Legislature(2005 - 2006)HOUSE FINANCE 519

04/03/2006 09:00 AM FINANCE


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09:09:55 AM Start
09:10:32 AM HB488
10:56:17 AM 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> --
Pedro Van Meurs, Oil & Gas Consultant
+ Bills Previously Heard/Scheduled TELECONFERENCED
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.                                                                                       
                                                                                                                                
9:10:32 AM                                                                                                                    
                                                                                                                                
DR.  PEDRO   VAN  MUERS,   (TESTIFIED  VIA   TELECONFERENCE),                                                                   
CONSULTANT TO THE OFFICE OF THE  GOVERNOR, ALGERIA, commented                                                                   
on  the  process  the bill  has  gone  through  while  moving                                                                   
through the legislative committees.                                                                                             
                                                                                                                                
Dr. Van  Muers addressed  the 20/20  ratio versus the  25/20-                                                                   
ratio  taxation   package  with   regards  to  building   the                                                                   
pipeline.    Analysis  indicates  there  is  some  difference                                                                   
between  the  two  fiscal  packages.    Ultimately,  the  oil                                                                   
companies  are the  decision makers  and it  is important  to                                                                   
include  them in the  process.   He worried  about the  25/20                                                                   
ratio  activity and  international  attractiveness  including                                                                   
the progressivity  feature.   Analysis  indicates there  is a                                                                   
difference.                                                                                                                     
                                                                                                                                
9:14:01 AM                                                                                                                    
                                                                                                                                
Dr. Van Muers  stated that negotiating could  lead to delayed                                                                   
contracts.  He reiterated that  the question remains with the                                                                   
companies.   Interesting  ideas have surfaced  over the  past                                                                   
six weeks.   He  appreciated the  progressive feature  coming                                                                   
out  of  the  House  Resources  Committee  (HRC),  which  was                                                                   
considered  and adopted  in  the Senate  Resources  Committee                                                                   
(SRC).   It is important to  realize that the price  at which                                                                   
it becomes progressive  is an important feature.   In the HRC                                                                   
proposal,  that number  was  based on  a  nominal price  that                                                                   
could not be escalated with inflation.   Over time, the value                                                                   
of the insertion  point becomes less.  A  progressive feature                                                                   
based on  a nominal system should  be on a  reasonable price.                                                                   
If the price  inserted is too low, it would  be unattractive.                                                                   
If  using  the  progress  feature,  oil  and  gas  should  be                                                                   
separated.                                                                                                                      
                                                                                                                                
9:17:42 AM                                                                                                                    
                                                                                                                                
Dr.  Van Muers  mentioned that  the HRC  version removed  the                                                                   
"crawl back".   He supported  the idea of  a 2 for  1 feature                                                                   
put  in place  by the  SRC, insuring  the  maximum amount  of                                                                   
commitment from the large companies.                                                                                            
                                                                                                                                
He mentioned the small company  allowance originally proposed                                                                   
at  $73 million  dollars.   HRC  chose  the  tax credit;  SRC                                                                   
choose the  5 thousand barrels a  day with no tax  payable up                                                                   
to 30  thousand barrel a  day.  He  believed that was  a good                                                                   
feature and could help the small companies.                                                                                     
                                                                                                                                
9:20:33 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  asked about  the idea of  starting at  a high                                                                   
tax rate  and adjusting  it down until  supported by  the oil                                                                   
companies.   Dr. Van  Muers agreed  that the companies  could                                                                   
move out  of Alaska.  A  famous case arose in  Columbia where                                                                   
that county  lost the  investment; it  took about five  years                                                                   
for  them to  get their  investment  back.   If the  industry                                                                   
considers the  overall fiscal  package too tough,  it becomes                                                                   
difficult to  get the investment  back.  After  Columbia lost                                                                   
their investment,  it cost them more attempting  to get their                                                                   
investment back.   It is important that it not  misfire.  The                                                                   
fiscal  systems  overtime  adjust.     He  thought  that  the                                                                   
proposed tax rate  shifts were relatively modest  compared to                                                                   
what has happened in other countries.                                                                                           
                                                                                                                                
9:24:57 AM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer hoped  to get the  "arrangement" correct  the                                                                   
first time.   He  pointed out  that Alaska  is a more  stable                                                                   
place   than   many   others,  although,   there   are   more                                                                   
economically desirable  places to invest such as  the Gulf of                                                                   
Mexico and Texas.                                                                                                               
                                                                                                                                
Dr. Van Muers  acknowledged that the Gulf of  Mexico rates as                                                                   
one of the best fiscal systems  in the world and comes with a                                                                   
lot  of deep-water  activity.    There  is no  question  that                                                                   
area's fiscal system would be  more attractive than Alaska's.                                                                   
The same is true of the Alberta  oil sands.  There are places                                                                   
more  attractive, however,  that  does not  necessarily  mean                                                                   
that all  the investors go only  to that spot.   He addressed                                                                   
the overall tax rate and activity happening in Europe.                                                                          
                                                                                                                                
9:28:15 AM                                                                                                                    
                                                                                                                                
Dr. Van  Muers explained that  the level of activity  will be                                                                   
affected.  The more attractive  the fiscal system, the higher                                                                   
the activity.                                                                                                                   
                                                                                                                                
Texas has  an entirely different  series of systems  with the                                                                   
State water concerns.   There are other jurisdictions  in the                                                                   
world such  as Norway and  Russia, which have  tougher fiscal                                                                   
systems and continue  to have activity in those  regions.  It                                                                   
is a gray area.  The Alaska fiscal  terms as formulated would                                                                   
be "in  the middle  of the  pack" and  would not present  the                                                                   
toughest or the best terms around the world.                                                                                    
                                                                                                                                
9:29:51 AM                                                                                                                    
                                                                                                                                
Representative Weyhrauch asked  if when oil price falls below                                                                   
$20 dollars a  barrel, would it be reasonable  to implement a                                                                   
per barrel  tax rate at  75%.  Dr.  Van Muers explained  that                                                                   
the Petroleum  Production Tax  (PPT), at  least for  the next                                                                   
ten  years,  is  clearly more  attractive  than  the  current                                                                   
Economic Limit  Factor (ELF) system.  Obviously,  Alaska with                                                                   
the  high  transportation  costs  of $5  dollars  per  barrel                                                                   
provides  a low  netback.   Every  time  the price  declines,                                                                   
Alaska gets hurt  more than anywhere else in the  world.  One                                                                   
of the advantages of the PPT in  maintaining activity is that                                                                   
it is a profit-based  system, which means that  Alaska runs a                                                                   
higher risk at low price levels.                                                                                                
                                                                                                                                
9:32:37 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  asked what  tax structure  is used  in the                                                                   
Gulf  of Mexico.   Dr.  Van Muers  advised that  the Gulf  of                                                                   
Mexico does  not have the kind  of tax credits  considered by                                                                   
Alaska.   They have  two payments,  a royalty  and a  federal                                                                   
corporate income tax  at 35%.  There is no  production tax at                                                                   
all.  The royalty tax offers a  "royalty holiday" for initial                                                                   
volumes  of  production.    There  could  actually  be  a  0%                                                                   
royalty, with  only 35%  corporate income  tax, which  is the                                                                   
way the federal government encourages activity.                                                                                 
                                                                                                                                
9:35:32 AM                                                                                                                    
                                                                                                                                
Co-Chair  Chenault  inquired the  actual  royalty.   Dr.  Van                                                                   
Muers replied 12.5%  for deep waters and 16%  for the shallow                                                                   
waters.                                                                                                                         
                                                                                                                                
Co-Chair Chenault  pointed out that there are  no state taxes                                                                   
involved, which makes it considerably  different than Alaska.                                                                   
He  mentioned the  situation  in Louisiana.    Dr. Van  Muers                                                                   
responded that  in State waters,  the fiscal system  applies.                                                                   
In Texas,  along the coast, the  taxation system is  as tough                                                                   
as  the Alaska  system.   In federal  waters,  the system  is                                                                   
based on the one previously described.                                                                                          
                                                                                                                                
9:37:14 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  noted that the three major  producers were                                                                   
not as interested  in the tax credit versus  the 20/25 ratio.                                                                   
Dr. Van  Muers explained  that in  discussing PPT with  those                                                                   
companies, there  was no indication  of interest-free  in the                                                                   
tax credit;  they figured highly  in that proposal  for heavy                                                                   
oil.   Those companies proposed  that the tax  credits should                                                                   
be higher  than the 20/20 proposal.   He clarified  that they                                                                   
received  incentive for  investment.   However,  the  current                                                                   
focus is on the  rate; a higher rate means  a lower corporate                                                                   
take.   Tax credits  are an integral  part of the  Industry's                                                                   
own  discussion   and   the  20%  credit   number  has   been                                                                   
encouraged.                                                                                                                     
                                                                                                                                
9:40:05 AM                                                                                                                    
                                                                                                                                
Vice  Chair  Stoltze  mentioned  the  remarks  that  the  oil                                                                   
companies are the  decision makers on the gas line.   Dr. Van                                                                   
Muers advised  that the first  phase of the plan  is changing                                                                   
of the oil tax, which is a stand-alone  feature.  As a result                                                                   
of that, the oil companies hoped  it would be consistent with                                                                   
bringing a gas  pipeline forward.  Then the  tax credits were                                                                   
consistent with putting  the gas pipeline forward.   At 20/20                                                                   
ratio, the companies  are willing to live up  to the Stranded                                                                   
Gas contract.   The Industry sees it that if  the 20/20 ratio                                                                   
is in place, they are willing to move forward.                                                                                  
                                                                                                                                
It is  up to  the Legislature  to decide  on the  taxes.   If                                                                   
there are certain levels of changes  to the oil tax, it could                                                                   
impact the overall concept of  the package.  If an oil tax is                                                                   
passed, fundamentally  different from the  investment package                                                                   
that   the   Industry   had   in   mind,   there   could   be                                                                   
reconsideration.   That needs  to be investigated  with those                                                                   
companies.  He speculated on possibilities.                                                                                     
                                                                                                                                
9:45:40 AM                                                                                                                    
                                                                                                                                
Vice Chair Stoltze asked for recommendations  on an incentive                                                                   
package.    Dr.  Van  Muers  commented  that  the  worst-case                                                                   
scenario  would be  that  the  oil tax  passed  and then  the                                                                   
sponsors  became  hesitant  to  move  forward  with  the  gas                                                                   
contract.   That  would leave  Alaska  with the  oil tax;  it                                                                   
would remain  to be seen  what happens  then.  It  could mean                                                                   
there would  be no gas contract  put forward;  anything could                                                                   
happen.   It is important not  to speculate, as  the Industry                                                                   
is the one that will give clear answers on the questions.                                                                       
                                                                                                                                
9:48:44 AM                                                                                                                    
                                                                                                                                
Representative  Kerttula  asked about  the  2  for 1  concept                                                                   
discussed  in SRC.   Dr. Van Muers  said SRC  came up  with a                                                                   
good formula -  the crawl back.  In the  Governor's proposal,                                                                   
it was  agreed that the  bill would contain the  possibility,                                                                   
that companies would  have the ability to recover  $1 billion                                                                   
dollars  expended  over the  past  five years.    In the  HRC                                                                   
version,  that  feature  was cancelled;  canceling  it,  puts                                                                   
Alaska $1  billion dollars ahead.   The SRC version  proposed                                                                   
that  the  three  sponsors  must  indicate  that  they  "mean                                                                   
business"  with  inclusion  of the  20/20  ratio  investment.                                                                   
They must show their commitment  to Alaska.  One way to prove                                                                   
that, Alaska would  allow to recover whatever  the number is,                                                                   
but  only  allow  $1 dollar  extra  deduction  for  every  $2                                                                   
invested  into  the  future.   Alaska  needs  a  doubling  of                                                                   
investment.  There is evidence  that production is declining,                                                                   
which led to the SRC proposal,  indicating that companies are                                                                   
allowed to  recover $1 in  addition to  the $2 dollars  as an                                                                   
extra encouragement.   He  thought that was  a good  idea, as                                                                   
Alaska needs more investment.                                                                                                   
                                                                                                                                
9:52:38 AM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked  if he had  seen the  New York                                                                   
Times article addressing the windfalls  in the Gulf of Mexico                                                                   
and the  congressional plunders  resulting from that  action.                                                                   
Dr.  Van Muers  was aware  of the  fact that  on the  federal                                                                   
level,  the fiscal  system off  the Gulf of  Mexico has  been                                                                   
questioned and may need to be reviewed.                                                                                         
                                                                                                                                
9:54:52 AM                                                                                                                    
                                                                                                                                
Representative  Kerttula  understood  that  Alaska  would  be                                                                   
competitive using the 20/20 and/or  the 25/20 ratio.  At this                                                                   
point, the companies will make  their internal decision.  Dr.                                                                   
Van Muers  testified that he  had analyisized all  the levels                                                                   
of  taxation  credits  and  rates.   There  is  a  difference                                                                   
between  the  20/20  and  the  25/20 ratio.    The  25/20  is                                                                   
approximately the same as currently  exists.  He assumed that                                                                   
at the  25/20 ratio,  more tax would  be collected  but there                                                                   
would not be  as much activity; the 20/20 rate  provides more                                                                   
activity and would be the more attractive feature.                                                                              
                                                                                                                                
9:58:13 AM                                                                                                                    
                                                                                                                                
Representative Kerttula mentioned  the tax and tax credit for                                                                   
new investors.   Dr. Van Muers agreed; it relates  to the $73                                                                   
million additional allowance.   If no tax is paid, the higher                                                                   
the tax rate & credits, the more  that can be claimed in loss                                                                   
carried forward credits.  The  Governor's bill proposed using                                                                   
the flat  rate for  all companies.   Dr. Van Muers  preferred                                                                   
the version  proposed  by the  SRC as it  provides a  sliding                                                                   
scale and only  small companies would benefit from  that.  If                                                                   
a company falls within the small  company bracket, the higher                                                                   
the tax rate,  the better because they receive  credits, more                                                                   
loss carried forward.                                                                                                           
                                                                                                                                
10:01:26 AM                                                                                                                   
                                                                                                                                
Representative  Hawker commented  on testimony regarding  the                                                                   
environment   of  lower   net   effective   taxes,  and   how                                                                   
exploration and development is  encouraged and expands; in an                                                                   
environment of  higher taxes, exploration and  development is                                                                   
discouraged.    He  understood  that testimony  on  the  PPT,                                                                   
establishes overall,  a net effective  tax rate,  which leads                                                                   
to  the  conclusion  that  passing PPT  could  lead  to  less                                                                   
development and exploration in the State.                                                                                       
                                                                                                                                
Dr. Van Muers  stated there are two features,  the tax credit                                                                   
and the  tax rate.  The  Governor's bill attempts  to achieve                                                                   
some kind of  economic balance by creating higher  tax rates,                                                                   
at the same time  providing stronger tax credits.   It is not                                                                   
only the tax  rate that is important, but rather,  the entire                                                                   
structure  of the credit.   The  economic analysis  indicates                                                                   
that  taxes could  be increased  but at  same time  providing                                                                   
increased tax credits.  Some nations  have been successful at                                                                   
creating the right  tax structure such as Norway  at the same                                                                   
time creating  an environment  that encourages  reinvestment,                                                                   
which is the focus of the PPT proposal.                                                                                         
                                                                                                                                
10:05:22 AM                                                                                                                   
                                                                                                                                
Representative  Hawker did  not  see how  higher taxes  could                                                                   
encourage economic development.   Dr. Van Muers explained the                                                                   
idea is  related to  the entire  cash flow.   The concept  of                                                                   
profitability is  not the total  amount of profit  but rather                                                                   
how much profit results from how  much investment.  What they                                                                   
are saying is  that they get less profit, but  the investment                                                                   
is somewhat less  and is affecting the total  balance between                                                                   
what they  get and what  they pay.   Consequently, it  is the                                                                   
entire relationship  between what  you get  and what  you pay                                                                   
that determines  whether an investment is attractive  or not.                                                                   
In that balance, the 20/20 ratio is a favorable system.                                                                         
                                                                                                                                
10:07:18 AM                                                                                                                   
                                                                                                                                
Representative  Hawker advised that  is the definition  of an                                                                   
internal rate  of return on any  investment.  He did  not see                                                                   
how the  net affects increased  tax rates could  be improved.                                                                   
Dr. Van Muers  explained it would improve, because  after tax                                                                   
investment, it would be considerably  less.  A rate of return                                                                   
is not the only criteria.                                                                                                       
                                                                                                                                
10:08:52 AM                                                                                                                   
                                                                                                                                
Dr.  Van  Muers  explained  that if  an  investment  is  more                                                                   
profitable, then the investment becomes more likely.                                                                            
                                                                                                                                
10:09:42 AM                                                                                                                   
                                                                                                                                
Representative  Kelly  inquired if  the  tax rate  increases,                                                                   
should the credits  be raised to 25% as well.   Dr. Van Muers                                                                   
noted that his original report  recommended 20/15 ratios, but                                                                   
has increased to a 20/25 ratio,  in order to strike a correct                                                                   
rate.  He explained  that the downside risk  for Alaska would                                                                   
be higher  if tax rates  and credits were  too high.   He did                                                                   
not recommend going  "all out on a limb" on  tax credits, due                                                                   
to the  significant risks resulting  to the State  of Alaska.                                                                   
He felt that 20%  tax credit was as high as  the State should                                                                   
go.                                                                                                                             
                                                                                                                                
10:13:31 AM                                                                                                                   
                                                                                                                                
In response to  a question by Representative  Kelly regarding                                                                   
connection  of the  gas  line  with the  PPT,  Dr. Van  Muers                                                                   
observed that  the Stranded  Gas Act  did not address  fiscal                                                                   
stability for oil.   The concept is to judge  oil taxation on                                                                   
its own  merit, next a public  review, and then  the Stranded                                                                   
Gas  Act would  have  to be  amended before  considering  the                                                                   
contract.   Finally, the Legislature  would have the  view of                                                                   
the total package;  a process which allows  renegotiation and                                                                   
then the  public and Legislature  would have the  opportunity                                                                   
to refute or accept.                                                                                                            
                                                                                                                                
10:18:55 AM                                                                                                                   
                                                                                                                                
Representative  Kelly spoke to  the complexity of  the issue.                                                                   
The system would be changed to taxing the net, with a claw-                                                                     
back  provision   and  credits   within  that  system.     He                                                                   
questioned if there are other  systems like that and how they                                                                   
perform auditing over time.                                                                                                     
                                                                                                                                
Dr. Van Muers recommended the  PPT to the Governor because it                                                                   
is  well established  worldwide.    Norway uses  the  system;                                                                   
Britain  use to  use  that system;  Australia,  Newfoundland,                                                                   
Algeria  and  other  areas  have  been  successful  with  the                                                                   
profit-based  system.  The  international experience  is that                                                                   
more  auditing is  needed.   Dr.  Van Muers  is presently  in                                                                   
Algeria to  create a  monitoring system.   It requires  extra                                                                   
governmental  effort  to insure  that  they  have their  fair                                                                   
share.   He felt confident  that the Administration  would be                                                                   
able to implement the process  and encouraged the Legislature                                                                   
to listen  to those who implement  the law.   He acknowledged                                                                   
it is more  complex than the ELF.   ELF has its  own concerns                                                                   
regarding how fields  are defined.  There are  advantages and                                                                   
disadvantages to both systems.   Profit based systems seem to                                                                   
provide a fairer share for the  jurisdictions.  He recognized                                                                   
that regulations need to be passed.                                                                                             
                                                                                                                                
10:26:22 AM                                                                                                                   
                                                                                                                                
In response  to a question  by Representative Kelly,  Dr. Van                                                                   
Muers  commented  he  was  positive  about  the  20/20  ratio                                                                   
proposal including  the progressivity  feature.   He believed                                                                   
that it  was a more balanced  proposal than his  original one                                                                   
at 25/20.  There is more balance  in the number and will make                                                                   
companies more  likely to reinvest.   The 25/20  ratio scales                                                                   
have more risk than the 20/20  for carry forward credits.  He                                                                   
agreed it is a superior system and supports that approach.                                                                      
                                                                                                                                
10:29:19 AM                                                                                                                   
                                                                                                                                
In response  to a question  by Representative Kelly,  Dr. Van                                                                   
Muers  felt that  international  factors could  lead to  more                                                                   
investment  in  Alaska.    He  observed  that  the  world  is                                                                   
changing and a  number of governments are  considering higher                                                                   
taxes to  make their  systems more progressive.   There  is a                                                                   
trend   happening  and   higher   oil  prices   are   causing                                                                   
governments  to review their  fiscal oil  price.  He  thought                                                                   
that  gas is  still  on the  moderate  side,  but that  could                                                                   
change once there  is more supply.  He expected  more nations                                                                   
to  join  in higher  takes  over  the  next  few years.    He                                                                   
concluded  that Alaska  could take  significant more  without                                                                   
seeing  investment  decline.   There  currently  is an  over-                                                                   
supply of stranded gas, still on the modest side.                                                                               
                                                                                                                                
10:32:55 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  advised that neither version  addressed heavy                                                                   
oil and  that significant amounts  of heavy oil  reserves are                                                                   
present.   Dr. Van  Muers spoke to  stimulating heavy  oil on                                                                   
the North  Slope, depending of  course on an  adequate fiscal                                                                   
package.  The conclusion is if  there is a higher tax credit,                                                                   
there would  be an additional  stimulus, which  the companies                                                                   
are seeking.  The higher the credits,  the higher the rate of                                                                   
return.  The conclusion  is if the tax credits  are pushed up                                                                   
to  high, the  government  becomes too  exposed  from a  risk                                                                   
point  of view,  which  would  be unwise.    The  20/20 is  a                                                                   
package that would stimulate heavy development.                                                                                 
                                                                                                                                
10:38:13 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  indicated that the  HRC was referring  to the                                                                   
Western  Texas Instruments  (WTI) as  the standard;  whereas,                                                                   
typically,  the Alaska  North Slope (ANS)  standard is  used.                                                                   
He asked  if the three major  producers could  manipulate the                                                                   
ANS price, based on the quality of the oil.                                                                                     
                                                                                                                                
Dr.  Van  Muers   advised  that  there  are   advantages  and                                                                   
disadvantages  in using  the WTI  versus ANS.   ANS  reflects                                                                   
better the  actual North Slope crude.   There is quite  a bit                                                                   
of variation;  the advantage of  using ANS is that  it better                                                                   
reflects the value  of the North Slope crude.   ANS typically                                                                   
trails $2  dollars less  than WTI.   There are  disadvantages                                                                   
and no matter  what the State does, eventually  there will be                                                                   
a decline in production of the  crude.  Already, the level of                                                                   
production does not  create a very transparent  market and it                                                                   
will  likely increase  in  the future.    Eventually, if  the                                                                   
Stranded  Gas  contract  moves   forward,  WTI  will  be  the                                                                   
reliable benchmark.   The  State at some  point will  need to                                                                   
switch to  WTI because the market  may become too  narrow for                                                                   
the other.  The WTI standard is used worldwide.                                                                                 
                                                                                                                                
10:42:50 AM                                                                                                                   
                                                                                                                                
Co-Chair Chenault asked if locking  in the long term was done                                                                   
in other parts of the world.   Dr. Van Muers advised that the                                                                   
Stranded  Gas  Development Act  permits  locking  in the  tax                                                                   
system for  a period of  time and many  nations in  the world                                                                   
are doing  that.  If there  is a marginal gas  project, fixed                                                                   
terms have  an enormous  risk factor for  the investors.   He                                                                   
worried about  those risk factors.   Other nations  have been                                                                   
adept in guaranteeing fiscal stability.   Nations are locking                                                                   
into  terms for  a considerable  period [35  years] of  time,                                                                   
which is  attractive to  investors and is  the basis  for the                                                                   
entire Stranded  Gas Act.   Not  all investments have  fiscal                                                                   
stability such as  Norway & Britain.  Those  governments have                                                                   
sufficiently  profitable projects that  allows for  no fiscal                                                                   
stability.  Having fiscal stability  gives the project a huge                                                                   
push  forward.   He  urged that  the  entire  oil package  be                                                                   
considered with the idea of fiscal stability.                                                                                   
                                                                                                                                
10:48:00 AM                                                                                                                   
                                                                                                                                
Representative Kerttula asked  if the profit-based system was                                                                   
similar  to the  severance tax  based  on profits.   Dr.  Van                                                                   
Muers responded that  each fiscal system around  the world is                                                                   
somewhat different.   The Alaska PPT is not a  copycat of one                                                                   
done  anywhere  else.    If there  are  royalties,  then  the                                                                   
profit-based system  must be designed  differently.   The PPT                                                                   
attempts  to make  a profit based  system,  the same goal  of                                                                   
other nations,  but unique  to the  situation of that  place.                                                                   
He  thought  that Alaska  was  more  favorable to  offer  tax                                                                   
credits.   Once  the PPT  is introduced,  other nations  will                                                                   
watch  to   see  how  it  works.     The  PPT  is   based  on                                                                   
international standards.                                                                                                        
                                                                                                                                
10:51:57 AM                                                                                                                   
                                                                                                                                
Representative  Kerttula asked  if  any other  country had  a                                                                   
production  tax based  on profit  rather than  on the  gross.                                                                   
Dr. Van Muers replied  that it is common for  nations to have                                                                   
three levels of taxation:                                                                                                       
                                                                                                                                
   · Royalty based on gross value                                                                                               
   · Extra tax based on the net value                                                                                           
   · Corporate income tax                                                                                                       
                                                                                                                                
10:53:36 AM                                                                                                                   
                                                                                                                                
Co-Chair Chenault  asked if Dr.  Van Muers could  determine a                                                                   
fix for Cook Inlet.  Dr. Van Muers  pointed out that SRC came                                                                   
up with  a good formula to  insure that Cook  Inlet produces.                                                                   
The levels  there now are  low and would  not be hurt  by the                                                                   
overall  tax system of  the 5  thousand barrel  a day  with a                                                                   
sliding  scale going  up to  30  thousand barrels  a day  was                                                                   
designed  around  Cook Inlet.    It is  a  non-discriminatory                                                                   
system and achieves  for that platforms producing  little, no                                                                   
tax would  be applied, yet  producers still benefit  from the                                                                   
tax benefit.   The  PPT stipulates  that and  will result  in                                                                   
more activity in the area.  There  will be tax by some of the                                                                   
major players on the gas.  He  reiterated as a result of PPT,                                                                   
more development could happen in the Cook Inlet region.                                                                         
                                                                                                                                
HB 488 was HELD in Committee for further consideration.                                                                         

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