Legislature(2005 - 2006)HOUSE FINANCE 519

04/05/2006 01:30 PM FINANCE


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01:37:31 PM Start
01:37:40 PM HB488
03:55:35 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 488                                                                                                            
                                                                                                                                
     "An  Act  repealing  the  oil  production  tax  and  gas                                                                   
     production  tax and  providing for  a production  tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     relationship  of  the  production  tax to  other  taxes;                                                                   
     relating to  the dates tax  payments and  surcharges are                                                                   
     due   under   AS   43.55;  relating   to   interest   on                                                                   
     overpayments under  AS 43.55; relating to  the treatment                                                                   
     of  oil   and  gas  production   tax  in   a  producer's                                                                   
     settlement  with the royalty  owner; relating  to flared                                                                   
     gas,  and to  oil and  gas used  in the  operation of  a                                                                   
     lease  or  property, under  AS  43.55; relating  to  the                                                                   
     prevailing  value   of  oil  or  gas  under   AS  43.55;                                                                   
     providing for  tax credits against the tax  due under AS                                                                   
     43.55 for certain expenditures,  losses, and surcharges;                                                                   
     relating to statements or  other information required to                                                                   
     be  filed  with  or  furnished   to  the  Department  of                                                                   
     Revenue,  and relating  to  the penalty  for failure  to                                                                   
     file certain  reports, under  AS 43.55; relating  to the                                                                   
     powers  of  the  Department   of  Revenue,  and  to  the                                                                   
     disclosure  of   certain  information  required   to  be                                                                   
     furnished to the Department  of Revenue, under AS 43.55;                                                                   
     relating to criminal penalties  for violating conditions                                                                   
     governing access to and use  of confidential information                                                                   
     relating to the oil and gas  production tax; relating to                                                                   
     the  deposit of  money collected  by  the Department  of                                                                   
     Revenue under  AS 43.55; relating to the  calculation of                                                                   
     the gross  value at  the point of  production of  oil or                                                                   
     gas; relating  to the determination of the  net value of                                                                   
     taxable oil and gas for purposes  of a production tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     definitions  of 'gas,'  'oil,' and  certain other  terms                                                                   
     for purposes of AS 43.55;  making conforming amendments;                                                                   
     and providing for an effective date."                                                                                      
                                                                                                                                
1:40:41 PM                                                                                                                    
                                                                                                                                
BARRY PULLIAM, SENIOR ECONOMIST,  ECON ONE RESEARCH, provided                                                                   
background information  about Econ One, an  economic research                                                                   
and  consulting firm  that  has worked  in  Alaska since  the                                                                   
1980's.     Mr.   Pulliam  gave   an   overview  of   today's                                                                   
presentation  and  referred  to a  handout  "Presentation  on                                                                   
Alaska Gas Pipeline Project" (copy  on file.)  He referred to                                                                   
slide 2, the  list of consulting services his  firm provides.                                                                   
He mentioned work for federal  government agencies on energy-                                                                   
related  matters,  as  well  as  for  foreign  countries  and                                                                   
companies in the petroleum and natural gas industry.                                                                            
                                                                                                                                
Mr. Pulliam shared his working  experience as listed on slide                                                                   
3  of  the  handout.    He  informed  the  Committee  of  Dr.                                                                   
Finizza's background and qualifications listed on slide 4.                                                                      
                                                                                                                                
1:46:25 PM                                                                                                                    
                                                                                                                                
DR.  TONY FINIZZA,  SPECIAL  CONSULTANT,  ECON ONE  RESEARCH,                                                                   
focused on oil  price issues.  He said he wanted  to make the                                                                   
Committee  aware that they  should not  be too certain  about                                                                   
the future.  He referred to slide  6, which lists conclusions                                                                   
and observations  regarding oil  price forecasts.   Producers                                                                   
are using $40 as  a planning base case, with $30  as a stress                                                                   
price case,  to make  their predictions.   The majors  may be                                                                   
using a  slightly lower  price range  than independents,  but                                                                   
are moving  their views  up.   This range  may be lower  than                                                                   
their best  estimate,  but is consistent  with their  prudent                                                                   
planning  approach.    This range  is  also  consistent  with                                                                   
recently  observed  oil  asset  purchases.    This  range  is                                                                   
consistent  with publicly  available  forecasts although  the                                                                   
recent Department  of Energy's forecast is above  this range.                                                                   
What  really matters  is what  forecast the  risk takers  are                                                                   
using.  Forecasters have been  humbled and will be humbled by                                                                   
their forecasts.                                                                                                                
                                                                                                                                
1:49:12 PM                                                                                                                    
                                                                                                                                
Dr.  Finizza discussed  factors  suggesting continued  higher                                                                   
prices  and those  opposing  higher oil  prices,  as seen  on                                                                   
slide 7.  Continued higher prices  are affected by strong oil                                                                   
demand and  a growing  gap between  global demand and  global                                                                   
non-OPEC supply.                                                                                                                
                                                                                                                                
Factors  opposing   higher  prices  include  the   fact  that                                                                   
conventional oil  faces a threat from alternative  sources of                                                                   
liquids when  prices are high.   There will be  a penetration                                                                   
of alternative transportations  vehicles.  The economy cannot                                                                   
sustain  very  large  increases  in prices.    A  $10  barrel                                                                   
difference in oil  prices is a $73 billion  increase in total                                                                   
consumer costs per year, effectively a tax on the consumer.                                                                     
                                                                                                                                
Dr. Finizza  depicted Exxon Mobil's world  liquids production                                                                   
outlook  on slide  8.  Oil  demand from  Asian economies  and                                                                   
what appears to  be a retarding of oil supply,  suggests that                                                                   
liquids from OPEC would grow and would keep prices high.                                                                        
                                                                                                                                
Slide  9 shows  various  oil price  forecasts.    One is  the                                                                   
Energy  Information  Agency's  (EIA)  Annual  Energy  Outlook                                                                   
(AEO), January 2006, that forecasts  oil prices through 2030,                                                                   
converted to WTI  by Econ One.  Others are  the International                                                                   
Energy Agency  in Paris,  a Reuters Poll  of 18 oil  analysts                                                                   
for WTI  in 2010 from March  2006, and NYMEX  Futures Market,                                                                   
which all generally say prices  will be in the $40 per barrel                                                                   
range for a while.                                                                                                              
                                                                                                                                
Slide 10 depicts EIA's annual  energy outlook for 2006, based                                                                   
on probability.   Looking at 2030,  real prices should  be in                                                                   
the $30-$70 range 60 percent of the time.                                                                                       
                                                                                                                                
1:53:54 PM                                                                                                                    
                                                                                                                                
Slide  11 deals with  the Reuters  poll forecast  for WTI  in                                                                   
2010  from 18  oil analysts.   The  median is  about $40  per                                                                   
barrel.    Slide  12, IEA's  oil  price  forecasts,  shows  a                                                                   
similar  pattern  all lower  than  prices  today.   Slide  13                                                                   
depicts WTI prices  with selected NYMEX strips  - the history                                                                   
and  the market  forecast in  nominal dollars.   It  predicts                                                                   
that prices will be lower than today's prices.                                                                                  
                                                                                                                                
Slide 14  shows producers'  views of future  oil prices.   He                                                                   
noted that  producers have been  burned by forecasts  of high                                                                   
oil  prices  in  the  past.     Dr.  Finizza  predicted  that                                                                   
producers will test their projects  against a price path that                                                                   
is below  their most likely view,  which might be $35  to $40                                                                   
per barrel.  He thought that producers  will also stress test                                                                   
their projects  at $30  per barrel.   He emphasized  that the                                                                   
consequences  of error  are not  symmetrical.   If  producers                                                                   
overstep the  future path  of prices,  they will be  severely                                                                   
punished by Wall Street.                                                                                                        
                                                                                                                                
Slide 15 shows  implied oil company price views  of Marubeni,                                                                   
Norsk Hydro,  and Statoil.  Slide  16 shows some  examples of                                                                   
humbling oil  price forecasting, one  by the EIA  and another                                                                   
by  polls  of   "experts"  from  the  Society   of  Petroleum                                                                   
Evaluation  Engineers (SPEE).   Slide  17 shows EIA's  annual                                                                   
price  outlooks, all  of which  were higher  than the  actual                                                                   
forecast.  Slide 18 shows SPEE's  annual Delphi poll forecast                                                                   
compared with the actual value through May 15, 2004.                                                                            
                                                                                                                                
Slide  19 comes  off  of the  British  Petroleum website  and                                                                   
shows historical  crude oil  prices, in  nominal and  in real                                                                   
dollars, nearing  or above  today's prices.   He pointed  out                                                                   
that until  now, $40 dollar  forecasts were only  breached in                                                                   
the 1970's and early 80's.                                                                                                      
                                                                                                                                
Mr.  Finizza summarized  that  "the  oil price  analysis  for                                                                   
looking at  the impact on  producers and explorers,  I think,                                                                   
should  center  on  the  price   scenarios  they're  thinking                                                                   
themselves,"  and  is a  reasonable  forecast  for Alaska  to                                                                   
consider.                                                                                                                       
                                                                                                                                
2:00:23 PM                                                                                                                    
                                                                                                                                
Dr. Finizza  spoke  about the  economics of  new fields.   He                                                                   
began with  his conclusions, as  shown in Slide 21.   Without                                                                   
ANWR  opening,  expectation  of   large  oil  discoveries  is                                                                   
unlikely,  due to the  field size  distribution of  remaining                                                                   
economic reserves.   At low prices, 25/20 helps  the explorer                                                                   
more than  20/20 because  of the way  it shelters  the costs.                                                                   
Incentives are  required at low prices,  although alternative                                                                   
approaches  could  work.    For  example,  a  production  tax                                                                   
holiday might  work.  The sunset  provision in the  Senate CS                                                                   
is not  going to provide  incentives for exploration  because                                                                   
the  timing is  wrong.   At low  prices, both  tax plans  are                                                                   
preferred   over  the   status   quo  in   order  to   incent                                                                   
exploration.  Exploration  is still a risky  business.  Under                                                                   
either 20/20 or 25/20, the remaining  reserves to be explored                                                                   
are economic reserves, except at very low prices.                                                                               
                                                                                                                                
2:03:09 PM                                                                                                                    
                                                                                                                                
Dr. Finizza depicted  a stylized lifecycle of a  new field in                                                                   
slide 22.   There is an  exploration and appraisal  period of                                                                   
four years, a development capital  period of three years, and                                                                   
a production phase of 5-20 years.   He pointed out that there                                                                   
is a 7-year  lag from the time of exploration  to production.                                                                   
He opined that  the sunset provision expires at  the point of                                                                   
production;  therefore,  the  model  is  without  the  sunset                                                                   
provision.                                                                                                                      
                                                                                                                                
Slide  23 is a  table comparing  the reserves  that might  be                                                                   
available for exploration  in the Central North  Slope vs. in                                                                   
ANWR.   They  are  undiscovered technically  recoverable  oil                                                                   
reserves.  The  best estimate of oil reserves  in the Central                                                                   
North Slope  is 4 billion; in  ANWR it is 10.4 billion.   The                                                                   
USGS is saying  that 22 percent of the oil in  ANWR is likely                                                                   
to  be found  in  fields  over 1  billion  barrels.   In  the                                                                   
Central  North Slope  that amount  is zero.   In the  Central                                                                   
North Slope the amount to be found  in fields smaller than 64                                                                   
million barrels is 51 percent,  whereas, in ANWR it is only 1                                                                   
percent.  This makes it tough for exploration projects.                                                                         
                                                                                                                                
2:05:52 PM                                                                                                                    
                                                                                                                                
Senator  Wilken  asked why  the  estimates  in NPRA  are  not                                                                   
considered.  Dr. Finizza said  they should be included.  They                                                                   
would be analogous to the Central North Slope numbers.                                                                          
                                                                                                                                
Slide  24 looks  at  the  size distribution  of  undiscovered                                                                   
fields in  the Central North Slope.   The expected  number of                                                                   
fields with more  than 500 million barrels is  one; with more                                                                   
than 50  million it is  21.  Slide 25  shows that ANWR  has a                                                                   
lot larger fields.                                                                                                              
                                                                                                                                
Slide 25  shows economic  oil reserves  in the Central  North                                                                   
Slope  at  alternative prices.    At  WTI $40,  1.89  billion                                                                   
barrels would be economically recoverable.                                                                                      
                                                                                                                                
Slide  27 shows  the expected  discoveries under  alternative                                                                   
prices in  the Central North  Slope.   At the $40  level, the                                                                   
expected  number of  discoveries  would be  about 20  fields,                                                                   
over time,  of which  60 percent  would be  small.   Slide 28                                                                   
shows the likely distribution of new field discoveries.                                                                         
                                                                                                                                
Slide  29  depicts   how  an  explorer  might   look  at  the                                                                   
exploration proposition.   One way would be  to calculate the                                                                   
Net  Present   Value  of  all   outcomes,  weighted   by  the                                                                   
expectation  of the outcome.   The most  likely outcome  is a                                                                   
dry hole.  He highlighted the example on the slide.                                                                             
                                                                                                                                
2:10:44 PM                                                                                                                    
                                                                                                                                
Slide 30 shows  the schematic of cash flow  for this example,                                                                   
which is negative 100 percent  of the time for cash flow from                                                                   
exploration,  and negative  16.7 of  the time  for cash  flow                                                                   
from  development and  production.   Slide  31  shows how  to                                                                   
avoid  the "gambler's  ruin".   If the chance  of drilling  a                                                                   
successful well is 1-in-6, an  explorer will want to mitigate                                                                   
the risk of failure by drilling more wells.                                                                                     
                                                                                                                                
2:12:33 PM                                                                                                                    
                                                                                                                                
Slide 32 is an illustration of  a failed exploration program.                                                                   
He  gave a  hypothetical  situation  under the  current  tax,                                                                   
under 20/20, and under 25/20.   Slide 32 shows oil production                                                                   
profiles  from the  four types  of  fields.   It depicts  the                                                                   
number in millions  barrels per year and the  number of years                                                                   
from  the  start  of  development.    Slide  34  depicts  the                                                                   
economics of a  6-well exploration program with  a 50 million                                                                   
barrel-per-day   field,  under   high  cost   and  with   low                                                                   
production,  without  a  $60 million  allowance.    Slide  35                                                                   
depicts the same information with a $60 million allowance.                                                                      
                                                                                                                                
2:16:46 PM                                                                                                                    
                                                                                                                                
Slide 36 shows the economics of  a 6-well exploration program                                                                   
without a $60 million allowance.                                                                                                
                                                                                                                                
Slide  39 is a  comparison of  tax proposals:  the House  CS,                                                                   
status quo, 20/20  with a $73 million tax allowance,  and the                                                                   
Senate CS, with  the producer net cash flow  discounted at 10                                                                   
percent.   The three plans do  better than the status  quo at                                                                   
low  prices.    Slide  40  shows  the  total  state  revenues                                                                   
comparing the  same tax proposals  with a crossover  point at                                                                   
about $50.   Slide 41 shows  the impact of  progressivity for                                                                   
the same 4 proposals,  and producer net cash flow.   Slide 42                                                                   
depicts the impact of progressivity  on total state revenues.                                                                   
                                                                                                                                
Slides 43 and 44  depict the impact of 25/20  versus 20/20 on                                                                   
producer net cash flow and on total state revenues.                                                                             
                                                                                                                                
2:20:32 PM                                                                                                                    
                                                                                                                                
Slide 45 summarizes exploration  forgiveness - an alternative                                                                   
to tax free  allowance.  Dr. Finizza suggested,  for each new                                                                   
field, to give a "tax holiday"  from the PPT for the first 10                                                                   
million  barrels of production,  which  is equivalent  to the                                                                   
tax  re-allowance in  dollar terms.   This  would provide  an                                                                   
incentive  for  new  exploration  because  it  helps  improve                                                                   
producers'  cash  flow in  the  early stages  of  production.                                                                   
Producers could not  seek royalty relief if they  opt for the                                                                   
tax holiday.  It also provides  an incentive to put the field                                                                   
on early.  The  tax holiday would not be applied  to existing                                                                   
fields.   The fiscal impact  on the state  would not  be felt                                                                   
until the field is producing.                                                                                                   
                                                                                                                                
The graph in  slide 46 shows tax-free annual  production in a                                                                   
50 million barrel field.  Slide  47 is the typical cumulative                                                                   
production profile  of a 100 MMB  field.  Slide 48  shows the                                                                   
impact on producer  economics, and slide 49  shows the impact                                                                   
on state  revenues.   Slide 50  depicts the  impact on  small                                                                   
field economics in a 50 MB field.                                                                                               
                                                                                                                                
2:23:42 PM                                                                                                                    
                                                                                                                                
Slide  51 explains  how producers  may look  at results  on a                                                                   
probabilistic basis.  Dr. Finizza  used a mean of $40 and P20                                                                   
of $25,  and P80 of $55  ($40 plus or  minus $15).   Slide 52                                                                   
shows the  distribution of results  - producer  internal rate                                                                   
of return(  IRR).   The blue  line depicts  the IRR  from PPT                                                                   
using the House  CS versus the status quo.  The  table on the                                                                   
right  shows if the  median value  for IRR  is 17.2  percent,                                                                   
under the status  quo it would be roughly 14  percent.  Using                                                                   
P20, the  IRR under PPT is  9.5 percent and under  the status                                                                   
quo, 5 percent.  The graph shows  the chance of IRR under PPT                                                                   
and  under  the  status  quo.     Slide  52  deals  with  the                                                                   
distribution of  results and the  producer IRR, and  slide 53                                                                   
shows its effect on total state revenues.                                                                                       
                                                                                                                                
2:27:47 PM                                                                                                                    
                                                                                                                                
Dr.   Finizza    summarized   his   observations    regarding                                                                   
exploration impacts  in slide 54.  Without  ANWR opening, the                                                                   
expectation of large oil discoveries  is unlikely, due to the                                                                   
field size distribution  of remaining economic  reserves.  At                                                                   
low  prices,  25/20  helps  the  explorer  more  than  20/20.                                                                   
Incentives are  required at low prices,  although alternative                                                                   
prices would  work as well.   At low prices, 20/20  and 25/20                                                                   
are  preferred  over  the  status quo,  in  order  to  incent                                                                   
exploration.     Exploration  is  still  a   risky  business.                                                                   
Probabilistic  results  using  the  "Industry  View"  of  oil                                                                   
prices yields a  smaller chance of losing IRR  under PPT than                                                                   
under the status quo.  There is  a higher change of a revenue                                                                   
loss for the state under PPT.   Under either a 20/20 or 25/20                                                                   
program, remaining  reserves are  economic except for  at low                                                                   
prices (<$30).                                                                                                                  
                                                                                                                                
2:30:03 PM                                                                                                                    
                                                                                                                                
Senator Con Bunde  asked for an opinion about  the likelihood                                                                   
of $40 per barrel prices in the  future.  Dr. Finizza said he                                                                   
believes the $40 amount is correct.   The EIA has a $50 price                                                                   
as their best guess.  He maintained  that $40 would match the                                                                   
industry's predictions.   Senator Bunde asked  Senator Wilken                                                                   
what this  year's budget  is based on.   Senator  Wilken said                                                                   
$49.                                                                                                                            
                                                                                                                                
2:31:37 PM                                                                                                                    
                                                                                                                                
Mr.  Pulliam  turned  the  discussion  to  PPT  and  existing                                                                   
fields.   He referred  to slide  56, the effective  severance                                                                   
tax  rates over  time for  historical  and projected  fields,                                                                   
under the  status quo.   He defined  "effective tax  rate" as                                                                   
the nominal  rate times  ELF.   The ELF  will drive  down the                                                                   
effective tax rate.   Over the next 24 years,  the average of                                                                   
all fields  will be  just over  5 percent,  rather than  just                                                                   
over 12  percent.   Slide 57  shows the  same information  by                                                                   
field -  Prudhoe Bay,  Kuparuk, and Alpine.   Slide  58 shows                                                                   
the effective tax rates and wellhead  prices over time on all                                                                   
North Slope fields.                                                                                                             
                                                                                                                                
2:35:29 PM                                                                                                                    
                                                                                                                                
Slides  59-61 show effective  tax rates  and wellhead  prices                                                                   
over time for Prudhoe Bay, Kuparuk, and Alpine fields.                                                                          
                                                                                                                                
2:36:08 PM                                                                                                                    
                                                                                                                                
Mr.  Pulliam discussed  projected  volumes.   Slide 62  shows                                                                   
projected  North  Slope crude  oil  production  based on  the                                                                   
Department  of  Revenue's  (DOR)  2005 fall  forecast.    The                                                                   
spring  update reduced  the aggregate  by 30,000 barrels  per                                                                   
day lower  than what is  shown on this  graph.  It  is broken                                                                   
down into three periods because  the further out in time, the                                                                   
less is known.   The periods are FY 2007-2011,  FY 2007-2016,                                                                   
and  FY 2007-2030.    Without  ANWR  the volumes  from  known                                                                   
fields  are  likely  to  be  about  80  percent  of  what  is                                                                   
available on the  North Slope.  Prudhoe Bay is  the big field                                                                   
or about 45 percent of the projected  volumes.  Kuparuk added                                                                   
in equals  about 65  percent.  With  the addition  of Alpine,                                                                   
the  total  is  about  75  percent  of  the  total  projected                                                                   
volumes.                                                                                                                        
                                                                                                                                
Mr. Pulliam  discussed  decline rates.   The average  decline                                                                   
rate is  about 3.5 percent per  year over the next  24 years.                                                                   
These volumes do not include Point Thompson or Oooguruk.                                                                        
                                                                                                                                
2:40:40 PM                                                                                                                    
                                                                                                                                
Slide 63  shows the change in  projected taxes under  a 20/20                                                                   
tax and is a  DOR forecast production (FY 2007-2030).   There                                                                   
are  a  number   of  different  production  scenarios.     He                                                                   
suggested that  enhanced volumes  are not likely  unless ANWR                                                                   
opens.  The price shown in the  graph is an EIA base forecast                                                                   
where ANS  equals about  $53 real average.   The  slide shows                                                                   
the  potential impact  of  the severance  tax  in three  time                                                                   
periods.                                                                                                                        
                                                                                                                                
Mr. Pulliam distinguished  between real - 2006  dollars - and                                                                   
nominal  dollars, which,  after inflation,  would be  higher.                                                                   
The charts  all deal in real dollars.   The blue area  is the                                                                   
first 5  years, and the yellow  area is the next  five years.                                                                   
He highlighted the  statistics in the box in  the lower right                                                                   
corner of  the slide.   He concluded  that if the  status quo                                                                   
remains  in  place,  the  effective tax  rate  would  be  7.1                                                                   
percent.   He  noted  that taxes  are  collected on  wellhead                                                                   
value.  If tax  is  taken from  the PPT  and  converted to  a                                                                   
percentage of wellhead value,  it comes to a 12.2 percent PPT                                                                   
effective  rate or  a 5-percentage  point  increase from  the                                                                   
status quo.  He observed that  12 percent is the average rate                                                                   
for the  North Slope.   He  cautioned that  forecasting  is a                                                                   
necessary  exercise, but  the further  out, the less  certain                                                                   
the results.                                                                                                                    
                                                                                                                                
2:48:31 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam referred to the table  on slide 64, the change in                                                                   
the projected  20/20 tax under  different price levels.   The                                                                   
numbers are the  same as the prior chart for  the first five-                                                                   
year period.  The next three columns  look at different price                                                                   
levels.  The tax collected is  lower as prices are lower, but                                                                   
the tax rate  drops as well.   He reviewed the fixed  $40 ANS                                                                   
price column.   He noted that impacts of 5, 10,  and 25 years                                                                   
range  between a $330  million  increase in  taxes to a  $400                                                                   
million increase  per year.  With  PPT the tax rate  would be                                                                   
approximately 10.6 percent.  The  final three columns look at                                                                   
the breakeven analysis.                                                                                                         
                                                                                                                                
2:51:33 PM                                                                                                                    
                                                                                                                                
Representative Hawker referred  to the fixed column and asked                                                                   
if it refers to  $40 nominal.  Mr. Pulliam  clarified that it                                                                   
is $40 "real".   In response to a question  by Representative                                                                   
Hawker,  Mr.  Pulliam  considered  all the  scenarios  to  be                                                                   
relevant.                                                                                                                       
                                                                                                                                
Mr. Pulliam noted  that the final three columns  refer to the                                                                   
average price that the old and  new systems would produce the                                                                   
same revenues  and the same effective  tax rates.   The price                                                                   
would fall  over time because  the status quo tax  rate falls                                                                   
over time.                                                                                                                      
                                                                                                                                
2:54:40 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  reviewed the  table on slide  65, the  change in                                                                   
projected taxes under a 20/20  tax with costs increased by 20                                                                   
percent.    He  observed  that PPT  allows  a  deduction  for                                                                   
operating costs and  for capital expenditures.   It will also                                                                   
give  a  credit  for capital  expenditures.    If  costs  are                                                                   
higher, the tax will be lower.   He noted that tax rates fall                                                                   
and the  breakeven prices rise  by approximately $4  a barrel                                                                   
if costs are higher.                                                                                                            
                                                                                                                                
Mr. Pulliam  noted that the  graph on  slide 66 looks  at the                                                                   
25/20 proposal.                                                                                                                 
                                                                                                                                
Mr. Pulliam referred  to slide 67 and noted  that it reflects                                                                   
the  effective tax  rate at  different  prices and  breakeven                                                                   
points.   The breakeven price is  $4 a barrel lower  with the                                                                   
25/20 proposal.                                                                                                                 
                                                                                                                                
2:58:19 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam briefly noted slides 68, 69, and 70.                                                                                
                                                                                                                                
Mr. Pulliam  reported that  slide 71  reviews changes  in the                                                                   
projected  taxes under  the  House Resources  CS.   Slide  72                                                                   
shows  the  changes   under  the  House  Resources   CS  with                                                                   
different  price  levels.   The  breakeven  prices  are  very                                                                   
similar to  the 20/20  plan because at  lower prices  the two                                                                   
don't  differ much.    Slide 73  shows  the same  information                                                                   
affected by a 20 percent cost increase.                                                                                         
                                                                                                                                
3:00:55 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  reviewed the chart  on slide 74,  the difference                                                                   
in  projected taxes  between  the House  Resources  CS and  a                                                                   
20/20 tax, using  the ANS real price of $52.70.   He observed                                                                   
that  the  levels  are  going  to  be  higher  than  $50  and                                                                   
therefore impacted  by progressivity.  Projections  over time                                                                   
show higher nominal prices.                                                                                                     
                                                                                                                                
3:02:21 PM                                                                                                                    
                                                                                                                                
Representative  Hawker referred to  earlier charts  showing a                                                                   
rise  in taxes  with  the  House Resource  Committee  version                                                                   
containing progressivity.  He  observed that the HRES version                                                                   
contains  a  windfall  tax  based  on  gross  receipts.    He                                                                   
suggested  that there  could  be an  alternate  progressivity                                                                   
mechanism  based on  margin.   He questioned  how they  would                                                                   
differ.                                                                                                                         
                                                                                                                                
Mr.  Pulliam  observed  that   with  progressivity  based  on                                                                   
margin, the differences  would not be as great.   There would                                                                   
still be significant differences because of high prices.                                                                        
                                                                                                                                
3:04:16 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  examined the chart on  slide 75.  He  noted that                                                                   
the difference between  the plans opens up after  30 years as                                                                   
progressivity "kicks in".                                                                                                       
                                                                                                                                
In  response to  a  question by  Senator  Bunde, Mr.  Pulliam                                                                   
explained that  25/20 causes the  decline of the rise  due to                                                                   
the slope of  progressivity.  The Senate version  kicks in at                                                                   
a  lower price  level,  but has  a lower  slope.   The  House                                                                   
version kicks in later but has a steeper slope.                                                                                 
                                                                                                                                
3:07:02 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  reviewed slide 76,  which depicts the  change in                                                                   
projected taxes under the Senate Resources CS.                                                                                  
                                                                                                                                
Mr. Pulliam observed  that slide 77 has the  same sensitivity                                                                   
at different price  levels.  Breakeven prices  are lower here                                                                   
than under the 20/20 plan by about $4 per barrel.                                                                               
                                                                                                                                
3:08:10 PM                                                                                                                    
                                                                                                                                
Senator  Bunde referred  to slide  77 and noted  that in  the                                                                   
first  5-year   period,  under   the  $33.40  scenario,   the                                                                   
effective  tax rate  is still  at  17 percent.   Mr.  Pulliam                                                                   
observed that high prices ($50  a barrel) are being projected                                                                   
for the  next five  years.  The  $33.40 reflects  the average                                                                   
forecast over the  next 24 years.  He referred  back to slide                                                                   
10, which  shows the EIA forecast.   The EIA  projects prices                                                                   
over $40 a barrel.                                                                                                              
                                                                                                                                
3:10:35 PM                                                                                                                    
                                                                                                                                
Representative  Kelly concluded that  the $40 would  "provide                                                                   
better behavior"  over time.   Mr. Pulliam observed  that the                                                                   
$40 is based  on small incremental increases,  but the market                                                                   
doesn't  generally   move  in  that  manner.     The  EIA  is                                                                   
attempting  to  reflect  what   the  market  would  do.    He                                                                   
suggested that  if prices return  to $40, that they  would do                                                                   
so in a steep decline.                                                                                                          
                                                                                                                                
3:12:42 PM                                                                                                                    
                                                                                                                                
Mr.  Pulliam turned  to slide  78, which  is consistent  with                                                                   
previous slides.                                                                                                                
                                                                                                                                
Mr. Pulliam  reported that slide  79 looks at  the difference                                                                   
in  projected taxes  between the  Senate Resources  CS and  a                                                                   
20/20 tax.   The EIA  Base Forecast  would result  in average                                                                   
revenues of about $700 million.                                                                                                 
                                                                                                                                
Slide 80  looks at the difference  between the Senate  CS and                                                                   
20/20 at different price levels.                                                                                                
                                                                                                                                
3:13:50 PM                                                                                                                    
                                                                                                                                
Representative  Kelly asked about  the 20 percent  price cost                                                                   
increase.    Mr. Pulliam  replied  that  the increase  is  in                                                                   
production  costs.    Representative Kelly  inquired  if  the                                                                   
costs have been projected into  the future.  Mr. Pulliam said                                                                   
yes.                                                                                                                            
                                                                                                                                
3:15:25 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  showed slide 81,  effective severance  tax rates                                                                   
over time.   The  next several  charts build  on each  other.                                                                   
Tax  rate  is a  function  of  price.  Slide 82  depicts  the                                                                   
effective  average tax  rates at  various price  levels.   It                                                                   
shows the average  historical rate of 12 percent,  which does                                                                   
not vary  with price.   Slide  83 shows  the addition  of the                                                                   
projected  status  quo for  the  next  ten years  at  various                                                                   
prices.  Slide  84 adds projections for Prudhoe  Bay of about                                                                   
11.6 percent.   Slide 85  adds on the  20/20 plan.   He noted                                                                   
that    operating  and  capital  costs  are  deducted.    The                                                                   
percentage rises  as prices rise.   Costs are a  fixed number                                                                   
and are deductible, which results in the curve.                                                                                 
                                                                                                                                
Mr. Pulliam addressed  the breakeven price in the  graph.  As                                                                   
prices rise, the impact of the  deduction for operating costs                                                                   
and the credit is smaller.  These  are 2006 prices.  The kink                                                                   
in the graph is  at $40, and is the impact  of the transition                                                                   
credit in the governor's plan  to recoup the last five years'                                                                   
capital  costs.   As  the  $40 line  is  crossed  there is  a                                                                   
reduction in the effective tax rate.                                                                                            
                                                                                                                                
Slide 86  is a  comparison with  25/20, and  it has  the same                                                                   
kink as in the previous slide.   The historical average is at                                                                   
$33.  Slide  87 adds the  House Resources CS, which  is about                                                                   
equal to  20/20 until $40.   It has  no kink because  it does                                                                   
not have  the transition payment,  but it has  progressivity.                                                                   
Slide 88  depicts the  Senate Resources CS  line.   It starts                                                                   
out with a lower  tax rate because it has a  transition plan,                                                                   
or 2-for-1 credit.  It rises above all of the other plans.                                                                      
                                                                                                                                
3:23:32 PM                                                                                                                    
                                                                                                                                
Slide 89 compares the House CS  and the Senate CS plans.  The                                                                   
lines  move  toward   each  other  after  time   because  the                                                                   
progressivity feature  impacts both plans.   He addressed the                                                                   
validity of the volume projection  by the DOR.  He maintained                                                                   
that there  would have to be  a lot more investment  for that                                                                   
to  happen.   Slide  90  looks  at the  impact  of  increased                                                                   
investment  on  the various  plans.    PPT would  reduce  the                                                                   
effective  tax  rate  considerably   by  about  4  percentage                                                                   
points.   Under the 20/20 plan,  if $2.5 billion  is invested                                                                   
at a $40 price rate, the effective  tax rate would be reduced                                                                   
quite a bit to that of the projected status quo.                                                                                
                                                                                                                                
3:27:49 PM                                                                                                                    
                                                                                                                                
Slide 91 shows projected government  take under the different                                                                   
plans, at various price levels.                                                                                                 
                                                                                                                                
Representative Kelly  asked about the increase  in investment                                                                   
and the decline  of oil.  Mr.  Pulliam said he does  not know                                                                   
if  revenues would  be higher.    Representative Kelly  asked                                                                   
about  the 6-well  scenario and  the ability  to predict  the                                                                   
state's  take.   Mr.  Pulliam noted  these  slides deal  with                                                                   
investment in  existing fields.   Exploration is  a different                                                                   
experience.   Representative Kelly  requested information  on                                                                   
the sensitivity of exploration.                                                                                                 
                                                                                                                                
3:31:13 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  returned to slide  91 and government take.   The                                                                   
statistics  look   at  net   revenues  divided   between  the                                                                   
government and the industry after costs are removed.                                                                            
                                                                                                                                
3:32:57 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam's final topic dealt  with progressivity issues as                                                                   
listed on slide 92:  choice of  threshold price, WTI vs. ANS,                                                                   
real vs.  nominal, deductibility,  and cap.   He pointed  out                                                                   
that both  plans use  a threshold price;  the House  uses WTI                                                                   
$50 per  barrel and the  Senate uses ANS  $40.  He  said that                                                                   
WTI is  a good  benchmark and  he is  not concerned  with the                                                                   
difference between  WTI and ANS.  DNR and DOR  feel that both                                                                   
prices  are representative.    A threshold  price that  moves                                                                   
back to the North Slope could be used.                                                                                          
                                                                                                                                
3:36:28 PM                                                                                                                    
                                                                                                                                
Slide 93  shows Platt's WTI and  ANS prices since 1996.   The                                                                   
numbers move together  for the most part.  In  only one year,                                                                   
the difference was  greater than more than $1,  and less than                                                                   
$3.  He said he has no concern about WTI.                                                                                       
                                                                                                                                
Mr.  Pulliam  spoke  about  the issue  of  real  vs.  nominal                                                                   
dollars.   Both  CS's  use nominal  dollars.    He deemed  it                                                                   
appropriate  to include  an  indexing system.    DOR will  be                                                                   
collecting  cost information  and  they  could calculate  the                                                                   
change in the cost of transportation from year to year.                                                                         
                                                                                                                                
3:40:06 PM                                                                                                                    
                                                                                                                                
Mr. Pulliam  addressed  deductibility.   Both CS's allow  for                                                                   
the  deductibility of  the progressive  portion  of the  tax,                                                                   
which is the  tax based on wellhead  value.  He said  that is                                                                   
appropriate.                                                                                                                    
                                                                                                                                
Mr.  Pulliam  spoke  about  the  cap.   Slide  94  shows  the                                                                   
progressive portion  of the tax  rate in the House  Resources                                                                   
CS and  potential alternatives at  various price levels.   He                                                                   
said the  jump at  18 percent  seems inappropriate.   If  the                                                                   
goal  is to cap  out the  rate at  37 percent,  it should  be                                                                   
allowed  to rise until  it hits  that amount.   He  suggested                                                                   
that the Senate plan have a cap.                                                                                                
                                                                                                                                
3:43:13 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula  asked  why  limit  the  ability  to                                                                   
progress.   Mr.  Pulliam  suggested it  could  progress at  a                                                                   
diminishing increment.   Representative  Kerttula asked  if a                                                                   
model could  be made to depict  that.  Mr. Pulliam  said that                                                                   
could be done.                                                                                                                  
                                                                                                                                
3:44:34 PM                                                                                                                    
                                                                                                                                
Senator Wilken referred to slide  91 and said he is struck by                                                                   
the  minimal changes  when  moving  between categories.    He                                                                   
expected it to  be more.  He looked at Alaska's  take and the                                                                   
original tax regime.  He inquired  if the table were shown to                                                                   
producers,  if there would  be agreement.   Mr. Pulliam  said                                                                   
there should  be no argument  - maybe different  estimates of                                                                   
cost.   He addressed the  first statement  as a piece  of the                                                                   
puzzle.     He  pointed  out   that  the  severance   tax  is                                                                   
deductible.                                                                                                                     
                                                                                                                                
Senator Wilken  related a  suggestion that  could cause  a 20                                                                   
percent change in investment.   He wondered if the changes on                                                                   
91 were enough to drive significant investment.                                                                                 
                                                                                                                                
3:48:14 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer noted  there  is  plenty of  heavy  oil.   He                                                                   
inquired if the 20/20 would be  enough investment to go after                                                                   
the heavy  oil.  Mr. Pulliam said  it depends on price.   Co-                                                                   
Chair  Meyer  asked about  the  $45  price  and the  need  to                                                                   
attract investment.   Dr. Finizza suggested  not categorizing                                                                   
it by heavy oil.  At $45 it should not be a problem.                                                                            
                                                                                                                                
3:51:36 PM                                                                                                                    
                                                                                                                                
Senator Wilken asked about progressivity  and the incremental                                                                   
rate as  a fraction of  the market rate.   He wondered  about                                                                   
the cost to  lift a barrel.   Mr. Pulliam stated if  it jumps                                                                   
from  $40 to  $60, it  will cost  about  the same  to lift  a                                                                   
barrel.   Senator  Wilken asked  for a  rule of  thumb.   Mr.                                                                   
Pulliam said  he would think about  that.  In the  context of                                                                   
progressivity,  he  suggested  that  the  committee  consider                                                                   
building  in  a  feature  that would  index  it  with  rising                                                                   
prices.                                                                                                                         
                                                                                                                                
3:53:51 PM                                                                                                                    
                                                                                                                                
Dr. Finizza  added that  there may  be a  rule that  he could                                                                   
research.                                                                                                                       
                                                                                                                                
Representative Holm wondered about  phasing out incentives at                                                                   
lower  prices.   Dr.  Finizza  related that  one  idea is  to                                                                   
reduce  tax on  the first  "so many"  barrels of  production.                                                                   
Mr. Pulliam added that a tax holiday is another mechanism.                                                                      
                                                                                                                                
3:55:35 PM                                                                                                                    
                                                                                                                                
Senator Bunde referred  to Slides 63, 66, 71, and  74.  On 74                                                                   
there  is a  huge  decline beginning  in  2012  in the  House                                                                   
Resources CS  at the  base of 20/20.   Mr. Pulliam  clarified                                                                   
that it  is the decline in  the difference between  the House                                                                   
Resources CS and the 20/20.  Senator  Bunde asked if slide 63                                                                   
is the same.  Mr. Pulliam said yes.                                                                                             
                                                                                                                                
HB  488  was   heard  and  HELD  in  Committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                

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