Legislature(2005 - 2006)HOUSE FINANCE 519

08/01/2006 10:00 AM House FINANCE


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10:19:19 AM Start
10:19:29 AM HB3001
05:02:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB3001 OIL/GAS PROD. TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
-- Continued Immediately After Session --
HOUSE BILL NO. 3001                                                                                                           
                                                                                                                                
     "An Act  relating to the  production tax on oil  and gas                                                                   
     and  to  conservation  surcharges  on oil;  relating  to                                                                   
     criminal  penalties for  violating conditions  governing                                                                   
     access to  and use of confidential  information relating                                                                   
     to the production tax; amending  the definition of 'gas'                                                                   
     as that  definition applies  in the Alaska  Stranded Gas                                                                   
     Development  Act;  making   conforming  amendments;  and                                                                   
     providing for an effective date."                                                                                          
                                                                                                                                
Co-Chair   Chenault  said   the   Committee  would   continue                                                                   
discussion on  the Produce of  Pay tax proposal as  set forth                                                                   
by the Administration on 7/31/06.  He provided members with a                                                                   
proposed  work   draft  to  HB  3001,   labeled  24-GH2096\I,                                                                   
Bullock, 8/1/06 (WORK DRAFT).                                                                                                   
                                                                                                                                
DR.  PEDRO VAN  MEURS, CONSULTANT,  OFFICE  OF THE  GOVERNOR,                                                                   
noted that he  had distributed a graph entitled  "Effect of a                                                                   
Do Nothing  Scenario Under  Produce or  Pay" (copy  on file).                                                                   
He   explained  how   base  production   works  relative   to                                                                   
production decline.  As shown  on the graph, a producer would                                                                   
be in the 25% tax rate by 2010 in a "do nothing" scenario.                                                                      
                                                                                                                                
Co-Chair Meyer  asked if the  production curve  included gas.                                                                   
Dr. Van Meurs responded by saying  the graph illustrates oil,                                                                   
but the WORK DRAFT refers to both oil and gas.                                                                                  
                                                                                                                                
10:26:06 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  asked if, in 10  years when the  gas pipeline                                                                   
comes online,  production  decline would  be offset  with gas                                                                   
production and  henceforth reduce the  overall tax.   Dr. Van                                                                   
Meurs,  said  that  the  additional  production  would  be  a                                                                   
significant underpinning of the decline curve.                                                                                  
                                                                                                                                
Co-Chair Chenault  asked about IRS and taxation:  Would there                                                                   
be penalties involved  similar to IRS or would  there just be                                                                   
interest that  would be demanded  on the underpayment  versus                                                                   
overpayment?                                                                                                                    
                                                                                                                                
ROBYNN  WILSON,  DIRECTOR,  DIVISION OF  TAX,  DEPARTMENT  OF                                                                   
REVENUE clarified how the tax  payment and tax interest would                                                                   
be dealt with.   She noted that there would  be no penalties,                                                                   
there would just be interest owed.                                                                                              
                                                                                                                                
10:28:40 AM                                                                                                                   
                                                                                                                                
Representative Kelly  asked why the 5 percent  increases kick                                                                   
in  at 2012  and not  sooner.   Dr. Van  Meurs explained  the                                                                   
concept of new production and  the need for organization time                                                                   
by some companies: approximately  5 years.  He also discussed                                                                   
the  provision's  goal  to  not  discriminate  against  those                                                                   
companies that need the time to  organize.  He opined that 5-                                                                   
year's time  is not  unreasonable given  the fact that  there                                                                   
are many companies already in  production on the North Slope.                                                                   
A 10-year timeframe  has disadvantages because  there is less                                                                   
incentive.                                                                                                                      
                                                                                                                                
10:32:44 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson explained  that the  first four  sections of  the                                                                   
WORK  DRAFT  remains  the same  and  briefly  explained  that                                                                   
Section 5 (AS 43.55.011) establishes  the tax rate; Section 9                                                                   
(AS  43.55.020) establishes  payment  rules;  and the  credit                                                                   
provisions are  in Section 13  (AS 43.55.023-025).  The lease                                                                   
expenditures in AS 43.55.160 were broken into 3 parts.                                                                          
                                                                                                                                
Ms.  Wilson provided  an overview  of  the WORK  DRAFT.   She                                                                   
referenced  page  3 and  noted  that  the sections  had  been                                                                   
reordered to provide a more readable  format.  Subsection (e)                                                                   
will be  what is  established in  (f).   Section 5(f)  is the                                                                   
core of  the bill,  detailing the  base rate and  incremental                                                                   
rate. Section 5(f)(2) identifies  the rate applicable to base                                                                   
production Section 5(f)(3) is  the percentage rate applicable                                                                   
to a producer's  incremental production.  Subparagraphs  A, B                                                                   
& C detail the increase in percentage rates.                                                                                    
                                                                                                                                
10:40:01 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson observed  that Section  5(f)(4) establishes  base                                                                   
production.   Section  5(f)(4)(A)  provides  the formula  for                                                                   
base production. She also noted  that the rate increase would                                                                   
be capped at 22.5%  for the first 3 years. This  ceiling rate                                                                   
was   established  in   order   to  provide   companies   the                                                                   
opportunity to  immediately increase production at  a rate no                                                                   
higher than  22.5%. This  was identified  on the matrix  from                                                                   
7/31 presentation.                                                                                                              
                                                                                                                                
She  continued   an  explanation   of  Section  5(5),   which                                                                   
establishes  that   the  production  is  calculated   in  BTU                                                                   
equivalent  barrels and  that it  cannot be  less than  zero.                                                                   
This continues  the rules for  base production.  Section 5(6)                                                                   
deals  with transferring  of properties  in 2005.   The  base                                                                   
production  transfers  with  the  properties.  This  prevents                                                                   
companies from  transferring properties  just to get  a lower                                                                   
tax rate.                                                                                                                       
                                                                                                                                
10:42:20 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson  explained  that  page 4,  Section  5(g)  is  the                                                                   
progressivity  language  seen   previously.  Subsection  (k),                                                                   
lines  27 and 30  are blank.  [L1] These are the elements  of                                                                   
progressivity still under discussion.                                                                                           
                                                                                                                                
10:4 :59 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson  discussed  Section  5. She  noted  that  Section                                                                   
(5)(h)  is the second  part of  the progressivity  provision.                                                                   
She  explained  that  the  only  change  reflects  an  annual                                                                   
calculation.  There  is no change of the concept  in the WORK                                                                   
DRAFT. Royalties  originally contained  in Section  5(f) were                                                                   
moved to  Subsection (i) with  no changes. These  subsections                                                                   
are reordered  to provide more  clarity i.e.,  to subsections                                                                   
with   basic  tax   rate   together  the   subsections   with                                                                   
progressivity and  the private royalties. Section  5(j) deals                                                                   
with Cook Inlet  gas. Other than some clarifying  language on                                                                   
how to  calculate the average  there is no change  to Section                                                                   
5(k), which  deals with Cook Inlet  oil.  She  clarified that                                                                   
there is no  intended change to the gross  value calculation.                                                                   
A new  subsection was  added (Section  5(l)) to clarify  what                                                                   
happens when  there is a lowering  of the tax  rate regarding                                                                   
Cook  Inlet  oil &  gas.   This  clarification  is  important                                                                   
because the  tax credits  can only be  used against  the base                                                                   
tax.    The  language  outlines   the  ordering  of  the  tax                                                                   
deduction.                                                                                                                      
                                                                                                                                
10:46:11 AM                                                                                                                   
                                                                                                                                
Representative  Kelly  asked  if  the  language  changes  the                                                                   
effective  rate for  Cook  Inlet.   Ms.  Wilson replied  that                                                                   
there is no change to Cook Inlet.                                                                                               
                                                                                                                                
10:47:00 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson   described  Section  5(o).  There   is  improved                                                                   
language regarding regulations  for determining heating value                                                                   
of the producer's  gas.  The language clarifies  how BTU will                                                                   
be calculated.                                                                                                                  
                                                                                                                                
Section 7, addresses  how the estimated  installment payments                                                                   
will  be  calculated.  The  producers  will  calculate  their                                                                   
expected tax  on a monthly basis.  The also section  sets out                                                                   
the calculations for the expected tax rate.                                                                                     
                                                                                                                                
10:48:38 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson observed  that  Section  7(B) (4)  defines  rules                                                                   
regarding estimated  tax payments  having to do  with private                                                                   
royalties.                                                                                                                      
                                                                                                                                
Language  was  included  in Section  9  clarifying  that  the                                                                   
producers shall  refund the excess  to private  royalty owner                                                                   
in accounting for the estimated tax payments:                                                                                   
                                                                                                                                
     If  the  total deductions  of  installment  payments  of                                                                   
     estimated tax for a calendar  year exceed the actual tax                                                                   
     for  that  calendar  year, the  producer  shall,  before                                                                   
     April 1 of the following  year, refund the excess to the                                                                   
     royalty owner.                                                                                                             
                                                                                                                                
The rest of the changes in Section  9 relate to tax liability                                                                   
calculated in a calendar year rather than monthly.                                                                              
                                                                                                                                
Section 12,  describes the interest  rules applicable  to the                                                                   
estimated or  installment payments due. Subsection  (g) deals                                                                   
with   underpayment    and   subsection   (h)    relates   to                                                                   
overpayments.   Interest is calculated  from the due  date of                                                                   
the installment  payment until  such time  as the payment  is                                                                   
made or  March 31,  whichever  is earlier.   The interest  is                                                                   
calculated  under,  Internal  Revenue Service  6621  &  6622:                                                                   
Determination   of  rate  of   interest  (on  file).     This                                                                   
particular interest  only occurs for the period  in which the                                                                   
payment is outstanding, until March 31.                                                                                         
                                                                                                                                
10:51:26 AM                                                                                                                   
                                                                                                                                
Ms. Wilson observed  that the Section 13, capex  credits, was                                                                   
reordered, but not changed.  Page  13, line 4, subsection (b)                                                                   
deals with  the conversion of a  loss into a credit,  at 20%,                                                                   
to be carried forward.                                                                                                          
                                                                                                                                
10:52:45 AM                                                                                                                   
                                                                                                                                
Ms. Wilson referred to Section  13, amendment to 43.55.024 on                                                                   
Page  17,  line  13 and  noted  it  contains  the  additional                                                                   
nontransferable  tax  credit  that  was in  43.55.170.    The                                                                   
credit started as  a deduction and was turned  into a credit.                                                                   
The WORK DRAFT brings the credits  all into one section.  New                                                                   
area  development credit  reflects  6 million,  which is  the                                                                   
annual total of 500,000 x 12 months.  The exploration credits                                                                   
in 43.55.025 remain the same.                                                                                                   
                                                                                                                                
Co-Chair  Chenault   asked  why  $6  million.     Ms.  Wilson                                                                   
explained that the tax is based on the calendar year.                                                                           
                                                                                                                                
10:54:48 AM                                                                                                                   
                                                                                                                                
Ms. Wilson noted that Section  25 (4.55.160) on Page 24, line                                                                   
15, was divided into 3 sections:  43.55.160, determination of                                                                   
production  tax  value; 43.55.165,  lease  expenditures;  and                                                                   
43.55.170,  adjustments  to  lease expenditures.    The  WORK                                                                   
DRAFT out  specific regions:  (A) North  Slope; (B)  the area                                                                   
south of  the Brooks Range that  is not cook inlet;  (C) Cook                                                                   
Inlet oil; and (D) Cook Inlet  gas. Paragraph 2 on line 13 is                                                                   
the  calculation   of  the  production  tax   value  for  the                                                                   
progressivity.                                                                                                                  
                                                                                                                                
10:57:46 AM                                                                                                                   
                                                                                                                                
Representative  Paul  Seaton asked  distinction  between  the                                                                   
taxes in  A and  B.  Ms.  Wilson clarified  that there  is no                                                                   
difference  between taxes.   The difference  comes into  play                                                                   
with the new  area development credit, which  only applies to                                                                   
areas other  than the North Slope  and Cook Inlet.  The value                                                                   
is calculated separately in order to apply the net tax.                                                                         
10:58:55 AM                                                                                                                   
                                                                                                                                
Ms.  Wilson  pointed   out  key  elements  on   page  27,  to                                                                   
43.55.165,   which  determines   whether   costs  are   lease                                                                   
expenditures.  The  department  shall consider,  among  other                                                                   
factors, industry  practices replaced:  "shall a  substantial                                                                   
weight will be  given to industry practice".  Line  13 is the                                                                   
calculation of  tax value for progressivity.   The department                                                                   
shall consider industry standards  but if it is on list it is                                                                   
prohibited.  Subsection (e)  specifies the  list the  list of                                                                   
prohibited  expenses.   This is  reiterated in  Line 19.  The                                                                   
intent remains with the language clearer.                                                                                       
                                                                                                                                
11:01:14 AM                                                                                                                   
                                                                                                                                
Ms. Wilson  continued to review  Section 25. An  amendment to                                                                   
43.55.165  on  Page  29, line  22,  paragraph  (2)  clarifies                                                                   
intent to  use a percentage of  direct costs.   She explained                                                                   
that exceptions to lease expenditures  in subsection (e); and                                                                   
language to 43.55.170  on Page 32, assets and  adjustments to                                                                   
lease expenditures,  remain the  same.  Expanded  language in                                                                   
43.55.180  requires the  Department of  Revenue to report  to                                                                   
the legislature  on 2011.    Language was changed  to reflect                                                                   
an annual tax return on Page 34, line 27: 43.55.201.                                                                            
                                                                                                                                
11:05:42 AM                                                                                                                   
                                                                                                                                
Representative Seaton  asked about the definition  of oil and                                                                   
gas in regards to taxing: at what  point during production is                                                                   
it gas and  where is it liquid?   [The question was  held for                                                                   
later discussion.]                                                                                                              
                                                                                                                                
11:07:33 AM                                                                                                                   
                                                                                                                                
Representative  Seaton  asked about  page  5,  and asked  for                                                                   
calculation on progressivity.   Ms. Wilson replied that there                                                                   
would be  monthly calculations,  which would be  triggered by                                                                   
the provisions in subsection (h).  The slope is determined by                                                                   
subsection (g).  In response to a question  by Representative                                                                   
Seaton, Ms.  Wilson clarified that  the goal is  to calculate                                                                   
the net equivalent  per barrel. She explained  that the value                                                                   
for the  month is  divided by  produced barrels to  determine                                                                   
the net  amount per  barrel, which would  be compared  to the                                                                   
trigger point to determine progressivity.                                                                                       
                                                                                                                                
11:09:52 AM                                                                                                                   
                                                                                                                                
Representative  Seaton  asked for  clarification  on page  4,                                                                   
line  20, specifically  the  language regarding  monthly  and                                                                   
yearly calculations.   Ms. Wilson replied  that progressivity                                                                   
is  calculated on  a monthly  basis  and is  a calendar  year                                                                   
return.  Representative Seaton  asked if the progressivity is                                                                   
known each month and has to be  paid in that month; otherwise                                                                   
would  there be interest  due  on it.   Ms. Wilson  confirmed                                                                   
that his explanation is correct.                                                                                                
                                                                                                                                
11:11:35 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  asked about the  decline rate.   He suggested                                                                   
getting it  could be a disincentive  if it were not  close to                                                                   
the  actual  rate.   He  requested  an  opinion about  the  5                                                                   
percent rate.                                                                                                                   
                                                                                                                                
11:12:40 AM                                                                                                                   
                                                                                                                                
Dr. Van  Meurs replied that the  natural decline rate  of the                                                                   
"do nothing" scenario is 10% -  12% in a mature state.  The 5                                                                   
percent is not meant to match  a do nothing scenario in order                                                                   
to maintain  a 22.5% percent.   Companies would have  to have                                                                   
significant,  on-going  investment in  order  to prevent  the                                                                   
decline.  He suggested ways to  slow the decline.  In setting                                                                   
the decline  rate,  it is assumed  that the  industry has  to                                                                   
make  considerable effort.   The  5 percent  decline rate  is                                                                   
very sensitive and has been tested.                                                                                             
                                                                                                                                
11:16:31 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  noted that the  geology is different  on each                                                                   
field;  some  declines  are preventable  and  some  are  not.                                                                   
There  is  no  perfect  number.   Dr.  Van  Muers  reiterated                                                                   
previous comments on the decline rate.                                                                                          
                                                                                                                                
11:17:14 AM                                                                                                                   
                                                                                                                                
Representative  Kertula asked  if the  decline rate  is known                                                                   
for  Prudhoe  Bay  or  Kuparuk.    Dr.  Van  Meurs  said  the                                                                   
sensitivity analysis  was not done  on specific fields.   The                                                                   
blended  rate is a  corporate  wide rate.   Fields that  have                                                                   
less decline  set the  impact for  fields that decline  more.                                                                   
The idea is to  create a blended rate that  is reasonable and                                                                   
requires  the  industry  to  maintain  a  certain  amount  of                                                                   
investment/production.   Representative  Kertula   summarized                                                                   
that  it is more  about the  rate than  the field.   Dr.  Van                                                                   
Meurs agreed.                                                                                                                   
                                                                                                                                
11:19:48 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  LES  GARA  inquired about  the  variables  of                                                                   
geology  and age  of  the field  and the  discrepancies  this                                                                   
might present  with the proposed  tax system.  Dr.  Van Meurs                                                                   
said the geology  of the fields vary greatly.   During normal                                                                   
decline, the  decline can be  modified through  various means                                                                   
of investment and  reinvestments.  He noted  that the blended                                                                   
rate is the component that encourages investment.                                                                               
                                                                                                                                
11:22:56AM                                                                                                                    
                                                                                                                                
Representative  Gara  observed that  no  matter  how poor  an                                                                   
investment is  made, the  rate of 22.5%  would not go  up for                                                                   
2006, 2007,  and 2008.   He noted that  the existing  tax has                                                                   
provided incentive for investment  and yet most companies are                                                                   
at zero percent  production rate.  He asked Mr.  Van Meurs to                                                                   
explain what  seems to be a  benefit to companies  without an                                                                   
adequate return to  the State.  Dr. Van Meurs  responded that                                                                   
the  idea is  to give  companies  some time  to evaluate  the                                                                   
favorable economics from a reinvestment  point of view of the                                                                   
PPT bill. The goal is to increase  production. The 3 year cap                                                                   
allows for companies  to reorganize based on  the PPT concept                                                                   
and create incremental production based on the new tax.                                                                         
                                                                                                                                
11:27:00 AM                                                                                                                   
                                                                                                                                
Representative Gara posed another  scenario pointing out that                                                                   
there would not  be incentives for a company with  a field in                                                                   
a low  rate of decline, under  the propose tax  structure. He                                                                   
referenced Page 3, and noted that  if a company is not adding                                                                   
production or investment their  rates still stay the same for                                                                   
the following 3  years.  He expressed concern  that companies                                                                   
that have chosen for many years  NOT to invest could continue                                                                   
without penalty,  with no additional  gain for the State.   A                                                                   
gross  revenue based  system without  tax  credits would  not                                                                   
encourage  reinvestments.  He  related  that,  from  Alaska's                                                                   
point of view, it is a negative  effect when companies do not                                                                   
reinvest.  Dr.  Van Muers reiterated that the  purpose of PPT                                                                   
is to  encourage new  investment and  increase production  in                                                                   
Alaska to create the neutral benefit  of good investment.  It                                                                   
attempts  to  change investment  behavior.    The POP  is  an                                                                   
additional layer of protection for the State.                                                                                   
                                                                                                                                
11:30:21 AM                                                                                                                   
                                                                                                                                
Representative  Seaton questioned  why, if  the base  rate is                                                                   
taxed at  75%, why  the first  year is it  only 70%.  Dr. Van                                                                   
Meurs explained that analysis  is based on a request from the                                                                   
legislature to make sure the blended rate is 22.5%.                                                                             
                                                                                                                                
11:33:24 AM                                                                                                                   
                                                                                                                                
Ms. Wilson referenced a handout  from 7/31/06 (Copy on File).                                                                   
Page 1 indicates  the severance tax under the  Produce or Pay                                                                   
Plan (POP) and various PPT proposals at $60/bbl.                                                                                
                                                                                                                                
Representative  Hawker was  troubled with  the conclusion  of                                                                   
the graph.   He stated that  the Department of  Revenue curve                                                                   
is not a declination curve.  Ms.  Wilson agreed to the source                                                                   
of the  numbers.  The projections  are based on  forecasts of                                                                   
production  amounts and  do not  reflect  the assumptions  of                                                                   
increased investment.   It was presented as the  model of all                                                                   
other versions.                                                                                                                 
                                                                                                                                
11:38:05 AM                                                                                                                   
                                                                                                                                
Representative   Hawker  requested   modeling  on   alternate                                                                   
production scenarios.   He noted that the graphs  reflect the                                                                   
potential of production that seems  achievable.  He said that                                                                   
he would  like to  see modeling  on a  goal of production  in                                                                   
which to create incentive for companies to achieve.                                                                             
                                                                                                                                
11:39:28 AM                                                                                                                   
                                                                                                                                
Representative  Holm  noted  that  there  was  no  discussion                                                                   
regarding the  stranded oil.   He asked what  potential there                                                                   
was regarding  stranded oil.   Dr. Van Meurs stated  that the                                                                   
Department  of   Revenue  is  concerned  about   the  current                                                                   
activity  on   the  North  Slope.     He  thought   it  could                                                                   
potentially  face a situation  by 2007, that  where it  is no                                                                   
longer  economic to recover  [stranded  oil].  He  maintained                                                                   
that  every   reservoir  can  increase  recovery   if  better                                                                   
technology is  applied.  Recovering factors could  range from                                                                   
20-60%.  It  is in  the  interest  of every  jurisdiction  to                                                                   
maximize recovery.  The Administration believes  that the PPT                                                                   
proposal would provide continuous  stimulus to technology for                                                                   
field recovery.   At a certain point in time,  the oil fields                                                                   
would  be abandoned.   It  is in  the joint  interest of  the                                                                   
State and  industry to delay that  timeline.  A  system based                                                                   
on net achieves  that objective better than a  system that is                                                                   
based on gross.                                                                                                                 
                                                                                                                                
The  Department has  the ability  to  lower the  rate of  the                                                                   
royalties.  The  royalty  proposal  is  the  ability  of  the                                                                   
Department to lower the royalty  in marginal situations and a                                                                   
PPT based on net built in will help Alaska.                                                                                     
                                                                                                                                
11:44:33 AM                                                                                                                   
                                                                                                                                
Representative Holm  stated that the graph does  not indicate                                                                   
the potential loss  and gain.  Dr. Van Meurs  agreed, stating                                                                   
that was  not intentional.  He  believed the State  would see                                                                   
higher production with PPT.                                                                                                     
                                                                                                                                
11:46:49 AM                                                                                                                   
                                                                                                                                
Ms. Wilson  briefly overviewed  the remaining  graphs  of the                                                                   
handout:   Page  2 @  $40/bbl &  Page 3  @ $20/bbl.   Page  4                                                                   
provides the State  take and the distribution  of future cash                                                                   
flows under status quo: Governor's  bill, POP and various PPT                                                                   
proposals from FY2007-2030.  Page  5 indicates the cumulative                                                                   
severance tax from 2007-2030,  produce or POP and various PPT                                                                   
proposals.    Page 6  shows  the  government share  with  the                                                                   
distribution  of  future cash  flows  under  status quo:  the                                                                   
Governor's  bill, POP  and  various PPT  proposals.   Page  7                                                                   
illustrates  the comparison  of forecast  production to  a 5%                                                                   
decline curve.   In conclusion,  Page 8 indicates  the volume                                                                   
weighted average blended tax rate, equaling 22.35%.                                                                             
                                                                                                                                
11:52:25 AM                                                                                                                   
                                                                                                                                
Co-Chair Chenault asked  if the numbers were off  a bit.  Ms.                                                                   
Wilson commented  that 2030 was  the date chosen as  the date                                                                   
the TAPS would be more costly than of benefit to keep on.                                                                       
                                                                                                                                
11:53:16 AM                                                                                                                   
                                                                                                                                
DAN  DICKINSON,  CONSULTANT,   TAX  DIVISION,  DEPARTMENT  OF                                                                   
REVENUE, responded  to Rep. Seaton's question.  The notion of                                                                   
gas to liquid would not affect  the point of production.  The                                                                   
point of production determines  getting it out of the ground.                                                                   
The changing  of gas to  liquids is a manufacturing  process.                                                                   
Under current law, if there was  such a plant, the cost would                                                                   
be deductible  and the  energy would not  be deductible.   It                                                                   
would be similar to a refining plant.                                                                                           
                                                                                                                                
AT EASE:       11:55:27 AM                                                                                                    
RECONVENE:     1:27:52 PM                                                                                                     
                                                                                                                                
KEN KONRAD,  VICE PRESIDENT,  ALASKA GAS, BRITISH  PETROLEUM,                                                                   
related that  increased oil investment  is critical to  a gas                                                                   
pipeline and  the opposite  is also  true.  When  considering                                                                   
greater production  on the North Slope there  are two factors                                                                   
considered  by the  industry:  cost and  infrastructure.   He                                                                   
related how they were interdependent.                                                                                           
                                                                                                                                
1:32:41 PM                                                                                                                    
                                                                                                                                
Mr.  Konrad observed  that in  2006  there is  7.6% less  oil                                                                   
going thru  TAPS than the year  before.  He noted  that there                                                                   
is an  increase in awareness on  all sides of  the importance                                                                   
of investment.   The biggest risk  to Alaska is  the question                                                                   
of attracting investment.  He  presented the perspective from                                                                   
an investor's viewpoint.                                                                                                        
                                                                                                                                
1:34:31 PM                                                                                                                    
                                                                                                                                
Mr. Konrad referred  to a slide presentation  called "Produce                                                                   
or Pay  Proposal"  (copy on file.)  He commented  on the  key                                                                   
messages on page  2.  He said the 20 percent  PPT tax rate is                                                                   
high and was only agreed upon  in order to produce gas.  This                                                                   
tax structure  will not maximize  investment. He  pointed out                                                                   
that the new proposal is a significant  increase in tax.  The                                                                   
structure  recognizes  the importance  of  production but  is                                                                   
simplistic and relies on unrealistic assumptions.                                                                               
                                                                                                                                
Mr. Konrad  related that the  incentive is better  focused on                                                                   
investment.  A  5% decline rate does not reflect  the current                                                                   
North  Slope  reality.    In  conclusion  he  said  retaining                                                                   
progressivity makes  it more difficult for Alaska  to attract                                                                   
the capital it needs.                                                                                                           
                                                                                                                                
1:39:06 PM                                                                                                                    
                                                                                                                                
TOM WILLIAMS,  SENIOR TAX COUNSEL, BRITISH  PETROLEUM, stated                                                                   
that  the  opening comments  are  a  review of  the  original                                                                   
proposal.  He further explained  why the tax rate is too high                                                                   
and not  in the  best interests  of Alaska.   He opined  that                                                                   
Alaska could gain  more money overall with a  lower tax rate.                                                                   
He  stated   that  lower  tax   rate  would  stimulate   more                                                                   
investment/reinvestment.                                                                                                        
                                                                                                                                
1:42:37 PM                                                                                                                    
                                                                                                                                
Mr.  Williams  explained that  the  structure  on Page  5  is                                                                   
simplistic.    Production  is  an output;  investment  is  an                                                                   
input.  Producers  have control only over the  investment and                                                                   
can not forecast the production.   The linkage of tax rate to                                                                   
production  introduces additional  uncertainty and  thus risk                                                                   
for  the   investor.    Added   risk  and  uncertainty   make                                                                   
investments  less  attractive   and  will  make  Alaska  less                                                                   
attractive compared  to its competitors.   The  POP structure                                                                   
could work, but only if the numbers  are right.  Care must be                                                                   
taken to avoid unintended consequences.                                                                                         
                                                                                                                                
1:45:22 PM                                                                                                                    
                                                                                                                                
Mr. Williams  continued to review  Page 6. He  concluded that                                                                   
the  future North  Slope  will be  different  from the  past.                                                                   
Future production  will become  more and more  challenging as                                                                   
light oil  targets become smaller  and less economic  and the                                                                   
proportion of viscous oil increases.   Future production from                                                                   
known resources  in existing fields will greatly  exceed that                                                                   
from  exploration. Mr.  Williams  noted  that the  projection                                                                   
from the  Department of Natural  Resources is  310.43 million                                                                   
barrels a  year for  2006.  Production  would represent  just                                                                   
over 3 billion barrels, calculated  at a 10% decline over the                                                                   
next fifty  years.   Of the  seven and  a half billion,  more                                                                   
than half is going to need to  have new investment or attract                                                                   
new investment.  In response to  a question by Representative                                                                   
Holm, he  observed that they risk  leaving oil in  the ground                                                                   
if it is not economic to produce.  He further noted that at a                                                                   
12% decline rate,  only 2.6 billion barrels of  the light oil                                                                   
would be  recovered; and  at 15% it  would be recoverable  at                                                                   
just over 2 billion barrels.                                                                                                    
                                                                                                                                
Page 7  - Depicts  a 6.5%-7% actual  decline rate  from 1992-                                                                   
2006. Mr.  Williams used the chart  to show that a  5 percent                                                                   
decline rate  does not reflect  current North  Slope reality.                                                                   
He  furthered the  point by  adding that  these are  declines                                                                   
that are  occurring in  spite the  industry's efforts  to add                                                                   
new fields and get access to heavy oil.                                                                                         
                                                                                                                                
1:48:57 PM                                                                                                                    
                                                                                                                                
Mr. Williams reviewed  Page 8 and emphasized  that increasing                                                                   
taxes on new oil  is bad policy. He referenced  Dr. Van Muers                                                                   
handout  page 11  noting different  tax  rates for  different                                                                   
levels of  production.  He felt  the graph was wrong  in that                                                                   
the tax  rate runs  inversely to  the economic robustness  of                                                                   
the  production.  He  went  on  to  say  the  easiest,  least                                                                   
expensive  oil  to  produce  is produced  first.  It  is  the                                                                   
opinion of BP  that a flat 15%  PPT tax rate for all  new oil                                                                   
would be a step in the right direction. He observed on                                                                          
                                                                                                                                
1:53:35 PM                                                                                                                    
                                                                                                                                
Mr.  Williams observed,  as outlined  on Page  9, that  lower                                                                   
taxes  means more  investment,  more production,  more  jobs,                                                                   
more state revenue and a healthier economy in Alaska.                                                                           
                                                                                                                                
1:54:24 PM                                                                                                                    
                                                                                                                                
Mr. Williams  added that the  structure does not  provide for                                                                   
equal treatment for those companies  who have spent more than                                                                   
5%  to slow  the  decline.   He  gave  an  example  of how  a                                                                   
newcomer  would   benefit  unfairly.     A  second   type  of                                                                   
discrimination  relates to  new sources  of production.   The                                                                   
use  of more  fuel  for production  adds  to the  costs.   An                                                                   
exploration may take 10 years  to come to production and will                                                                   
be taxed  unfairly because of  the incremental tax rate.   He                                                                   
also felt  that heavy  oil exploration  would not be  treated                                                                   
fairly.                                                                                                                         
                                                                                                                                
2:01:43 PM                                                                                                                    
                                                                                                                                
Mr.  Williams made  several  points regarding  investment  as                                                                   
contained   on   Page   11   -   Recommendations   Investment                                                                   
Methodology:                                                                                                                    
                                                                                                                                
   · To tie the tax rate to reinvestment would be a more                                                                        
     direct investment.  Investment is in the direct control                                                                    
     of industry.                                                                                                               
   · Increased   production  is   the   goal  and   increased                                                                   
     investment is the means.                                                                                                   
   · In   addition   to   increased   production,   increased                                                                   
     investment benefits to the Alaskan economy, businesses                                                                     
     and creates jobs for Alaskans.                                                                                             
   ·  A   tax  rate   based  on   reinvestment  reduces   the                                                                   
     investor's risk.  Gold plating can be prevented in a                                                                       
     straightforward fashion.                                                                                                   
   · Tax based  upon investment creates a more  level playing                                                                   
     field and may avoid unforeseen adverse consequences of                                                                     
     a decline-based tax rate.                                                                                                  
                                                                                                                                
Mr.  Williams   related  his   experience  with  this   as  a                                                                   
commissioner.  He explained how to limit gold plating.                                                                          
                                                                                                                                
2:06:38 PM                                                                                                                    
                                                                                                                                
Mr.  Williams addressed  the  concern regarding  diluting  of                                                                   
investment incentive by increasing  the tax as the investment                                                                   
comes to fruition. He spoke of  leveling the playing field to                                                                   
get more production in the long run.                                                                                            
                                                                                                                                
Mr. Williams  made several  points regarding  Page 12  titled                                                                   
Issues: Decline Methodology:                                                                                                    
                                                                                                                                
   · A decline  rate of  at least 10  percent is  required to                                                                   
     reflect current mature North Slope fields.                                                                                 
   · A rolling  five year historical average  would provide a                                                                   
     more reasonable base than a single year base period.                                                                       
   · Given  the period  required to develop  new barrels,  an                                                                   
     increase on the tax rate on new oil creates a                                                                              
     disincentive.                                                                                                              
   · BP  recommends  that  this  built  in  tax  increase  be                                                                   
     eliminated.                                                                                                                
   · Progressivity  makes it  more difficult  to attract  the                                                                   
     additional capital Alaska needs.   Progressivity should                                                                    
     be dropped or reduced to a much lower rate.                                                                                
   · Tax  rates for  new and  old  oil should  be lowered  to                                                                   
     ensure the blended tax rate is competitive with other                                                                      
     US and global provinces.                                                                                                   
                                                                                                                                
2:12:18 PM                                                                                                                    
                                                                                                                                
Mr. Williams said  a single reference year is  not indicative                                                                   
of mature field decline.  The  slide on Page 13 - North Slope                                                                   
Field Decline Rates with Investment,  depicts base production                                                                   
five-year averages of Prudhoe,  Kuparuk, Milne, Endicott, and                                                                   
Point McIntire.                                                                                                                 
                                                                                                                                
2:14:55 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  referred to  the  slide on  declining                                                                   
productivity.    He  recognized  production  decline  as  the                                                                   
common enemy and problem to be  addressed.  He summarized the                                                                   
industry's  viewpoint that  they will  provide production  if                                                                   
they have  the lower  tax rate.   Representative Hawker  said                                                                   
that the legislature is saying:  give us production and we'll                                                                   
give you the rate.  He asked BP what the difference was.                                                                        
                                                                                                                                
Mr. Konrad stressed  that economics not physics  is at issue.                                                                   
He noted  that the only  thing keeping  oil in the  ground is                                                                   
economics.   The industry  does not see  a way to  20 percent                                                                   
based on the  decline rate used relative to  the actual rate.                                                                   
Representative  Hawker   asked  why  Department   of  Revenue                                                                   
analysis shows  that this tax  rate equalizes over time.   He                                                                   
questioned why  if they have the  ability to access  the oil,                                                                   
the  tax structure  doesn't  work.    Mr. Williams  said  the                                                                   
industry   has  different   expectations   about   production                                                                   
forecasts.  He  recalled how ELF was designed  and speculated                                                                   
at a  different outcome.   Mr.  Konrad repeated his  concerns                                                                   
about the 20 percent tax rate.                                                                                                  
                                                                                                                                
2:21:18 PM                                                                                                                    
                                                                                                                                
Representative  Hawker said  the industry  is rigid  in their                                                                   
position of the  20% PPT being the only economics  that could                                                                   
work.  Mr.  Konrad  felt  this  was not  what  BP  wanted  to                                                                   
communicate.    He reiterated  comments  by Mr.  Williams  on                                                                   
stimulating  investment  and what  he feels  were  inaccurate                                                                   
percentages  and  production  rates  to  base  the  rate  on.                                                                   
Representative  Hawker  recalled  all of  the  proposals  and                                                                   
asked if  the industry would be  happy with the  original PPT                                                                   
proposal with progressivity  and a flat 25 percent  rate. Mr.                                                                   
Konrad  estimated the  actual rate  would be  between 25  and                                                                   
22.5 percent rate.  Representative Hawker then  asked if they                                                                   
would  be happy  with 22.5  percent and  progressivity.   Mr.                                                                   
Konrad emphasized that they could  and would prefer to invest                                                                   
more under a lower rate.                                                                                                        
                                                                                                                                
2:24:23 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   observed  that  the   House  Finance                                                                   
Committee has  twice sponsored a  20/20 tax rate bill  to the                                                                   
floor that  didn't pass.  The  House at this point  is forced                                                                   
to make  a compromise.  He  maintained that the  industry has                                                                   
not shown a willingness to compromise.                                                                                          
                                                                                                                                
Mr.  Konrad  replied  that  it  would  be  possible  for  the                                                                   
industry to  bring something forward outlining  an investment                                                                   
incentive  structure.   Representative Hawker  asked how  the                                                                   
legislature  could   convince  the  people  to   accept  that                                                                   
proposal.                                                                                                                       
                                                                                                                                
2:27:22 PM                                                                                                                    
                                                                                                                                
Mr. Williams spoke of possible  compromises as he offered his                                                                   
advice.  He  maintained  that there  are  alternatives  which                                                                   
would be better than a flat rate                                                                                                
                                                                                                                                
2:28:48 PM                                                                                                                    
                                                                                                                                
AT-EASE:       2:28:48 PM                                                                                                     
RECONVENE:     3:12:15 PM                                                                                                     
                                                                                                                                
Representative Holm related that  the Committee has been told                                                                   
that  investments  are not  going  into  Prudhoe due  to  the                                                                   
business models  the individual  companies pursue.   He asked                                                                   
why was  investment flat in Prudhoe  Bay when the ELF  was in                                                                   
such  a  position  that  there  was a  minimal  tax  for  the                                                                   
production of oil.   He also asked for an explanation  of the                                                                   
word  "over-incenting".   He  questioned  what assurance  the                                                                   
State has that the oil industry  would produce to the maximum                                                                   
benefit of the people of Alaska.                                                                                                
                                                                                                                                
3:15:09 PM                                                                                                                    
                                                                                                                                
Mr.  Konrad  responded  to the  question  about  Prudhoe  Bay                                                                   
investments.    He  recalled  that there  were  a  number  of                                                                   
satellite  investments  that  did  not  pay  production  tax;                                                                   
production output/investment  could be checked  by looking at                                                                   
the  previous  five years.    He mentioned  situations  where                                                                   
"over-incenting"  created problems,  but did  not think  that                                                                   
these  circumstances  existed  in  Alaska.   In  response  to                                                                   
Representative  Holm's comment  about producing  the oil  too                                                                   
quickly,  Mr.  Konrad  maintained  that  even  with  50  year                                                                   
business  plans  there  is  still  a  large  amount  of  oil,                                                                   
particularly heavy oil, left in the ground.                                                                                     
                                                                                                                                
Mr. Williams noted  that when production is added  to a field                                                                   
it makes it larger. With the ELF  formula, field size was the                                                                   
dominant parameter in setting  the rates.  When the field was                                                                   
increased, it raised the rate  for the whole field.  This was                                                                   
the burden  for the industry in  the ELF system.  He answered                                                                   
the question  regarding "over-incenting".  He  explained that                                                                   
the term  was used only in  the narrow sense with  regards to                                                                   
gold plating.  He spoke  to the  excess production  issue and                                                                   
gave another  example of damage  to the reservoir.   He noted                                                                   
that there  are a number  of variables during  production and                                                                   
that it  is important not to  waste energy in the  process of                                                                   
producing.   He pointed out that  the purpose of the  Oil and                                                                   
Gas  Conservation   Commission  is   to  prevent   this  from                                                                   
happening through regulation of field practices.                                                                                
                                                                                                                                
3:23:56 PM                                                                                                                    
                                                                                                                                
Representative Holm  asked where price  and the value  of the                                                                   
commodity fit into the scheme.   He suggested there should be                                                                   
urgency  to  produce  the  higher  valued  commodity  in  the                                                                   
currently  producing, known  field.   Mr. Konrad agreed  that                                                                   
there  is  an   enormous  undeveloped  resource   base.    He                                                                   
emphasized that there  is no risk of running out  of oil; the                                                                   
concern is  rather running out  of economic opportunities  to                                                                   
develop fields.   He further noted that when  production gets                                                                   
too low  the unit  costs go up.   He said  this is  a greater                                                                   
concern for industry than running out of oil.                                                                                   
                                                                                                                                
3:27:35 PM                                                                                                                    
                                                                                                                                
Mr.  Williams  asserted  that  there  is  a  lot  of  capital                                                                   
investment   in  Prudhoe   Bay.  Wells   are  being   drilled                                                                   
horizontally through  thin layers of rock on the  edge of the                                                                   
reservoir, which  was made possible with new  technology.  He                                                                   
concluded that  there is  a lot of  activity in Prudhoe  Bay,                                                                   
but added  that there are  maintenance and repair  challenges                                                                   
associated with decline.                                                                                                        
                                                                                                                                
3:28:41 PM                                                                                                                    
                                                                                                                                
Representative Kelly addressed  the decline rate and asked if                                                                   
establishing a production curve  for each company would solve                                                                   
the  problem.    Mr. Williams  responded  that  it  would  be                                                                   
impossible to  administer and to  tax. He related  that there                                                                   
are events that have an effect on production curves.                                                                            
                                                                                                                                
3:32:32 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked about  the Alaska Oil  and Gas                                                                   
Conservation Commission  (AOGCC) and the 5 year  set of data.                                                                   
She  requested  this data.    She  mentioned a  process  that                                                                   
entails a refutable  presumption whereby industry  could come                                                                   
in and disprove  the decline rate.    Mr. Williams  said that                                                                   
if  that  idea  were  pursued  that  there  should  be  clear                                                                   
criteria on the basis that the determination be made.                                                                           
                                                                                                                                
3:34:38 PM                                                                                                                    
                                                                                                                                
Representative Gara  asked if production could  be speeded up                                                                   
with  enough industry  incentives.   Mr.  Williams said  with                                                                   
proper  incentives, investments  could  be made  to slow  the                                                                   
decline.                                                                                                                        
                                                                                                                                
Representative  Gara questioned  whether this approach  would                                                                   
encourage companies to speed up  production to reduce the tax                                                                   
burden.   Mr. Konrad  replied that  in an operational  sense,                                                                   
the company  produces all  they can.   He emphasized  that it                                                                   
takes   many  years   to   make  investments   and   increase                                                                   
production.  The  price of oil does not  determine production                                                                   
level.  Representative Gara asked  about incentives contained                                                                   
in the  WORK DRAFT and  asked if they  would produce  more in                                                                   
order to get the  lower tax rate.  Mr. Konrad  responded that                                                                   
there is investment  opportunity at all sites.   Mr. Williams                                                                   
added that  towards the  end of the  field life when  margins                                                                   
are smaller,  tax rates are  higher, which means  investments                                                                   
are less.   He  gave an example  of Prudhoe  Bay in  the past                                                                   
when  nothing  was gained  by  incentives because  they  were                                                                   
unable to produce more than 1.5 million barrels.                                                                                
                                                                                                                                
3:41:22 PM                                                                                                                    
                                                                                                                                
Representative  Hawker discussed the  purpose of  the decline                                                                   
curve.  He  pointed out that it  might be better termed  as a                                                                   
decline allowance.  The point  of the curve is a mechanism to                                                                   
create  an incentive  for investment;  if  the decline  curve                                                                   
were actual, it  would lose its purpose.   He  noted that the                                                                   
BP charts suggest  the decline should be at  10% to represent                                                                   
current realities.   Mr.  Konrad replied  that if nothing  is                                                                   
invested it  would be far in  excess of 10  percent, probably                                                                   
around 15  percent.  Representative  Hawker asked  if current                                                                   
spending  is inevitably  a  10% decline  curve.   Mr.  Konrad                                                                   
replied  that  current  spending  is  7.6%.    Representative                                                                   
Hawker asked if BP was asking for a -4% differential.                                                                           
                                                                                                                                
Mr. Williams  said yes:  in the context  of $2.5  billion tax                                                                   
increase.    Mr.   Konrad  said  that  if  the   goal  is  to                                                                   
incentivize   investment  that   is   the  way   to  do   it.                                                                   
Representative Hawker commented  on the sensitivity data that                                                                   
established the  5% rate.  He  further noted that this  was a                                                                   
compromise  with those that  felt it  should be  at 2  or 3%.                                                                   
Mr. Williams  said the industry  suggests a base  and looking                                                                   
at the natural decline and then  seeing what "new" production                                                                   
is: production  that results  from new  investment.   He also                                                                   
felt that  the 10% rate would  put current investors  and new                                                                   
investors on a more level playing field.                                                                                        
                                                                                                                                
3:47:10 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  asked,  on  the  matter  of  a  level                                                                   
playing field,  why there was  a concern if the  new investor                                                                   
gets taxed at  15% and companies spending on  new investments                                                                   
get 15%.   Mr. Williams replied  that BP spent $1  billion to                                                                   
get from  the natural  harvest decline  rate to the  historic                                                                   
decline rate  of approximately 7%.   He pointed out  that the                                                                   
$1 billion  would be taxed  at 22% or  higher, compared  to a                                                                   
new field being taxed at 15%.                                                                                                   
                                                                                                                                
Representative Hawker  referred to earlier testimony  from BP                                                                   
that  spoke  of  reducing  the decline  to  3%,  by  doubling                                                                   
investment.   Mr. Williams said  yes, he would stand  by that                                                                   
testimony.    Representative   Hawker  said  he  is  confused                                                                   
because the 5% provides for a  mechanism to buy down the rate                                                                   
yet industry is  not supportive of this concept.   Mr. Konrad                                                                   
said,  as investors  they do  not see  it that  way into  the                                                                   
future.                                                                                                                         
                                                                                                                                
3:52:49 PM                                                                                                                    
                                                                                                                                
Mr.  Williams  reiterated  comments  on  the  discrepancy  in                                                                   
incremental   rate   between   new  investors   and   current                                                                   
producers.   Representative Hawker appealed for  a compromise                                                                   
to resolve the tax issue.                                                                                                       
                                                                                                                                
3:54:08 PM                                                                                                                    
                                                                                                                                
Representative Kelly  brought up the 3% decline  rate and the                                                                   
current decline  and asked  if it is  correct.  Mr.  Williams                                                                   
said it  is a subtle point.  Each investment  decision stands                                                                   
on its own merits.  Each year  there are unknown numbers that                                                                   
will   need   to   be  justified   at   the   blended   rate.                                                                   
Representative  Kelly referred  to  20 percent  and said  the                                                                   
House   is  at  22.5   percent.     Mr.  Williams   expressed                                                                   
appreciation for the cap.                                                                                                       
                                                                                                                                
3:58:11 PM                                                                                                                    
                                                                                                                                
BRIAN  WENZEL, VICE  PRESIDENT,  FINANCE AND  ADMINISTRATION,                                                                   
CONOCOPHILLIPS, stated that his  company does not support the                                                                   
new WORK DRAFT  for HB 3001. He said it puts  a tax burden on                                                                   
the industry.   He spoke  against the  22.5 percent tax.   He                                                                   
further  noted that  this system  is not the  $1 billion  tax                                                                   
increase originally proposed,  which ConocoPhillips supports.                                                                   
The original  proposal  provided a balance  and a  foundation                                                                   
for an  agreement  for a gas  pipeline contract,  as well  as                                                                   
investment  incentives,  production growth,  and  employment.                                                                   
He maintained that the current WORK DRAFT does not do that.                                                                     
                                                                                                                                
4:03:24 PM                                                                                                                    
                                                                                                                                
Mr.  Wenzel   went  on   to  say   that  the  original   bill                                                                   
incentivized   production.     He  said   the  POP   punishes                                                                   
production failure.   There may be production  shortfalls for                                                                   
a  number of  reasons.  The 15  percent tax  rate  is not  an                                                                   
incentive for exploration or for heavy oil.                                                                                     
                                                                                                                                
4:06:14 PM                                                                                                                    
                                                                                                                                
Mr. Wenzel said he was concerned  that the WORK DRAFT further                                                                   
exacerbates  the  difference   between  a  production  adding                                                                   
project  and  a non  production-adding  project.  Mr.  Wenzel                                                                   
maintained  that  all  investment  is good  investment.    He                                                                   
commented that the work draft  differentially hurts long-term                                                                   
investors. He  reiterated concerns  regarding the  5% decline                                                                   
curve.                                                                                                                          
                                                                                                                                
4:08:12 PM                                                                                                                    
                                                                                                                                
Mr.  Wenzel  referred  to  a   chart  entitled  "North  Slope                                                                   
Production  and  Individual  Field Decline  Rates"  (copy  on                                                                   
file.)  He said  the  decline rate  even  with investment  is                                                                   
accelerating.                                                                                                                   
                                                                                                                                
4:11:12 PM                                                                                                                    
                                                                                                                                
Mr. Wenzel pointed  to structural flaws with the  system.  He                                                                   
questioned  the rationale  for 22.5 percent.  He said  Conoco                                                                   
Phillips does  not support the  WORK DRAFT.  They  do support                                                                   
seeking a linkage  between a higher company  reinvestment and                                                                   
lower production tax.                                                                                                           
                                                                                                                                
4:13:19 PM                                                                                                                    
                                                                                                                                
Mr. Wenzel  said the  focus should  be on  reinvestment.   He                                                                   
claimed  that they already  have motivation  to produce  from                                                                   
their shareholders.  He argued  that the answer can be solved                                                                   
with  an investment-based  system  rather  than a  production                                                                   
based system.                                                                                                                   
                                                                                                                                
4:16:33 PM                                                                                                                    
                                                                                                                                
Mr.  Wenzel   maintained  that   reinvestment  creates   more                                                                   
economic  development  as  well   as  state  royalties.    In                                                                   
closing, ConocoPhillips urged  reconsideration of the billion                                                                   
dollars per  year production increase  proposal.  He  said it                                                                   
is  the  easiest  way  to  accelerate  progress  on  the  gas                                                                   
pipeline.   He  urged  there  be a  limit  of the  degree  of                                                                   
progressivity of  any tax bill  or an elimination of  it all-                                                                   
together.                                                                                                                       
                                                                                                                                
4:18:52 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   asked  why  there  a   problem  with                                                                   
incenting it if they are producing.   Mr. Wenzel replied that                                                                   
there  is  inconsistencies  in  the proposed  system  from  a                                                                   
fiscal policy  stand point. He  reiterated the desire  for an                                                                   
investment approach rather than a production approach.                                                                          
                                                                                                                                
4:22:03 PM                                                                                                                    
                                                                                                                                
Representative  Hawker asked how  the industry feels  about a                                                                   
claw-back with  gold-plating limits to reward  companies that                                                                   
invest in  Alaska oil  and gas development.   Under  the ELF,                                                                   
the tax rate  drops to zero, which is maximum  incentive, but                                                                   
the State is not getting the desired results.                                                                                   
                                                                                                                                
4:25:00 PM                                                                                                                    
                                                                                                                                
In answer  to  Mr. Wenzel's  question, Representative  Hawker                                                                   
explained  where the  75-25  split originated.  He  explained                                                                   
that  a  mathematical  algorithm  was  created  for  the  tax                                                                   
system, at status  quo, which would result in  a blended rate                                                                   
of  22.5 percent.  The algorithm  achieves  the initial  rate                                                                   
which,  because  of  the concept  of  incremental  and  base,                                                                   
allows a means  to determine, whether established  production                                                                   
goals have been achieved. From  there the rate would increase                                                                   
or decrease. Mr. Wenzel maintained  that the same 22.5% could                                                                   
be   reached  in   another  way,   other   than  the   75-25.                                                                   
Representative Hawker  agreed it could be done at  a 15-30 or                                                                   
a 50-50  split and  asked if that  would be more  acceptable.                                                                   
Mr. Wentzel argued that whether  than using an algorithm that                                                                   
"appears to  have some numbers  that are acceptable"  that he                                                                   
would  rather  go after  some  fundamental numbers  and  talk                                                                   
about the period of time to make  those determinations of old                                                                   
oil  versus   new  oil  to   reaching  the  correct   answer.                                                                   
Representative  Hawker  stated that  number  was targeted  to                                                                   
something  acceptable   to  the   entire  legislature.     He                                                                   
reinforced the need to get out of a legislative deadlock.                                                                       
                                                                                                                                
4:28:01 PM                                                                                                                    
                                                                                                                                
Representative  Seaton commented  on  investment and  thought                                                                   
that the testimony  on the PPT credit of 20% with  a tax rate                                                                   
of 20% provided  significant investment incentive.   He asked                                                                   
if the  program needed  to be  modified to further  stimulate                                                                   
investment.                                                                                                                     
                                                                                                                                
Mr.  Wenzel responded  that  the original  proposal  provides                                                                   
sufficient   and  significant   incentives  for   investment.                                                                   
ConocoPhillips  is not opposed  to the  concept of  drawing a                                                                   
linkage  between lower  production  tax  rates and  incentive                                                                   
levels.                                                                                                                         
                                                                                                                                
4:30:39 PM                                                                                                                    
                                                                                                                                
Representative Kertula asked if  there were provisions in the                                                                   
bill  that address  a  situation  where a  company  purchases                                                                   
another company,  increasing production, but with  no gain to                                                                   
the  State.    Representative  Hawker  said  yes,  there  are                                                                   
provisions in the bill that address the issue.                                                                                  
                                                                                                                                
4:31:28 PM                                                                                                                    
                                                                                                                                
Representative Kelly  asked Mr. Wentzel if the  decline curve                                                                   
was the  main concern.   Mr.  Wentzel said  that even  if the                                                                   
decline rate  hit the  target he would  still have  a problem                                                                   
with the absolute level.                                                                                                        
                                                                                                                                
4:35:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  asked what  ConocoPhillips' plans  are for                                                                   
bringing heavy crude  to market.  He noted that  there is a 5                                                                   
or 6-year window for this development.   He asked; if it were                                                                   
not profitable to produce heavy  oil at $74 a barrel, when it                                                                   
would  be  profitable.   Mr.  Wenzel  stated that  the  grace                                                                   
period for that  development is not long enough.   He went on                                                                   
to say that he felt there should  be no sunset on incentives.                                                                   
Co-Chair  Chenault said  the proposed  system's intent  is to                                                                   
keep taxes low to incent the development of heavy oil.                                                                          
                                                                                                                                
In terms of heavy  oil, it takes a long time  to develop.  He                                                                   
commented on  continually developing  technology in  order to                                                                   
expedite the  process of  extraction.   He stressed  that the                                                                   
state should encourage  research and a lower  investment risk                                                                   
through  advance technology  and other  areas that assist  in                                                                   
extraction.                                                                                                                     
                                                                                                                                
4:39:27 PM                                                                                                                    
                                                                                                                                
Representative Holm asked if they  would not invest in Alaska                                                                   
if they did not get incentives.   Mr. Wenzel stated that they                                                                   
would continue to  do business in Alaska, but  indicated that                                                                   
it might not be at the maximum  level.  He said the State and                                                                   
industry share mutual benefit of the resource.                                                                                  
                                                                                                                                
4:41:03 PM                                                                                                                    
                                                                                                                                
Representative Holm  did not disagree.   He pointed  out that                                                                   
Alaska owns  the assets and they  are leased.   He questioned                                                                   
if there should  be a greater reward for owning  those assets                                                                   
when the  value goes up.   He noted  the issues of  the lease                                                                   
agreements.   Alaskans  need a  place at the  table to  state                                                                   
their needs.  He asserted that  those that live in Alaska get                                                                   
a  negative impact  when  the  price of  oil  is high;  there                                                                   
should be some benefit as the price increases.                                                                                  
                                                                                                                                
Mr.  Wenzel  disagreed  about   the  lease  agreements.    He                                                                   
acknowledged  that the  State  of Alaska  sold  the right  to                                                                   
extract the hydrocarbon to take  to market subject to certain                                                                   
conditions  such as  royalties,  which is  separate from  the                                                                   
State's taxing authority.  He  questioned whether the current                                                                   
proposal further encourages investment  in Alaska. The people                                                                   
of  Alaska receive  the  increase  by the  increased  royalty                                                                   
share.  He further discussed changing  of lease terms and the                                                                   
challenges of that.                                                                                                             
                                                                                                                                
4:46:40 PM                                                                                                                    
                                                                                                                                
Representative Hawker discussed  the investment metric versus                                                                   
metric production issue and the  accompanying challenges.  He                                                                   
asked how  much the State  should subsidize investment  under                                                                   
the investment scheme.                                                                                                          
                                                                                                                                
Mr. Wenzel did  not want to speculate on the issue.   He felt                                                                   
that if there were going to be  a discussion it would be best                                                                   
to bring in an economist to outline the variables.                                                                              
                                                                                                                                
4:50:11 PM                                                                                                                    
                                                                                                                                
Representative Hawker addressed  the problem the industry has                                                                   
with the  25% rate.   Investment is  both productive  and non                                                                   
productive.   He recommended an  approach that  establishes a                                                                   
base tax rate of  25% with a buy-back on some  combination of                                                                   
investment and production.   Mr.  Wenzel stated that the idea                                                                   
of combined incentive would be additionally complex.                                                                            
                                                                                                                                
Representative  Hawker  commented that  there  is already  an                                                                   
unlimited reward  for investment. Mr. Wenzel  did not dispute                                                                   
that.  He was  willing to help evaluate other  incentives but                                                                   
did not view it as necessary.                                                                                                   
                                                                                                                                
4:54:55 PM                                                                                                                    
                                                                                                                                
Representative Gara noted that  under the current ELF system,                                                                   
the effective  tax rate  is zero;  how could  a 20%  tax rate                                                                   
cause greater  investment.  Mr.  Wenzel said that  investment                                                                   
would occur under the ELF and  maintained that ConocoPhillips                                                                   
is currently  investing.  Representative  Gara asked  if they                                                                   
would invest  more under the  20/20 than they  are currently.                                                                   
Mr.  Wenzel could  not  guarantee  that raising  taxes  would                                                                   
result in projects Alaska.                                                                                                      
                                                                                                                                
4:59:27 PM                                                                                                                    
                                                                                                                                
Representative Gara recalled earlier  testimony, which stated                                                                   
that  a 25% tax  rate is  less than  the world  average.   He                                                                   
asked Mr.  Wenzel if he  is saying that  if the tax  stays at                                                                   
25%,  they  are  interested  in investing  in  Alaska.    Mr.                                                                   
Wentzel  said  that  investment  is  based  on  a  number  of                                                                   
elements.                                                                                                                       
                                                                                                                                
5:00:08 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer MOVED  to ADOPT  the work draft  to HB  3001,                                                                   
labeled 24-GH2096\I, Bullock,  8/1/06.  Representative Hawker                                                                   
OBJECTED  for  a  question.    He  asked  if  Mr.  Mintz  and                                                                   
legislative legal  had reviewed the bill.   Co-Chair Chenault                                                                   
replied  it   had  been  reviewed.    Representative   Hawker                                                                   
WITHDREW his  OBJECTION.  There  being NO further  OBJECTION,                                                                   
it was adopted.                                                                                                                 
                                                                                                                                
5:02:17 PM                                                                                                                    

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