pay  the  full minimum  tax and  then                                                               
carry forward  those credits into  a subsequent year  where there                                                               
would be enough tax liability to offset them.                                                                                   
The second  question deals with  gross value reduction  (GVR) for                                                               
new oil. On those  fields the issue is not the  NOLs, but the per                                                               
taxable  barrel  credit  for legacy  fields,  what  is  currently                                                               
hardened at the floor. That number  cannot go below the 4 percent                                                               
level. However,  on the new  oil fields the $5/barrel  credit can                                                               
go  below the  floor, and  companies could  effectively pay  zero                                                               
using those.  SB 130 "hardens"  the floor, as well,  against that                                                               
The final  question is a  much smaller issue,  especially because                                                               
these credits  are sunsetting: should  the small  producer credit                                                               
and  exploration credits  be usable  to reduce  payments for  any                                                               
producer below the 4-percent floor.                                                                                             
3:33:41 PM                                                                                                                    
SENATOR STOLTZE joined the committee.                                                                                           
3:33:59 PM                                                                                                                    
SENATOR STEDMAN asked how much  the small producer credit and the                                                               
exploration credit  alternative was in  2016 and 2017,  so people                                                               
at home can grasp the magnitude of what they are talking about.                                                                 
MR. ALPER explained  in the universe of $40/oil,  the gross value                                                               
of  is   $30/barrel,  presuming   $10  for   transportation.  The                                                               
department's rule  of thumb  number is that  there are  about 160                                                               
million taxable barrels  produced per year from  the North Slope,                                                               
so calculation is  500,000 barrels/day times the  year, minus the                                                               
royalty barrels.  So, 160 million  barrels times $30  equals $4.8                                                               
billion, which is  the gross value at the point  of production. A                                                               
4  percent gross  tax on  that is  $200 million.   So,  the total                                                               
scope of  what they  are talking  about peaks  out at  about $200                                                               
million. Within  their forecast about  $150 million will  be lost                                                               
to the NOL credits being used to go below the floor.                                                                            
The  small producer  and exploration  credits are  a very  small,                                                               
$10-15 million, and similarly the  new oil part probably is about                                                               
$25 million.                                                                                                                    
3:36:14 PM                                                                                                                    
Preventing  the  companies  from  applying the  NOL  against  the                                                               
minimum  tax is  about their  total lease  expenditures exceeding                                                               
their gross  value at  the point of  production. That  means they                                                               
have  negative  income, or  a  loss,  as  defined in  the  Alaska                                                               
production tax statutes.  That will be different  in general from                                                               
what companies might  show to their own  stockholders, because of                                                               
the way the state treats  capital expenditures (it uses different                                                               
accounting nuances). Often capital  expenditures are treated on a                                                               
cash-flow  based,  retained-earnings   based  calculation  versus                                                               
federal filings.                                                                                                                
MR. ALPER explained that the NOL  is calculated on a calendar tax                                                               
year and the idea is to ensure  that any NOLs that aren't used to                                                               
reduce the taxes below the  minimum tax would be carried forward.                                                               
So effectively, the  state would be paying the credit  not in the                                                               
first  year, but  in  whatever  year the  price  of  oil goes  up                                                               
subsequently, so  that there  is enough taxes  to reduce  it, but                                                               
still stay above the 4 percent floor.                                                                                           
3:37:56 PM                                                                                                                    
MR. ALPER presented  slides 18-21 showing how  the production tax                                                               
works at $100/oil,  $70/oil and $40/oil. The $100/oil  is in some                                                               
ways what  the modeling looked  like when they were  last talking                                                               
seriously about  oil taxes with  $10 for transportation  cost and                                                               
$90  gross  value. The  state  receives  about $35/oil  in  lease                                                               
expenditures  (operating  and  capital),  which works  out  to  a                                                               
production tax  value of $55  (what the tax calculation  is based                                                               
on), a 35  percent tax results in $19.25, less  the $6 per-barrel                                                               
credit. That means  the state actually receives  $13.25. But here                                                               
a comparison  is made  to the 4-percent  minimum tax,  the floor,                                                               
which results in $3.60, and  since the state receives the "higher                                                               
of," the  actual tax it receives  is $13.25 (on a  gross of $90).                                                               
That  is  multiplied by  the  160,000  million. That  would  mean                                                               
production  tax revenue  in a  year of  $100/oil would  be around                                                               
$2.1 billion.                                                                                                                   
3:38:48 PM                                                                                                                    
CHAIR GIESSEL recognized Senator Bishop in the audience.                                                                        
MR. ALPER  said at  $70/barrel (slide  19), suddenly  the minimum                                                               
tax   becomes   a  relevant   part   of   the  calculation.   The                                                               
transportation  and lease  expenditures  are the  same ($35)  and                                                               
result in a  $60 gross value and that leaves  a $25 net. Applying                                                               
a 35-percent  tax that net  results in a  tax of $8.75.  The per-                                                               
barrel  credit applied  here is  the maximum  level of  $8.00 and                                                               
results in  a net  payment of  $0.75 per  barrel. So,  what takes                                                               
precedence (in the  "higher of" situation) is the  minimum tax (4                                                               
percent  of   that  $60  gross),   which  results  in   $2.40  or                                                               
approximately $380 million  per year in production  tax revenue -                                                               
still in the realm of positive numbers.                                                                                         
At  $40/oil,  Mr.  Alper  explained,  companies  start  suffering                                                               
operating losses  (slide 20). So if  it costs $45 to  produce and                                                               
transport it  to market,  that results  in a  negative $5/barrel.                                                               
This results in  an aggregate number of $800 million  per year in                                                               
NOLs   for  the   North  Slope   producers.  Meanwhile   the  tax                                                               
calculation effectively generates a  negative number (-$1.75) and                                                               
the minimum  tax (4 percent of  the $30 gross) results  in $1.20.                                                               
So, the "higher of" is $1.20  and that times the volume comes out                                                               
to $190 million (roughly the $200  million he said in response to                                                               
Senator Stedman's question).                                                                                                    
3:40:40 PM                                                                                                                    
Meanwhile, there is a $280  million carried forward loss into the                                                               
second  year.  So,  slide  21  shows what  happens  in  a  second                                                               
consecutive year of low prices.  The same calculation happens and                                                               
results  in $190  million in  tax  liability. Only  now the  $280                                                               
million  in carried  forward  NOLs  from year  one  gets used  to                                                               
offset that  $190 million tax bill  making the actual tax  to the                                                               
state  zero.  Another $90  million  more  remains to  be  carried                                                               
forward, plus  another $280 million  earned in year 2  leading to                                                               
$370  million carried  forward into  year three.  And as  long as                                                               
prices stay  low like that, "these  NOL credits sort of  stack up                                                               
on us," Mr. Alper explained.  The DOR's forecast shows about $750                                                               
million in  stacked-up NOLs in  2018/9 before the  price recovers                                                               
sufficiently  to  where  the companies  start  buying  them  down                                                               
CHAIR  GIESSEL asked  if this  assumes that  a company  that just                                                               
suffered $800  million in  operating losses  will continue  to do                                                               
the  same thing  and expect  different results  in year  two even                                                               
though none of the variables have changed.                                                                                      
MR.  ALPER answered  yes; the  department doesn't  forecast short                                                               
term  changes in  behavior in  their modeling.  They get  updates                                                               
from  companies twice  a  year  and that  gets  built into  their                                                               
modeling  going  forward.  To a  certain  extent,  companies  are                                                               
reducing their expenditures through the  laying down of rigs, but                                                               
the labor  that it  takes to  pump the existing  oil is  going to                                                               
continue to be spent. However,  companies will start to constrain                                                               
their costs and the department expects  that a loss will be lower                                                               
in a second consecutive year.                                                                                                   
SENATOR COSTELLO asked at what  year does the department forecast                                                               
the price will be $70/barrel or above.                                                                                          
MR. ALPER answered  that the chart she was referring  to goes out                                                               
as far  as the spring  forecast for just 2025  when it is  in the                                                               
high $60s.  Using the  normal inflationary  trend, he  guessed it                                                               
would go to $70 in 2026.                                                                                                        
SENATOR  WIELECHOWSKI said  SB 130  does not  address the  $8/per                                                               
barrel  credit  in any  way  and  asked  how  much the  state  is                                                               
allowing  to be  deducted at  $70/barrel through  the per  barrel                                                               
MR. ALPER answered  that the tax is officially  calculated by the                                                               
companies that use  the per-barrel credit until the  tax bumps up                                                               
against  the minimum  tax.  So,  on slide  19,  the answer  would                                                               
$6.35. So,  they would use $6.35  to bring the taxes  down to the                                                               
$2.40 minimum  tax level. Then they  would lose the rest  of that                                                               
3:44:24 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  the state did  not have  any per-                                                               
barrel tax  credit, how much  more would  it be getting  at $6.45                                                               
per barrel in the $70/oil scenario.                                                                                             
MR. ALPER answered  the $8.75 in tax times  the production volume                                                               
would result in  little bit less than $1.5 billion  in revenue. A                                                               
more appropriate  comparison would  be the flat  $5/barrel credit                                                               
in the original  version of SB 21. In that  scenario, at $70/oil,                                                               
the  state  would see  $3.75  as  the  net  and the  minimum  tax                                                               
wouldn't be triggered at the $70  level. That would lead to about                                                               
a  $600 million  in  revenue or  $200 million  more  than in  the                                                               
example before them.                                                                                                            
3:45:28 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if the state was  allowing about $1.5                                                               
billion to  be deducted  at $70/oil with  a per-barrel  credit of                                                               
MR. ALPER answered  that the $1.5 billion was  with no per-barrel                                                               
credit and $400 million in  revenue. So, the difference is closer                                                               
to $1.1 billion.                                                                                                                
SENATOR STEDMAN  said another way of  looking at it might  be the                                                               
marginal difference between the $5  and the $8 sliding scale that                                                               
holds  one in  the minimum  tax for  another $10  extra in  price                                                               
MR. ALPER  said that  is a  fair statement  and that  having that                                                               
higher  and  steeper  per  barrel   credit  tends  to  make  that                                                               
crossover a higher price point.                                                                                                 
SENATOR MICCICHE asked for the actual crossover point.                                                                          
MR. ALPER  answered that the  current forecast has  the crossover                                                               
at $78/barrel.                                                                                                                  
SENATOR MICCICHE  answered that  they had  not modeled  it within                                                               
the  current forecast.  They were  modeling it  in 2013  based on                                                               
their assumptions at  the time, but he didn't have  that in front                                                               
of him now.                                                                                                                     
3:47:24 PM                                                                                                                    
MR. ALPER said slide 22 sums  up everything he just said and that                                                               
the members' questions had done a  good job of going into how the                                                               
numbers move around. The  idea in slide 22 is that  at the end of                                                               
the second  year there  are $370 million  in carried  forward NOL                                                               
MR. ALPER  said the second part  of strengthening the tax  has to                                                               
do with the gross value reduction  (GVR) that new oil is eligible                                                               
for and  the $5/barrel credit. A  simple graph on slides  23 & 24                                                               
showed how  that tax calculation  works for legacy  fields versus                                                               
GVR-eligible new  oil fields at  $80/oil, because that's  a point                                                               
where there  is a distinctive  difference between the two  and at                                                               
$60/oil. They used  a cost of $46, which resulted  in a net value                                                               
of $34 (at $80/oil).                                                                                                            
3:48:50 PM                                                                                                                    
For legacy oil, the 35 percent  tax rate would be applied to that                                                               
$34,  which  results in  $11.90,  minus  the  $8 tax.  So,  $3.90                                                               
becomes  the actual  tax. The  minimum  tax in  that scenario  of                                                               
$2.80  is  not triggered.  The  crossover  point is  somewhere  a                                                               
little bit below $80/barrel (within a dollar).                                                                                  
For the GVR-eligible field in  this scenario, the $34 is adjusted                                                               
by subtracting  20 percent  of the  gross value  at the  point of                                                               
production. Gross  is the well-head  value after  transport ($70)                                                               
and 20  percent of that  is $14. So,  the $14 is  subtracted from                                                               
the $34 net to  equal a taxable value of $20.  The 35 percent tax                                                               
rate is  the same  but it's  applied to  the smaller  number ($20                                                               
rather $34)  and the tax  becomes $7,  and then the  $5-flat per-                                                               
barrel credit  (for GVR eligible fields)  leads to a tax  rate of                                                               
$2.  The  $2   is  below  the  minimum  tax.   However,  in  this                                                               
circumstance,  the  GVR-eligible  field would  actually  pay  the                                                               
$2/barrel tax and not the $2.80 minimum tax.                                                                                    
This legislation  proposes that  GVR-eligible oil should  also be                                                               
subject to the  minimum tax and pay the $2.80  rather than the $2                                                               
rate. The GVR remains the same;  the $5 credit remains there, but                                                               
in this  circumstance the  last $.80  of that  $5 would  be lost,                                                               
similar to  $1 and change  in the  $70 example he  walked through                                                               
for Senator Wielechowski.                                                                                                       
3:50:10 PM                                                                                                                    
SENATOR  COSTELLO asked  if  he had  been  able to  retroactively                                                               
model how this would affect the  state's bottom line, since it is                                                               
on the books.                                                                                                                   
MR. ALPER  answered that the  minimum tax didn't become  a factor                                                               
until the last part of 2014  and they hadn't precisely modeled it                                                               
looking backwards,  but he  could say  with some  confidence it's                                                               
about a $25-million line item.                                                                                                  
SENATOR WIELECHOWSKI asked the effective  tax rate for legacy oil                                                               
and GVR eligible oil on this slide at $80.                                                                                      
MR. ALPER  answered since the  effective tax rate generally  is a                                                               
share of  net profits (cash  flow), the  $3.90 tax on  the legacy                                                               
oil would  be in the neighborhood  of 12 percent and  the $2 GVR-                                                               
eligible oil would in the 6-7 percent range.                                                                                    
3:51:28 PM                                                                                                                    
The same  conversation at $60  oil reveals that legacy  oil leads                                                               
to a  negative calculation  when the  per-barrel credit  goes all                                                               
the way  to zero. So,  the limiting  factor under current  law is                                                               
the 4  percent minimum tax.  With $60 oil,  4 percent of  the $50                                                               
gross becomes $2/barrel. The GVR-eligible  producer does the same                                                               
calculation and  can get as far  as zero. The tax  before the $5-                                                               
credit is only $1.40.  So $1.40 out of the $5  would be used; the                                                               
other $3.60 would  be lost. The company would pay  zero. The bill                                                               
proposed that that oil would also pay the $2-minimum tax.                                                                       
3:52:30 PM                                                                                                                    
MR.  ALPER  started  explaining  section   17(c)  of  SB  130  on                                                               
migrating credits.  It means that  a per-barrel credit  earned in                                                               
one month could potentially be  used to offset taxes from another                                                               
month under  certain circumstances.  This condition is  not built                                                               
into the fiscal  note modeling as having any  value, because it's                                                               
very specific to volatility. It  only happens in years where some                                                               
months fall under the minimum  tax calculation and years where in                                                               
some months the price of oil supports the higher tax.                                                                           
MR. ALPER  said a classic  example of  that happened in  2014. He                                                               
explained that the sliding scale  credits were originally brought                                                               
into SB 21  as a form of progressivity  or reverse progressivity,                                                               
because  it  is  progressivity through  subtraction  rather  than                                                               
addition. But the  idea was that the per-barrel  credit itself is                                                               
very much  of a monthly  calculation. It can, under  current law,                                                               
go up and down by the month.                                                                                                    
3:53:58 PM                                                                                                                    
Slide  26 (labeled:  section 17(c):  Strengthen the  Minimum Tax,                                                               
"Credits "lost" to the minimum  tax before annual true-up) graphs                                                               
what 2014  looked like  in actuality, Mr.  Alper said.  The total                                                               
production tax for  January, based on 35 percent of  the net, was                                                               
about  $280  million. But  the  amount  that the  state  actually                                                               
received was close to $200  million (green bar), because the per-                                                               
barrel credit  of whatever  the number  was that  month (probably                                                               
around $45/barrel) reduced the payments.  Below that, the red bar                                                               
is where  4 percent of  the gross would have  been. If it  were a                                                               
minimum tax month, the state  would have received the red number;                                                               
but from  January through  October the  state received  the green                                                               
bar height number ($200 million).                                                                                               
He explained that the price  of oil fell dramatically through the                                                               
summer of  2014 and by  October the  state was just  barely above                                                               
the minimum tax. In November and  December the tax went below the                                                               
minimum. In November and December  the state received roughly $30                                                               
to $40 million per month, the amount under the red bar.                                                                         
The shaded dotted areas above  that (still on slide 26) represent                                                               
the per-barrel credits  that were unusable, because  the whole $8                                                               
couldn't be  used before they  bumped up against the  minimum tax                                                               
in that month.  In November they were able to  use roughly $7 out                                                               
of the $8;  in December they were  able to use $2 out  of the $8.                                                               
But when  the annual true  up was done  for the entire  tax year,                                                               
slide  27 shows  how the  dotted areas  were able  to effectively                                                               
offset taxes that were accrued in  the month of January to reduce                                                               
the payment  in the dotted  area below  the $200 million  all the                                                               
way to  a bit below the  $100 million line. So  that $112 million                                                               
worth of credits  that were usable in a  monthly calculation were                                                               
usable in an annual calculation  to reduce the total payment. Mr.                                                               
Alper said  this hit  them as  a surprise.  Until the  claims for                                                               
refunds came  in the  annual true  up in the  last week  of March                                                               
2015, the department  thought it had $100 million  more than they                                                               
actually  did,  and  had  to  pay  large  refunds  to  the  major                                                               
MR. ALPER said  section 17(c) of the bill,  while technically and                                                               
complexly written, is  simply intended to make  the per-barrel of                                                               
credit itself a strict monthly calculation  and not to be used to                                                               
offset taxes from a different month.                                                                                            
CHAIR GIESSEL asked  if the department is asking  the taxpayer to                                                               
accurately submit monthly tax returns.                                                                                          
MR. ALPER answered no. Currently  taxpayers are expected to do an                                                               
estimated tax  deposit based on  the calculation for  that month.                                                               
Because they are actually paying  the amount based on the monthly                                                               
calculation already,  it's based  on an  estimate of  their lease                                                               
expenditures  divided  by  12  for the  year.  Doing  an  expense                                                               
calculation by the month would  be far too onerous. The producers                                                               
know how much oil they sold and what the price was.                                                                             
He  explained  that the  per-barrel  credits  unclaimable in  one                                                               
month should  be limited  to that  month. That  particular credit                                                               
which is calculated and earned on  a monthly basis should also be                                                               
used on a monthly basis and  it's strictly constrained to the per                                                               
taxable barrel credit.                                                                                                          
3:57:46 PM                                                                                                                    
SENATOR COSTELLO asked if this is  what takes the state six years                                                               
to audit.                                                                                                                       
MR. ALPER  answered no;  this is  all worked  out within  the tax                                                               
year. It  could be auditable  like anything  else, but this  is a                                                               
situation that  comes up at  the tax true  up period in  March of                                                               
the year following the end of the tax year.                                                                                     
SENATOR COSTELLO  asked how  often the state  has to  reimburse a                                                               
MR. ALPER  answered that this is  a specific provision of  SB 21,                                                               
so  it  wasn't  relevant  before   2014.  It  was  very  relevant                                                               
specifically in 2014 when there  was that level of volatility. In                                                               
2015, which  was just  completed, every month  in 2015  was below                                                               
the minimum tax, and  the state was in the red  in the context of                                                               
this chart. So, there was no  ability to migrate, to offset taxes                                                               
with  used  per barrel  credits.  The  only  time it  would  have                                                               
occurred  was  in 2014  and  they  hope  to protect  the  state's                                                               
interest  in statute  in  the  event of  a  future  year of  high                                                               
SENATOR  MICCICHE commented  that  the only  year  one sees  that                                                               
extreme volatility is when there  is extreme price variation with                                                               
part of the year above the minimum tax.                                                                                         
MR. ALPER agreed.                                                                                                               
SENATOR  STEDMAN asked  if  he had  calculated  this in  reverse,                                                               
where the state  comes off the minimum tax and  goes into several                                                               
months of extreme volatility upward.                                                                                            
MR.  ALPER   answered  yes;  it   works  the  same   in  reverse.                                                               
Effectively,  the  way  the  tax  true  up  is  done  is  in  the                                                               
aggregate. The  value for  the year  is added  up along  with the                                                               
per-barrel  credits  and 4  percent  of  the whole  year's  total                                                               
becomes  the  minimum  tax.  So, that  is  where  the  per-barrel                                                               
credits could  be used, because they  are still above the  year 4                                                               
percent instead of the month 4 percent.                                                                                         
SENATOR MICCICHE said it looks  like the most volatile year would                                                               
have prices teetering at the $78 level. Is that right?                                                                          
MR. ALPER answered no. For  instance, October in the graph before                                                               
them is  one of those  months when the price  of oil was  down in                                                               
the $70s. There  isn't much "headroom" above the  minimum tax, so                                                               
the most that the state could  lose is the difference between the                                                               
minimum  tax and  the calculated  tax after  the use  of the  per                                                               
barrel credit. If there were a bunch  of months of $150 oil and a                                                               
bunch of  months of  $30 oil, the  very large  per-barrel credits                                                               
could reduce state production tax collection to the minimum tax.                                                                
4:02:41 PM                                                                                                                    
The narrative  on slide 28  mostly says greater  price volatility                                                               
means that the credit recovery could  take a greater share of the                                                               
production tax.  Effectively, the  minimum tax only  protects the                                                               
full year's revenue,  because credits that cannot  be used within                                                               
a  year  can be  recovered  at  year's end  the  way  the law  is                                                               
currently written. Slides  29 and 30 show a  more extreme version                                                               
where the price  of oil declines from $90 down  to $50 earlier in                                                               
the year.  In this particular  scenario the  sum total of  all of                                                               
those dotted lines that begin in  June to offset all of the green                                                               
bars add  up to  $233 million, a  little bit on  the high  end of                                                               
what the  state is expecting with  a lot of volatility.  Slide 30                                                               
shows $233  million in  credits being  applied to  what otherwise                                                               
would have  been an $836-million  revenue year, dropping  it down                                                               
$603 million.  That is the  migrating credits story,  the hardest                                                               
one to  tell. It could  reduce the state's  taxes by close  to 30                                                               
percent. It reduces the effective  tax rate in that scenario from                                                               
about 14.5  percent to 10 percent.  Part of the rationale  of any                                                               
sort of monthly tax calculation  is that the state should benefit                                                               
from months with higher prices,  and this phenomenon allows it to                                                               
receive less revenue  on the upside if it's within  the same year                                                               
that has low price months. That  is why they are seeking to embed                                                               
this section in the bill.                                                                                                       
4:04:20 PM                                                                                                                    
MR. ALPER  said section  18 is a  totally different  concept that                                                               
has to do with the  interaction between the gross value reduction                                                               
(GVR)  for  new and  a  net  operating  loss (NOL).  One  doesn't                                                               
intuitively think of  those two things as  being related, because                                                               
to get  the gross  value reduction  it means  you are  a producer                                                               
(you have  production and sales)  and you shouldn't  be operating                                                               
at  a loss.  There are  multiple scenarios  where a  new producer                                                               
could be operating at a loss -  a new field, for instance. But at                                                               
today's low prices, their costs do not meet their prices.                                                                       
The  second situation  would be  if  a company  were involved  in                                                               
continuing  to  invest -  drilling  wells  or  working on  a  new                                                               
project -  they could,  even at  higher prices,  bring themselves                                                               
into an operating loss for the field.                                                                                           
The understanding behind  SB 21 was to try to  build a flat level                                                               
of state support at all price  points in all circumstances on the                                                               
North Slope,  and the number that  came out of the  final version                                                               
of the bill was 35 percent.  So, the operating loss credit should                                                               
be 35 percent  of the operating loss. What is  happening here is:                                                               
in the  earlier slide he talked  about the GVR in  the context of                                                               
the  minimum  tax,  but  the  GVR  is  a  subtraction  mechanism:                                                               
subtract a  number from your taxable  value and pay taxes  on the                                                               
difference.  If  the  taxable  value is  in  essence  a  negative                                                               
number, because you are at a  loss, and you subtract from it, you                                                               
create  a   larger  negative  number  -   a  synthetically  large                                                               
operating loss -  and 35 percent of that number  becomes a number                                                               
that is much greater than 35  percent of the actual loss, itself;                                                               
in some case,  more than 100 percent of the  loss. The difference                                                               
in  the scenario  on slide  33 means  about $7.6  million to  the                                                               
state (through a larger than 35 percent NOL credit).                                                                            
4:06:37 PM                                                                                                                    
MR. ALPER apologized  for the complicated slide  33 and explained                                                               
that current  law works  down the left-hand  column, a  low price                                                               
typical cost  scenario ($40 oil),  the $46 costs; the  company is                                                               
losing  $6/barrel. Based  on that  loss, a  35 percent  operating                                                               
loss credit  would normally result  in a credit  of $2.10/barrel,                                                               
However, the  GVR calculation is  20 percent of the  gross, which                                                               
is  $30, which  is another  $6  subtracted from  the negative  $6                                                               
getting  to negative  $12 (circled  in  red on  left column);  35                                                               
percent of that number leads  to a $4.20 credit. So, effectively,                                                               
the  company is  getting paid  an  operating loss  credit by  the                                                               
state that represents  70 percent of their losses  rather than 35                                                               
He explained that the technical change  in section 18 of the bill                                                               
simply says, "In event of a loss,  the GVR gets added back in for                                                               
the calculation of an operating  loss credit." This means that $6                                                               
calculation  would  be  foregone  in  a  loss  circumstance,  the                                                               
negative $6  would represent the  actual loss. The  negative cash                                                               
flow  would be  what be  receiving the  NOL credit  at $2.10  (35                                                               
percent of the loss).                                                                                                           
4:08:01 PM                                                                                                                    
MR. ALPER said  that was the intent and Mr.  Mayer with enalytica                                                               
had  said this  was  an unforeseen  circumstance and  recommended                                                               
retaining this provision.  If slide 33 is talking  about a single                                                               
producer  with  a  10,000  barrel-a-day   field,  and  that  gets                                                               
multiplied out  for the year,  it's the difference between  a $15                                                               
million  and $7.5  million NOL  credit or  about $7.5  million in                                                               
savings to the state.                                                                                                           
SENATOR STEDMAN  asked which fields  fit this scenario  and where                                                               
Point Thomson lies in it.                                                                                                       
MR.  ALPER answered  that the  three qualifications  for the  GVR                                                               
are: you  have to  be unitized  subsequent to  2003, and  the two                                                               
well-known  producing  fields  that  fall in  that  category  are                                                               
Oooguruk  (Caelus) and  Nikiatchuq  (primarily  ENI). They  would                                                               
classically fall into this sort  of calculation. Should they have                                                               
a loss, Mr. Foley from  Caelus, when speaking to various versions                                                               
of this legislation,  has said that this change  would impact his                                                               
company. So, he can talk a  little bit about it within the bounds                                                               
of confidentiality  because Mr. Foley  already had. There  are no                                                               
other fields, yet,  although any new fields that start  up soon -                                                               
for  example,  the   Mustang  field  -  would   fall  under  this                                                               
definition. Point Thomson will come  in as GVR-eligible under the                                                               
idea of  a new participating  area. Although that unit  goes back                                                               
to the  early 70s,  they haven't filed  for a  participating area                                                               
(essentially, a pool) until after  the settlement. So, well after                                                               
the effective  date of the bill.  So, Point Thomson will  get the                                                               
There  are  extensions  to existing  fields,  if  producers  meet                                                               
certain criteria and  if they are prepared to  go through certain                                                               
hurdles of metering  and the like. A couple of  examples like CD5                                                               
and  the  Southwest  Kuparuk  could  plausibly  qualify,  but  he                                                               
couldn't  say for  sure that  they  actually did  go through  the                                                               
hoops required to get the GVR in those extensions.                                                                              
SENATOR STEDMAN  said it looks  like Point Thomson  would qualify                                                               
for  the 30  percent  GVR.  He assumed  under  that same  pricing                                                               
scenario, the credits in the new  areas along with the 30 percent                                                               
GVR, instead of being in the  70 percent range, would be somewhat                                                               
higher than  that. He asked Mr.  Alper to explain that.  And then                                                               
he asked  what other jurisdictions fall  back at that rate  of 70                                                               
MR. ALPER clarified  that he had asked that question  of then DNR                                                               
Commissioner Balash  who brought out  a lease chart of  the Point                                                               
Thomson area  indicating that  only a  handful of  the individual                                                               
leases are above  the 12.5 percent level. The  requirement to get                                                               
the higher level GVR is that  every single lease has to be higher                                                               
than the 12.5 percent. So, Point  Thomson would come in at the 20                                                               
percent GVR, not the 30 percent.                                                                                                
He explained that the scenario on  slide 33 is based on something                                                               
that could happen in the future,  after the effective date of the                                                               
bill.  If something  happened in  2014/15 there  is a  45 percent                                                               
NOL. Using the same scenario,  the state would pay the difference                                                               
between  45  percent  and  90  percent  of  a  company's  losses.                                                               
Depending on the rate of that loss,  it could go to well over 100                                                               
percent in certain circumstances.                                                                                               
4:12:16 PM                                                                                                                    
SENATOR STEDMAN  asked what other  states beside Texas  and North                                                               
Dakota reimburse on losses.                                                                                                     
MR. ALPER answered to his  knowledge those states don't reimburse                                                               
on  losses.  They  have  relatively  flat  gross  tax  rates  and                                                               
companies pay a percentage of  the gross. That means that without                                                               
the credits,  at low prices  companies are losing money  and they                                                               
are  also paying  a relatively  small tax  to the  state. "That's                                                               
pretty much the end of the story."                                                                                              
SENATOR STEDMAN remarked, "Except for the royalty owner."                                                                       
MR.  ALPER responded  that  everyone pays  royalty  and in  those                                                               
other states,  the royalty,  in most cases,  goes to  the private                                                               
land owner, but in Alaska, the state enjoys most of it.                                                                         
4:13:15 PM                                                                                                                    
He  said slide  35 makes  the same  calculation at  a high  price                                                               
($80/oil)/high  cost  scenario for  a  company  that is  spending                                                               
$80/barrel  building the  next  oil  field -  not  because he  is                                                               
trying to lose  money on this field, but because  he is trying to                                                               
get  future  production   on  line  in  a  new   field.  In  that                                                               
circumstance, the producer  with $80/oil, $80/lease expenditures,                                                               
and $10/transportation  costs is losing  $10/barrel. If it  was a                                                               
straight 35-percent NOL credit, the  proposed change is that they                                                               
would get a  $3.50 NOL credit. However, if the  20-percent GVR is                                                               
applied to  that -$10 (net  value before GVR), that  would result                                                               
in  a $14  adjustment  (based  on 20  percent  of  $70 well  head                                                               
value). So  the adjusted negative value  would be a -$24,  and 35                                                               
percent  of  that  is  $8.40.  Then the  state  would  be  paying                                                               
effectively an 84 percent NOL credit to that producer.                                                                          
A 45-percent NOL credit would result  in more than 100 percent of                                                               
an NOL  credit. The  savings to  the state in  this model  is the                                                               
difference  between  a  $30  million credit  and  a  $12  million                                                               
credit, or about $18 million.                                                                                                   
CHAIR GIESSEL  asked if the NOL  on the North Slope  right now is                                                               
at 45 percent until July 1.                                                                                                     
MR.  ALPER answered  that it  went to  35 percent  on January  1,                                                               
2016. He explained  that many of the credits can  be moved around                                                               
within a  year, but the NOLs  are very much tied  to the calendar                                                               
year or the auditors get very upset.                                                                                            
SENATOR STEDMAN remarked that Senator  Wielechowski had asked for                                                               
the  history  of  the  floor   for  some  context  to  the  floor                                                               
MR. ALPER said he would get  that. He added that the floor didn't                                                               
have  a  lot  of teeth  until  SB  21  came  in and  hardened  it                                                               
specifically to the per-taxable barrel credit.                                                                                  
4:17:04 PM                                                                                                                    
He said  sections 26 and  27 are a  little bit different  in that                                                               
they don't  talk about restrictions  on the  credits, themselves.                                                               
These are restrictions on the  ability to turn those credits into                                                               
cash.  They  are  within  "028,"  the  section  of  statute  that                                                               
controls  the tax  credit fund,  itself,  where money  is put  to                                                               
repurchase credits.  Four restrictions  were added  in SB  130 to                                                               
the state's  repurchase of  credits. The first  one says  that if                                                               
you are  a very large company  and have greater than  $10 billion                                                               
in annual  revenue, then you are  no longer eligible to  get cash                                                               
for your  credits, the idea  being these companies  are generally                                                               
better capitalized and have more  robust balance sheets. They can                                                               
hold the credits on their own  books until such time as they have                                                               
production and will use it to offset their future taxes.                                                                        
MR. ALPER  said there is no  magic to the number  of $10 billion.                                                               
Any number of oil companies fall  in above that line, but roughly                                                               
speaking,  that's  the  state's  all-in  spending  if  you  count                                                               
federal  money,  the  Permanent Fund,  capital  budget,  and  the                                                               
General fund.  The thought is if  the company is bigger  than the                                                               
state, it doesn't need to pay them cash for their credits.                                                                      
The  one change  that has  received a  little more  attention and                                                               
will impact  more companies is  the $25-million  per-company per-                                                               
year  limitation. If  a  company  is earning  a  large amount  of                                                               
credits, the  state will repurchase  $25 million and the  rest of                                                               
the  credits   will  be  rolled  forward   effectively  into  the                                                               
following  year.  If  a  project  keeps  building  credits  their                                                               
payment would be based on a  "first in/first out" basis where the                                                               
oldest ones  would get paid  out at the  rate of $25  million per                                                               
year.  That   number  was  plucked   from  the   original  credit                                                               
repurchase language that  was in the PPT bill (HB  3001 in 2006),                                                               
which  created the  idea  for the  first  time of  re-purchasable                                                               
credits  and then  put  in that  $25 million  cap.  That cap  was                                                               
subsequently removed in the ACES bill a year or so later.                                                                       
4:19:13 PM                                                                                                                    
The third restriction is the  cash for the Alaska-hire provision.                                                               
The  concept is  if  the  state owes  a  company  $10 million  in                                                               
credits,  the DOR  would  look  to the  Department  of Labor  and                                                               
Workforce  Development (DOLWD)  statistic of  their instate  hire                                                               
percentage and  their subcontractors in the  prior calendar year.                                                               
If it was 80 percent, the  state would purchase $8 million out of                                                               
that $10 million and the other  $2 million would hold their value                                                               
and be  rolled forward  for use  in a  future year  against their                                                               
Finally,  they  put in  a  10-year  sunset.  If the  credits  are                                                               
unusable  they will  expire 10  years  after the  date they  were                                                               
issued,  which  is  where  the  "first  in/first  out"  mechanism                                                               
becomes important  to make sure that  the older ones get  used up                                                               
4:20:08 PM                                                                                                                    
SENATOR COSTELLO asked if he  saw a difference between describing                                                               
the  credits  as "unused"  versus  "unusable,"  because it's  not                                                               
within a company's  power to use a credit until  the price of oil                                                               
goes above $70 or they are also  in line and may never get to the                                                               
front of the line.                                                                                                              
MR. ALPER  answered he  wouldn't say  they were  in line;  it has                                                               
nothing to do  with their relationship with  other companies. The                                                               
$25 million  per company cap would  be for that company  and then                                                               
that company would be able to  receive $25 million the next year.                                                               
But it's  fair to  say some  of those credits  would be  lost for                                                               
being unusable,  because they  were not able  to get  them cashed                                                               
out in time should the price not  be high enough once they are in                                                               
production to apply their tax liability against.                                                                                
SENATOR  COSTELLO said  it seems  that the  state has  a hand  in                                                               
that, for  example, when  the governor vetoed  some of  the money                                                               
for paying credits  from last year. If the state  is not going to                                                               
be  cashing  them   out  or  they  expire,  that   could  have  a                                                               
significant impact going both ways.                                                                                             
MR. ALPER agreed that was a  good point. One of the weaknesses of                                                               
the  governor's veto,  administratively,  was when  there is  not                                                               
enough money the structure is  "first in/first out." Putting some                                                               
sort  of limitation  would  create some  ability  to prorate  the                                                               
money if there  was a limited amount of money  rather than saying                                                               
just  because you  got  your credits  processed  through the  DOR                                                               
staff  before someone  else did,  you're  going to  get paid  but                                                               
someone else is  going to have to wait until  next year. There is                                                               
a little bit of arbitrariness  in a cutoff without some mechanism                                                               
that more equitably shares the  impact of that cutoff, and that's                                                               
the sort of thing they are looking to impose here.                                                                              
4:22:58 PM                                                                                                                    
SENATOR MICCICHE  asked if he  thought the  Alaska-hire provision                                                               
would pass constitutional muster.                                                                                               
MR. ALPER replied that it  is controversial and will certainly be                                                               
challenged. It doesn't matter in  how it will be adjudicated. The                                                               
department's  feeling is  that because  they aren't  taking value                                                               
per se  from someone,  just the  timing of  the ability  to enjoy                                                               
that value, that no one is  going to lose their credits. They are                                                               
just going to be  earning them in a later year.  It might be more                                                               
likely  to  survive  constitutional   scrutiny  than  some  other                                                               
attempts at Alaska hire. Miss  Gramling is the assistant attorney                                                               
general handling this issue and she would know more.                                                                            
CHAIR GIESSEL noted that Miss Gramling was not on line.                                                                         
4:24:29 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  for data on the  percentage of Alaska                                                               
versus  non-Alaskans  who  are  getting   laid  off  in  the  oil                                                               
MR. ALPER said he hadn't seen  any information on how the layoffs                                                               
are impacting local versus out-of-state employees.                                                                              
SENATOR WIELECHOWSKI asked  if the $25 million  limit was changed                                                               
to $100 million in the House.                                                                                                   
MR.  ALPER answered  that the  House Resources  version had  $200                                                               
million  and  the House  Finance  committee  substitute had  $100                                                               
SENATOR WIELECHOWSKI asked him the  policy reasons behind why $25                                                               
million is better than $100 or $200 million.                                                                                    
MR. ALPER answered  that the department hadn't  done the analysis                                                               
until they  started seeing  the larger  numbers, and  that's when                                                               
they went  back through their  records and calculated  the number                                                               
of  companies that  had  come  in at  some  of  the higher  price                                                               
points. There  has been exactly  one transaction in 10  years the                                                               
department has  been paying  tax credits  where a  single company                                                               
made more  than $200 million  in a year,  and he found  only five                                                               
circumstances  where  a  company   made  between  $100  and  $200                                                               
million.  There  were 11  circumstances  where  a company  earned                                                               
between $50 and $100 million. So,  a total of 17 instances of $50                                                               
million or  more going to  a single  company. They did  not count                                                               
the $25  to $50 million, because  there would be a  lot of those.                                                               
So the impact is quite broad.                                                                                                   
The  discussion in  the  House Resources  Committee  of the  $200                                                               
million  was  distinctly  limited   to  the  outlier  event:  Mr.                                                               
Armstrong with  his very large  project on the North  Slope could                                                               
lead to  the state having $600  or $800 million a  year in credit                                                               
liability during their peak construction  years and that would be                                                               
in advance of any revenue coming  from the oil in that field. The                                                               
state figured  out a way to  protect its interests with  the $200                                                               
million.  It was  something of  an insurance  policy against  the                                                               
very extreme outlier.   The $25 million would be  a much broader-                                                               
based reduction in payments to a much wider range of companies.                                                                 
COMMISSIONER HOFFBECK followed up  that the broad policy decision                                                               
after meeting  with the  companies was that  that the  NOL credit                                                               
needed to be the key  component that they felt needed protection,                                                               
but it  is also the  one that is  the most difficult  to control.                                                               
It's not project  specific and there are a lot  of different ways                                                               
of  ending up  with an  NOL. So,  although they  were willing  to                                                               
leave the  NOL credit in play,  because of the importance  to the                                                               
various  companies,  they still  needed  some  way to  limit  the                                                               
state's exposure to it in any  given year. That was when the idea                                                               
came  up of  putting  the  cap back  in.  It  limits the  state's                                                               
exposure,  but creates  a longer  tail  on how  long the  credits                                                               
4:28:09 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  once companies  hit a  loss and  can                                                               
write  it  off  on  future  taxes,  is  the  state  providing  an                                                               
unnecessary incentive to  do more things that  will accrue losses                                                               
to deduct in future years.                                                                                                      
MR. ALPER responded  that he hoped not. The  35-percent figure is                                                               
flat across the board. So, if  someone spends an extra million on                                                               
a  gold plated  object on  the North  Slope, they  would only  be                                                               
getting $350,000 back  from the state. This is one  of the places                                                               
where in some  ways the loss of the steep  progressivity from the                                                               
prior tax  regime works  in the  state's interest.  Because there                                                               
was in some ways more of  an incentive to spend money because you                                                               
weren't  just getting  a  reduction  in taxes  based  on a  lower                                                               
production tax value,  but a company could lower its  tax rate by                                                               
reducing   their   per-barrel   profits   going   down   on   the                                                               
progressivity  slope  - essentially,  a  high  marginal tax  rate                                                               
working in reverse.                                                                                                             
SENATOR WIELECHOWSKI  said they  talked a lot  about the  idea of                                                               
incentivizing  production in  SB 21,  but that's  not really  the                                                               
case, because with NOLs the  state is still allowing companies to                                                               
write off expenditures. Is that correct?                                                                                        
MR.  ALPER answered  yes.  The  NOL was  always  envisioned as  a                                                               
payback for  someone who is  under the development stage  to kind                                                               
of level  the playing field between  them and the producer.  To a                                                               
certain  extent  they were  taken  by  surprise at  dealing  with                                                               
producers  having   operating  losses.   It  changed  a   lot  of                                                               
assumptions in their  calculations in what they  are seeing going                                                               
SENATOR STEDMAN  digressed to the  30 percent GVR for  new fields                                                               
and said  that nationwide royalty  is around 20 percent.   Alaska                                                               
is at 12.8 and  the newer ones are 16.5 percent.  He asked if the                                                               
30 percent GVR wipes out the "modernistic" royalty rate.                                                                        
MR.  ALPER  answered  that  they modeled  some  fields  and  then                                                               
modeled  them again  at the  high North  Slope royalty  and found                                                               
that the increment in additional  royalty the state would get was                                                               
"pretty evenly" offset by the  additional reduction in production                                                               
4:32:41 PM                                                                                                                    
SENATOR  COSTELLO  commented  that  prior  to  SB  21  they  were                                                               
incentivizing  investment and  activity versus  results. So,  she                                                               
could see companies looking for  well lease expenditures or other                                                               
types  of tax  credits,  but to  assume a  company  is trying  to                                                               
operate  at a  net operating  loss is  a curious  suggestion. She                                                               
asked Mr. Alper  if he thinks companies are trying  to lose money                                                               
under the current system.                                                                                                       
MR. ALPER  answered, "Most definitely  not!" Except for  the rare                                                               
circumstance, the state  is never paying anyone 100  cents on the                                                               
dollar.  Companies are  losing  money beyond  what  the state  is                                                               
paying them back.                                                                                                               
SENATOR COSTELLO said that is what  she is hearing, too, and that                                                               
companies are trying  to operate more efficiently  and are having                                                               
to lay off people.                                                                                                              
4:34:00 PM                                                                                                                    
MR. ALPER said section 31 is  simpler and a little bit obscure as                                                               
well.  With   extended  low  prices,   the  state  is   facing  a                                                               
circumstance where  potentially the gross  value at the  point of                                                               
production could go  less than zero either on the  field level or                                                               
on the slope  level. Gross value at the point  of production is a                                                               
waystation in  the tax calculation  on the way to  production tax                                                               
value.  So,  the  way  this  is written,  if  that  part  of  the                                                               
calculation  is negative,  it  would reset  to  zero for  further                                                               
calculations to production tax value,  and at $30/barrel it means                                                               
there has to be a  circumstance of $30 transportation costs. That                                                               
is unusual,  but it  could certainly happen.  If prices  go below                                                               
$20/barrel, he could envision even  more circumstances where that                                                               
would happen.                                                                                                                   
Slide 38 displayed the different  tax and feeder pipeline tariffs                                                               
(all-in tariffs) before  adding a rough average of  $3.37 for the                                                               
marine transport from  Valdez to the typical refinery.  So, for a                                                               
base at  Prudhoe Bay the tax  tariff is $6.13, but  if production                                                               
is  coming from  Kuparuk, a  company has  to also  pay the  $0.32                                                               
feeder line  to get it  from Kuparuk to  Pump Station 1,  and you                                                               
are paying $6.45.  Something like Endicott has  a two-hour feeder                                                               
pipeline and  gets it up  to $8.35. But  the outlier in  there is                                                               
Point  Thomson, the  newest  field  that is  about  to come  into                                                               
production this  year; it has to  get to Badami and  the operator                                                               
has filed  a $19.17 tariff  for that.  This means that  the total                                                               
tariff to  get to  Valdez is  $28.49, which  added to  the marine                                                               
transport gets  one to $31.86  transportation cost. So,  if Point                                                               
Thomson were  to go into production  for a year at  $30 oil, they                                                               
would  effectively  have a  negative  value  at the  wellhead  of                                                               
$1.86/barrel.  So,   over  the  expected  production   of  10,000                                                               
barrels/day, minus the  royalty, there would be  a negative gross                                                               
value of $5.9 million.                                                                                                          
So, the  provision proposed  in SB  130 would be  to say  for any                                                               
given  field that  wellhead value  would have  to reset  to zero,                                                               
meaning that negative $5.9 million  wouldn't be allowed to offset                                                               
positive gross values  in other production from  that producer on                                                               
the North Slope. The effective tax  there is about $2 million (35                                                               
percent of that little bit less than $6 million).                                                                               
CHAIR  GIESSEL  said  Point  Thomson   is  on  the  threshold  of                                                               
beginning production of gas liquids  and they are operating under                                                               
the Point  Thomson Settlement Agreement,  which requires  them to                                                               
produce liquids at a rate that  they will be losing money (today,                                                               
it's $40).                                                                                                                      
MR. ALPER said yes, that was  correct. He mentioned that there is                                                               
a technical issue embedded in  this section. That is although the                                                               
gross value at  the point of production is  roughly comparable to                                                               
what they collect  royalty on, it's not a royalty  value. So, the                                                               
state  doesn't  run  the  risk of  negative  royalties.  They  do                                                               
however,  face  the  circumstance   potentially  of  the  private                                                               
royalty tax  being a negative  calculation, which they  had never                                                               
contemplated and  it needs to be  fixed in some way.  If there is                                                               
production  from  private  land  -  CD5  is  an  example  -  that                                                               
production should happen to fall  through negative gross value at                                                               
the point  of production,  the statute  doesn't account  for what                                                               
might happen if the state is  supposed to be collecting 5 percent                                                               
of that number in a private royalty tax.                                                                                        
4:38:21 PM                                                                                                                    
SENATOR  STEDMAN  said he  never  thought  much about  the  Point                                                               
Thomson tariff,  because it was  never in their face.  They still                                                               
have to have  operating and capital costs there and  asked if Mr.                                                               
Alper had any idea  of what those are or do  they use the average                                                               
out of the Revenue Sources Book.                                                                                                
MR.  ALPER  said  presuming  something along  the  lines  of  the                                                               
average  cost, maybe  a little  bit less  because they  have just                                                               
come out  of a very  capital-heavy initial  construction project,                                                               
it's fair  to say  the break  even at Point  Thomson is  close to                                                               
$60/barrel. To a  certain extent that is ameliorated  by the fact                                                               
that they own the feeder pipeline  that is getting the $19 tariff                                                               
(they are somewhat paying themselves).                                                                                          
SENATOR STEDMAN  said that  puts a fine  point on  the difficulty                                                               
the state  has had in moving  Point Thomson forward, and  the big                                                               
price exposure industry  had in moving it  forward, especially if                                                               
they need $60 or $65 to break  even. It doesn't help the state in                                                               
developing the basin.                                                                                                           
4:40:19 PM                                                                                                                    
He  asked  under  the  settlement   agreement  to  develop  Point                                                               
Thomson, if  the state is  forcing them  to do things  they might                                                               
not otherwise do outside of that to minimize losses.                                                                            
MR. ALPER  answered that  he is  not an  expert on  Point Thomson                                                               
engineering, but  it's a relatively  simple system of  only three                                                               
wells. They  are obligated  to produce  those wells  and compress                                                               
and reinject that  gas for the next several years.  In some ways,                                                               
it's a  test system to see  how the reinjected gas  migrates back                                                               
through  the field  to  determine the  viability  of an  expanded                                                               
cycling  process: if  the gasline  comes  in, can  they get  good                                                               
production of  liquids for  a lot of  the year  while reinjecting                                                               
gas into the ground or will it be more viable to blow it down?                                                                  
This is a "waystation" towards  a much larger policy decision for                                                               
the owners of  that field. Their settlement has  a decision point                                                               
in  2018/19 over  phase  2  when they  are  obligated  to make  a                                                               
decision that  will lead  to some  sort of  additional investment                                                               
for them in three or four years.                                                                                                
SENATOR STEDMAN said  let's hope for $80/barrel oil  and they are                                                               
profitable, so the state can make a little bit, too.                                                                            
CHAIR  GIESSEL said  she hoped  they  become profitable,  because                                                               
that is the state's gas pipeline.                                                                                               
4:42:35 PM                                                                                                                    
MR. ALPER went  to the last part of the  bill, the "deep" section                                                               
concerning  municipal utility  limitations.  This was  discovered                                                               
through  paying historic  tax  credits and  finding  that is  the                                                               
literal  interpretation of  the law.  If a  company is  producing                                                               
most of  the gas themselves  (if they are  a utility that  owns a                                                               
gas field and  a great bulk is going to  their own turbines) that                                                               
use of gas  isn't a sale for  tax purposes - its'  just their own                                                               
gas. But if they  have a little bit of extra and  sell to a third                                                               
party, that's  a sale. That  becomes revenue. For the  purpose of                                                               
various  credits,  the  question  is whether  the  expenses  that                                                               
offset that  small amount of  sale - the  way the law  is written                                                               
that all of the expense  could offset that revenue, thus creating                                                               
(similar to the  GVR NOL section) synthetic NOL  (NOLs that don't                                                               
reflect the  actual profitability  of that company). They propose                                                               
to say that only the pro-rata  share of the costs would be usable                                                               
to offset  the revenue. The chart  on the right side  of slide 40                                                               
is current  law illustrated by  using a utility using  20 million                                                               
feet  per day,  burning  18  million feet  in  their turbine  and                                                               
selling 2  million feet  to someone  else. If  that gas  is worth                                                               
$8/mcf, the revenue  based on selling 2 million per  day over the                                                               
course of the year is about $6 million feet.                                                                                    
If their  lease expenditure is  $3 (on  all the gas),  that's $21                                                               
million  worth  of lease  expenditure.  They  could share  a  net                                                               
operating  loss  effectively  of  $16 million  even  though  they                                                               
didn't  really lose  $16 million,  and  in Cook  Inlet the  state                                                               
would be paying  them a 25 percent NOL credit  of $4 million. The                                                               
bill proposes  to say if  you're selling  only 10 percent  of the                                                               
gas and using 90 percent of  it yourself, you only get to account                                                               
10 percent  of your lease  expenditures against that  revenue for                                                               
the purposes  of any tax  or operating  loss. In this  case, they                                                               
would be shown to be profitable,  because only 10 percent of that                                                               
$22 million -  $2 million - would be deductible.  They would show                                                               
a $3 million operating profit and  would not be receiving an NOL.                                                               
It's a  relatively simple and technical  non-controversial change                                                               
that is just trying to fix a literal interpretation of the law.                                                                 
SENATOR MICCICHE  said that is  roughly an $8  million difference                                                               
in that case. He asked  the overall effect statewide of utilities                                                               
not being taxed on volumes sold to third parties.                                                                               
MR. ALPER  answered that they  are taxed  on the volumes  sold to                                                               
third parties (currently  $0.17/mcf in Cook Inlet),  and it would                                                               
be  in the  tens  or  low hundreds  of  thousands  of dollars  in                                                               
production tax as opposed to  the $16 million operating loss that                                                               
would lead to the $4 million  NOL. So, effectively that 2 mcf/day                                                               
times  700 mcf/year  times the  $0.17  tax is  what that  company                                                               
would be subject to.                                                                                                            
SENATOR  MICCICHE  asked  what  the  overall  effect  is  on  the                                                               
allowable lease expenditures.                                                                                                   
MR. ALPER answered in the single digit millions of dollars.                                                                     
SENATOR STOLTZE asked  what their discussions have  been with the                                                               
municipalities that have  utilities that run on gas.  Two come to                                                               
mind: the North Slope Borough and the Municipality of Anchorage.                                                                
COMMISSIONER HOFFBECK  answered that he  didn't know if  they had                                                               
any contact with the North Slope Borough or ML&P.                                                                               
MR. ALPER answered  that the North Slope Borough is  a little bit                                                               
different in  this circumstance,  because they  are not  the same                                                               
entity as  those who own the  gas fields and the  production that                                                               
supply  that. There  is an  actual transaction  that occurs  when                                                               
they sell their gas.                                                                                                            
SENATOR  STOLTZE said  it seems  a little  odd that  ML&P or  the                                                               
mayor's  office wouldn't  have  been a  little  more involved  to                                                               
protect  the interests  of their  consumers or  be part  of their                                                               
discussion. Have they outreached to them?                                                                                       
MR. ALPER  answered they didn't  specifically reach out  to them,                                                               
but they are  well aware of this issue. He  hadn't heard anything                                                               
from them. The  department is in contact with  them through their                                                               
role  as taxpayers,  and it  was in  that role  that they  became                                                               
aware  of  the  circumstance.  Perhaps  their  non-responsiveness                                                               
indicates  their recognition  that this  might be  something that                                                               
should be corrected, but he didn't want to speak for them.                                                                      
SENATOR STOLTZE  said he would like  to coax a response  from the                                                               
largest  municipality  in  the  state  on  the  impact  to  their                                                               
customer base.                                                                                                                  
4:49:22 PM                                                                                                                    
CHAIR GIESSEL said  both committees in the other  body that heard                                                               
this  bill  invited  ML&P  and  they did  not  respond  and  they                                                               
declined to  present to this  committee a  few days ago  when the                                                               
other utilities were  there.  She is in the  process of sending a                                                               
letter to the  mayor to ask if  he had a comment on  this, but it                                                               
hadn't been executed yet.                                                                                                       
SENATOR MICCICHE commented that this  looks like it can't be more                                                               
than a half to three-quarter  million dollar problem on an annual                                                               
basis  in comparison  to the  hundreds of  millions in  chunks of                                                               
revenue they are  talking about, and looks like a  cost that will                                                               
be shifted to the ratepayer.                                                                                                    
MR. ALPER  replied that any  tax that  a utility would  be paying                                                               
the state  would be minimal  and would  most likely be  offset by                                                               
the small producer credit, anyway.  The credits they are enjoying                                                               
by having all of their lease  expenditures, which could be in the                                                               
tens of millions  of dollars per year to operate  that field, are                                                               
only being  offset by  a relatively small  amount of  sales, then                                                               
the state  could see losses  in the  tens of millions  of dollars                                                               
with 25 percent of that eligible for an NOL credit.                                                                             
4:51:28 PM                                                                                                                    
Slide 41 gets into the  scenario analysis modeling for this piece                                                               
of legislation that came as  requests from individual legislators                                                               
over  the  previous  interim.  In  some  ways  they  have  copied                                                               
stylistically some  modeling from  PFC Energy and  enalytica, the                                                               
legislature's  consultants. Typically,  the DOR  has modeled  oil                                                               
and gas as  a North Slope-wide or Cook Inlet-wide  model so there                                                               
is per-barrel spending  on operating and capital,  but it doesn't                                                               
really capture the  nuance of an individual  investment where the                                                               
capital spending  is not evenly  spread throughout  the lifecycle                                                               
of  the field.  In fact,  it's very  front loaded.  Likewise, the                                                               
operating doesn't happen  until after they are  in production and                                                               
it  tends  to  be  scaled  with  the  production.  And  then  the                                                               
production itself  is on a  curve that  ramps up and  ramps down.                                                               
Every  small  field follows  the  same  left  curve they  see  on                                                               
Prudhoe Bay.                                                                                                                    
This life  cycle model shows  the cash  flow over the  30-40 year                                                               
life  of  a project  for  both  the  state's production  tax  and                                                               
credits  as a  standalone item,  the all-state  revenues (general                                                               
fund revenue), and also the  producers' cash flow. They applied a                                                               
discount rate to all of these  using the most recent track record                                                               
of  the  Permanent  Fund  earnings, which  is  6.15  percent,  to                                                               
represent  the time  value  of  money for  the  state's money  in                                                               
Alaska, if the alternative is having the money in savings.                                                                      
4:53:05 PM                                                                                                                    
The model  looks at  $30, $60,  and $80/oil as  well as  the fall                                                               
forecast scenarios.  They also worked  in higher and  lower price                                                               
scenarios  due to  a request  from the  House Finance  Committee,                                                               
which he  promised to provide  this committee. They  also modeled                                                               
the  status quo  versus  the  sum total  of  the  changes in  the                                                               
governor's bill.                                                                                                                
They  looked at  new field  on  the North  Slope with  50-million                                                               
barrels in the ground. This really  means it peaks-out in the 10-                                                               
15,000/barrel/day  range,  comparable   to  smaller  fields  like                                                               
Oooguruk, the Nikiatchuq,  and the Mustangs. They  also looked at                                                               
a  much  larger  field,  the  750-million/barrel  in-place  field                                                               
comparable  to  the  Armstrong  field. That  was  done  in  three                                                               
different  iterations  using the  12.5  percent  royalty, the  20                                                               
percent GVR, the  higher royalty with the higher  GVR (as Senator                                                               
Stedman alluded to earlier), and also  what happens if half of it                                                               
is on  private land.  They also modeled  the Cook  Inlet scenario                                                               
for a 50-million/barrel  field with a big  question mark floating                                                               
above in  2022 when the  tax caps in  statute go away.  He didn't                                                               
feel comfortable inventing  a tax regime for Cook  Inlet, so they                                                               
have a  high and  a low scenario,  caps are  extended effectively                                                               
with no  production tax into the  future versus when tax  caps go                                                               
away,  meaning the  35  percent net  tax  without any  per-barrel                                                               
credit.  However,   he  said,  the  real   answer  probably  lies                                                               
somewhere between the two sets of modeling runs.                                                                                
MR. ALPER said the committee  substitutes that have passed in the                                                               
other body  include a Cook  Inlet-specific working group  to look                                                               
at proposing a  new regime for the next legislature  to revise in                                                               
future years.                                                                                                                   
4:56:06 PM                                                                                                                    
Finally, slide  43 models  gas scenarios of  670 bcf/  Cook Inlet                                                               
and Middle  Earth gas fields  that are roughly analogous  to what                                                               
BlueCrest  is  looking to  do;  it  would  peak-out at  about  50                                                               
CHAIR GIESSEL asked where Furie would fall.                                                                                     
MR. ALPER  answered that  Furie is  a little  bit of  an unknown.                                                               
Their phase  1 is probably around  the same size, but  from their                                                               
claims and  from their somewhat aggressive  investing in offshore                                                               
platforms,  they  have  alluded   to  having  a  somewhat  larger                                                               
resource base. What  they talk about is having  about 400/bcf. In                                                               
some of their earlier reports  they talked about having trillions                                                               
of feet  in place. Everyone is  hopeful, but no one  really knows                                                               
until they start  deviating further out from  their central point                                                               
to see how big the resource becomes.                                                                                            
4:57:21 PM                                                                                                                    
He said all the slides use  the structure graphic. The upper left                                                               
hand corner is the production  tax and tax credit alone scenario.                                                               
(Slide  44) This  is credits  the  state is  paying the  producer                                                               
based on whatever it  is they might be earning. In  the case of a                                                               
North Slope  field, it  is almost  entirely NOLs.  The production                                                               
tax  received  is  the  blue curve  in  revenues  starting  after                                                               
construction is finished.                                                                                                       
MR.  ALPER explained  when he  talks about  50-million/barrels of                                                               
oil  in place,  there  is an  assumption of  capex  - maybe  $12-                                                               
$18/barrel  - that  becomes  the aggregate  times  the number  of                                                               
barrels produced. So, a $12/barrel  capex scenario for 50 million                                                               
barrels means $600  million is going to be spent,  and most of it                                                               
will be spent in  the first two years, but it  get the 35 percent                                                               
NOL credit  over several  years. The  state's negative  cash flow                                                               
peaks out at around $50 million  per year at the highest level of                                                               
The total state  general fund cash flow (including  the oil money                                                               
that  goes to  the Permanent  Fund)  is in  the upper  right-hand                                                               
corner.  The  production tax  is  represented  by the  green  and                                                               
royalty  is indicated  by blue.  In  most years,  royalty is  the                                                               
state's  largest revenue  source. The  purple line  is the  state                                                               
corporate  income  tax  and  a "small  wedge"  that  isn't  quite                                                               
visible at this  level of resolution is the state's  share of the                                                               
property tax.  He said on the  North Slope a large  percentage of                                                               
the property tax actually accrues  to the North Slope Borough and                                                               
that didn't show  up on this graph. The producers'  cash flow was                                                               
graphed on  the lower left;  the green bars represent  a positive                                                               
after-tax  cash flow  after having  been partially  reimbursed by                                                               
the credits, once they are in production.                                                                                       
Finally, the lower right has some  of the sum total data from the                                                               
colored graphs  separated into the  three chunks: the top  one is                                                               
the  production tax.  In  this scenario  - $60  oil  for a  small                                                               
stand-alone oil field on the North  Slope - the state spends $162                                                               
million  on  credits  and receives  $183  million  in  production                                                               
taxes, a  positive revenue of $21  million.  But if  a time value                                                               
of money  is assigned  (net present  value) to  that calculation,                                                               
indicating that  the state would  be negative $37 million  on the                                                               
production tax, alone, on that field.                                                                                           
Meanwhile, the second "chunk" is  the total state cash flow where                                                               
the  losses are  a little  smaller (negative  $121 million).  The                                                               
difference between  that and the  negative $162 million  is there                                                               
are some years  where the state is still paying  out credits when                                                               
production  has  started  and  paying a  little  bit  of  royalty                                                               
revenue. In this "very stylized  new North Slope field" the state                                                               
gains a value  of $136 million. The same calculation  is done for                                                               
the  producers.  The  same  discount   rate  was  used,  but  the                                                               
producers look for a higher  return on investment than 6 percent.                                                               
If that  were the case, the  so-called hurdle rate is  where they                                                               
would be seeing  a smaller number if  they were to apply  a 10 or                                                               
12 percent discount rate. This is the status quo scenario.                                                                      
5:02:30 PM                                                                                                                    
MR.  ALPER  said  he  had   three  different  scenarios  in  this                                                               
presentation  and he  would  be  happy to  meet  with any  member                                                               
individually to discuss this "stuff" at length.                                                                                 
5:02:38 PM                                                                                                                    
He said  these slides refer to  HB 247 and he  apologized for not                                                               
updating them  to SB  130. The most  visually different  thing on                                                               
the tax credit side (in the  upper left) is suddenly the negative                                                               
numbers get  cut off at $25  million per year. However,  as those                                                               
credits  are earned  for  more  years into  the  future the  "tax                                                               
credit spend"  gets shifted forward and  creates some distortions                                                               
in the companies' cash flow (in  the lower left). So, they really                                                               
need to look at the net effect changes.                                                                                         
The state's production tax discounted  value, at $45/46 oil, goes                                                               
from a negative $37 [million]  to a negative $10 [million], while                                                               
the  credit  outlay  goes  from  a  negative  $162  [million]  to                                                               
negative $101  [million]. Meanwhile,  the total  discounted value                                                               
of all the state's taxes goes  from $136 million to $163 million.                                                               
Of  course, as  the state  is gaining  value from  the companies,                                                               
their  discounted  cash  flow  goes  from  $112  million  to  $93                                                               
million.  Delaying  payment of some of the  credits creates value                                                               
to the state through the time value of that money.                                                                              
MR.  ALPER said  those numbers  are relatively  small if  one can                                                               
consider $163  million small.  The numbers  get much  larger when                                                               
looking at a  large field. They modeled this at  $80/oil with the                                                               
expectation that it's unlikely that  someone will make what quite                                                               
literally is a $10 billion  sanctioning investment to build out a                                                               
field of this size without an expectation of a higher oil price.                                                                
5:04:31 PM                                                                                                                    
He  looked at  a 750-million/barrel  field at  $80/oil. The  most                                                               
jarring  thing  with  a  front-loaded field  and  that  level  of                                                               
expenditure is  that the  state's credit  outlay is  $2.8 billion                                                               
before it  sees production taxes  off that field. At  the highest                                                               
point, the state is paying $800  million per year and for the top                                                               
three years  about $550 million  per year.  That is the  data set                                                               
that led the  House Resources Committee to put  in a $200-million                                                               
cap,  because that  is when  the credits  are really  outside the                                                               
state's capacity no matter what else  is going on - although that                                                               
would be a  single partner. He explained that any  of the caps in                                                               
the  various versions  of the  legislation haven't  accounted for                                                               
partnerships.  If there  are four  partners, each  earning a  $25                                                               
million  cap that  would actually  be $100  million, which  would                                                               
change these numbers dramatically.                                                                                              
5:05:42 PM                                                                                                                    
In this field the state gets  almost $9 billion in production tax                                                               
against the $3  billion in credit. With the time  value of money,                                                               
the state makes  $869 million. The state makes over  $1 billion a                                                               
year  for  a   few  years  at  the  peak  of   this  project,  an                                                               
extraordinarily  good  thing   if  it  can  get   built.  With  a                                                               
discounted value  of $3.5 billion  and a relatively  robust value                                                               
for  the producer  based on  all of  their assumptions  (which by                                                               
their very  nature are wrong),  the company would get  $2 billion                                                               
from this project.                                                                                                              
5:06:21 PM                                                                                                                    
What Mr. Alper learned when  he overlaid the $25-million per-year                                                               
cap  is that  this probably  created too  large a  distortion for                                                               
this field. The  state's cash-out went from $2.8  billion to only                                                               
$100 million;  the state about doubled  its discounted production                                                               
tax value  from less than $900  million to $1.7 billion,  and its                                                               
all-in cash  went from  $3.5 billion  to $4.3  billion. Meanwhile                                                               
the company  lost about  one-third of the  value from  this field                                                               
going down  from $2.2  billion discounted  to about  $1.4 billion                                                               
(slide 47). It's unlikely that someone  is going to do this alone                                                               
with the governor's bill and  four partners and a $100-million-a-                                                               
year cap,  and the  answer would fall  somewhere between  his two                                                               
5:07:29 PM                                                                                                                    
Being  pressed for  time, Mr.  Alper jumped  past the  Cook Inlet                                                               
scenario  that  is  similar  to   the  North  Slope  small  field                                                               
scenario, as  far as  how the  numbers move.  The Cook  Inlet was                                                               
modeled for  both the  Cook Inlet  tax cap  expired and  also the                                                               
Cook Inlet tax caps extended (not  in the bill), but he wanted to                                                               
highlight that  the larger presentations  have summary  tables at                                                               
the back. He  put all of the summary tables  in this presentation                                                               
so they are  easily available. Slide 50 looks at  the North Slope                                                               
oil  scenarios and  slide 51  looks at  the non-standard  royalty                                                               
scenarios  (high  and  private   royalty),  the  Cook  Inlet  oil                                                               
scenarios were  on slide  52, and  slide 53  had the  various gas                                                               
scenarios for both Cook Inlet and  Middle Earth (that has its own                                                               
statutory tax caps).                                                                                                            
CHAIR GIESSEL thanked  him for his presentation  and recessed the                                                               
meeting to 7:00 p.m. to continue work on SB 130.                                                                                
7:01:31 PM                                                                                                                    
CHAIR GIESSEL  reconvened the Senate Resources  Committee meeting                                                               
at 7:01 p.m. Present at the  call to order were Senators Stedman,                                                               
Coghill, Costello, Wielechowski and Chair Giessel.                                                                              
SENATOR COSTELLO moved the work  draft CSSB 130(RES), version 29-                                                               
GS2609\W, as the working document.                                                                                              
CHAIR GIESSEL objected for explanation purposes.                                                                                
7:02:36 PM                                                                                                                    
AKIS  GIALOPSOS,   staff  to  Senator  Giessel   and  the  Senate                                                               
Resources  Committee, Alaska  State Legislature,  Juneau, Alaska,                                                               
explained  the  changes  in  the   proposed  work  draft  \W  and                                                               
contrasted those to the changes in existing work order \A.                                                                      
SENATOR MICCICHE joined the committee.                                                                                          
SENATOR STOLTZE joined the committee.                                                                                           
MR. GIALOPSOS said the changes were as follows:                                                                                 
1.  The title  is changed  to reflect  subsequent changes  in the                                                               
committee  substitute, and  to  conform  to legislative  drafting                                                               
2. Section.  6 of  the previous  version A  of the  bill, dealing                                                               
with  confidentiality   requirements  (in  the  event   that  the                                                               
qualified capital expenditure and  well lease expenditure credits                                                               
in the A  version were removed, but the NOL  credit had remained)                                                               
is removed.                                                                                                                     
3. Language  on page  2, line 31  to page 3,  line 25  amends the                                                               
previous Section.  7 of version  A by changing the  interest rate                                                               
to  7 percent  above the  Federal Reserve  rate. However,  rather                                                               
than the full six years  of accruing a compounded quarterly rate,                                                               
the  interest will  only  accrue  for only  three  years, and  no                                                               
interest after  year three. However,  the statute  of limitations                                                               
would be for the full six years.                                                                                                
4. Section.  8 of  the previous  version A  of the  bill, dealing                                                               
with confidentiality requirements, is removed.                                                                                  
5. Language on  page 3, line 26,  to page 4, line  28, amends the                                                               
previous Sections.  9, 10, and  11 of version  A of the  bill, by                                                               
incorporating a  new definition of  outstanding liability  to the                                                               
state that is created in a later section.                                                                                       
6. Section. 12  of the previous version A of  the bill, hardening                                                               
the floor at 5 percent, is removed.                                                                                             
7:05:00 PM                                                                                                                    
7. Page 4,  line 29 to page  5, line 19, adds a  new Section. 10,                                                               
repealing the calculation for the Cook  Inlet tax cap, as well as                                                               
the  subsection   for  the  tax  calculation   for  gas  produced                                                               
elsewhere in the state for use in-state.                                                                                        
8. Page  5, line 20 to  page 7, line  4, adds a new  Section. 11,                                                               
conforming to Section 10.                                                                                                       
7:05:34 PM                                                                                                                    
9. Page  7, lines 5-10,  adds a new  Section. 12, making  oil and                                                               
gas produced  in the Cook  Inlet sedimentary basin  after January                                                               
1,  2018,  exempt  from  any  production  tax,  and  prevents  an                                                               
explorer or producer in the basin from acquiring credits.                                                                       
10. Page 7, line 11 through  page 15, line 1, amends the previous                                                               
Section. 13 in  the A version of the bill  by removing references                                                               
to hardening the  gross minimum floor, and conforming  to the new                                                               
Section. 10.                                                                                                                    
7:05:46 PM                                                                                                                    
11. Page 15, lines 2-23, repeals  the previous Section. 14 in the                                                               
A version  of the bill,  dealing with interest  calculations, and                                                               
conforming  to  the  new  Section.  6  on  interest  calculations                                                               
(compounding interest only year one through three).                                                                             
12.  Page  15,  lines  24  through page  17,  line  10,  conforms                                                               
Sections. 15,  16 of the bill  to the new Section.  6 on interest                                                               
calculations and further conforming to those changes.                                                                           
7:06:27 PM                                                                                                                    
13. Section.  17 of the previous  version A of the  bill, dealing                                                               
with  recalculating the  per-barrel  credit on  a monthly  rather                                                               
than a yearly basis, is removed.                                                                                                
14. Page 17, lines 11-30, adds  a new Section. 17 and reduces the                                                               
Qualified Capital Expenditure Credit to  10 percent as of January                                                               
1, 2017.                                                                                                                        
15.  Page 17,  line 31,  through  page 18,  line 21,  adds a  new                                                               
Section.  18,  eliminating   the  Qualified  Capital  Expenditure                                                               
Credit  for the  Cook Inlet  sedimentary basin  as of  January 1,                                                               
16. Page 18, line 22, through  page 19, line 17, amends the prior                                                               
Section. 18  of the  A version  of the  bill, by  eliminating the                                                               
provision  that  expired  net operating  loss  credits  after  10                                                               
years, and adds  new language that lowers the  Net Operating Loss                                                               
Credit for non-North  Slope activity to 15 percent  as of January                                                               
1, 2017. The  provision that prevented the  Gross Value Reduction                                                               
from  enhancing a  Net Operating  Loss remains  in the  Committee                                                               
7:07:24 PM                                                                                                                    
17.  Page 19,  line 18,  through  page 20,  line 15,  adds a  new                                                               
Section.  20  by  conforming  to Section.  19  of  the  Committee                                                               
Substitute,  eliminating the  Net Operating  Loss Credit  for the                                                               
Cook Inlet sedimentary basin as of January 1, 2018.                                                                             
18.  Page 20,  line  16, through  page 21,  line  2, removes  the                                                               
language in  the previous  Section. 20  of the  A version  of the                                                               
bill, related  to the  expiration of  Net Operating  Loss Credits                                                               
after 10 years.                                                                                                                 
7:07:51 PM                                                                                                                    
19.  Page  21,  lines  3-14,  conforms  to  renumber  subsections                                                               
earlier in the bill.                                                                                                            
20. Section.  22 of the previous  version A of the  bill, dealing                                                               
with confidentiality requirements, was removed.                                                                                 
21. Sections.  23, 24, and  25 of the  previous version A  of the                                                               
bill,  provisions  that  hardened  the minimum  tax  floor,  were                                                               
22.  Page 21,  line  15, through  page  22, line  7,  adds a  new                                                               
Section. 23,  lowering the  Well Lease  Expenditure Credit  to 20                                                               
percent by January 1, 2017.                                                                                                     
7:08:29 PM                                                                                                                    
23.  Page  22, line  8,  through  page 23,  line  3,  adds a  new                                                               
Section. 24, conforming  to Section. 23 and  eliminating the Well                                                               
Lease Expenditure Credit for the  Cook Inlet sedimentary basin by                                                               
January 1, 2018.                                                                                                                
24.  Page 23,  line  4, through  page  24, line  11,  adds a  new                                                               
Section.  25  that  grandfathers exploration  activity  that  has                                                               
spudded but  not completed in  the Frontier Basins  (referring to                                                               
statutes ending in 025).                                                                                                        
25.  Page 24,  line  12,  through page  25,  line  5, amends  the                                                               
previous Section.  26 of the  A version  of the bill  by removing                                                               
the limitation  on companies to  receive credits if  their global                                                               
revenues are  in excess of  $10 billion/year. It raises  the per-                                                               
company annual  refund credit  from $25  million to  $85 million,                                                               
and  adds  language to  prevent  a  company from  splitting  into                                                               
subsidiaries in order  to claim more than  the per-company annual                                                               
refund limit.                                                                                                                   
7:09:33 PM                                                                                                                    
26. Page 25,  lines 6-20, amends the previous Section.  27 of the                                                               
A version  of the bill,  related to Alaska resident  hire. Rather                                                               
than tying the percentage of  cashable credits to a company based                                                               
upon the rate of Alaska  resident hire, the Department of Revenue                                                               
would be required to promulgate  regulations, giving priority for                                                               
payment from the  tax credit fund for  companies whose employees,                                                               
and  contractors, have  a  resident  hire rate  in  excess of  75                                                               
27.  Page 25,  line  21,  through page  26,  line  5, amends  the                                                               
previous Section. 27  of the A version of the  bill, related to a                                                               
definition of an outstanding liability  to the state. The current                                                               
definition now defines  that only the same amount  of a liability                                                               
to the  state for  oil and  gas-related activity  can be  used to                                                               
reserve a credit refund.                                                                                                        
7:10:18 PM                                                                                                                    
28.  Page 26,  line 8,  conforms to  the elimination  of the  Net                                                               
Operating Loss  Credit in  the Cook  Inlet sedimentary  basin; is                                                               
essentially  the  same  language,  renumbered,  as  the  previous                                                               
Section. 28 of the A version of the bill.                                                                                       
29.  The previous  Section.  31 of  the A  version  of the  bill,                                                               
preventing  the Gross  Value  at the  Point  of Production,  from                                                               
going below 0, is removed.                                                                                                      
30.  Page 27,  line 31,  through  page 30,  line 14,  adds a  new                                                               
Section. 32 to  conform to the elimination of the  Cook Inlet tax                                                               
cap calculation, and the calculation  for the tax on gas produced                                                               
elsewhere in state for use in-state.                                                                                            
7:10:58 PM                                                                                                                    
31.  Page 30,  line 15,  through  page 31,  line 34,  adds a  new                                                               
Section. 33, conforming to Section. 10 and 33 of the bill.                                                                      
32.  Page  31, lines  5,  through  page  32,  line 18,  adds  new                                                               
Sections. 34 and 35, putting a  lifespan on oil or gas qualifying                                                               
for the Gross Value Reduction (new  oil), to five years after the                                                               
production  of  commercial  quantities.   For  oil  or  gas  that                                                               
qualifies for the Gross Value  Reduction that is in production as                                                               
of January 1, 2017, the  Gross Value Reduction expires on January                                                               
1, 2021.                                                                                                                        
33. Page  36, lines 16-24, adds  a new Section. 39  to conform to                                                               
the changes in Section. 10 of the bill.                                                                                         
7:11:37 PM                                                                                                                    
34. Page 37, lines 19-25, amends  the previous Section. 37 of the                                                               
A version  of the bill, related  to the limiting of  a tax credit                                                               
to  the  municipal  entity.  The  only  changes  were  conforming                                                               
changes to the legislative drafting manual.                                                                                     
35. The  previous Section. 39 of  the A version of  the bill, the                                                               
prior  definition  of  outstanding  liability to  the  state,  is                                                               
7:12:05 PM                                                                                                                    
36.  Page 38,  line 19,  through  page 39,  line 27,  adds a  new                                                               
Section.  44,  requiring  a taxpayer  seeking  a  refundable  tax                                                               
credit, to  post a  surety bond  in the  amount of  $250,000. The                                                               
bond would  serve as financial  relief to  political subdivisions                                                               
and  local  contractors  in  Alaska in  the  event  the  taxpayer                                                               
entered into bankruptcy.                                                                                                        
37. Page  39, lines  28, through  page 40,  line 2,  conforms the                                                               
Sections. 45, 46,  and 47, related to  repealing statutes earlier                                                               
in the bill.                                                                                                                    
38. Page 40,  lines 3-6, adds a new Section.  48, makes Sections.                                                               
7-9, 26 and 28 effective January 1, 2017.                                                                                       
39. Page 40, line 7, through  page 42, line 9, adds new Sections.                                                               
49, 50, 51, and 52  placing transition language for the Qualified                                                               
Capital  Expenditure  Credit  and   the  Well  Lease  Expenditure                                                               
Credit;  the  Net Operating  Loss  Credit  and  filing of  a  tax                                                               
40. Page 43, line 3, adds  a new Section. 55, making Sections. 25                                                               
and 53 effective immediately.                                                                                                   
41. Page 43, lines 4-5, adds  a new Section. 56, making Sections.                                                               
10-16, 18,  20, 24, 32, 33,  39, 46, 51 and  52 effective January                                                               
1, 2018.                                                                                                                        
42. Page 43, lines 6-7, adds  a new Section. 57, making Sections.                                                               
21,  22, 29-31,  36-38,  40, 41,  43, 47,  49,  and 50  effective                                                               
January 1, 2022.                                                                                                                
43. Page 43,  lines 8-9, adds a new Section.  58, providing that,                                                               
except  for Sections.  55-57,  the Act  takes  effect January  1,                                                               
CHAIR  GIESSEL opened  committee discussion  and invited  Senator                                                               
Costello to talk about the interest rate.                                                                                       
7:14:14 PM                                                                                                                    
SENATOR COSTELLO said the average  time it takes states to adjust                                                               
the interest rate for an audit  is about three to four years, but                                                               
in Alaska it  takes six years. So  the CS goes back  to 7 percent                                                               
compounded  quarterly  for the  first  three  years and  that  is                                                               
followed by  three years of  no interest  rate. The intent  is to                                                               
have the  interest rate be  less punitive,  but at the  same time                                                               
not incentivize  the department  to take so  long, because  it is                                                               
not in anybody's best interest to have this take six years.                                                                     
CHAIR GIESSEL asked her to also  comment on how long it takes for                                                               
the new oil to become mature.                                                                                                   
SENATOR COSTELLO responded that the  first provision is fairer to                                                               
the companies  and takes into  account the  effect of new  oil on                                                               
the state's treasury and caps new  oil at five years, much like a                                                               
child  who passes  the infancy  stage.  So, they  said that  five                                                               
years  after  commercial  operations  have started,  the  oil  no                                                               
longer qualifies for the new oil credits.                                                                                       
CHAIR  GIESSEL said  Middle Earth  is part  of Senator  Coghill's                                                               
district and they  have heard from those producers  that they are                                                               
just getting started, and asked him  to comment on the changes in                                                               
the CS related to that.                                                                                                         
7:17:06 PM                                                                                                                    
SENATOR  COGHILL said  it looks  like they  are grandfathered  in                                                               
except that new language was  added saying expenditures for wells                                                               
and exploration that had to be  shown to be "spudded in" by July,                                                               
2016.  There  were  no  changes  to the  023  credits,  so  "it's                                                               
CHAIR  GIESSEL  remarked that  that  area  is working  on  energy                                                               
security for the  Interior. She asked Senator  Stoltze to explain                                                               
the new approach to the Alaska hire provision.                                                                                  
7:17:52 PM                                                                                                                    
SENATOR STOLTZE said  that most Alaskans agree  with the governor                                                               
in the laudable  goal of trying to have  resident preferences and                                                               
this bill  provides "about as  good a defendable chance"  as any.                                                               
He  liked that  fact  that a  company is  being  judged on  their                                                               
previous  year's  employment  performance.  It's  a  more  honest                                                               
approach. Alaska hire is worth "pushing it as far as we can."                                                                   
CHAIR  GIESSEL  invited Senator  Micciche  to  comment about  the                                                               
surety  bond   requirement  for   companies  that   go  bankrupt,                                                               
something that happened a couple of  times in his district on the                                                               
7:19:34 PM                                                                                                                    
SENATOR MICCICHE  said it was a  key issue during the  Senate Oil                                                               
and  Gas Working  group discussions.  Some larger  companies that                                                               
were  service  providers as  well  as  Mom  and Pops  will  never                                                               
recover a penny from a couple  of the companies that "bailed" and                                                               
dissolved.  He explained  that the  surety bond  is proposed  for                                                               
$250,000 and it  guarantees that first to be paid  would be state                                                               
and political subdivisions  that have an outstanding  tax bill or                                                               
some other liability.  Then the most important  are identified as                                                               
persons  furnishing  labor,  material, or  renting  or  supplying                                                               
equipment to the applicant.                                                                                                     
He told a story  about how a very small Mom and  Pop on the Kenai                                                               
Peninsula that  was just simply  servicing septic tanks  was left                                                               
holding  the bag  for  thousands of  dollars  that they  couldn't                                                               
afford.  This would  clarify that  small Alaska  companies should                                                               
come first and  be protected when a company can't  live up to its                                                               
financial obligations. This is a  reasonable approach that allows                                                               
a cash deposit  if a company chooses  not to take out  a bond. It                                                               
is required  until a  company goes into  production and  then the                                                               
company can be relieved by the commissioner or the surety.                                                                      
CHAIR GIESSEL  said that  Cook Inlet credits  were deleted  as of                                                               
2018, a significant step, with a  step down in 2017 when the well                                                               
lease  expenditure   credits  will  drop  down   to  20  percent,                                                               
qualified capital expenditures will drop  down to 10 percent, and                                                               
a well  down to 10  percent. Then  in January, 2018,  all credits                                                               
are removed  from the Inlet.  Also, going forward, they  agree to                                                               
have no tax structure in Cook Inlet.                                                                                            
She said  the chart  that enalytica provided  to both  bodies was                                                               
"pretty jaw  dropping." She said  that the North  Slope companies                                                               
received  $200  million  in  credits  in  2015,  and  Cook  Inlet                                                               
received $400 million in credits  and there was virtually nothing                                                               
in any kind of revenue to the  state. The approach here is to get                                                               
government's  fingers out  of the  Cook  Inlet and  let the  free                                                               
market work.                                                                                                                    
Why 2018? Chair Giessel said  there are four reasons. Number one,                                                               
they are in the process of  giving Agrium a "go-ahead" to restart                                                               
the  fertilizer plant  in Cook  Inlet with  corporate tax  relief                                                               
that will be equal  to the royalty for the gas  that they will be                                                               
using. They will need about  80/mcf/day, which makes it an anchor                                                               
tenant. This de-constrains the market in Cook Inlet.                                                                            
Second  reason: Donlin  Creek's  pipeline EIS  will be  completed                                                               
around 2018.  Here is another user  of 10-30/mcf gas out  of Cook                                                               
Inlet.  Third, Hilcorp  has a  consent decree  from the  RCA that                                                               
will expire  in 2018 freeing  up a  free market paradigm  for the                                                               
pricing  of natural  gas. And,  fourth,  by 2018  they will  know                                                               
whether AKLNG is going forward or not.                                                                                          
7:24:32 PM                                                                                                                    
Another change in  the CS was made by eliminating  the work group                                                               
that  has  been  proposed  by  the  House.  The  reason  is  that                                                               
establishing a  working group  going forward  is like  labeling a                                                               
"draft" on  anything they do this  year. The idea here  is to rip                                                               
the Band-Aid  off and take  care of Cook  Inlet and take  care of                                                               
Middle Earth, do some changes on  the credits for the North Slope                                                               
that they believe  will still allow companies to  go forward, but                                                               
will also  help address Director  Alper's chart, which  shows the                                                               
state  in unpaid  credit card  debt that  continues to  grow each                                                               
7:26:00 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked when  other members  got this  CS; he                                                               
just got it at 5:50 p.m.                                                                                                        
CHAIR GIESSEL said it was not distributed before then.                                                                          
SENATOR  WIELECHOWSKI said  there were  quite a  few changes  and                                                               
asked if the administration could testify.                                                                                      
SENATOR MICCICHE asked what the  chair's plan is for a consultant                                                               
review of the bill's effects.                                                                                                   
CHAIR GIESSEL  answered that  Janak Mayer  was listening  on line                                                               
and the Department  of Revenue and the governor  had been briefed                                                               
on this an hour and a  half ago. She also thanked Representatives                                                               
Mark Neuman and Tammie Wilson  for being here. She also mentioned                                                               
that  working  group   members  Senators  Wielechowski,  Stoltze,                                                               
Micciche   were  there   and  thanked   them.  She   invited  the                                                               
administration forward.                                                                                                         
7:27:52 PM                                                                                                                    
COMMISSIONER  HOFFBECK said  as  an overview,  the department  is                                                               
largely in agreement  with many areas of SB 130,  and agrees that                                                               
this is significant legislation in  terms of Cook Inlet. Allowing                                                               
the Middle  Earth credits  to stay in  place longer  is something                                                               
they recognized  also in their bill,  because it is an  area that                                                               
is in its infancy and needs a  little bit more time to get going.                                                               
There were  no changes to the  Governor's bill on NOLs  for North                                                               
Slope. However,  it changes the  cash flow credit cap,  which the                                                               
governor had capped at $25  million. The earlier versions went to                                                               
$200 million  and $100  million. Now it's  at $85  million, which                                                               
they will model tomorrow. Their  biggest concern was that leaving                                                               
the NOLs in place left the  state exposed to paying large sums in                                                               
credits  and some  kind of  control  was needed  for the  state's                                                               
annual outlay.                                                                                                                  
SB 130  did not  adopt the  5 percent hard  floor, one  area they                                                               
don't see exactly the same. But  the Governor said this is all in                                                               
pencil recognizing  that this bill has  a lot of savings  and the                                                               
answer  is  in   the  total  numbers,  not   necessarily  in  any                                                               
individual provision.                                                                                                           
COMMISSIONER   HOFFBECK  said   they   would   have  liked   more                                                               
confidential  information disclosure,  because when  dealing with                                                               
NOL credits  is a little  harder than well lease  expenditures or                                                               
qualified capital  expenditures that  are a little  more project-                                                               
focused and might be a little easier to report.                                                                                 
7:31:23 PM                                                                                                                    
The  GVR  sunset  at  five  years  is  another  very  significant                                                               
provision that  wasn't in the  Governor's bill. It  was discussed                                                               
and that is seen as a very significant difference.                                                                              
The interest of  7 percent for three years and  no interest after                                                               
that: their  goal is to audit  within three years and  they don't                                                               
have  a lot  of heartburn  with giving  themselves a  little more                                                               
incentive  to  get to  the  three-year  audit window.  They  also                                                               
recognize how onerous six years of  high interest rates can be on                                                               
an  adjustment  and  this  provision  provides  a  balance.  They                                                               
appreciated the fact  that the provision allowing  for credits to                                                               
be applied against outstanding liabilities was left in place.                                                                   
7:32:41 PM                                                                                                                    
COMMISSIONER  HOFFBECK said  they see  some leakage  of value  in                                                               
changing the  annual true-up  to monthly,  but that  is something                                                               
that only  applies in  years of  significant volatility  and they                                                               
understand the concern.                                                                                                         
They support Alaska  hire, but had not thought about  using it as                                                               
a  mechanism for  cuing  a company  to the  front  of the  credit                                                               
program. They  thought that incentive  was a good way  of dealing                                                               
with it  if there is  ever a shortage  in the money  available to                                                               
pay the credits.                                                                                                                
He said  that SB 130  takes out  the municipal loophole  with the                                                               
surety  bond, and  that  is  also a  good  idea. Eliminating  the                                                               
working  group is  consistent with  the  Governor's treatment  of                                                               
Cook  Inlet.   They  agree  that   the  working   group  inserted                                                               
uncertainty into the  process. People want to know  what they are                                                               
working with and want a decision to be made.                                                                                    
The   sliding  scale   a  little   different,   but  again,   the                                                               
Commissioner said it  needs to be modeled within  the totality of                                                               
the numbers.  He said they could  have the model done  by mid-day                                                               
CHAIR GIESSEL said that would great and thanked him.                                                                            
7:35:38 PM                                                                                                                    
SENATOR MICCICHE asked  the logic behind picking  $25 million for                                                               
the credit cap since this bill caps it at $85 million.                                                                          
COMMISSIONER  HOFFBECK answered  that it  was an  "anchor number"                                                               
that  had been  used  in  past legislation.  They  used  it as  a                                                               
starting  point  recognizing   that  it  would  be   a  point  of                                                               
discussion.  They also  talked  about  inflation proofing,  which                                                               
would have brought it up into the $40-million range.                                                                            
7:36:39 PM                                                                                                                    
CHAIR  GIESSEL said  the $85  million is  close to  what the  028                                                               
fund, at $73 million, is this year.                                                                                             
SENATOR  COSTELLO commented  that  the Governor  has stated  that                                                               
transparency  is important  and  asked if  she assumes  correctly                                                               
that companies can provide information  related to their business                                                               
and receive some assistance.                                                                                                    
COMMISSIONER HOFFBECK answered  that is envisioned in  SB 130. If                                                               
they come  forward and  ask for  additional cashable  support, it                                                               
would  be in  an  open  process, and  therefore,  there would  be                                                               
little bit  more knowledge of  it. The transparency  issues helps                                                               
the legislature and the public  more, because the department sees                                                               
all the numbers and knows what  is going on, but they can't share                                                               
those numbers to  help people understand the  thought process and                                                               
why they  are moving forward. But  the public has every  right to                                                               
know why the state is "writing big checks."                                                                                     
7:38:46 PM                                                                                                                    
SENATOR MICCICHE said 2014 was  a perfect storm situation for the                                                               
annual versus  monthly true-up,  and he  asked if  they recognize                                                               
that their  example has  a fairly low  probability of  becoming a                                                               
typical trend  in oil prices and  if that is a  significant issue                                                               
for the state.                                                                                                                  
COMMISSIONER HOFFBECK  answered that  it could  be. Right  now it                                                               
looks like  oil prices  are going to  be constrained  between $35                                                               
and  $65.  At $35,  people  start  laying down  their  equipment,                                                               
because they are losing money. So,  you see a reduction in supply                                                               
as  fields decline.  Once the  supply/demand becomes  unbalanced,                                                               
prices will start to climb. When  they hit the $65 price point, a                                                               
lot of  oil can be brought  on line relatively quickly.  So, they                                                               
think  it's going  to bounce  around in  that range  for quite  a                                                               
while, and when it's in that range  it won't be a huge issue. But                                                               
because  there is  only about  a 3  percent oversupply  currently                                                               
being produced,  there is a  chance that  a spike in  price could                                                               
happen temporarily.  Certainly, this bill is  consistent with the                                                               
fact  that  the state  has  an  annual  production tax,  and  it,                                                               
therefore, is a policy decision.                                                                                                
MR.  ALPER added  that looking  back through  the modern  era and                                                               
Alaska as  a net profits tax  regime, he could imagine  an impact                                                               
if a  similar tax  regime were  in place in  the later  months of                                                               
2008 and  the early months of  2009 when the price  of oil dipped                                                               
from the high  $140s down to $30-something and then  came back up                                                               
to the $60s through the  2009 legislative session. Everyone could                                                               
all hope for volatility on the upside next year.                                                                                
SENATOR WIELECHOWSKI asked  for a sense of how much  more or less                                                               
SB 130  will generate  for the state  compared to  the governor's                                                               
MR. ALPER replied that he would  try to be evasive until tomorrow                                                               
after the modeling has been done.  In a general sense, all of the                                                               
fiscal notes  that the  chart format  is using  are a  mixture of                                                               
revenues items and  savings from expenditures on  credits. The CS                                                               
before the  committee, with  the absence  of the  floor hardening                                                               
provisions, definitely wouldn't see as  much on the revenue side,                                                               
but  with the  more aggressive  Cook Inlet  ramp-down they  would                                                               
probably see more  on the savings of  credit spending, especially                                                               
in the permanent savings of credits.                                                                                            
The  more aggressive  tax  caps  in the  governor's  bill have  a                                                               
bigger  short-term  impact without  question,  but  to a  certain                                                               
extent, some of  that rolls forward into future  years where they                                                               
might see  a smaller or even  a negative impact as  companies are                                                               
getting the second,  third and fourth chunk of  their $25 million                                                               
cap  a year.  That  would  have a  flatter  impact  than the  $85                                                               
million limit. He  guessed it's going to be a  larger fiscal note                                                               
than  the  House  Finance  CS,  but  somewhat  smaller  than  the                                                               
governor's original bill.                                                                                                       
SENATOR WIELECHOWSKI  asked if  the House's  fiscal note  is $900                                                               
MR. ALPER answered about $150 million.                                                                                          
SENATOR WIELECHOWSKI said  the fiscal note says  "leaves same" on                                                               
the Senate version of the North Slope NOLs.                                                                                     
COMMISSIONER  HOFFBECK  answered  that  means  the  same  as  the                                                               
governor's bill.                                                                                                                
7:44:27 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked him  to explain what  the explanatory                                                               
paper says about  the sliding scale. The Governor's  bill says no                                                               
change in scale - can't take below  5 percent, and SB 130 says no                                                               
change in scale - 4 percent status quo.                                                                                         
MR. ALPER  explained the one  part of  SB 21 that  truly hardened                                                               
the floor  referred to the  sliding-scale, per-barrel  credit for                                                               
legacy oil from  zero to $8. That calculation cannot  bring a tax                                                               
below 4  percent, and that  is solid.  This is where  the state's                                                               
revenue  came from  in 2015  and that  it is  still getting.  The                                                               
Governor's  bill proposed  saying other  credits -  the operating                                                               
loss  credit, the  $5/barrel credit,  small  producer credit,  et                                                               
cetera also  - could  not go  below the floor.  That is  the part                                                               
that  was  removed  from  the  CS.  The  Governor  also  proposed                                                               
bringing all of  that to 5 percent. So,  the sliding-scale credit                                                               
continues to  be hardened  to 4  percent as  in current  law, and                                                               
it's  not being  increased  to  5 percent  as  in the  governor's                                                               
CHAIR  GIESSEL clarified  that she  drew up  the quick  reference                                                               
document he was referring to.                                                                                                   
SENATOR   WIELECHOWSKI  said   he   would  just   wait  for   the                                                               
department's analysis tomorrow.                                                                                                 
SENATOR  MICCICHE said  it  looks like  at  $40/barrel the  state                                                               
saves  about $28  million  in hardening  the floor  from  4 to  5                                                               
percent until  the price goes over  the minimum range at  $75. He                                                               
asked Mr.  Alper if he  agreed that  the reduction in  Cook Inlet                                                               
credit dramatically offsets hardening the floor.                                                                                
MR. ALPER answered that the  chart Senator Micciche was referring                                                               
to talked about the specific  impact of increasing the floor from                                                               
4 to 5 percent. That was sort  of the second phase of the minimum                                                               
tax change, the first phase  being hardening the other credits to                                                               
the 4 percent level and that  change brought in about another $50                                                               
million  in addition  to the  $50  million in  the original  bill                                                               
(according  to the  fall forecast).  But by  the time  the spring                                                               
forecast came  out, the North  Slope major producers  applied for                                                               
much larger NOL  credits, and the fiscal impact  of the hardening                                                               
became close  to a $150  million line  item (with that  chart, it                                                               
boosted  the revenue  to about  $200 million).  That is  the full                                                               
revenue impact  of the floor  hardening and  increasing provision                                                               
that is not in the CS.                                                                                                          
SENATOR  MICCICHE  asked  a  question  about  how  the  value  of                                                               
hardening the  Cook Inlet credits  versus eliminating  them would                                                               
compare to keeping the 4 percent floor.                                                                                         
MR.  ALPER  responded   that  the  Cook  Inlet   credits  in  the                                                               
enalytica's chart  were $404 million  in 2015 and that  number is                                                               
scheduled to step  down a little bit just because  of a reduction                                                               
in activity  in the Cook  Inlet. Whatever that number  is reduced                                                               
by is  what they will be  saving. Hardening the floor  means that                                                               
NOLs  aren't being  used  to go  below the  floor  and they  will                                                               
eventually  be paid  to the  company through  reduced taxes  in a                                                               
future year. Other  than the time value there is  "something of a                                                               
net zero in  that hardening," but that increases as  the stack of                                                               
NOL credits get carried forward.                                                                                                
CHAIR  GIESSEL  removed her  objection  to  adopting the  CS  and                                                               
finding no  other objections, announced  that CSSB  130(RES), 29-                                                               
GS2609\W, was  before the committee.  She then invited  Mr. Mayer                                                               
to comment  on the CS,  which was posted on  BASIS an hour  and a                                                               
half ago.                                                                                                                       
7:49:59 PM                                                                                                                    
JANAK  MAYER,  enalytica,   Legislative  Consultant,  Washington,                                                               
D.C.,  said he  liked the  way the  chair framed  the Cook  Inlet                                                               
versus  North  Slope credit/revenue  picture  in  the context  of                                                               
enalytica's slide.  He said they tried  to highlight consistently                                                               
that for FY15  they are talking $2.2 billion  in total restricted                                                               
and  un-restricted revenues.  Compare that  to [$324  million] in                                                               
credits.  Cook Inlet  is a  very different  ratio with  less than                                                               
$100 million  in revenues and  more than $400 million  in credits                                                               
for FY15.                                                                                                                       
Other  types of  credits: the  North Slope  has two  credit areas                                                               
left.  One is  the trailing  expenditure things  like exploration                                                               
credit, the small producer credit,  the dollar per-barrel credit,                                                               
and the NOL credit, a  mechanism of deducting expenses when there                                                               
isn't sufficient revenue to deduct it  in a current year. All net                                                               
profit  taxes  have   the  ability  to  deduct   expenses  in  an                                                               
appropriate  year, in  most cases  as a  carry forward  against a                                                               
future  liability. In  all  situations, the  amount  of the  NOLs                                                               
isn't changed  by any of  the proposals before them.  Whether the                                                               
credits can be used to go below  the floor or when the credit can                                                               
be taken are  simply about the timing of payments,  not about the                                                               
actual amounts of the payments.                                                                                                 
7:54:51 PM                                                                                                                    
MR. ALPER  said having priorities makes  a lot of sense.  What is                                                               
proposed in  Cook Inlet goes  beyond the Governor's bill  or some                                                               
of the House proposals. What  they have said consistently on Cook                                                               
Inlet  is that  with ongoing  drilling one  doesn't have  all the                                                               
expenses of  new facility  developments; simple  ongoing drilling                                                               
in  the   mature  fields   is  economic  in   a  wide   range  of                                                               
circumstances. Enalytica  has said  economics are  most difficult                                                               
when they are  constrained by a new  development with substantial                                                               
facilities,  since  those  are additional  capital  expenditures.                                                               
Those could  be economic  if one has  a substantial  resource and                                                               
demand, but without that, they are very difficult.                                                                              
The  obvious concern  with this  approach is  the timing.  If one                                                               
simply cuts off all of the  credits except the net operating loss                                                               
effective July  2016, companies have  already committed  to major                                                               
work  programs.  So, that  suddenly  puts  them in  jeopardy  and                                                               
potentially  prevents the  work  from going  ahead. Pushing  that                                                               
date out would allow ramping down  a little more slowly and could                                                               
resolve that problem.                                                                                                           
MR. MAYER said the small  independent producers are stopping now;                                                               
in particular,  Furie at Kitchen  Lights started  production last                                                               
year and now has had a  small amount of gas production. BlueCrest                                                               
is  making substantial  progress towards  their oil  project; one                                                               
wants to see  companies like that able to continue  the work they                                                               
are doing  through next year and  able to get to  the point where                                                               
they  have recovered  some substantial  portion of  their initial                                                               
investment  and  can  at  least  be  cash-flow-sustaining  moving                                                               
forward. Hopefully Cook Inlet can get  to the point of broad free                                                               
market principles going forward  from 2018 rather than continuing                                                               
to rely on government intervention.                                                                                             
7:58:47 PM                                                                                                                    
He said  stopping the massive outlay  of credits is okay  as long                                                               
as that  can be seen  as genuine and  durable and there  is every                                                               
reason to think  that could be quite a  favorable environment for                                                               
investment  -  in  particular for  ongoing  reinvestment  in  the                                                               
mature fields. The  biggest barrier to that at the  moment is the                                                               
much uncertainty as to what  the future fiscal regime looks like.                                                               
One  could address  that by  making it  very clear  that this  is                                                               
absolutely  the  future of  the  regime  and  it's not  going  to                                                               
On the  North Slope the  question of old  versus new oil:  at the                                                               
moment the 4  percent floor is essentially hard all  the way down                                                               
until the  point that a  company stops  being eligible for  a net                                                               
operating  loss (NOL).  That  is a  substantial  change from  the                                                               
situation under ACES and before  where most of the production tax                                                               
revenue for  the last year or  two has come from.  Once a company                                                               
reaches  the point  of being  eligible for  NOL credits,  that by                                                               
definition is  levying a  tax on  a producer  with nothing  but a                                                               
loss. In that sense, one  should be very careful about proceeding                                                               
with  floor hardening  in  terms  of it  coming  at  a time  when                                                               
companies are  most strapped  for cash or  when cash  is actually                                                               
negative and going  out the door. Trying to extract  more on that                                                               
front seems like not necessarily an ideal policy move.                                                                          
MR. MAYER  advised because  one can  carry expenses  forward, the                                                               
impact of the floor hardening is  a question of timing and not of                                                               
absolute amounts.  One needs to  keep in mind what the dynamic of                                                               
pushing  those payments  out into  future years  looks like  in a                                                               
time when eventually  oil prices do rise and how  that plays into                                                               
how the system works. At the  moment it's relatively easy for the                                                               
Alaska public to understand that  the state's fiscal situation is                                                               
highly constrained because  of low oil prices. It's  one thing to                                                               
understand that,  but it's  another for prices  to start  to rise                                                               
and to find that the  state is still financially constrained, not                                                               
because  of   oil  prices,  but   because  of  the   hangover,  a                                                               
substantial  hangover  potentially,  of having  to  pay  deferred                                                               
credits.  Hardening the  floor simply  means that  there is  this                                                               
trailing  tail  of  NOL  credits  that  can  be  carried  forward                                                               
potentially into  many years. Not  hardening the floor  means not                                                               
putting more  pain on the  companies that are  cash-flow negative                                                               
at the moment. But it  also recognizes essentially that liability                                                               
to the state now rather than pushing it off into future years.                                                                  
8:03:12 PM                                                                                                                    
On the question of the cashable  NOL amounts, Mr. Mayer said they                                                               
have said  that the $25-million  cap has a substantial  impact on                                                               
companies that are  eligible for the cashable NOL  credit who are                                                               
currently  developing. In  many  cases, that  could  mean one  is                                                               
making  a  $1.3 billion  capital  investment.  For that  sort  of                                                               
project,  one might  only need  $300 or  $400 million  of initial                                                               
capitalization  combined with  cashable  NOL credits  to make  it                                                               
work  before   it  came  self-sustaining   from  the   cash  flow                                                               
A $25-million  cap substantially  changes that picture.  It could                                                               
take  a $350-million  project and  turn  it into  a $500  million                                                               
project in  many cases. For companies  currently undertaking this                                                               
activity, that  is a major  impact. The impact, for  instance, of                                                               
the $100-million  cap is much less  in most cases, at  the moment                                                               
not binding on  most companies and simply will  protect against a                                                               
future  major  development  that   could  lead  to  major  credit                                                               
outflows for  the state. An  $85-million cap might start  to have                                                               
some effect on some current companies,  but it avoids many of the                                                               
worst effects of a $25-million cap.                                                                                             
8:05:17 PM                                                                                                                    
Finally, Mr.  Mayer talked about  the impact of moving  the gross                                                               
value  reduction (GVR)  to five  years.  When SB  21 question  of                                                               
should this  time be limited  for the life  of a new  project was                                                               
discussed. One could  structure that benefit in a  range of ways,                                                               
but one  of the  key things  to understand is  that for  many new                                                               
developments,  there are  several  years  of substantial  ongoing                                                               
drilling and reinvestment  that takes place before  a project can                                                               
sustain  that  initial  production  plateau for  five  years  and                                                               
become a  taxpayer. While there  is substantial merit  around the                                                               
question of  extending the GVR  indefinitely or not, he  could do                                                               
some modeling,  but it  may well  be the case  that for  many new                                                               
developments  a  five-year  limit  actually means  that  the  GVR                                                               
itself, has very  little impact at all either on  economics or on                                                               
the total amount of tax that the project pays.                                                                                  
The  question  then  is  for  existing  GVR  project  owners  and                                                               
investors the substantial  change in the tax system  and in those                                                               
circumstances the GVR  is actually delivering the  benefit it was                                                               
designed to do - in terms of  making the economics of a new field                                                               
on the North Slope more attractive.                                                                                             
8:07:34 PM                                                                                                                    
CHAIR GIESSEL asked when his analysis would be available.                                                                       
MR. MAYER answered tomorrow afternoon.                                                                                          
[SB 130 was held in committee.]                                                                                                 

Document Name Date/Time Subjects
CSHB 216(RES) - Sponsor Statement.pdf SRES 4/11/2016 3:30:00 PM
HB 216
CSHB 216(RES) - Legislation Ver. N.pdf SRES 4/11/2016 3:30:00 PM
HB 216
CSHB 216(RES) - Sectional Analysis.pdf SRES 4/11/2016 3:30:00 PM
HB 216
CSHB 216(RES) - Fiscal Note - DNR-MLW-3-14-2016.pdf SRES 4/11/2016 3:30:00 PM
HB 216
CSHB 216(RES) - Summary of Changes (Ver. W to N).pdf SRES 4/11/2016 3:30:00 PM
HB 216
HCR17 Sponsor Statement 2-1-2016.pdf SRES 4/11/2016 3:30:00 PM
HCR 17
CSHCR17 Summary of Changes 3-15-2016.pdf SRES 4/11/2016 3:30:00 PM
HCR 17
HCR17-LEG-COU-03-15-16.pdf SRES 4/11/2016 3:30:00 PM
HCR 17
HCR17-Final Version E.PDF SRES 4/11/2016 3:30:00 PM
HCR 17
CSSB130-Explanation of Changes-Version W.pdf SRES 4/11/2016 3:30:00 PM
SB 130
CSSB130-Version W.pdf SRES 4/11/2016 3:30:00 PM
SB 130