Legislature(2005 - 2006)HOUSE FINANCE 519

03/31/2006 01:30 PM FINANCE


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01:45:24 PM Start
01:45:47 PM HB488
03:31:43 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Major Producers continued if necessary
Questions and Answers with Administration
HOUSE BILL NO. 488                                                                                                            
                                                                                                                                
     "An  Act  repealing  the  oil  production  tax  and  gas                                                                   
     production  tax and  providing for  a production  tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     relationship  of  the  production  tax to  other  taxes;                                                                   
     relating to  the dates tax  payments and  surcharges are                                                                   
     due   under   AS   43.55;  relating   to   interest   on                                                                   
     overpayments under  AS 43.55; relating to  the treatment                                                                   
     of  oil   and  gas  production   tax  in   a  producer's                                                                   
     settlement  with the royalty  owner; relating  to flared                                                                   
     gas,  and to  oil and  gas used  in the  operation of  a                                                                   
     lease  or  property, under  AS  43.55; relating  to  the                                                                   
     prevailing  value   of  oil  or  gas  under   AS  43.55;                                                                   
     providing for  tax credits against the tax  due under AS                                                                   
     43.55 for certain expenditures,  losses, and surcharges;                                                                   
     relating to statements or  other information required to                                                                   
     be  filed  with  or  furnished   to  the  Department  of                                                                   
     Revenue,  and relating  to  the penalty  for failure  to                                                                   
     file certain  reports, under  AS 43.55; relating  to the                                                                   
     powers  of  the  Department   of  Revenue,  and  to  the                                                                   
     disclosure  of   certain  information  required   to  be                                                                   
     furnished to the Department  of Revenue, under AS 43.55;                                                                   
     relating to criminal penalties  for violating conditions                                                                   
     governing access to and use  of confidential information                                                                   
     relating to the oil and gas  production tax; relating to                                                                   
     the  deposit of  money collected  by  the Department  of                                                                   
     Revenue under  AS 43.55; relating to the  calculation of                                                                   
     the gross  value at  the point of  production of  oil or                                                                   
     gas; relating  to the determination of the  net value of                                                                   
     taxable oil and gas for purposes  of a production tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     definitions  of 'gas,'  'oil,' and  certain other  terms                                                                   
     for purposes of AS 43.55;  making conforming amendments;                                                                   
     and providing for an effective date."                                                                                      
                                                                                                                                
                                                                                                                                
MARK  HANLEY,   MANAGER,  PUBLIC  AFFAIRS,   ALASKA-ANADARKO,                                                                   
referred to  a handout entitled  "Anadarko - PPT  Discussion"                                                                   
(copy on  file).  He  gave a brief  overview of  Anadarko, an                                                                   
independent  producer  without  refineries or  gas  stations.                                                                   
Anadarko  has  3,000  employees  and  operations  around  the                                                                   
world.  The headquarters are in Houston, Texas.                                                                                 
                                                                                                                                
Mr. Hanley  referred to Slide  2, "Anadarko's  Alaska Acreage                                                                   
Position".  The  pink acreage shows fields operated  by other                                                                   
companies, generally  ConocoPhillips.  In the  yellow acreage                                                                   
Anadarko is the operator, and  includes Arctic Slope Regional                                                                   
Corporation land.  Anadarko has  about 2.2 million net acres,                                                                   
on  par  with ConocoPhillips.    Anadarko  has  an  extensive                                                                   
position across the North Slope.                                                                                                
                                                                                                                                
Mr. Hanley explained that Slide  3 shows the opportunities in                                                                   
Alaska:    a  world  class  petroleum  basin,  a  significant                                                                   
remaining  resource  potential,   legacy  type  prospectivity                                                                   
(Anchor   Fields),  favorable   political  environment,   and                                                                   
abundant new entrants/partnering opportunities.                                                                                 
                                                                                                                                
1:53:03 PM                                                                                                                    
                                                                                                                                
Mr.  Hanley   discussed  the  challenges  found   in  Alaska:                                                                   
maturing    basin/materiality,    high   costs,    lack    of                                                                   
infrastructure and competition,  limited access to facilities                                                                   
and   pipelines,   extremely  long   lead-time   exploration,                                                                   
seasonal drilling  and regulatory timing requirements,  and a                                                                   
lack of  a gas  market.   He stressed  that Anadarko  is very                                                                   
supportive of getting a gas line bill.                                                                                          
                                                                                                                                
Mr. Hanley spoke of PPT from Anadarko's  point of view.  They                                                                   
support the  original bill and  feel that the  administration                                                                   
did a good job of balancing issues  and priorities.  Anadarko                                                                   
pays more  in taxes,  but exploration  economics improve  and                                                                   
there is some downside price protection.                                                                                        
                                                                                                                                
1:55:57 PM                                                                                                                    
                                                                                                                                
Mr. Hanley shared  an editorial from the March  17, Anchorage                                                                 
Daily News.   Anadarko believes that declining  production is                                                                 
the biggest  issue.  Each new  forecast shows a  further drop                                                                   
in North Slope production.                                                                                                      
                                                                                                                                
Mr. Hanley  maintained that  more production  is needed.   He                                                                   
referred to  Slide 6:   Declining  production is the  primary                                                                   
driver  of  lower  state  revenue.     Increased  investment,                                                                   
compared  with   today's  levels,   is  needed  to   increase                                                                   
production and  stem decline.   The original bill  offset tax                                                                   
increase  with credits  and allowances.   Tax rate  increases                                                                   
and  allowance  decreases,  with no  credit  offsets,  reduce                                                                   
Anadarko's economics.                                                                                                           
                                                                                                                                
1:58:51 PM                                                                                                                    
                                                                                                                                
Mr. Hanley referred to a chart  by Dr. Pedro Van Meurs, which                                                                   
shows the  25 percent tax  rate.  It  shows the value  of the                                                                   
$73 million  allowance.   Mr.  Hanley disagreed with  Dr. Van                                                                   
Meur's idea  that increasing  the tax rate  does not  have an                                                                   
impact.  He  compared the economics with the  existing system                                                                   
to the PPT.  At lower prices the  state assumes more risk; at                                                                   
higher  prices  they  get  more  of the  "high  side".    The                                                                   
companies are giving  up some of the high side,  as well.  He                                                                   
questioned where the kickoff point should be.                                                                                   
                                                                                                                                
2:03:06 PM                                                                                                                    
                                                                                                                                
Mr.  Hanley  referred to  Slide  11,  which shows  small  oil                                                                   
development -  after tax net  present value discounted  at 12                                                                   
percent  vs.  wellhead oil  price.    He noted  a  difference                                                                   
between  Dr. Van  Meurs'  graph in  that  the wellhead  price                                                                   
instead of  the WTI price  is used in  Anadarko's graph.   He                                                                   
emphasized  the concept that  the $73  million has  value and                                                                   
20/20  is better,  and  he  cautioned to  carefully  consider                                                                   
where the crossover point is.                                                                                                   
                                                                                                                                
2:05:45 PM                                                                                                                    
                                                                                                                                
Representative Weyhrauch requested  that Mr. Hanley reference                                                                   
the bill during the discussion.                                                                                                 
                                                                                                                                
Mr. Hanley addressed  key issues regarding PPT.   He informed                                                                   
the committee that  the 20 percent tax rate is  found on page                                                                   
3, lines  21-26 of the  bill.  He  said Anadarko  agrees with                                                                   
that rate.   He related  that as the  tax rate is  increased,                                                                   
the company's economics is decreased.                                                                                           
                                                                                                                                
Mr. Hanley explained  the tax escalator is also  known as the                                                                   
windfall profits tax or the progressive  tax.  In the bill it                                                                   
is found on page  4, lines 7-15.  Some say  that once $50 per                                                                   
barrel  is  achieved,  then  a  higher  rate  is  paid.    He                                                                   
maintained  that the increment  is paid  on the whole  thing.                                                                   
He gave  an example.   He  advised that  it is  not a  normal                                                                   
windfall  profits   tax.    He  noted  that   costs  are  not                                                                   
considered  and will  go  up.   Steel  and  labor costs  will                                                                   
increase.  He opined that the  tax needs to apply to the net.                                                                   
                                                                                                                                
Mr. Hanley questioned if $50 is  the right number.  Companies                                                                   
look at various numbers, but many use the upside.                                                                               
                                                                                                                                
2:12:55 PM                                                                                                                    
                                                                                                                                
Mr.  Hanley   referred  to  a   slide  used  in   a  previous                                                                   
presentation  regarding  Economic  Oil  Reserves  in  Central                                                                   
North Slope Alaska at Alternative  Prices.  He suggested that                                                                   
Alaska  should not  plan on  $60 oil  prices.   As the  price                                                                   
forecast  goes  up,  some  of  the  economically  recoverable                                                                   
reserves  are  limited.    He showed  a  graph  that  depicts                                                                   
Expected  Discoveries  Under Alternative  Prices.   He  noted                                                                   
that the  $8 difference between  WTI and ANS  is significant.                                                                   
He questioned  if using  WTI is  the right thing  to do.   He                                                                   
advised  to go to  $55 and  use ANS,  which is equivalent  to                                                                   
$63 WTI.                                                                                                                        
                                                                                                                                
2:17:36 PM                                                                                                                    
                                                                                                                                
Representative   Hawker  asked  about   ANS  vs.  WTI.     He                                                                   
summarized that the  three major players have  the ability to                                                                   
unduly influence  price.   The  dominance of the  three major                                                                   
players is a  detriment.  Mr. Hanley responded,  "If they can                                                                   
do it,  they should be  doing it now".   He said he  finds it                                                                   
hard to believe.                                                                                                                
                                                                                                                                
Representative  Hawker said  he  appreciates the  distinction                                                                   
given between  ANS, WTI,  and wellhead.   He stated  he wants                                                                   
the index  to be as  objective, verifiable, independent,  and                                                                   
determinable  as possible.    He asked  if  the wellhead  met                                                                   
those  criteria, as  well as the  West Coast  pricings.   Mr.                                                                   
Hanley agreed  with Representative  Hawker's concept  that it                                                                   
needs  to be fair  and should  take into  account the  actual                                                                   
factors that  are out there.   He pointed out  the difficulty                                                                   
of  figuring out  what an  average  wellhead is,  due to  the                                                                   
variety.  Representative  Hawker concluded that  there are as                                                                   
many  challenges writing  a structure  based  on wellhead  as                                                                   
based on West Coast.                                                                                                            
                                                                                                                                
2:21:35 PM                                                                                                                    
                                                                                                                                
Mr.  Hanley spoke  in support  of the  $73 million  allowance                                                                   
that has  been turned  into a  $12 million  credit, which  is                                                                   
more valuable to small players.   For Anadarko if $73 million                                                                   
went away  it would  be like  increasing the  tax rate  to 25                                                                   
percent.  For  the larger companies, it would  be like taking                                                                   
their tax  rate to  20.5 percent.   He mentioned  the 10-year                                                                   
sunset  on the $73  million allowance  found  in the bill  on                                                                   
page 24, line 13.   He spoke of the sunset's  affect on a new                                                                   
player's buying  leases having no  value for credit  down the                                                                   
line.                                                                                                                           
                                                                                                                                
2:25:00 PM                                                                                                                    
                                                                                                                                
Representative Weyhrauch summarized  that the House Resources                                                                   
version turned  the $73  million into  a $12 million  credit.                                                                   
He  inquired  about an  unfinished  statement  regarding  $14                                                                   
million.  Mr. Hanley explained  that the 20 percent tax rate,                                                                   
when  it  was an  allowance,  was  the  equivalent of  a  $14                                                                   
million credit.   The $73 million was reduced  to $60 million                                                                   
and turned  into a  $12 million  credit.   The intent  was to                                                                   
encourage new players and smaller  players.  He repeated that                                                                   
the   sunset  would   eliminate  this   credit  for   smaller                                                                   
companies.                                                                                                                      
                                                                                                                                
Representative  Hawker asked  for an  opinion on the  credits                                                                   
mentioned in  the governor's  bill.  Mr.  Hanley said  he did                                                                   
not see that  presentation.  Representative Hawker  wanted to                                                                   
discuss this  further with Mr.  Hanley.  Mr. Hanley  said the                                                                   
credit  is  non-transferable  and  non-sellable  and  applies                                                                   
after all other deductions and credits are taken.                                                                               
                                                                                                                                
Representative  Hawker  noted  that  the intent  of  the  $12                                                                   
million credit is to benefit the  small players, but everyone                                                                   
benefits.  He suggested  it not be made available  to the big                                                                   
players.  Mr. Hanley said that  is a policy call.  Currently,                                                                   
all  existing companies  would qualify.   The  tradeoff is  a                                                                   
higher  tax rate.    It creates  an  incentive  for some  and                                                                   
applies to everyone so it is equitable.                                                                                         
                                                                                                                                
2:30:33 PM                                                                                                                    
                                                                                                                                
Mr.  Hanley  talked  about  the  transition  allowance,  also                                                                   
called  the five-year  look back,  on page  27, lines  24-27,                                                                   
which allows for  a credit for the first three  months of the                                                                   
year.  In December 2004, Anadarko  submitted approval for two                                                                   
satellites,  and   then  the  governor  came   out  with  the                                                                   
aggregation  decision.  The  projects were  put on hold.   He                                                                   
explained  the negotiation process  with the  administration.                                                                   
Anadarko  decided to  go ahead  with the  projects and  spent                                                                   
over  $400 million  getting them  into production.   Now  the                                                                   
company will be  hit with a higher tax rate.   Had they known                                                                   
this was coming  they would have put it off for  a year and a                                                                   
half  in  order  to receive  the  20  percent  deduction  and                                                                   
credit.   With no transition there  won't be any  credits and                                                                   
there will be a  higher tax rate.  Anadarko  supports a look-                                                                   
back provision.                                                                                                                 
                                                                                                                                
Representative  Hawker requested  an opinion  on the  2-for-1                                                                   
proposal.   He  spoke  of concerns  with  the five-year  look                                                                   
back.    Mr.  Hanley  thought   that  the  2-for-1  would  be                                                                   
beneficial for a longer time period  than 3 years, such as 10                                                                   
years.                                                                                                                          
                                                                                                                                
2:36:07 PM                                                                                                                    
                                                                                                                                
Mr. Hanley spoke about point of  production on page 17, lines                                                                   
5-16  of the bill.   The  concept is  to remove  the cost  of                                                                   
transportation  from the  point  of production,  which  makes                                                                   
sense.   Page 25, line 24  starts to describe what  the gross                                                                   
value at the point of production  means.  It means "where oil                                                                   
goes into the  pipeline in pipeline quality".   Everything it                                                                   
takes to  get oil  into pipeline quality  is upstream  of the                                                                   
point  of  production  and  qualifies  for  the  credits  and                                                                   
deductions.                                                                                                                     
                                                                                                                                
2:38:22 PM                                                                                                                    
                                                                                                                                
Mr. Hanley  continued  the discussion  regarding gas  and the                                                                   
point  of production,  which  is  upstream of  any  treatment                                                                   
facility.   The treatment  facility is  not included  for the                                                                   
purposes of  credits and deductions.   He speculated  that in                                                                   
the  new  gas  contract  the   treatment  facility  would  be                                                                   
included.    He  opined  that   in  future  gas  exploration,                                                                   
treatment facilities should be included.                                                                                        
                                                                                                                                
In response  to a question  by Representative  Weyhrauch, Mr.                                                                   
Hanley observed that  the provision was in the  original bill                                                                   
and was not added in the House Resources Committee.                                                                             
                                                                                                                                
2:40:47 PM                                                                                                                    
                                                                                                                                
Representative  Kelly requested  suggestions from Mr.  Hanley                                                                   
as to what  language could be  used in the bill to  solve the                                                                   
problems he  mentioned.   Mr. Hanley agreed  to do that.   He                                                                   
observed that  he would  need to  talk to the  administration                                                                   
for clarification.                                                                                                              
                                                                                                                                
Representative  Kelly  reiterated his  desire  to have  input                                                                   
from Anadarko.                                                                                                                  
                                                                                                                                
2:43:42 PM                                                                                                                    
                                                                                                                                
Representative Kerttula  referred to page  2, lines 1  and 2.                                                                   
She questioned why  the producers have to subtract  a payment                                                                   
received  for "the  use  by another  person  of a  production                                                                   
facility  in which the  producer has  an ownership  interest"                                                                   
from those things  that they can deduct.  She  predicted that                                                                   
would be  problematic as far as  access.  Mr.  Hanley agreed.                                                                   
He  observed  that it  would  be  considered income  and  the                                                                   
state's goal is  that it not be deductible.  He  said that he                                                                   
does not know if it would have a negative impact.                                                                               
                                                                                                                                
Representative   Hawker  referred   to  the   gas  point   of                                                                   
production determination.   He questioned if  the development                                                                   
of Point Thompson was included.   Mr. Hanley did not know how                                                                   
Point  Thompson would  be  developed and  if  there would  be                                                                   
separate   gas  treatment  facilities.   He  concluded   that                                                                   
everything  upstream would  probably  be included.   He  felt                                                                   
that it should  be included if a separate  treatment facility                                                                   
were needed.                                                                                                                    
                                                                                                                                
2:47:36 PM                                                                                                                    
                                                                                                                                
Mr. Hanley spoke to new gas economics,  much of which remains                                                                   
unclear, which  is typically worse  than oil.   He maintained                                                                   
that the  government take  is less than  on oil. The  cost of                                                                   
transportation versus  the overall value of the  product is a                                                                   
much higher  percentage.  The  existing severance  tax starts                                                                   
at 12.5 percent for oil and goes  up to 15 percent after five                                                                   
years.  Gas severance  tax starts at 10 percent  and does not                                                                   
go up.  The  escalator for gas starts at $8  and is higher on                                                                   
a relative  basis than  the $50  on oil.   He suggested  that                                                                   
there should be some extra incentives for gas.                                                                                  
                                                                                                                                
2:51:09 PM                                                                                                                    
                                                                                                                                
In  response  to  a question  by  Representative  Kelly,  Mr.                                                                   
Hanley  noted  that  on  page   11,  line  16,  the  existing                                                                   
expiration  incentive  credit  system, more  incentives  were                                                                   
given for  exploration.  He  felt that the 10-year  extension                                                                   
is  appropriate.    The  extension on  the  $73  million  was                                                                   
problematic because it applies to production.                                                                                   
                                                                                                                                
He suggested  either the credit in  SB 185 or the  20 percent                                                                   
credit,  but not  both.   The wells  close to  infrastructure                                                                   
would take  the 20  percent credit under  PPT.  Bigger  wells                                                                   
would take an  additional 20 percent credit.   Representative                                                                   
Kelly summarized that  it pertains to both gas and  oil.  Mr.                                                                   
Hanley said that is correct.                                                                                                    
                                                                                                                                
Representative  Weyhrauch  noted that  he  found the  10-year                                                                   
extension on page 12.   He asked  where the 40 percent credit                                                                   
is located.   Mr. Hanley  responded that nothing  was changed                                                                   
in the existing statute.  They  allowed the production credit                                                                   
to apply  to the tax  due under the new  PPT.  He  pointed to                                                                   
page 8, line 7, which allows for  the 20 percent credit under                                                                   
PPT or the credits in the existing law.                                                                                         
                                                                                                                                
2:56:23 PM                                                                                                                    
                                                                                                                                
Representative Kelly questioned  if SB 185 solves the problem                                                                   
on the  gas.   Mr. Hanley  felt that  it offset  some of  the                                                                   
changes that  were made  such as reducing  the credit  to $12                                                                   
million, but that  it did not solve the problems.   SB 185 is                                                                   
not  as  valuable  as  PPT, since  it  does  not  change  the                                                                   
question of gas being disadvantaged to oil.                                                                                     
                                                                                                                                
2:57:32 PM                                                                                                                    
                                                                                                                                
At Ease                                                                                                                         
                                                                                                                                
3:11:05 PM                                                                                                                    
                                                                                                                                
Questions and Answers with the Administration                                                                                 
                                                                                                                                
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF                                                                         
REVENUE, addressed questions on PPT legislation.  She read                                                                      
and responded to questions 1 and 2:                                                                                             
                                                                                                                                
   1.  Why  did  the  Governor   offer  five-year  transition                                                                   
   (clawback)  when capital has  already been depreciated  in                                                                   
   the tax rate over a five to seven year period?                                                                               
                                                                                                                                
   The  Governor  believes that  this  is a  fairness  issue.                                                                   
   Once  enacted,  the PPT  will  measure  tax based  on  net                                                                   
   profit.   These will be  profits generated  by investments                                                                   
   made prior to the effective  date of the legislation.  The                                                                   
   cost  of all  new  investments will  be  reflected in  the                                                                   
   calculation  of net profits;  the costs will  be deducted.                                                                   
   However, the  costs incurred for recent  investments would                                                                   
   not otherwise  be reflected  in the calculation.   Without                                                                   
   the transition  deduction, the producer would  be taxed on                                                                   
   the  profits  generated  by  assets, which  would  not  be                                                                   
   properly represented in the profit calculation.                                                                              
                                                                                                                                
   Much  of the  oil and  gas equipment  is depreciated  over                                                                   
   seven  years  for  federal  tax purposes.    In  addition,                                                                   
   certain  oil  and gas  equipment  is depreciated  over  15                                                                   
   years.  To  our knowledge, the only oil  and gas equipment                                                                   
   with a 5-year life is offshore  drilling equipment.  It is                                                                   
   notable, also, that these lives  are those articulated for                                                                   
   federal  tax  purposes.    For  accounting  purposes,  the                                                                   
   depreciable  lives are often  longer than the  lives under                                                                   
   federal tax law.   This means that very few  of the assets                                                                   
   are  fully depreciated,  even for  those assets  purchased                                                                   
   five years ago.                                                                                                              
                                                                                                                                
   The Governor believes that  it is fair to give a five-year                                                                   
   look back for,  in effect, depreciation expense  on recent                                                                   
   investments  that  are generating  future  profits,  which                                                                   
   will be subject to tax.                                                                                                      
                                                                                                                                
   2.  Requested  a  written   explanation  of  progressivity                                                                   
   clause versus Governor's Bill.                                                                                               
                                                                                                                                
   As presented by  the Governor, HB 488 included  a fair tax                                                                   
   rate  of 20%  of net  profit. The  Governor believes  this                                                                   
   strikes a good balance for  long-term state fiscal health.                                                                   
   That bill  did not include  a progressive tax rate.   Over                                                                   
   the  long run,  increased  revenues  should  be driven  by                                                                   
   increased investment and production  rather then swings in                                                                   
   commodity prices.                                                                                                            
                                                                                                                                
   The CS for HB 388(RES) includes  a two-pronged progressive                                                                   
   tax rate.  At prices between  $50 and $100 per barrel, the                                                                   
   progressive  rate adds  3/10%  of the  wellhead value  for                                                                   
   every dollar the  market price is over $50.   If the price                                                                   
   of oil exceeds $110 per barrel,  the tax jumps up to 37.5%                                                                   
   of gross wellhead value.  The  Governor believes that this                                                                   
   is excessive,  and  will hinder future  investment  in the                                                                   
   state.                                                                                                                       
                                                                                                                                
3:15:23 PM                                                                                                                    
                                                                                                                                
Representative Kerttula  referred to Mr.  Hanley's testimony.                                                                   
She noted  that every  dollar is taxed,  not just  the amount                                                                   
over $50.   Ms. Wilson said  it is true that  the progressive                                                                   
tax  generates  a  percentage  of  that  tax  on  the  gross.                                                                   
Representative  Kerttula  asked  if  a  normal  progressivity                                                                   
works and what the implications are.                                                                                            
                                                                                                                                
DAN  DICKINSON,  CONSULTANT,   TAX  DIVISION,  DEPARTMENT  OF                                                                   
REVENUE, clarified how the tax works.                                                                                           
                                                                                                                                
3:19:10 PM                                                                                                                    
                                                                                                                                
Ms. Wilson read question 3:                                                                                                     
                                                                                                                                
          3. Provide information on the decline of oil field                                                                    
          production over next 50 years by field.                                                                               
                                                                                                                                
She referred  to the  chart and  table, "10-year ANS  Decline                                                                   
Rates by Field" (copy on file) to answer the question.                                                                          
                                                                                                                                
Representative  Hawker recalled, "No  decline after 99".   He                                                                   
suggested that the chart should scare every member.                                                                             
                                                                                                                                
3:21:16 PM                                                                                                                    
                                                                                                                                
Ms. Wilson read questions 4 and 5:                                                                                              
                                                                                                                                
   4.  I've  been told  that  the  incentives for  the  Major                                                                   
   Producers  are not the  same as  it would  be for  the new                                                                   
   explorers.  If that is so,  what other incentives could we                                                                   
   offer to make "wildcatters" interested in Alaska?                                                                            
                                                                                                                                
   The Governor's  bill was  specifically designed  to entice                                                                   
   new entrants,  particularly "wildcatters" to  Alaska.  The                                                                   
   Governor's bill provides a  20% tax credit for exploration                                                                   
   and  capital  investments,   which  could  be  immediately                                                                   
   monetized by  the explorer.  In addition,  current statute                                                                   
   AS   43.55.025  provides   a   40%   credit  for   certain                                                                   
   exploration  expenditures.    The Governor  believes  that                                                                   
   these  incentives   are  very  adequate  to   promote  new                                                                   
   exploration.                                                                                                                 
                                                                                                                                
   5.   Transition provisions  should  be allowed because  no                                                                   
   oil  has been  produced  from those  capital  investments.                                                                   
   But  were  those  investments  made at  prices  less  than                                                                   
   $25/bbl  and so would  be recovered  much more quickly  at                                                                   
   $60/bbl?    How is  this  accounted  for in  the  clawback                                                                   
   provision?                                                                                                                   
                                                                                                                                
   The transitional  deduction  (or "clawback") accounts  for                                                                   
   recent  investments by, in  effect, allowing  depreciation                                                                   
   expense  to be recognized  in the  calculation of  the net                                                                   
   profits  generated by  those assets.   From an  accounting                                                                   
   standpoint,  depreciation   expense  is  recognized  on  a                                                                   
   systematic basis  over the life  of the asset.   The asset                                                                   
   is considered to generate net  income evenly over the life                                                                   
   of the asset.  A windfall in  one year does not change the                                                                   
   asset's  ability to  generate income  later in its  useful                                                                   
   life.                                                                                                                        
                                                                                                                                
3:22:55 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   asked  about  questions   1  and  5.                                                                   
Accounting depreciation  is not  the relevant measure  of the                                                                   
underlying economics.   This is  an unusual circumstance  and                                                                   
the   investor   has   already    recovered   their   capital                                                                   
investments.   Ms. Wilson  responded that if  you look  at it                                                                   
from an economic  standpoint that may be true.   However, new                                                                   
investment  is  trying  to  allow   representation  of  those                                                                   
assets.                                                                                                                         
                                                                                                                                
Mr. Dickinson  said it is a  matter of incentive.   You don't                                                                   
want to have a situation where  people think they should wait                                                                   
a year to invest.  Representative  Hawker suggested making an                                                                   
effective date.                                                                                                                 
                                                                                                                                
3:26:15 PM                                                                                                                    
                                                                                                                                
Representative  Kelly said  it  is fairness  issue driven  by                                                                   
Kuparuk.   It is a fallback.   He wondered what the  value of                                                                   
the Kuparuk ELF is and what the net clawback is.                                                                                
                                                                                                                                
Mr. Dickinson  reworded it  to say what  would happen  if the                                                                   
PPT had  been in place for  5 years already.   Representative                                                                   
Kelly  noted that  some believe  that we waited  too long  to                                                                   
change  ELF.    He  spoke  in favor  of  the  2-for-1.    Mr.                                                                   
Dickinson  said  roughly $1  billion  clawback  and less  tax                                                                   
would be paid.   Representative Kelly thought  there would be                                                                   
some balance between the two numbers.                                                                                           
                                                                                                                                
3:30:21 PM                                                                                                                    
                                                                                                                                
Ms. Wilson read question 6:                                                                                                     
                                                                                                                                
     6. How much severance tax (dollars) did Alaska lose                                                                        
     because the Kuparuk Tax went below the legacy field tax                                                                    
     rate in 1998-99?                                                                                                           
                                                                                                                                
She  referred  to  the attachment  on  "Production  Value  by                                                                   
Field" (copy on file).                                                                                                          
                                                                                                                                
In response to a question by Representative Kelly, Mr.                                                                          
Dickinson mentioned looking at the rate of decline.                                                                             
                                                                                                                                
3:31:43 PM                                                                                                                    
                                                                                                                                
Ms. Wilson read question 7:                                                                                                     
                                                                                                                                
   7. How might we smooth the progressivity curve to                                                                            
   eliminate or moderate the steep increase at $110?                                                                            
                                                                                                                                
   The elimination of the steep  increase can be accomplished                                                                   
   by   changing  the   values  at   page  4   line  18,   AS                                                                   
   43.55.011(g)(2)   to  reflect   the  desired   price/index                                                                   
   ceiling.  If the index of 125  at $110 is removed, and the                                                                   
   progressivity  tops out  at $110,  then the top  surcharge                                                                   
   rate would be 18% applied to gross value.                                                                                    
                                                                                                                                
Representative Weyhrauch asked about the tax rate on oil                                                                        
relative to other natural resources in the state.  Ms.                                                                          
Wilson said she could not answer that question.                                                                                 
                                                                                                                                

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