Legislature(2011 - 2012)BARNES 124

01/26/2012 10:15 AM ECON. DEV., TRADE & TOURISM

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10:18:07 AM Start
10:18:50 AM HCR19
11:44:38 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Presentations on 2011 Norway Policy Tour by:
- Representatives Seaton and Edgmon
- Nils Andreassen, Executive Director and Ira
Perman, Chairman, Institute of the North
- Bradford G. Keithley, Perkins Coie, LLP
- Mark Myers, Vice Chancellor for Research,
University of Alaska, Fairbanks
              HCR 19-OIL & GAS POLICY/NORWAY TOUR                                                                           
10:18:50 AM                                                                                                                   
CHAIR HERRON announced that the  first order of business would be                                                               
HOUSE  CONCURRENT RESOLUTION  NO. 19,  Acknowledging the  lessons                                                               
learned  from  the  2011  Norway   Policy  Tour  and  encouraging                                                               
investment in  the state's  oil and gas  industry.   He explained                                                               
that  the resolution  would be  held  for further  action at  the                                                               
committee meeting of 2/2/12,  and introduced representatives from                                                               
the Institute of the North.                                                                                                     
10:21:50 AM                                                                                                                   
NILS  ANDREASSEN,  Managing  Director, Institute  of  the  North,                                                               
informed the committee representatives  from the Institute of the                                                               
North ("Institute"),  and a  contingent of  45 Alaskans  from the                                                               
public, private, academic, and  nonprofit sectors participated in                                                               
a  week-long policy  tour  to  Norway in  September,  2011.   The                                                               
participants now seek  to share what they  learned about Norway's                                                               
oil and gas development, economy,  tax structure, and development                                                               
climate  - particularly  pertaining to  Alaska's competitiveness.                                                               
Impetus  for the  tour came  from the  Institute's commitment  to                                                               
bring new  ideas, best  practices, and  strengthened partnerships                                                               
to Alaska.  A strengthened  relationship with Norway is important                                                               
because  of  its  role in  Arctic  governance,  its  government's                                                               
relationship  with  the  private  sector,  and  its  leadership's                                                               
priority  of  strong  communication  and  collaboration.    These                                                               
relationships with  the private sector are  supported by Norway's                                                               
core   values   of    competitiveness,   capacity-building,   and                                                               
competency.   Although there are many  differences between Alaska                                                               
and  Norway,  the trip  presented  an  opportunity to  examine  a                                                               
system   that   effectively   manages   development,   encourages                                                               
investment,  and  ensures  that  citizens get  a  fair  share  of                                                               
government-owned resources.   In  today's economy,  the Institute                                                               
encourages the  state to study  other systems, adapt  the lessons                                                               
learned  from  others,  and   share  experiences  while  building                                                               
10:24:45 AM                                                                                                                   
IRA PERMAN,  Chair, Board of  Directors, Institute of  the North,                                                               
provided a  PowerPoint presentation  entitled, "Institute  of the                                                               
North  Public Policy  Report:   How Norway  Develops Its  Oil and                                                               
Gas."  Slide 1  was a map of the Arctic  Circle surrounded by the                                                               
Arctic nations.  Slide 2, entitled  "Why We Went:  Oil Production                                                               
in Decline,"  was a  graph of Alaska's  oil flow  from 1977-2019.                                                               
He explained that because Alaska's  economic future is uncertain,                                                               
the  Institute   decided  to  look   at  Norway's  oil   and  gas                                                               
production.  Slide  4 was a graph that forecast  Alaska will have                                                               
surpluses for  seven years due  to the flow  of oil and  high oil                                                               
prices;  after that  revenue will  decline and  "we want  to find                                                               
ourselves a  way out of  that ... with  some speed and  haste but                                                               
with careful  deliberation."  Slide  5 was  a map of  Norway with                                                               
three Alaska cities  superimposed on top.   Norway's latitude and                                                               
coastline are  similar to that  of Alaska.  Mr.  Perman continued                                                               
to "what  we found,"  and described  the construction  - financed                                                               
largely by the private sector -  that is underway in Oslo.  Slide                                                               
8 indicated that  Norway has more jobs in the  oil and gas sector                                                               
than  does   Alaska;  in  fact,   the  oil  and  gas   sector  is                                                               
"extraordinarily active."   Slide 9  indicated Norway's  oil fund                                                               
is worth  US$570 billion compared  to the Alaska  Permanent Fund,                                                               
which is worth  about $40 billion.  He pointed  out that Norway's                                                               
first deposit  in the oil fund  was in 1996, and  it has produced                                                               
12 billion  barrels of oil  since that  date.  Total  savings for                                                               
Norway over the  life of its oil and gas  resource is expected to                                                               
be  $3  trillion.   Norway  statistics:  population -  4,888,000;                                                               
income per  capita - $88,400,  although living expenses  are very                                                               
high  and  value-added  taxes  are  25  percent;  gross  domestic                                                               
product purchasing power  parity - $59,100 versus  $47,700 in the                                                               
U.S;  unemployment rate  - 3  percent;  percentage of  government                                                               
annual  expenditure paid  by  oil and  gas revenues  -  10 to  26                                                               
percent versus 80  to 90 percent in Alaska;  and a democratically                                                               
elected unicameral Parliament with a ceremonial monarch.                                                                        
10:34:03 AM                                                                                                                   
REPRESENTATIVE  KELLER   asked  whether  the   income  comparison                                                               
included the income taxes paid by Norwegians.                                                                                   
10:34:24 AM                                                                                                                   
MR. PERMAN said yes.                                                                                                            
10:34:29 AM                                                                                                                   
REPRESENTATIVE   GARDNER  understood   in  Norway   preschool,  a                                                               
university education, and technical training are free.                                                                          
10:35:09 AM                                                                                                                   
MR.  PERMAN  heard that  income  taxes  in  Norway pay  for  pre-                                                               
kindergarten  through doctorate  education, even  for a  resident                                                               
living in a different country.                                                                                                  
10:35:27 AM                                                                                                                   
CHAIR HERRON  noted a student  does not have  to be a  citizen to                                                               
receive a free education.                                                                                                       
10:35:52 AM                                                                                                                   
REPRESENTATIVE PAUL SEATON, Alaska  State Legislature, added that                                                               
the  retirement system  in Norway  is not  associated with  one's                                                               
job, but  through the government,  and is available  to everyone.                                                               
In fact,  the retirement funds  and universal medical  care costs                                                               
are  paid by  the  oil  fund.   He  encouraged  the committee  to                                                               
recognize these differences.                                                                                                    
10:37:01 AM                                                                                                                   
BRADFORD G. KEITHLEY,  Attorney at Law, Partner  and Co-Head, Oil                                                               
and Gas Practice,  Perkins Coie LLP, provided a  brief history of                                                               
his background.   Mr. Keithley's  purpose as a  representative on                                                               
the  2011 Norway  Policy Tour  was to  focus on  the oil  and gas                                                               
aspect  of the  Norwegian  system to  understand its  differences                                                               
from  the Alaska  system, and  to  identify areas  of benefit  to                                                               
Alaska.     Norway's  oil and gas  industry is the  world's sixth                                                               
largest exporter of oil, and  Europe's second largest exporter of                                                               
gas.   Slide 12 was a  map that indicated the three primary areas                                                               
of Norway's  oil and gas production  are the North Sea,  which is                                                               
also the  location of the  world's second largest  new discovery,                                                               
the Barents  Sea, and the Norwegian  Sea.  Oil and  gas fields in                                                               
the Norwegian  Sea have had  limited development because  this is                                                               
an  important fishing  ground  for Norway.    Norwegians are  not                                                               
worried about their economic future  because Norway has flattened                                                               
its  oil  and gas  production  decline  by attracting  investment                                                               
capital  and co-investing  in its  own oil  and gas  development.                                                               
Slide 14  entitled, "Norway's Oil  and Gas  Production:" compared                                                               
Norway  and  Alaska's  production  curves  and  illustrated  that                                                               
Norway's  oil decline  curve does  not approach  the severity  of                                                               
Alaska's.    In   addition,  he  pointed  out   that  Norway  has                                                               
maintained  a   high  level  of   investment  for  oil   and  gas                                                               
development, and  Alaska has undergone  a decline.   Mr. Keithley                                                               
advised  there is  a direct  relationship between  investment and                                                               
production when  the investment is  in productive assets.   Slide                                                               
15 indicated that  the primary lesson learned on  the 2011 Norway                                                               
Policy  Tour is  that Norway  has successfully  attracted private                                                               
investment to  help develop its  oil and gas resources;  in fact,                                                               
over  60 international  oil and  gas producers  are investing  in                                                               
Norway   including  ExxonMobil,   BP,  ConocoPhillips,   Chevron,                                                               
Statoil, and many others.                                                                                                       
10:43:18 AM                                                                                                                   
CHAIR HERRON requested an example  of how Norway attracts private                                                               
10:43:33 AM                                                                                                                   
MR.  KEITHLEY said  Norway acts  as an  investor by  co-investing                                                               
with  the  private sector.    The  government participates  as  a                                                               
producer  in  the development  of  the  resource.     In  Alaska,                                                               
producers  pay  a bonus  prior  to  production,  and then  pay  a                                                               
royalty during production.  In  Norway, there is no bonus system,                                                               
but there  is more  focus on  development; as  a matter  of fact,                                                               
upon the  licensing of a  new area the government  will co-invest                                                               
alongside of  industry.  This  system aligns the interest  of the                                                               
government with  that of the  producer during the  development of                                                               
the resource, and provides the  producer with a level of comfort.                                                               
He opined  this factor  "has had the  most significant  impact on                                                               
...  attracting   and  maintaining  private  investment   in  the                                                               
country."  The  system is termed State  Direct Financial Interest                                                               
(SDFI),  and   the  government   participates  directly   in  the                                                               
development  of the  resource,  substitutes  definitive work  and                                                               
investment   commitments  for   an  upfront   lease  bonus,   and                                                               
participates  in development  decisions.    Mr. Keithley  further                                                               
advised that  the most significant  lesson learned was  that SDFI                                                               
creates an alignment of interests  between the government and the                                                               
producers because  the government  gains an understanding  of oil                                                               
and  gas  development  decisions,   participates  as  a  working-                                                               
interest owner; contributes to the  costs of development, and has                                                               
access to data.  Moreover,  as the Norwegian government increases                                                               
its understanding of  oil and gas development,  suspicions of the                                                               
producers are reduced  and there is a higher  level of confidence                                                               
and a  more positive environment.   He recalled that  Norway once                                                               
used  a   bonus  and  royalty   system,  but  during   the  '80s,                                                               
transitioned away  from that  system - on  both new  and existing                                                               
fields  -   because  it  impaired  investment   decisions.    The                                                               
Norwegian hosts  acknowledged that the lease,  bonus, and royalty                                                               
system  generates a  lot of  cash from  the producers,  but after                                                               
time does not  produce development since producers  can hold onto                                                               
property  without developing  the property.   Through  government                                                               
investment,  and by  taking  a  working-interest owner  position,                                                               
development is better  driven.  Mr. Keithley  displayed slide 22,                                                               
entitled, "Implementing SDFI in  Alaska," and explained that SDFI                                                               
can be  offered as  an option in  new leases at  the time  of the                                                               
lease sale; however,  that would not produce  the desired result,                                                               
and making SDFI an option  for developing existing resources is a                                                               
challenge.  One  important lesson from Norway's  experience is to                                                               
organize a  professional, non-politicized board -  similar to the                                                               
Alaska  Permanent  Fund  Corporation  board of  trustees  or  the                                                               
Alaska  Housing  Finance  Corporation  board of  directors  -  to                                                               
administer  the  state's  interest.   The  next  step,  with  the                                                               
cooperation  of the  oil companies,  is to  convert the  existing                                                               
leases to  SDFI with  a focus  on undeveloped  and underdeveloped                                                               
fields.   Mr. Keithley  reiterated that  this is  a way  to drive                                                               
increased  investment and  increased development  over time.   He                                                               
displayed slide 24 entitled, "The  Goal:  Change the Curve," that                                                               
showed  three different  alternatives for  Alaska's future:  zero                                                               
investment which  results in approximately  a 15  percent decline                                                               
rate; investment  of $1  billion to $1.5  billion per  year which                                                               
would  result  in  approximately  a 6  percent  decline;  and  an                                                               
investment  of $4  billion  to  $5 billion  per  year that  would                                                               
result in approximately  a 3 percent decline.   He estimated that                                                               
the current rate  of investment is approximately  $1.6 billion to                                                               
$1.75 billion per year.                                                                                                         
10:55:28 AM                                                                                                                   
REPRESENTATIVE SEATON  asked Mr. Keithley to  discuss the misstep                                                               
made  by Norway  surrounding the  Statoil model,  specifically to                                                               
differentiate between the  Statoil model and "what  was the right                                                               
amount of  state direct financial  investment that got  the right                                                               
balance  between state  participation  and  not interfering  with                                                               
10:56:13 AM                                                                                                                   
MR. KEITHLEY  explained that  Norway originally  invested through                                                               
Statoil, which is now a  partially privately-held company. In the                                                               
early '70s,  Statoil was 100 percent  government-owned and served                                                               
the purposes of  holding Norway's interest in  the development of                                                               
oil  and  gas resources,  and  to  act as  an  operator.   As  an                                                               
operator,  Statoil helped  develop the  service sector  industry,                                                               
gained expertise  in oil  and gas  operations, and  began service                                                               
operations outside  of Norway.   The company grew very  large and                                                               
powerful  and lost  its focus  on Norwegian  projects, so  in the                                                               
'90s Norway reduced  Statoil's share in oil and  gas resources to                                                               
50  percent, and  transferred the  other 50  percent interest  to                                                               
Petoro.  Subsequently, Statoil  increased its international focus                                                               
and shares were sold to the  public, although 67 percent is still                                                               
owned  by  the Norwegian  government.    In contrast,  Petoro  is                                                               
focused  solely  on Norwegian  resources  and  is a  small,  non-                                                               
operating, efficient, and professional investment company.                                                                      
10:59:32 AM                                                                                                                   
REPRESENTATIVE SEATON  recalled the Norwegian  officials stressed                                                               
that Statoil's growing  independence threatened Norway's policies                                                               
thus "that model  didn't work."  Conversely, Petoro  is funded by                                                               
the government, does not collect  profits independently, and acts                                                               
as a manager.                                                                                                                   
REPRESENTATIVE TUCK  understood that Statoil invests  on a field-                                                               
by-field  situation, and  negotiates terms  with other  companies                                                               
that want to invest.                                                                                                            
11:01:15 AM                                                                                                                   
MR. KEITHLEY  clarified that Statoil is  its own entity.   At the                                                               
time of licensing - which is  the equivalent of leasing in Alaska                                                               
-  Petoro  determines  what  the   government's  share  will  be,                                                               
therefore,   private  companies   know   what  the   government's                                                               
financial  share will  be in  terms of  investment responsibility                                                               
and revenue.  Norway participates in  all fields at an average of                                                               
20 percent;  moreover, Norway  does not  want to  take a  high or                                                               
total percentage  of a field,  but wants to remain  a co-investor                                                               
alongside of industry.                                                                                                          
11:02:24 AM                                                                                                                   
REPRESENTATIVE TUCK asked about any obstacles to overcome.                                                                      
MR. KEITHLEY acknowledged that in  the beginning there was a lack                                                               
of  success  due to  a  few  dry  holes, raising  concerns  about                                                               
investment decisions;  however, spreading out the  investment and                                                               
risk over all of the  fields, and co-investing with industry, was                                                               
highly successful.                                                                                                              
REPRESENTATIVE SEATON  explained the  difference between  a lease                                                               
in  Alaska and  a license  in Norway:  In Norway,  the government                                                               
provides  industry with  two-dimensional  (2D)  seismic work  for                                                               
their bids  and as  a result plans  of development  are submitted                                                               
for the license.  The  government then selects the preferred plan                                                               
of development  for the field,  thereby reducing the time  of the                                                               
development  phase.   He opined  this  process is  a little  more                                                               
complicated, but possible to do for fields in Alaska.                                                                           
11:04:34 AM                                                                                                                   
MR.  PERMAN further  explained that  Norway's SDFI  is part  of a                                                               
larger licensing  system which includes benefits  such as initial                                                               
seismic  and consistent  rules and  regulations on  environmental                                                               
protection  and safety,  yet without  the "wild  cards" investors                                                               
find in  Alaska.   The Institute sees  a great  potential benefit                                                               
for Alaska in pursuit of SDFI.                                                                                                  
11:06:12 AM                                                                                                                   
REPRESENTATIVE BRYCE  EDGMON, Alaska  State Legislature,  said he                                                               
was extremely fortunate  to have participated in  the 2011 Norway                                                               
Policy  Tour  experience.    Norwegians   are  unified  on  their                                                               
strategy  in  "going forward"  and  their  overall goal  to  take                                                               
profits from  their nonrenewable resources and  put those profits                                                               
into  a  renewable  vehicle:  the  oil  fund.    There  are  many                                                               
similarities  between  Norway  and  Alaska such  as  the  coastal                                                               
waters,  a  small  population, and  competing  interests  between                                                               
fisheries and  oil and gas development.   Norway is also  a major                                                               
player  in the  opening of  the  Arctic and  is a  leader in  the                                                               
generation of hydroelectric power.  Representative Edgmon said he                                                               
was   especially   interested   in  Norway's   success   bridging                                                               
differences between commercial  interests and promoting corporate                                                               
social responsibility.  Norway  also maintains friendly relations                                                               
with neighboring countries  and cultures even after  a history of                                                               
occupation  and  war.    In fact,  many  agreements  between  the                                                               
fishing industry  and the oil  and gas offshore  industry involve                                                               
other countries.   Returning to corporate  social responsibility,                                                               
he stated  that Norway  recognizes that  developers need  to make                                                               
profits, but they  also have to show  responsibility toward local                                                               
communities and cultures in order to alleviate controversy.                                                                     
11:11:38 AM                                                                                                                   
REPRESENTATIVE  SEATON  said  the  trip emphasized  some  of  the                                                               
differences between Norway and Alaska,  such as the impact of the                                                               
North Atlantic  Current on Norway's northern  coast which remains                                                               
ice-free for 200 miles.    He also found that another of Norway's                                                               
policies  that could  apply  to Alaska  is that  all  of the  oil                                                               
companies who do  business in Norway pay corporate  income tax on                                                               
the profits  made in  Norway.   He recalled  that in  1978 Alaska                                                               
realized that  apportioned worldwide  corporate tax would  - when                                                               
production in Alaska  was more profitable than  elsewhere - lower                                                               
the  taxes  received  by  the  state,  thereby  subsidizing  less                                                               
profitable  operations around  the world.   At  that time  Alaska                                                               
passed a separate  accounting tax rate; however, in  1981 - after                                                               
a  court challenge  by  the  oil companies  -  the  tax rate  was                                                               
returned to  worldwide apportionment.    Even after  the separate                                                               
accounting  rate  was  upheld  on appeal,  the  state  has  never                                                               
returned to that system.   Representative Seaton pointed out that                                                               
this means  an all-Alaska oil  company pays the  corporate income                                                               
tax  rate on  its  income  in Alaska,  but  an international  oil                                                               
company  may pay  much  less.   He opined  a  return to  separate                                                               
accounting ensures all companies pay the same rate.                                                                             
11:14:48 AM                                                                                                                   
CHAIR HERRON restated  the intent of the resolution  is to create                                                               
a bill  which will  ask the  legislature to  discuss oil  and gas                                                               
policies in committee.                                                                                                          
11:16:00 AM                                                                                                                   
REPRESENTATIVE SEATON, in  response to Chair Herron,  said if the                                                               
legislature  is to  look at  the  lessons learned  from the  2011                                                               
Norway Policy Tour,  SDFI is an important aspect, as  is the fact                                                               
that in  Norway everybody pays the  same tax rate.   He confirmed                                                               
that this is a subject he  would like to see discussed along with                                                               
11:17:17 AM                                                                                                                   
LONE SEMMINGSEN, Deputy Director  General, Tax Policy Department,                                                               
Ministry  of   Finance,  Government   of  Norway,   informed  the                                                               
committee  she   shares  the  responsibility  of   resource  rent                                                               
taxation  with  a  counterpart  in  the  Tax  Law  Department  of                                                               
Norway's Ministry  of Finance.     She said Norway  taxes natural                                                               
resources  differently  from  other  sources of  income  for  the                                                               
following reasons: when a natural  resource is exploited there is                                                               
the potential  for an extraordinary  rent, known as  the resource                                                               
rent;  natural  resources  are generally  immobile;  and  natural                                                               
resources belong to  the public, thus the resource  industry is a                                                               
legitimate tax  base.  While  ensuring a reasonable  public share                                                               
to the profits  from the petroleum sector, Norway  believes it is                                                               
important   to   attract   investment  by   reliable   investors.                                                               
Therefore,  Norway provides  a  stable tax  system  and a  policy                                                               
framework that  are free  from frequent  changes.   Today, Norway                                                               
takes 80-85 percent of the  value of petroleum production.  Also,                                                               
it is  important to provide  simple tax  rules that apply  to all                                                               
investors including  Statoil -  which is  partially owned  by the                                                               
government.   In fact,  equal tax treatment  of all  companies is                                                               
essential  to reduce  the administrative  burden.   A simple  tax                                                               
system reduces the opportunity for  the companies to avoid paying                                                               
taxes  and ensures  that taxes  are  correct and  enforced.   Ms.                                                               
Semmingsen  said   the  ministry  has  a   highly  competent  tax                                                               
administration  and also  ensures taxpayers'  rights by  allowing                                                               
extensive opportunities  for complaints  and court filings.   The                                                               
ministry uses  a variety of government-take  instruments:  direct                                                               
taxation of petroleum companies;  indirect taxes; a tax incentive                                                               
to reduce carbon  dioxide emissions; and an area fee.   In Norway                                                               
the  central  government  holds   direct  financial  interest  in                                                               
several oil and  gas fields thus the government, as  do all other                                                               
licensees, pays a  share of all investments  and operating costs,                                                               
and receives deductions thereof.   The amount of the government's                                                               
direct  share  is  decided  for each  field  and  varies  between                                                               
fields.    Norway owns  67  percent  of  Statoil and  receives  a                                                               
corresponding  share  of its  dividend.    There are  no  upfront                                                               
payments  or  fees  on  production,  and  royalty  payments  were                                                               
totally  phased  out in  2006.    She acknowledged  that  royalty                                                               
payments  were an  important source  of income  to the  Norwegian                                                               
government,  but today,  taxes and  SDFI are  the most  important                                                               
government-take instruments.                                                                                                    
11:24:01 AM                                                                                                                   
MS. SEMMINGSEN  continued to describe  the petroleum  tax system,                                                               
saying  that the  petroleum sector  is subject  to a  uniform net                                                               
profit tax at  a rate of 28  percent levied on a  broad tax base.                                                               
In  addition,  there  is  a  special tax  on  production  on  the                                                               
Norwegian continental shelf.  Production  began there in 1971 and                                                               
the  resource  rent  tax  was  in  place by  1975.    This  is  a                                                               
relatively stable  system as the  marginal tax rate has  been the                                                               
same  since 1992.   The  special  tax is  a net-surface  taxation                                                               
levied  on  a  company  basis,   and  companies  are  allowed  to                                                               
consolidate   costs  and   income  from   all  fields   in  their                                                               
portfolios.   The  additional tax  rate is  50 percent  levied on                                                               
extraordinary  profits; however,  an extra  deduction -  known as                                                               
the  uplift -  is given  to shield  an ordinary  return from  the                                                               
special  tax.   Since  2002,  uplift and  losses  can be  carried                                                               
forward with interest;  further, if a company  withdraws from the                                                               
Norwegian continental  shelf, losses are transferable  or the tax                                                               
value  will be  paid by  the  government.   Ms. Semmingsen  noted                                                               
Norway has  a similar system  for hydroelectric  production which                                                               
is  also  a natural  resource.    Norway's profit-based  taxation                                                               
system  promotes investment  and implies  a sharing  of risk  and                                                               
return between the  government and the investor.   Turning to the                                                               
other   large  source   of  government   income  from   petroleum                                                               
activities,  she explained  SDFI  is an  arrangement whereby  the                                                               
government holds  an interest in  oil and gas  fields, pipelines,                                                               
and onshore facilities.  The  SDFI program was instituted in 1985                                                               
and  was  managed  by  Statoil   until  2001,  when  Statoil  was                                                               
partially privatized and the administration  of the portfolio was                                                               
transferred  to Petoro.    She emphasized  that  Petoro does  not                                                               
receive  income from  SDFI  and  is not  an  oil  company.   Each                                                               
participant's interest in SDFI is  decided when the license for a                                                               
field  is  awarded,  including   the  size  of  the  government's                                                               
interest, which can  vary.  The government, along  with the other                                                               
licensees, pays its share of  investments and costs, and receives                                                               
gross income from  the license.  Currently, SDFI  is an important                                                               
instrument for increasing the government's  take in licenses with                                                               
high expected profitability.  Therefore,  SDFI works similarly to                                                               
a "cash-flow"  tax of  100 percent on  the government's  share of                                                               
the license, in addition to the  ownership of the real capital of                                                               
the installations  on the shelf.   Ms. Semmingsen  concluded that                                                               
this  policy  has  secured  for  Norway  government  income  from                                                               
petroleum  activities, while  allowing  for the  resources to  be                                                               
exploited in an economically efficient way.                                                                                     
11:30:04 AM                                                                                                                   
CHAIR HERRON commended Ms. Semmingsen on her professionalism.                                                                   
REPRESENTATIVE  SEATON  asked  whether  Ms.  Semmingsen  had  any                                                               
experience  with negotiating  SDFI on  old, existing  fields that                                                               
may require the demobilization and remediation of facilities.                                                                   
MS. SEMMINGSEN restated  that SDFI is determined at  the time the                                                               
license is awarded.   Previously, there was a  sliding scale that                                                               
allowed SDFI  to increase  its share  on more  profitable fields;                                                               
however, this system  was not supported by the  oil companies and                                                               
has been abolished.                                                                                                             
REPRESENTATIVE SEATON understood that  Norway makes no changes to                                                               
its share  from the issuing  of the  license through the  time of                                                               
MS. SEMMINGSEN said correct.                                                                                                    
11:33:57 AM                                                                                                                   
REPRESENTATIVE TUCK asked  whether there is a  lot of competition                                                               
at the time of licensing.                                                                                                       
MS.  SEMMINGSEN  said there  is  open  bidding  - similar  to  an                                                               
auction - and  companies describe their plans  for development of                                                               
the field.  The Ministry of  Petroleum and Energy then decides on                                                               
the license-group.                                                                                                              
CHAIR HERRON thanked the presenters.                                                                                            
CHAIR HERRON  asked Mr.  Barron how to  begin a  dialogue between                                                               
the  Department  of  Natural Resources  and  the  legislature  on                                                               
Norway's oil and gas tax policies.                                                                                              
11:37:47 AM                                                                                                                   
WILLIAM BARRON, Director, Central Office,  Division of Oil & Gas,                                                               
Department  of Natural  Resources,  said the  Norwegian model  is                                                               
interesting  but is  not unique  to the  industry; in  fact, many                                                               
countries have the opportunity to  initially, or at a later date,                                                               
participate  in a  working-interest share  in the  development of                                                               
their natural  resources.  He said  he was familiar with  the oil                                                               
and  gas fields  of Norway,  and others  that are  similar.   Mr.                                                               
Barron  supported   opening  a   dialogue  on  the   subject  and                                                               
continuing investigation; however, the  conversion from a tax and                                                               
royalty  system to  a  system  wherein the  state  has a  working                                                               
interest in  a property  "is quite  a conundrum.   How do  you go                                                               
from being the  regulator to being regulating the  regulator?"  A                                                               
plan for  exploration and a  plan for development  are distinctly                                                               
different programs.   He  pointed out that  having the  state pay                                                               
for upfront  2D seismic in  the North Slope foothills  would cost                                                               
$1.6 billion to  $1.8 billion over five years, and  it would take                                                               
an additional  three to four  years to complete  primary analyses                                                               
of the data.  Mr.  Barron cautioned that a working-interest owner                                                               
has many  responsibilities such as  losing money,  being outvoted                                                               
by   other   owners,   abandonment   liabilities,   environmental                                                               
disasters, dismantlement,  removal, and  restoration liabilities,                                                               
and  changes in  fiscal regimes.   He  advised that  most of  the                                                               
questions  that   first  arise   are  policy,   directional,  and                                                               
philosophical questions, and - after  a dialogue takes place - if                                                               
the state  is prepared for  this action, there will  be technical                                                               
and administrative  questions.  Furthermore, if  the state cannot                                                               
get into  existing fields, becoming a  working-interest owner may                                                               
not be  an advantage in  terms of new exploration  and subsequent                                                               
development.  Mr.  Barron opined there would be  a "time-delay in                                                               
exploration effort ... in exchange  for our current program."  He                                                               
concluded that the  Norwegian model is good  for Norway; however,                                                               
"these are  very complicated,  negotiated, concession  terms that                                                               
cover all sorts of socio-economic parameters."                                                                                  
11:44:08 AM                                                                                                                   
[Although not formally stated, HCR 19 was heard and held.]