Legislature(2005 - 2006)HOUSE FINANCE 519

04/03/2006 01:30 PM FINANCE

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01:39:54 PM Start
01:45:55 PM HB488
04:09:03 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 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."                                                                                      
     HB  488 was  HEARD  and HELD  in  Committee for  further                                                                   
J.  PATRICK FOLEY,  MANAGER  OF  LAND AND  EXTERNAL  AFFAIRS,                                                                   
PIONEER NATURAL RESOURCES ALASKA,  INC., provided information                                                                   
regarding Pioneer's  position on the bill. He  referenced the                                                                   
company president, Ken Schoeffield,  who was unable to attend                                                                   
due to  illness. Mr. Foley  explained that his  company began                                                                   
business in  2003, and  commented that they  were one  of the                                                                   
types  of  companies  that  the  State  of  Alaska  had  been                                                                   
encouraging to  do business. He  stated that their  portfolio                                                                   
had grown to approximately 1.7  million gross acres, equaling                                                                   
450 to 500  net acres. He illustrated their  acreage position                                                                   
on the  North Slope and  noted that ConocoPhillips  was their                                                                   
partner  in exploration.  The company  has two  wells in  the                                                                   
area currently,  and is expecting  to drill several  more. He                                                                   
noted  their development  project  in  Oooguruk,  as well  as                                                                   
exploration wells  in other locations  south of  Prudhoe Bay.                                                                   
He noted that ConocoPhillips in  Antigua operated their Artic                                                                   
Fox  drilling  rig.  He  also  mentioned  their  Cosmopolitan                                                                   
project in Cook  Inlet - a known resource discovered  by Arco                                                                   
originally. They  maintain small  working interest,  with the                                                                   
option to  increase to a  fifty percent working  interest and                                                                   
become the  operator. This will  be decided by the  summer of                                                                   
Mr. Foley discussed details of  Oooguruk project, an offshore                                                                   
development with 50 to 90 million  barrels of recoverable oil                                                                   
reserves,  developed at  a cost  of $500 million  and a  peak                                                                   
production projection of 15,000  to 20,000 barrels per day by                                                                   
2010. He  explained that  if this were  a simple  North Slope                                                                   
project,  it would  include  no processing.  Processing  fees                                                                   
were being discussed.                                                                                                           
Mr. Foley  described the project  components, such  as gravel                                                                   
placement in the  winter of 2006, equipment in  the winter of                                                                   
Representative Chenault  asked  how far from shore. Mr. Foley                                                                   
observed that the  island is eight miles from  the Island and                                                                   
is  at a  depth of  4.5  feet. The  pipeline  at its  deepest                                                                   
crosses 7.5 feet of water.                                                                                                      
1:45:55 PM                                                                                                                    
Mr.  Foley  acknowledged  the   cost  structure  as  being  a                                                                   
challenge, some  of the  highest in the  world. He  noted the                                                                   
theory that the  super sized fields had already  been tapped,                                                                   
meaning that smaller reservoirs  would be developed. He noted                                                                   
that the  cycle times between  discovery and production  were                                                                   
much longer here  than in the lower 48. He  observed that the                                                                   
cycle time was  shortened to 5 years in Oooguruk.  He pointed                                                                   
out that  it is  close to  infrastructure and  that work  had                                                                   
been done since its discovery in the 1970's.                                                                                    
Mr.  Foley  noted  the  investment   uncertainty  in  Alaska,                                                                   
pertaining  not  only  to  exploration  but  also  to  fiscal                                                                   
1:48:25 PM                                                                                                                    
Mr.  Foley  commented  that  their   initial  reception  from                                                                   
Administration was  welcoming. He expressed concern  over how                                                                   
to  process smaller  fields,  and  noted the  willingness  to                                                                   
allow  access to  facilities for  newer companies,  providing                                                                   
they  were  willing to  pay  processing  fees. He  noted  the                                                                   
State's  fiscal  policies, and  noted  that they  were  still                                                                   
attractive  compared  to  other   places  in  the  world.  He                                                                   
referenced  conversations  with  the Governor's  office,  and                                                                   
suggested that production  taxes might come out  to be nearly                                                                   
zero considering other incentives.                                                                                              
1:50:35 PM                                                                                                                    
Mr.  Foley maintained  that Alaska  needs  to be  competitive                                                                   
with lower  48 and  Canadian on-shore  resource plays,  which                                                                   
target tight sands, coal bed methane,  and shale. These types                                                                   
of  projects  are  low  risk, low  cost  and  are  attracting                                                                   
development. Many have lower tax rates.                                                                                         
1:51:57 PM                                                                                                                    
Mr. Foley concluded that this  was the climate that attracted                                                                   
his  company   to  develop   in  Alaska.   He  reviewed   the                                                                   
Administration's  original  proposal with  a  20 percent  tax                                                                   
rate and a  20 percent credit, concluding that  they believed                                                                   
it to  be fair and  balanced. He  noted the tax/credit  rate,                                                                   
$73  million exemption,  tradable  credits  and other  modest                                                                   
incentives  for new  exploration.  Large  companies that  are                                                                   
already paying  a production tax  can utilize the  credit the                                                                   
next  month. A  new entrant  would have  to wait  to use  the                                                                   
credit,  or  sell  them  when  their  value  had  eroded.  He                                                                   
explained  that the credits  had market  value, and  that the                                                                   
incentives  allowed  for  no  entrants  and  exploration,  by                                                                   
reducing  the  economic  size  field that  can  be  explored.                                                                   
Smaller,  less  productive  fields   would  be  economic.  He                                                                   
concluded that the Administration's  proposal would encourage                                                                   
new investment.                                                                                                                 
1:54:37 PM                                                                                                                    
Mr.  Foley then  commented on  the  proposed legislation.  He                                                                   
applauded  the 20% tax  rate, and  cautioned raising  the tax                                                                   
rate,  proposing   that  that  it  would   reduce  companies'                                                                   
incentive  to invest. He  pointed out  that if a  development                                                                   
existed, it  would be  in the State's  best interest  to have                                                                   
multiple independent companies also investing.                                                                                  
1:56:12 PM                                                                                                                    
Mr. Foley cautioned  that if the State wished  to implement a                                                                   
progressive  tax, that  they  be careful  in  its method.  He                                                                   
referred  to the  relationship  between  oil  price rise  and                                                                   
costs  for   exploration.  He   noted  that  costs   for  all                                                                   
development   related   services  had   increased   recently.                                                                   
Pioneer's  drilling  cost  doubled   in  Texas  in  2005.  He                                                                   
concluded that the  profit margin does correlate  to the rise                                                                   
in oil profits.                                                                                                                 
1:57:36 PM                                                                                                                    
Mr.  Foley suggested  that  if a  progressive  tax rate  were                                                                   
implemented, it should  be based upon profits,  rather than a                                                                   
simple  tax  rate. He  suggested  that  to  base the  tax  on                                                                   
profits would  make it unnecessarily  complex. He  noted that                                                                   
all of the oil sold by his company  would be sold as crude on                                                                   
the  west  coast and  encouraged  the  use  of ANS  price  if                                                                   
1:59:09 PM                                                                                                                    
Mr. Foley noted  that it was difficult to predict  prices. He                                                                   
concluded  that if  a price  were accepted,  there should  be                                                                   
some index to take inflation into  account. He suggested that                                                                   
excess  could be  taxed  at a  higher  rate,  but noted  that                                                                   
overtime that amount would be affected by inflation.                                                                            
2:00:25 PM                                                                                                                    
Mr. Foley then  discussed the idea of $12 million  "start up"                                                                   
credits to  encourage new entrants.  He noted that  the House                                                                   
had  converted this  concept  to a  $12  million credit,  but                                                                   
stated  that  it  was  similar  to  a  profit  exemption.  He                                                                   
suggested that this credit would  give an independent company                                                                   
the opportunity to  cover start up costs without  the benefit                                                                   
of an existing infrastructure.  He noted that his company had                                                                   
26  employees  housed  in  Alaska, and  stated  that  it  was                                                                   
difficult to do  business in the state without  personnel who                                                                   
actually understand the way things work here.                                                                                   
2:02:58 PM                                                                                                                    
Mr. Foley  proposed  that start  up costs in  the State  were                                                                   
high, and this exemption gave  a chance to smaller companies.                                                                   
He  noted  that  implementing  a  severance  tax  would  make                                                                   
business difficult for these smaller companies.                                                                                 
2:03:59 PM                                                                                                                    
Mr.  Foley   discussed  the  importance  of   monitoring  tax                                                                   
credits.  He pointed  out that  credits  could be  used in  a                                                                   
number of ways, whether held or  sold at a discount. He noted                                                                   
that the  purchaser of credits  would redeem its  full value,                                                                   
as  well  as the  cost  to  the  state. He  referred  to  the                                                                   
"refundable" credit of $10 million  included in the bill, and                                                                   
encouraged legislators  to increase  the amount.  He observed                                                                   
that if a new investor spent $100  million, that between a 20                                                                   
percent credit and a 20 percent  loss, $40 million in credits                                                                   
would  be generated.  He reiterated  that  any number  higher                                                                   
than 10 would be beneficial.                                                                                                    
2:06:21 PM                                                                                                                    
Mr. Foley  then addressed  Transitional Capital  Recovery. He                                                                   
noted that  their cumulative investment  since 2003  had been                                                                   
$100 million, and expressed the  need to be rewarded for this                                                                   
investment.  He noted  that in  this  time, they  had yet  to                                                                   
recoup their costs for development.                                                                                             
2:07:35 PM                                                                                                                    
Mr. Foley referenced  the 26 employees of Pioneer  in Alaska,                                                                   
and suggested  that the  State should make  it a  priority to                                                                   
convert all  resources into revenue.  He reiterated  that the                                                                   
20/20 proposal was balanced and  fair, and urged that careful                                                                   
consideration  be given  to raising  the tax  rate. He  noted                                                                   
that the start  up credit seemed to have a  sunset provision,                                                                   
and  encouraged  that  the  credits be  allowed  to  last  in                                                                   
perpetuity.  He  also  referred to  refundable  credits,  and                                                                   
encouraged that these be implemented.  Finally, he noted that                                                                   
a Transition  Capital look  back was appropriate,  especially                                                                   
for smaller companies.                                                                                                          
2:10:24 PM                                                                                                                    
Representative Kerttula  asked  how the  PPT would  play into                                                                   
the royalty reduction already  set forth. Mr. Foley responded                                                                   
that Mr. Van  Dyke discussed Pioneer's royalty  reduction and                                                                   
the  effect  of  royalty  reduction.   He  proposed  that  it                                                                   
benefited  the project,  but pointed  out that  it would  not                                                                   
dramatically add to  its success. He noted that  the rates of                                                                   
return were not actually at the rate previously discussed.                                                                      
2:12:13 PM                                                                                                                    
Responding  to another question  by Representative  Kerttula,                                                                   
royalty reduction  had not yet phased out,  which would occur                                                                   
linearly over four years.                                                                                                       
2:13:01 PM                                                                                                                    
Representative  Holm referred to  earlier comments  about the                                                                   
regulatory  process being  a stumbling  block to  production,                                                                   
and  asked for  clarification.  He  asked if  the  regulatory                                                                   
process was as big a burden as the tax rate.                                                                                    
2:14:20 PM                                                                                                                    
Mr.   Foley  acknowledged   that  the   resource  should   be                                                                   
protected.   However,  he   contrasted   the  difficulty   in                                                                   
regulatory  climate  between  the  North  Slope  and  another                                                                   
global location,  and noted that  it was dramatically  higher                                                                   
in the North  Slope. He suggested that it  required personnel                                                                   
familiar with the system.                                                                                                       
2:15:26 PM                                                                                                                    
Representative Holm asked how  long it would take to permit a                                                                   
well in  the Gulf  of Mexico.  Mr. Foley  noted that  he knew                                                                   
that Oooguruk  began its  regulatory process  on an  informal                                                                   
basis, and it took  one year to complete. He  also noted that                                                                   
many other projects took 4 to 5 years.                                                                                          
2:16:18 PM                                                                                                                    
Representative Holm observed  that  if the  State  considered                                                                   
creating incentive  for production, perhaps it  might do well                                                                   
to adjust the  permitting process as a type  of incentive. He                                                                   
noted  that perhaps  if  the  permitting took  an  inordinate                                                                   
amount of time, the price might decline before production.                                                                      
2:17:34 PM                                                                                                                    
Mr. Foley noted  his personal experience with  the regulatory                                                                   
process in the immediate infrastructure.  He felt the process                                                                   
worked  relatively well  and noted that  an offshore  project                                                                   
was permitted in  a year's time. He pointed  out however that                                                                   
more  remote   resources  would  require  a   more  difficult                                                                   
permitting  process,   and  suggested  that  this   might  be                                                                   
2:18:40 PM                                                                                                                    
Vice-Chair Meyer    referred   to  delays  occurring  on  the                                                                   
North  Slope relating  to  environment.  Mr. Foley  confirmed                                                                   
that  most exploration  work took  place in  the winter,  and                                                                   
noted the  snow road concept  in working with  the Department                                                                   
of Natural Resources,  developing systems to  facilitate work                                                                   
in late November, a month earlier  than historical trends. He                                                                   
also  noted that  drilling might  continue until  the end  of                                                                   
2:20:05 PM                                                                                                                    
Vice-Chair  Meyer  expressed  appreciation  for  the  smaller                                                                   
companies  like  Pioneer,  and  asked  how  many  wells  were                                                                   
drilled this  year. Mr.  Foley noted that  in the  past year,                                                                   
nine explorations  wells had been  drilled, as compared  to 3                                                                   
this year.  Vice-Chair Meyer asked  how this compared  to ten                                                                   
year ago. Mr.  Foley noted that he had worked  in exploration                                                                   
activities  for  the past  twenty  years, and  conceded  that                                                                   
there  might have  been a  time when  there were  as many  as                                                                   
eight wells drilled, compared  to times when prices were low.                                                                   
He  asked legislators  to  consider  whether  six wells  were                                                                   
adequate, and  suggested that  incentives might increase  the                                                                   
number of wells.                                                                                                                
2:22:18 PM                                                                                                                    
Vice-Chair Meyer stated his belief  that double the amount of                                                                   
wells  would be  more beneficial,  and  questioned why  there                                                                   
wasn't more exploration with a cost of $60 a barrel.                                                                            
2:22:47 PM                                                                                                                    
Mr.   Foley  noted   that  to   drill  a   well  would   cost                                                                   
approximately $10 million, with  a higher cost in more remote                                                                   
locations.  He  also  responded that  smaller  companies  had                                                                   
finite  resources, in  terms of equipment  and personnel.  He                                                                   
noted that  the fleet of  drilling tools would  increase over                                                                   
time. He noted that other companies  needed to first consider                                                                   
whether it  was worth their while  to enter into  business in                                                                   
2:24:41 PM                                                                                                                    
Vice-Chair Meyer questioned whether  the 20/20 proposal would                                                                   
be  adequate to  attract smaller  companies  if the  drilling                                                                   
season was  shorter in Alaska,  and regulatory  costs higher.                                                                   
Mr.  Foley confirmed  that the  20/20 proposal  was fair  and                                                                   
adequate   (without   progressivity),  providing   a   modest                                                                   
incentive  over the  current  structure,  and estimated  that                                                                   
other companies would  come to the State. He  emphasized that                                                                   
it would  enable small, marginal  [fields] to  be profitable,                                                                   
by  only a  few percentage  points  increase in  the rate  of                                                                   
2:26:10 PM                                                                                                                    
Representative Weyhrauch asked   how   our   drilling   costs                                                                   
compared  to  Texas. Mr.  Foley  noted  that the  costs  were                                                                   
significantly  less  in  the lower  48  states;  a $2  to  $3                                                                   
million well  would be  considered expensive.  Representative                                                                   
Weyhrauch asked how independents  were affected by the use of                                                                   
ANS. Mr. Foley pointed out that  the barrels would be sold in                                                                   
the west coast market. He noted  that it was not as simple as                                                                   
predicting an  average $2 dollar difference;  there have been                                                                   
times when the spread between ANS and WTI has been great.                                                                       
2:27:50 PM                                                                                                                    
Representative Weyhrauch observed  that three major companies                                                                   
were marketing and shipping from  the west coast and wondered                                                                   
whether it was better to separate  out that the network using                                                                   
ANS indexing to use WTI to game the system.                                                                                     
2:28:27 PM                                                                                                                    
Mr. Foley stated  that a company like Pioneer  had no ability                                                                   
to "game"  the system. He  noted that  it was not  a transfer                                                                   
price  or accounting  issue,  but  rather a  real  legitimate                                                                   
2:28:58 PM                                                                                                                    
Representative Chenault  referred  to  earlier  comments  and                                                                   
asked  how this  might affect  Cook Inlet.  Mr. Foley  stated                                                                   
that Oooguruk  was in a  decision making process  to conclude                                                                   
in the summer. He noted that their  company included analysis                                                                   
of Oooguruk  and Cosmopolitan  in their portfolio.  He stated                                                                   
that if a  project like Cosmopolitan were separated  out, the                                                                   
credits   might  prove   more  enticing.   He  thought   that                                                                   
Cosmopolitan may be  found to be marginal and  a slight shift                                                                   
would make it profitable.                                                                                                       
2:30:43 PM                                                                                                                    
Representative Chenault  commented  that  some  interest  was                                                                   
not only  North Slope,  but also  Cook Inlet, and  questioned                                                                   
what  incentives were  available to  bring smaller  companies                                                                   
into these areas.                                                                                                               
2:31:31 PM                                                                                                                    
TOM DODDS,  PRESIDENT, ANDEX RESOURCES, provided  information                                                                   
on  HB   488.  Andex   has  been   invested  in  Alaska   for                                                                   
approximately  6 years.  Andex is an  exploration leader.  He                                                                   
observed  that  there  has been  little  new  exploration  in                                                                   
Alaska.  They are currently  working on  a gas  [exploration]                                                                   
project of over 500,000 acres,  which would flow to Anchorage                                                                   
and   Fairbanks.   Andex   tries    to   identify   projects'                                                                   
risk/return.  Capital commitment  for  investment dollars  is                                                                   
huge. He acknowledged  Alaska's high cost of  operation. They                                                                   
are ready  to start  drilling in Nenana,  but are  waiting to                                                                   
see the results  of HB 488. He observed increases  in rent of                                                                   
400  percent  and  200  percent  in  steel.  There  are  also                                                                   
shortages of equipment  and manpower, which were  worsened by                                                                   
the recent hurricanes.                                                                                                          
2:38:06 PM                                                                                                                    
Mr. Dodds  observed that  they were  unable to find  partners                                                                   
for the  high risk  Nenana project.  Lower 48 companies  were                                                                   
not interested  in coming to Alaska. Three  Alaskan companies                                                                   
were recruited  as partners,  none of  which were normal  oil                                                                   
and gas  companies. There is  a big difference  between their                                                                   
company and  others in the Cook  Inlet and North  Slope. They                                                                   
are looking  for high  return investments. Exploration  would                                                                   
be  affected  under a  PPT  plan.  He  observed the  lack  of                                                                   
infrastructure,   but  pointed  out   that  Alaska   has  the                                                                   
potential for giant  new discoveries. It will  take people in                                                                   
the interior looking for these  reserves. Daily production is                                                                   
2:41:23 PM                                                                                                                    
Mr.  Dodds  expressed concern  that  under  the PPT  tax  new                                                                   
exploration would not come to  Alaska. He observed that their                                                                   
project is in a basin 300 miles  from the nearest operations.                                                                   
They are between  Cook Inlet and the North  Slope. Production                                                                   
is approximately 7 to 8 years  in the future. There is only a                                                                   
three-month   drilling  season,   which  must  occur   before                                                                   
breakup.  He stressed  that a  pipeline must  be put under  a                                                                   
river to reach  Fairbanks at a cost of $150 million  over 6 -                                                                   
7 years, which the producers must  finance. The project would                                                                   
lower  the cost  of fuel  in Fairbanks  by half  and open  up                                                                   
services in the interior.                                                                                                       
2:44:05 PM                                                                                                                    
Mr. Dodds emphasized  that they need long-term  stability and                                                                   
pointed to the raise in oil prices.  The 6 - 1 ration between                                                                   
oil and gas should  be more like 9 or 10 to 1,  and should be                                                                   
stand alone commodities. The incentive  with any tax increase                                                                   
must be  real. Without new  investment incentives  there will                                                                   
be little  to no new exploration.  He projected that  the oil                                                                   
and  gas assets  of  the state  of  Alaska  will be  depleted                                                                   
without  new  exploration.  Reserves  must  be  replaced  and                                                                   
investment encouraged.                                                                                                          
Alaska relies  heavily on  the oil and  gas industry.  Oil is                                                                   
ageing but  gas has  a huge potential.  He stressed  that the                                                                   
gas will  be a depleting  resource once it begins  production                                                                   
and emphasized the need for more exploration.                                                                                   
2:48:00 PM                                                                                                                    
Representative  Holm observed  that the  project has  been on                                                                   
hold for  several years.  Mr. Dodds  responded that  they did                                                                   
not anticipate  drilling before  the current year.  They held                                                                   
several public  meetings. Contracts with their  partners were                                                                   
only  signed two  years  ago. He  continued  to give  details                                                                   
regarding the project's  timeline. He noted that  the plan to                                                                   
begin  in  the   next  year  had  been  jeopardized   by  the                                                                   
introduction of HB  488. Andex is looking at  acquiring rigs.                                                                   
He emphasized that the project is high risk.                                                                                    
2:51:25 PM                                                                                                                    
In response to  a question by Representative  Holm, Mr. Dodds                                                                   
observed that  the same rigs could  be used for oil  and gas,                                                                   
but that size  is the issue. The  rigs must be light  load so                                                                   
that they can be broken down and brought across the river.                                                                      
2:52:54 PM                                                                                                                    
KEN  THOMPSON,  MANAGING  DIRECTOR,  ALASKA  VENTURE  CAPITAL                                                                   
GROUP  (AVCG),  testified via  teleconference  from  prepared                                                                   
comments.  He  stated  that  AVCG   was  an  independent  oil                                                                   
exploration  company  with a  focus  on  the North  Slope  of                                                                   
Alaska. AVCG  is a consortium  of 15 independent oil  and gas                                                                   
companies  and   individuals  from   Kansas  and  me   as  an                                                                   
owner/investor  from   Alaska.  AVCG  has  a   technical  and                                                                   
operational services' subsidiary  company called Brooks Range                                                                   
Petroleum, with offices  in Anchorage. He also  noted that he                                                                   
is the former President of ARCO Alaska, Inc.                                                                                    
2:56:18 PM                                                                                                                    
Mr. Thompson continued his testimony.                                                                                           
     AVCG has  been very active  in the past six  North Slope                                                                   
     (NS)  area wide lease  sales and  we have acquired  over                                                                   
     160,000 acres of exploration  leases in five exploration                                                                   
     prospect  areas, including  new acreage  we acquired  in                                                                   
     the   recent  March   1,  2006,   NS  lease  sale.   Our                                                                   
     exploration strategy  is to explore in  the central part                                                                   
     of the  North Slope  for fields  in the 25-150+  million                                                                   
     barrels  range, fields  that may  be too  small for  the                                                                   
     giant  producers   but  fields  that  can   be  produced                                                                   
     profitably  by smaller companies  like ours.  We believe                                                                   
     there  are  hundreds  of  millions if  not  billions  of                                                                   
     barrels  of  oil left  on  the  North Slope  in  smaller                                                                   
     fields   of   this   size    and   these   fields   near                                                                   
     infrastructure  can  be  brought on  more  quickly.  Our                                                                   
     first  exploration  well  in  partnership  with  Pioneer                                                                   
     Natural  Resources  -  the  Cronus  #1  about  10  miles                                                                   
     southwest  of  the  large   Kuparuk  Field  -  completed                                                                   
    drilling last week but results remain confidential.                                                                         
     I don't  understand all the  dynamics of the  past three                                                                   
     weeks in  the legislature,  but this I  do know.  The CS                                                                   
     for HB 488  needs to be greatly simplified  and it needs                                                                   
     to move back  closer to the Governor's  proposal and the                                                                   
     original  HB 488 draft  if a win-win  solution is  to be                                                                   
2:58:05 PM                                                                                                                    
     I  am an  optimist and  always have  been. I  personally                                                                   
     think  there is  still time  to avoid  a train wreck  in                                                                   
     this complicated  business of  a major restructuring  of                                                                   
     Alaska's petroleum taxation  system…if the House Finance                                                                   
     Committee acts  quickly. I, for  one, have not  given up                                                                   
     hope that there is a version  - easier to understand and                                                                   
     to implement - that can be  a win-win for both the State                                                                   
     and industry.  I repeat that the current draft  of CS HB
     488  is not a  win-win. There  is a  simpler and  better                                                                   
     way, in my opinion, for the  State to improve government                                                                   
     take  while not  dampening  exploration and  development                                                                   
     investment. Let me outline  my suggestions for a win-win                                                                   
     and my suggestions for simplification.                                                                                     
2:58:51 PM                                                                                                                    
     First,  however, let  me say  that while  I am  Managing                                                                   
     Director  of AVCG,  our other  owners disagree  strongly                                                                   
     that any change should be  made to the 20/20 PPT formula                                                                   
     proposed by the  Governor. The 20% PPT tax  rate and the                                                                   
     20% credit  originally presented in the  Governor's bill                                                                   
     should  be the  tax rate  and credit  enacted. The  AVCG                                                                   
     owners  representing  15  new exploration  investors  in                                                                   
     Alaska are  concerned enough that the current  system is                                                                   
     being revised  after they  have made almost  $10 million                                                                   
     investment  in North  Slope leases  and other costs  and                                                                   
     are planning  a 3-year  $46 million exploration  program                                                                   
     with our  first well  recently drilled. With  reasonable                                                                   
     discovery success  over the next  3 years in any  of our                                                                   
     upcoming  prospects, we  could  see development  capital                                                                   
     spending at $500 million to $1 billion.                                                                                    
     Quite honestly,  the AVCG  owners listened  in disbelief                                                                   
     when I told  them the production profits  tax rate being                                                                   
     considered in  the current CS to HB 488  draft could add                                                                   
     a   "progressive   surcharge"   that  could   place   an                                                                   
     additional  37.5%  taxation  of wellhead  value  by  the                                                                   
     state  at  high oil  prices  on  to  the base  PPT,  the                                                                   
     State's  12.5-16.7%  royalty,  the ad  valorem  property                                                                   
     tax,  the 3-9%  corporate  income tax,  lease bonus  bid                                                                   
     amounts,  the ongoing annual  lease rental amounts,  and                                                                   
     the  Federal  income  tax   rates  averaging  20-35%  of                                                                   
     taxable  income. It  all adds  up, and  AVCG Owners  are                                                                   
     saying, "enough is enough."                                                                                                
3:01:43 PM                                                                                                                    
     Interestingly  - and  this  is important  -  when I  was                                                                   
     communicating  the latest  CS to HB  488 details  to the                                                                   
     AVCG  owners by  teleconference  and  email recently,  I                                                                   
     felt two  overwhelming emotions.  The first  emotion was                                                                   
     discouragement.  Under the  original  20/20 proposal,  I                                                                   
     was  recommending  to our  owners that  considering  the                                                                   
     value  of  the  tax  credits,   we  could  add  a  sixth                                                                   
     exploration   well   for   every  fifth   well   drilled                                                                   
     essentially  at no cost to  our company…this  could lead                                                                   
     to additional discoveries  and production for all of us.                                                                   
     This is  good policy. However,  in discussing the  CS to                                                                   
     HB  488  with  its  much higher  taxation  at  high  oil                                                                   
     prices, I  recommended to our  owners that, in  order to                                                                   
     pay  potentially  higher   production  taxes  under  the                                                                   
     surcharge  concept,   we  sell  our  credits   to  other                                                                   
     companies  and save  the  cash to  literally offset  our                                                                   
     higher  taxes later.  I suggested  we  not consider  the                                                                   
     additional  sixth exploration  well any longer…the  AVCG                                                                   
     owners concurred. This will  result in potentially a new                                                                   
     oil  field   that  will  never  be  drilled   and  lower                                                                   
     production for  all of us. This is bad  policy. And this                                                                   
     is discouraging.                                                                                                           
3:03:45 PM                                                                                                                    
     But  I also  found  interesting another  strong  emotion                                                                   
     during that  teleconference which  surprised me  a great                                                                   
     deal. I felt embarrassment  for the State of Alaska, and                                                                   
     I felt embarrassment as an  Alaskan. Here I was, telling                                                                   
     a group  of outside investors  that recently put  all of                                                                   
     their  focus and  personal  exploration  budgets on  the                                                                   
     North Slope of  Alaska, and now I was  telling them that                                                                   
     Alaska   was  creating  the   most  complex,   confusing                                                                   
     production  tax bill ever  created since the  disastrous                                                                   
     Federal  windfall profits  tax. And  I was telling  them                                                                   
     that  Alaska  was  levying  the  highest  tax  rate  and                                                                   
     government take  in North America, much  higher than the                                                                   
     other U.S.  states where they invest. I  was embarrassed                                                                   
     that  the  anger  - or  the  mistrust  -  of the  Big  3                                                                   
     producers  and the  Governor has  resulted in the  State                                                                   
     crossing the  line between balancing State  revenues and                                                                   
     attracting outside investment.                                                                                             
3:05:05 PM                                                                                                                    
     Currently,  the total  Alaska  and Federal  governments'                                                                   
     take  is just over  50%. The  Governor's proposal  moved                                                                   
     this to  53% or so  then the original  HB 488  moved the                                                                   
     government  take closer to  55%. Then  the CS to  HB 488                                                                   
     boosted  the  government  take  close to  60%  with  its                                                                   
     "Progressivity Surcharge."                                                                                                 
3:08:41 PM                                                                                                                    
     My Personal Perspective                                                                                                  
     Now let me shift gears in  my comments to you. Because I                                                                   
     could not get buy-in for  any alternatives from the AVCG                                                                   
     owners except  the 20/20 case,  I have decided  to speak                                                                   
     out  alone. As  an Alaskan,  I am concerned  and feel  I                                                                   
     must  try  to share  a  personal perspective  trying  to                                                                   
     balance  what is  best for my  continued involvement  on                                                                   
     the  North Slope  in  balance with  how  the State  must                                                                   
     change  its system to  be competitive  in the  world and                                                                   
     realize more government share at high prices.                                                                              
3:10:23 PM                                                                                                                    
     I realize by stepping out  like this, I could jeopardize                                                                   
     my  management   status  with  AVCG  and   perhaps  even                                                                   
     jeopardize how  I am viewed  by the major  oil companies                                                                   
     and my friends in the independent  company sector. But I                                                                   
     have taken such personal  risks in the past, and I don't                                                                   
     mind doing so  again today to simply do what  I think is                                                                   
     the right thing to do regardless of others' opinions.                                                                      
     So,  let me  turn my  attention  to what  key changes  I                                                                   
     would make to the CS of HB  488. Again, my views are not                                                                   
     supported by  AVCG owners or others in  industry; rather                                                                   
     they are my personal views.                                                                                                
Mr. Thompson noted that he is okay with the tax rate being                                                                      
progressive, but stressed that it needed to be simplified.                                                                      
He continued his testimony:                                                                                                     
     When  the Governor's  office first  announced a  25% tax                                                                   
     rate then amended  that to 20%, I could see  the move by                                                                   
     legislators to  somehow bridge the gap from  20% to 25%.                                                                   
     However,  the  approach  used  by  the  House  Resources                                                                   
     Committee  based on their  outside consultants'  work is                                                                   
     simply too  complex and will be arduous  to implement. I                                                                   
     think - and  perhaps all of you think -  the Federal tax                                                                   
     code is too  complex….the changes to HB488  are also too                                                                   
     complex  and  will  lead  to  different  interpretation,                                                                   
     "gamesmanship"  possibly  by some  companies because  of                                                                   
     the  unwieldy  progressive  tax structure  formula,  and                                                                   
     future costly  lawsuits when the State disagrees  with a                                                                   
     company's  calculations. And  the number of  accountants                                                                   
     to keep track  of these complexities on  both sides will                                                                   
     balloon!   I    urge   you   to   simplify,    simplify,                                                                   
     simplify...yet   still   have  some   progression   that                                                                   
     legislators seem set on.                                                                                                   
3:12:20 PM                                                                                                                    
     For my company  which drills the smaller  oil traps that                                                                   
     may add up, we do not have  a lot of upside potential in                                                                   
     seeing  these   smaller  fields  grow  much   larger  in                                                                   
     reserves over time in contrast  to the giant Prudhoe Bay                                                                   
     and Kuparuk fields.  So our main upside is  in oil price                                                                   
     escalation  to offset  exploration risks  and to  offset                                                                   
     the cycles  of oil prices downward, a reality  over time                                                                   
     for  any   commodity.  I   find  it  disturbing   -  and                                                                   
     personally unfair  - that the House  Resources Committee                                                                   
     recommended  a windfall profits  tax, or  "Progressivity                                                                   
     Surcharge", as  high as an additional 37.5%  of value in                                                                   
     addition to the base PPT.                                                                                                  
3:13:20 PM                                                                                                                    
     I found it  so interesting to see the  Econ1 consultants                                                                   
     and  consultant Daniel  Johnston  saying the  government                                                                   
     should take  more and more  at high prices when  not one                                                                   
     member  of the  Resources  Committee asked  them a  very                                                                   
     important  question they  should have  been asked:  "how                                                                   
     much are you investing in  Alaska?" I was shocked to see                                                                   
     that  these  consultants,  when calculating  the  future                                                                   
     revenues to the State at  various escalating rates, used                                                                   
     the  same  oil  production   curves.  In  reality,  less                                                                   
     capital  will   be  spent  by  industry   at  exorbitant                                                                   
     production profits  tax rates (tax rates  above 25% when                                                                   
     coupled  with  all  other   payments  such  as  royalty,                                                                   
     corporate  income tax, ad  valorem tax, lease  costs and                                                                   
     rentals,   etc.).  With  less   capital  spending,   the                                                                   
     production  curve will be  lower…an increasingly  higher                                                                   
     tax  rate  may  not  in the  end  yield  the  forecasted                                                                   
     revenues for the State.                                                                                                    
3:14:29 PM                                                                                                                    
     On  a related  note, our  company plans  to go into  the                                                                   
     private  or public  equity  markets to  raise funds  and                                                                   
     capital   for  any  future   development.  Such   equity                                                                   
     investors invest in the oil  markets to be fully exposed                                                                   
     to  crude price upside.  When they  look at  investments                                                                   
     all over  the world,  and see that  Alaska could  tax at                                                                   
     much   higher  crude   prices   with  a   "Progressivity                                                                   
     Surcharge", they  will place their capital  elsewhere to                                                                   
     continue  their  exposure  to  higher  crude  prices  in                                                                   
     investments without  alternative taxing  structures such                                                                   
     as the  Lower 48 states,  the Gulf of Mexico  deep water                                                                   
     with  royalty relief,  the Canadian  oil sands  or other                                                                   
     countries.  The consultants did  not address  this issue                                                                   
     that  I face  month  in and  month  out…the private  and                                                                   
     public equity markets and  the desire for such investors                                                                   
     to  fully benefit  from  upside commodity  price  swings                                                                   
     without  hedging  or excessive,  escalated  taxation  at                                                                   
     high prices.                                                                                                               
3:16:11 PM                                                                                                                    
     I  could  not  believe  the  consultants  did  not  show                                                                   
     capital  spending   elasticity  graphs   from  different                                                                   
     countries. They did the legislature  a disservice by not                                                                   
     doing so. Their  work showed a biased perspective  in my                                                                   
     opinion;  by getting  the House  Resources Committee  to                                                                   
     adopt  a  complex  progressive tax  rate  structure,  or                                                                   
     windfall  profits  tax, the  consultants  may feel  they                                                                   
     have been  successful…but not  one of these  consultants                                                                   
     will be around to defend  their views in the future when                                                                   
     capital spending  does decline at exorbitantly  high and                                                                   
     unfair tax rates above the 25% level.                                                                                      
3:16:49 PM                                                                                                                    
     So,  what   is  a  simpler   alternative?  What   is  an                                                                   
     alternative to  yield more revenues to the  State with a                                                                   
     balance   to  attract  increased   investment?   I  have                                                                   
     followed  the  progression of  the  PPT  and noted  when                                                                   
     respected global consultant  Pedro van Meurs recommended                                                                   
     a  25/20  formula,  i.e.  a  25%  tax  rate  and  a  20%                                                                   
     investment  tax credit. Yet  the Governor recommended  a                                                                   
     20/20  formula   with  a   20%  tax  rate.   Since  that                                                                   
     controversial  time  a few  weeks  ago,  it appears  the                                                                   
     House  Resources  Committee  and  the  Senate  Resources                                                                   
     Committee have  spent a lot of time trying  to recapture                                                                   
     the  perceived  "lost  revenue" from  the  Governor  not                                                                   
     taxing  at  the  25%  level.  On  the  other  hand,  the                                                                   
     Governor  does make  a good  case  about increased  cash                                                                   
     flow  to  producers  and   resultant  increased  capital                                                                   
     investment  at  the  lower   20%  tax  rate  level.  But                                                                   
     consultants  Econ1 and  Daniel  Johnston did  get things                                                                   
     way off  track by  proposing too  complex a solution  to                                                                   
     bridge   this  gap   and  get   even  more…the   complex                                                                   
     "Progressivity  Surcharge."  Having  the PPT  at  higher                                                                   
     prices  being a  mixture of  taxation of  profits and  a                                                                   
     separate  incremental  tax  on incremental  revenues  is                                                                   
     unwieldy and an accounting nightmare.                                                                                      
     Let  me address  a way to  transition  from the 20%  tax                                                                   
     rate   to  the  25%   tax  rate   without  getting   too                                                                   
3:19:50 PM                                                                                                                    
     I suggest that the Finance  Committee revise the bill to                                                                   
     keep  the production  profits tax  simply that…a  tax on                                                                   
     production  profits,  and  not  an  underhanded  way  to                                                                   
     further  burden  gross  revenues  with  a  surcharge.  A                                                                   
     simpler  way getting  the progressive  rate from  20% to                                                                   
     25%  without the  surcharge treatment  complexity  is to                                                                   
     adopt  a graduated  PPT that  does  accomplish a  higher                                                                   
     State  take at higher  prices, yet  leaves a  reasonable                                                                   
     producer take.                                                                                                             
     I  recommend   the  following  production   profits  tax                                                                   
     schedule  as  a  suggested  one  to  "simulate"  revenue                                                                   
     results  somewhere between  the Governor's proposal  and                                                                   
     the  CS to  HB 488  proposal.  It is  one that  everyone                                                                   
     could  easily understand  and implement  with the  State                                                                   
     realizing upside  at higher oil prices yet  not too much                                                                   
     upside is taken away from explorers/producers for re-                                                                      
     Up to monthly average wellhead price of $50/barrel for a                                                                   
     company:   PPT rate of 20%                                                                                                 
     When  monthly  average wellhead  price  is  between $50-                                                                   
     75/barrel: PPT rate of 22.5%                                                                                               
  When monthly average wellhead price exceeds $75/barrel:                                                                       
     PPT rate of 25%                                                                                                            
     By  the  way, if  the  State  were  to pass  a  complex,                                                                   
     unwieldy windfall profits  tax like that one proposed by                                                                   
     Econ1  and favored  by some on  the Resources  Committee                                                                   
     with   escalating  production   profits  tax   rates  or                                                                   
     surcharges, I predict Alaska  will make the cover of the                                                                   
     industry-wide  influential  magazine  "The Oil  and  Gas                                                                   
     Journal"  and perhaps  even a  cover spot  in the  "Wall                                                                   
     Street Journal."  And I don't  mean this  media coverage                                                                   
     in a positive  way…I think all in industry  will say the                                                                   
     State is  taking advantage  of industry at  high prices.                                                                   
     Whether  or not industry  makes money  or not  and makes                                                                   
     good,  solid   returns  is  not  the  issue   with  such                                                                   
     extremes…the  perceived fairness of  taxation in  a high                                                                   
     cost, remote  area like Alaska  is the issue.  This will                                                                   
     discourage new entrants, in my opinion.                                                                                    
3:21:21 PM                                                                                                                    
     I highly  respect industry consultant Daniel  Yergin who                                                                   
     has  an excellent  reputation  among industry  personnel                                                                   
     and government  officials alike. In November,  2005, Mr.                                                                   
     Yergin said  this about a windfall profits  tax: "What a                                                                   
     windfall  profits  tax  does   is  introduce  a  lot  of                                                                   
     distortion. It reduces investment,  it increases a sense                                                                   
     of political  risk and it doesn't achieve  the goal that                                                                   
     is intended…it will really lead to decreased supply."                                                                      
     I urge the Finance Committee  to seriously consider this                                                                   
     simpler approach,  and ask that you have  the Department                                                                   
     of  Revenue run  the  above case  to  compare the  State                                                                   
     revenues to  the Governor's proposal, to  the current CS                                                                   
     to HB  488 proposal, and  to the existing  ELF severance                                                                   
     tax   program.   Please  do   away   with  the   complex                                                                   
     "Progressivity   Surcharge"   and  simplify,   simplify,                                                                   
3:22:02 PM                                                                                                                    
     (2) "Trigger  Points" For  Escalating PPT Should  Not be                                                                 
     WTI But Wellhead Value                                                                                                   
     I do  not think the  "trigger point" that  increases the                                                                   
     PPT  tax rate  from 20% should  be based  on West  Texas                                                                   
     Intermediate (WTI) oil price  as suggested by Econ 1 and                                                                   
     Daniel Johnston  and by  the House Resources  Committee.                                                                   
     The "trigger  point" should be when a  company's average                                                                   
     realized  wellhead  price  in  Alaska  exceeds  $50  per                                                                   
     barrel. Some  say lower, but I do think  there is strong                                                                   
     merit   that  those   who   have   invested  and   taken                                                                   
     exploration  risk and exposure  to low prices  should be                                                                   
     able  to  benefit  from   increased  profits  at  higher                                                                   
     prices…"share   the  pain,   share  the  gain"…to   this                                                                   
     $50/barrel  wellhead  level.  However, I  personally  am                                                                   
     fine  with  the  State  increasing   the  PPT  tax  rate                                                                   
     eventually to  a cap of 25% when wellhead  prices exceed                                                                   
     $50/ barrel.  Having said this, you need to  know that I                                                                   
     do not  know anyone  else in  industry who thinks  this;                                                                   
     everyone I know continues to press the 20/20 formula.                                                                      
3:23:34 PM                                                                                                                    
     Why  should  the State  tie  the  PPT calculation  to  a                                                                   
     company's  realized wellhead  price instead  of to  West                                                                   
     Texas Intermediate (WTI)  price? In reality on the North                                                                   
     Slope, not one company sees  WTI prices. Every crude oil                                                                   
     in  Alaska is different  in quality  with viscous  crude                                                                   
     receiving less and oil produced  from wells farther away                                                                   
     from  infrastructure receiving  less wellhead  value due                                                                   
     to higher  shipping costs.  Conversely, oil in  the Cook                                                                   
     Inlet is  close to  actual refining or  on the  water to                                                                   
     ship  out of  state and  thus realizes  on average  much                                                                   
     higher wellhead value than  most North Slope crude oils,                                                                   
     a  substantial plus  to Cook  Inlet  operators who  face                                                                   
     higher  operating   costs  with  maturing   fields.  Our                                                                   
     company's crude when discovered  on the North Slope will                                                                   
     be farther west,  and when we have to  transport the oil                                                                   
     via the major producers'  gathering system lines to TAPS                                                                   
     pump  station  #1, we  will  pay  the majors  a  certain                                                                   
     tariff  of $0.50-1.00/barrel  or  more,  and a  facility                                                                   
     processing  fee of  $3.00/barrel  of more,  giving us  a                                                                   
     lower  wellhead  value for  our  crude while  the  major                                                                   
     producers  make  an  additional profit  on  shipping  in                                                                   
     their  crude lines  and processing.  The majors  further                                                                   
     make profits from tariffs  for shipping down TAPS and in                                                                   
     their marine tankers.                                                                                                      
3:24:26 PM                                                                                                                    
     3) Reinstate The Transitional Deductible Allowance                                                                       
     Jumping immediately from  the prior ELF severance tax to                                                                   
     the PPT formula overnight  wreaks havoc with a company's                                                                   
     budgeting and their forecast  of available cash flow for                                                                   
     near-term capital  investment. While this  does not have                                                                   
     a  major impact  on AVCG,  I do  greatly empathize  with                                                                   
     ConocoPhillips,  who is  the largest  investor and  most                                                                   
     active  explorer  in Alaska,  about  having "look  back"                                                                   
     investment credits.  Part of the current  oil production                                                                   
     bringing in much higher revenues  to the State is due to                                                                   
     investment over  the past few years.  Interestingly, the                                                                   
     PPT   will  have   the   largest   negative  impact   on                                                                   
     ConocoPhillips,  particularly on  their production  from                                                                   
     the Kuparuk  Field. ARCO used to own  the ConocoPhillips                                                                   
     properties on  the North Slope, and I am  concerned with                                                                   
     the  impact  on  Alaska's   largest  investor  and  most                                                                   
     successful  explorer. A  transition  adjustment of  some                                                                   
     sort is appropriate and is fair.                                                                                           
     I  recommend  the  Finance  Committee  re-institute  the                                                                   
     original HB  488 compromise  to a three-year  staged and                                                                   
     tiered  "look back";  while  not as  substantial as  the                                                                   
     Governor's  proposal,  the House  Resources  Committee's                                                                   
     staged "look back" is fair  and should be re-instated in                                                                   
     the bill.  The cost  recovery allowed  should be  75% of                                                                 
     2005 expenditures, 50% of  2004 expenditures, and 25% of                                                                   
     2003 expenditures  to be  deductible as costs  for near-                                                                   
     term PPT calculations as originally in HB 488.                                                                             
3:26:22 PM                                                                                                                    
     4) The $12 Million Tax Credit Standard Allowance                                                                         
     The Governor proposed a $73,000,000  annual allowance of                                                                   
     production profits  that would not be taxed  by the PPT,                                                                   
     essentially  giving  a  $14.6  million  tax  credit  per                                                                   
     company.  The  House Resources  Committee  revised  this                                                                   
     downward  to   a  $50,000,000  annual  allowance   as  a                                                                   
     reasonable compromise, or  a $10,000,000 tax credit. The                                                                   
     CS to HB 488 further proposed  that this be changed to a                                                                   
     simple   $12,  000,000  annual   "standard  tax   credit                                                                   
     allowance" as a reasonable compromise.                                                                                     
     This  "standard  deduction"   is  very  important  to  a                                                                   
     startup company like AVCG/Brooks  Range Petroleum trying                                                                   
     to   establish  a   foothold  in   Alaska  and   someday                                                                   
     contribute substantial oil revenues to the State.                                                                          
     I   recommend   the  Finance   Committee   endorse   the                                                                   
     $12,000,000 tax credit allowance per company.                                                                              
3:27:05 PM                                                                                                                    
     5) Tax Credit Repurchase Program                                                                                         
     As protection for explorers  and new entrants to Alaska,                                                                   
     the  CS to  HB  488 devised  a tax  credit  repurchasing                                                                   
     program   for  those   credits   a   company  earns   on                                                                   
     expenditures up to $10,000,000  per year for investments                                                                   
     in exploration and/or lease purchases in Alaska.                                                                           
     This is  important to explorers  like AVCG who  does not                                                                   
     yet have production revenues.  Without such a repurchase                                                                   
     program, our  company might be  able to sell  our annual                                                                   
     tax credits  to one of the  major producers but  have to                                                                   
     accept only 90-95%  on the dollar or less.  On the other                                                                   
     hand,  the State  would  not be  giving  up anything  to                                                                   
     repurchase  the credits  at  100% of  value because  the                                                                   
     major  producers  would  otherwise  use the  credits  to                                                                   
     reduce their  tax bill and reduce revenue  to the State.                                                                   
     But  using  the  State repurchase  approach,  the  small                                                                   
     explorer  could  turn around  and  re-invest the  State-                                                                   
     refunded credit into new  leases, seismic or exploration                                                                   
     I  recommend  the  Finance  Committee  support  the  tax                                                                   
     credit repurchase program  outlined in the CS to HB 488.                                                                   
3:28:14 PM                                                                                                                    
     6) Remote Exploration Tax Credit Extension                                                                               
     I  thank   the  House  Resources  Committee   for  their                                                                   
     proposal  in  extending   the  SB  185  exploration  tax                                                                   
     credits for the next 10 years.                                                                                             
     I  recommend that  the  Finance Committee  also  endorse                                                                   
     this proposal  that will extend  the 40% tax  credit for                                                                   
     remote  wildcat  exploration wells  more  than 25  miles                                                                   
     from existing facilities.                                                                                                
3:29:01 PM                                                                                                                    
     7) Effective Date                                                                                                        
     The State  has made far more  money at high  prices than                                                                   
     anyone ever  dreamed. The State  has, in a  way, already                                                                   
     received a rich windfall  at high oil prices. The change                                                                   
     in the  production profits  tax is controversial  in its                                                                   
     own right. I would not dare  "pour salt in the wound" by                                                                   
     making  the tax effective  on April  1, 2006,  but allow                                                                   
     the transition as originally  planned to a July 1, 2006,                                                                   
     date.  This  will also  give  all  of  us time  to  hire                                                                   
     additional  accountants   to  do  the  monthly,  complex                                                                   
     I  recommend  that  the   Finance  Committee  amend  the                                                                   
     effective date to July 1, 2006.                                                                                            
3:30:11 PM                                                                                                                    
     Concluding Remarks                                                                                                       
     The above comments are my  personal views offered with a                                                                   
     hope that there  can be an eventual win-win  solution to                                                                   
     this  complex  subject  of   the  State  realizing  more                                                                   
     revenues at  higher prices while attracting  exploration                                                                   
     and development  investors who  can also realize  upside                                                                   
     at  higher  prices.  I  do  believe  the  House  Finance                                                                   
     Committee  can get  things  "back on  track" and  better                                                                   
     Importantly,  many -  if not  most -  in industry  would                                                                   
     disagree  with some  - if  not all -  my personal  views                                                                   
     expressed  above. But I  do feel  compelled to  "tell it                                                                   
     like it  is" from my perspective  as an Alaskan  who has                                                                   
     worked the  Cook Inlet and  the North Slope oil  and gas                                                                   
     fields for over 12 years.                                                                                                  
3:32:09 PM                                                                                                                    
Representative Kelly spoke to  the complexity issue and asked                                                                   
tying progressivity, would address simplicity.                                                                                  
Mr. Thompson responded  that the system will  be more complex                                                                   
than our  current system, and  commended the House  Resources                                                                   
Committee for  working with the  industry and  state agencies                                                                   
to determine  allowable and unallowable deductible  expenses.                                                                   
He   felt  that   the  progressivity   formula  proposed   by                                                                   
consultants created a more complex  system than necessary. He                                                                   
concluded that  while the legislation  is still  more complex                                                                   
than desirable, it was "livable".                                                                                               
At Ease:       3:35:44 PM                                                                                                     
Reconvened:    3:38:12 PM                                                                                                     
JOHN A.  BARNES, P.E.,  ALASKA ASSET  TEAM MANAGER,  MARATHON                                                                   
OIL COMPANY,  testified regarding creating incentives  in the                                                                   
Cook Inlet. He noted that they  focused solely on the natural                                                                   
gas market. Mr. Barnes commented  that the discussions on PPT                                                                   
dealt with  reaching tax  parities with  a world market,  but                                                                   
pointed out  that world wide  opportunities did not  apply to                                                                   
activities in Cook Inlet.                                                                                                       
3:39:40 PM                                                                                                                    
Mr. Barnes  commented on  the Cook  Inlet Gas Summary  before                                                                   
PPT and  noted the declining  reserves and production  rates,                                                                   
as well as high  costs, and a difficult regulatory  arena. He                                                                   
gave  the State  a "D"  in its  permitting  process. He  also                                                                   
noted the need for additional  exploration and the historical                                                                   
price differential.                                                                                                             
3:41:41 PM                                                                                                                    
Mr. Barnes referred to a table  outlining the results of Cook                                                                   
Inlet Area wide Lease Sales. He  noted that there had been an                                                                   
increase  in coal  acres sold.  Next he referred  to a  graph                                                                   
illustrating the timeline of Cook  Inlet Exploration, showing                                                                   
that exploration had recently begun to increase again.                                                                          
3:42:56 PM                                                                                                                    
Mr.  Barnes  then examined  three  different  price  markers:                                                                   
Henry Hub, DOR  PV and DNR Royalty Values.  He concluded that                                                                   
Cook  Inlet  received   less  for  its  product   than  other                                                                   
locations.  He   also  noted  the  extreme   volatility,  and                                                                   
suggested  that it  was  not a  good indicator  to  determine                                                                   
3:44:30 PM                                                                                                                    
Mr.  Barnes discussed  the  future  of supply,  pointing  out                                                                   
Enstar  as working  well with  the  supply/demand market.  He                                                                   
compared  average  residential  gas  prices  and  noted  that                                                                   
prices had benefited from Cook Inlet resources.                                                                                 
3:46:03 PM                                                                                                                    
Mr. Barnes  ran conceptual  comparisons  on an average  well,                                                                   
based on the CSHB 488 (RES).                                                                                                    
3:46:42 PM                                                                                                                    
Mr.  Barnes  showed   a  slide  illustrating   a  before  tax                                                                   
comparison  for  various  states. He  commented  that  Alaska                                                                   
would realize a lower profit,  unless there was price parity.                                                                   
He  commented  that there  was  a  disadvantage in  the  Cook                                                                   
Inlet.  Profit investment  ratio of  excess of  4; Alaska  is                                                                   
1.7, which accounts for poor investment.                                                                                        
3:48:05 PM                                                                                                                    
Mr.  Barnes offered  a  comparative analysis  as  a means  of                                                                   
considering how  companies decided whether to  invest in Cook                                                                   
Inlet  as opposed  to  other areas.  He  noted that  although                                                                   
there was good  land access, there remained  the disadvantage                                                                   
of high costs, permitting troubles, and price.                                                                                  
3:49:33 PM                                                                                                                    
Mr. Barnes  proposed that  there was  nothing wrong  with ELF                                                                   
for Cook  Inlet natural gas. He  commented that a  higher tax                                                                   
rate would result in lower reserves.  He suggested that there                                                                   
would be  a decline  in exploration  and development  in that                                                                   
area. He also noted that potential  loss of jobs and volatile                                                                   
costs to utility customers.                                                                                                     
3:51:23 PM                                                                                                                    
Mr.  Barnes  analyzed the  PPT  for  $4  Cook Inlet  Gas.  He                                                                   
concluded  that as compared  to Henry  Hub, a consumer  would                                                                   
see a fluctuation in Cook Inlet.                                                                                                
3:52:45 PM                                                                                                                    
In summary,  Mr. Barnes suggested  that legislators  not link                                                                   
Cook Inlet  PPT to the volatile  Henry Hub price,  but rather                                                                   
to   the  Department   of   Revenue  Prevailing   Value.   He                                                                   
recommended  that incentives be  prioritized, including  some                                                                   
kind of  transitional investment  credits. He concluded  that                                                                   
they  did not  support  the CS  as it  stands,  but rather  a                                                                   
movement  back  toward the  bill  in  its original  form.  He                                                                   
conceded  that  the  currently  proposed  approach  was  very                                                                   
3:55:00 PM                                                                                                                    
Vice-Chair Meyer  summarized that Marathon would  like to see                                                                   
an exemption from the PPT for  Cook Inlet. Mr. Barnes agreed.                                                                   
He added  that there  are multiple  parameters that  could be                                                                   
Vice-Chair  Meyer concluded  that Cook  Inlet is working.  He                                                                   
stressed that Cook  Inlet is a small percent of  the state of                                                                   
Alaska's  oil  and  gas production.  Mr.  Barnes  agreed  and                                                                   
estimated  that it  is approximately  20,000  barrels a  day.                                                                   
Total  production  is approximately  equal  to  one month  of                                                                   
Prudhoe Bay.                                                                                                                    
3:57:47 PM                                                                                                                    
In response to a question by Representative  Holm, Mr. Barnes                                                                   
stressed   that  the   transaction   price   should  be   the                                                                   
transaction  amount.  Any tax  structure  with  progressivity                                                                   
should be driven by the transaction activity.                                                                                   
3:59:37 PM                                                                                                                    
Representative Holm  asked if there  is an ANS price  for gas                                                                   
and if not what  would be an average price  that makes sense.                                                                   
Mr. Barnes  noted that there  is not  a market price  for gas                                                                   
that makes sense. The value the  State uses to assess royalty                                                                   
settlements is the  best marker. There is not  a good market,                                                                   
with daily gas trades.                                                                                                          
4:01:19 PM                                                                                                                    
Representative  Holm questioned  if  a greater  price of  gas                                                                   
would  encourage investment.  Mr. Barnes  responded that  gas                                                                   
prices  are starting  to  rise.  There are  a  series of  gas                                                                   
contracts  in  Cook Inlet  tied  to various  market  indexes.                                                                   
There has  been a  transition to contracting  for gas  in the                                                                   
Cook  Inlet. He  provided  details  of recent  contracts.  He                                                                   
noted that the  consumer would benefit if the  activity level                                                                   
de-linked the capital and push down prices.                                                                                     
4:03:25 PM                                                                                                                    
Representative Joule  asked how much is exported.  Mr. Barnes                                                                   
noted  that  half   the  gas  is  exported;   40  percent  of                                                                   
Marathon's gas goes to the LNG plant.                                                                                           
4:04:15 PM                                                                                                                    
Representative  Kelly  referred   to  slide  14.  Mr.  Barnes                                                                   
referred to the price curve on  slide 7 and noted that prices                                                                   
are curving  up due  to indexes  in legacy contracts  raising                                                                   
prices and competition for capital  by new contracts. The gap                                                                   
is narrowing.  He did not think  it would narrow  100 percent                                                                   
due to  the volatility. He explained  that slide 14  looks at                                                                   
the price as linked to Henry Hub.  The calculation of PPT has                                                                   
two key  points with  flatting.  All things  are equal  at 20                                                                   
percent. As Henry  Hub goes up, the curve climbs  and the gas                                                                   
gets  transacted at  $4. Consumers  would see  an impact  for                                                                   
contracts that  pass the tax  through. He concluded  that the                                                                   
prices would  be unstable with  the linkage to Henry  Hub and                                                                   
it would  not make sense  to implement. Representative  Kelly                                                                   
observed that it is linked to progressivity.                                                                                    
4:09:03 PM                                                                                                                    
In  response  to  a question  by  Representative  Kelly,  Mr.                                                                   
Barnes  noted  that  as  Henry  Hub  balances  up  and  down,                                                                   
progressivity  is increased.  Henry  Hub is  calculated on  a                                                                   
monthly  basis.  Representative  Kelly  summarized  that  the                                                                   
volatility  only  occurs at  the  point of  marriage  between                                                                   
Henry Hub and Cook Inlet prices due to the link with                                                                            
Mr.  Barnes returned  to  slide  14. The  tax  rate would  be                                                                   
changed due  to progressivity  even if  the business  has not                                                                   
changed. He explained  that business would not  have changed,                                                                   
but the tax would have increased.                                                                                               

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