Legislature(2005 - 2006)HOUSE FINANCE 519

04/10/2006 02:00 PM FINANCE

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02:19:34 PM Start
02:21:12 PM HB488
04:15:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Testimony <Invitation Only> --
Panel Discussion
+ 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.                                                                                       
2:21:12 PM                                                                                                                    
Co-Chair  Chenault  explained  the meeting's  intent  was  to                                                                   
offer a  panel discussion  with Cook  Inlet leaseholders  and                                                                   
the Department of Natural Resource.   The bill version before                                                                   
the  Committee is  the  House Finance  substitute  and a  new                                                                   
version   will   be   forthcoming.     He   asked   how   the                                                                   
implementation  of the  bill would  affect  business in  that                                                                   
Question #1:                                                                                                                    
2:23:12 PM                                                                                                                    
     ·      General:  Legislators took an oath to maximize                                                                      
            the  return  on  resources  for  the  benefit  of                                                                   
            Alaskans.     What  is   the  best   proposal  to                                                                   
            maximize  that  return, while  at  the same  time                                                                   
            encouraging   investment   and   exploration   to                                                                   
            extend  the  production  life of  the  oil &  gas                                                                   
JOHN  BARNES,  PRODUCTION  MANAGER,   MARATHON  OIL,  ALASKA,                                                                   
clarified  Marathon Oil  ranks the  Governor's proposed  bill                                                                   
1,   the House  Finance  Committee  (HFC)  version  2  &  the                                                                   
Senate  Finance Committee  (SFC) version  3.   Each  proposal                                                                   
has  strengths  and  weakness  for the  high  cost/low  price                                                                   
environment  of oil.   He  discussed  severance tax,  greater                                                                   
activity  and higher  tax  rates and  that  concern with  all                                                                   
three  bills   is  the  marginal  investment   being  weighed                                                                   
competitively   with   the   Alaskan   disadvantages.      He                                                                   
recommended  that Cook Inlet  adopt a  5/20 formula  and that                                                                   
any new committee substitute adopt  the strength of all three                                                                   
2:25:40 PM                                                                                                                    
JOHN ZAGER,  GENERAL MANAGER, CHEVRON-ALASKA,  voiced support                                                                   
for the  proposal made  by the  Governor, providing  a larger                                                                   
benefit to the smaller producers.  He stated that Chevron-                                                                      
Alaska  supports a  20/20 ratio  and that there  should  be a                                                                   
lower tax  rate for both oil and  gas.  He admitted  the Cook                                                                   
Inlet area was different.                                                                                                       
2:27:17 PM                                                                                                                    
Co-Chair   Chenault  commented   Mr.   Johnston   was  at   a                                                                   
disadvantage amongst representation from the oil companies.                                                                     
2:27:58 PM                                                                                                                    
DANIEL JOHNSTON,  LEGISLATIVE  CONSULTANT, DANIEL JOHNSTON  &                                                                   
CO., INC.,  acknowledged that there  is more work to  be done                                                                   
to make the Cook  Inlet area safe.  The area  has been caught                                                                   
in an attempt by  the Legislature to create a  system under a                                                                   
variety of conditions.  That is  of concern and needs fixing.                                                                   
2:28:53 PM                                                                                                                    
MARK  HANLEY,   MANAGER,  PUBLIC  AFFAIRS,   ANADARKO-ALASKA,                                                                   
reiterated support for the Governor's  proposal, a truce made                                                                   
between  all  companies.    He  acknowledged  it  will  be  a                                                                   
challenge to come  up with a proposal supported  by everyone.                                                                   
The  original  bill is  critical  for  both large  and  small                                                                   
players and  that any changes to  that bill, such as  the 25%                                                                   
tax  rate,   decrease  exploration  economics.     The  25/20                                                                   
proposal  is not  as attractive  as  the 20/20,  particularly                                                                   
given  inability to  use those  credits for  offsetting.   He                                                                   
mimicked   previous   comments   regarding   the   order   of                                                                   
preference, the  Governor's proposal  1,  the HFC  version 2                                                                    
and lastly, the SFC version.                                                                                                    
2:31:22 PM                                                                                                                    
PATRICK FOLEY, MANAGER OF LAND  AND EXTERNAL AFFAIRS, PIONEER                                                                   
OIL, concurred  with his colleagues in ranking  the preferred                                                                   
versions of  the bill.   He stated  that the Governor's  bill                                                                   
would make  Alaska more competitive.   A key element  of that                                                                   
proposal is the  $73 million dollar standard  deduction.  For                                                                   
a new  investor, that  exemption provides  an opportunity  to                                                                   
defray  many  start-up costs.    Both  the House  and  Senate                                                                   
versions offer a sunset before value can be derived.                                                                            
2:32:57 PM                                                                                                                    
Co-Chair  Chenault  asked about  the  sunset  length, set  at                                                                   
2:33:59 PM                                                                                                                    
Mr. Zager failed  to see any logic of a sunset  provision and                                                                   
worried  about  future  discrimination.     He  supported  no                                                                   
2:34:52 PM                                                                                                                    
DAN  DICKINSON,  CONSULTANT,   TAX  DIVISION,  DEPARTMENT  OF                                                                   
REVENUE, reminded  members that a  lot of work went  into the                                                                   
Governor's  proposal   and  that  the  only   sunset  in  the                                                                   
Governor's  bill  is  the  look-back,   offering  a  specific                                                                   
transition provision.  He encouraged more incentives.                                                                           
2:35:56 PM                                                                                                                    
Representative Kelly inquired  if the look-back provision had                                                                   
been  indefinitely extended.   Mr.  Dickinson responded  that                                                                   
the Administration  was looking at it and that  it could make                                                                   
sense to  include it for  a short period.   He  recommended a                                                                   
three-year sunset study consideration.                                                                                          
Mr. Hanley advised that development  credits should not offer                                                                   
a  sunset,  in  particular for  new  developers.    Regarding                                                                   
exploration credits, a ten-year  sunset might be appropriate.                                                                   
Development sunset could exclude Alaska for some.                                                                               
2:38:22 PM                                                                                                                    
Mr.  Johnston agreed,  noting  that Alaskan  weather  window,                                                                   
five-years   anywhere    else   at   best    under   ordinary                                                                   
circumstances would be like two-years  in Alaska.  He was not                                                                   
in support of the 10-year sunset provision.                                                                                     
Question #2:                                                                                                                    
   ·    Progressivity:  Substantial discussion has occurred                                                                     
        over the progressivity  surcharges  in the House  and                                                                   
        Senate bills.  Outstanding issues  include inflation,                                                                   
        the slope  and  the  cap.   What  do you  consider  a                                                                   
        reasonable way to address the issues?                                                                                   
Mr. Zager  responded that gas  would be tied to  net profits.                                                                   
Each  company  each  month  would  have  to  calculate  their                                                                   
profits for that month and then  taxed on that.  He mentioned                                                                   
net profits  as regulated for  inflation; the costs  go down,                                                                   
the State  could receive a  benefit.  He urged  consideration                                                                   
of the Governor's proposal.                                                                                                     
2:41:09 PM                                                                                                                    
Mr. Johnston  commented on the  fairness and economic  logic,                                                                   
in contradiction to having a progressive  element governing a                                                                   
severance tax as  proposed.  Theoretically, it  would be more                                                                   
consistent to  base the progressive mechanism  on profits per                                                                   
barrel of  oil and include  progressive element based  on the                                                                   
rate  as well,  making  tax  based profits;  a  determination                                                                   
could be based on profits as well.   He thought that would be                                                                   
a good idea and offered to help assist in that discussion.                                                                      
2:42:21 PM                                                                                                                    
Representative  Hawker  added his  endorsement  to the  idea,                                                                   
thinking  it could  solve  many issues  still  on the  table.                                                                   
Representative  Kerttula   asked  for  further   explanation.                                                                   
Mr.  Zager explained  that net  profits  could be  calculated                                                                   
using revenue,  minus qualifying expenses,  creating capital;                                                                   
to achieve a net profit, multiplying  it by 20% or 25%, which                                                                   
provides  the actual  tax amount.   If costs  were high,  the                                                                   
profits would  be more than double.   If for some  reason the                                                                   
costs increased,  the margin would  remain the same  for more                                                                   
than 20-years.   The formula ties the profit  margin directly                                                                   
to what taxes are paid.  If oil  prices double, there is good                                                                   
rational to  take the  higher percentage  of the profit,  not                                                                   
tied to the Western Texas Instrument  (WTI).  He addressed an                                                                   
appropriate inflation factor.                                                                                                   
Representative Kerttula asked  where progressivity would come                                                                   
in.   Mr. Zager  explained the  number is  determined by  the                                                                   
Department of Labor  & Workforce Development.   He added that                                                                   
the  number kicks  off when  the  profit margins  are at  the                                                                   
number determined by the legislation,  escalating at 2%.  The                                                                   
same formula  would be used.   It would be most  equitable to                                                                   
tie it to actual profits.                                                                                                       
2:47:37 PM                                                                                                                    
Representative  Kerttula voiced  concerned in not  indicating                                                                   
the profit.   [inaudible].  Mr.  Zager said that is  the risk                                                                   
in business and is a different issue.                                                                                           
Representative Kelly  asked how that  would compare and  if a                                                                   
net approach model could be accomplished.  [inaudible]                                                                          
Mr. Johnston  responded that the issue  discusses statistics,                                                                   
determining the  valuable, keeping costs down.   The question                                                                   
remains  if companies  get to  keep any of  the saved  funds.                                                                   
The  only incentive  to keep  cost-bases down  is the  profit                                                                   
based  systems.   Making it  Petroleum  Production Tax  (PPT)                                                                   
profit  based would  increase incentive  for those  companies                                                                   
and  was addressed  during previous  testimony.   It will  be                                                                   
difficult to make that shift,  seeing an increase of 2/10 for                                                                   
every dollar.   He  maintained, it is  important to  know the                                                                   
rate and the base for every levy.                                                                                               
Representative Kelly  inquired the amount of  effort and time                                                                   
to determine  that rate.   Mr.  Johnston said  it was  not as                                                                   
previously described.  There are three rate types:                                                                              
   ·    The world bank model,                                                                                                   
   ·    The R-factor - payoff, and                                                                                              
   ·    The Price cap formula - windfall profit taxes.                                                                          
He  recommended crafting  a new  system  to accommodate  both                                                                   
companies and the Administration.                                                                                               
2:52:32 PM                                                                                                                    
SENATOR LYDA GREEN asked if there  were other sections of the                                                                   
bill,  needing   balanced  with   the  impact  of   a  credit                                                                   
Mr.  Dickinson  explained  that the  specific  concern  would                                                                   
arise during a  year of loss, in the Governor's  bill, 20% of                                                                   
loss can  be carried forward as  a credit.  The  effect would                                                                   
be  the  same as  having  a  loss  one month;  it  becomes  a                                                                   
question regarding the affect  of the surcharge.  It would be                                                                   
a tradeoff and  that the calculation would be  independent of                                                                   
that number.                                                                                                                    
2:55:04 PM                                                                                                                    
Mr. Zager added  that it  could be simplified  with  a policy                                                                   
call  of  20% capital  credit  as  an  additional  incentive,                                                                   
lowering the margin.                                                                                                            
2:55:44 PM                                                                                                                    
Senator  Green asked  if  there was  an  accepted process  to                                                                   
determine  the  net  profit  for the  industry.    Mr.  Zager                                                                   
pointed out that  the Department of Revenue  will work during                                                                   
the next several  months to determine a net  profits process.                                                                   
Mr. Dickinson  added,  currently, they work from  a cash flow                                                                   
model concept.                                                                                                                  
Question #3:                                                                                                                    
2:56:49 PM                                                                                                                    
   ·    What do you think will be the result of PPT                                                                             
        regarding investment and how that would impact                                                                          
Mr. Barnes commented  that a 20/20  tax structure  would make                                                                   
the incremental  investments, especially in Cook  Inlet, less                                                                   
competitive.   He  noted  that  at worst,  there  would be  a                                                                   
decline in exploration with a  subsequent decline in reserves                                                                   
and   production.     Efforts   to  mitigate   the  lack   of                                                                   
profitability   might  be  effective   and  that   there  are                                                                   
considerations regarding alternatives  that could benefit the                                                                   
activity  level,  including  credits  for  exploration.    He                                                                   
thought  that  drilling  unproductive  wells  for  investment                                                                   
credits  was  not  a  solution  but  rather  creating  better                                                                   
Mr. Foley added  that much  depends on  the structure  of the                                                                   
ultimate   bill.    The   original  proposal   made   by  the                                                                   
Administration  seems  moderate  and  fair;  however,  as  it                                                                   
becomes  more complicated,  the  incentive decline.   In  the                                                                   
Governor's bill even at the lower  prices, there continues to                                                                   
be industry protection.                                                                                                         
Mr. Hanley stated that the Governor's  original bill improved                                                                   
exploration economics  & that  as the bill changes,  industry                                                                   
perspective  changes.  He  pointed out  that higher  taxes do                                                                   
not encourage investment.                                                                                                       
3:01:57 PM                                                                                                                    
Mr. Zager  referred to previous  notes examining  the program                                                                   
under  the  20/20 scenario.    At  that scenario,  it  lowers                                                                   
overall investment.  If taxes  were lowered, it would improve                                                                   
many  projects.   He  stressed  that credits  are  important,                                                                   
noting a tradeoff between tax and capital credits.                                                                              
3:03:24 PM                                                                                                                    
Mr.  Johnston  questioned how  in  raising oil  prices  could                                                                   
affect  the  overall  perspective.   Mr.  Zager  conceded  it                                                                   
definitely changes the entire situation.                                                                                        
Mr. Johnston  observed that the  oil prices overrule  the tax                                                                   
structure.  He  speculated that if the prices  are high, even                                                                   
at the  25/20 structure,  investment would  remain high.   He                                                                   
noted that  with current  oil price  assumptions, there  is a                                                                   
great deal of pessimism opposed  to marketplace behavior.  He                                                                   
suggested   that   the   marketplace    viewed   oil   prices                                                                   
He pointed  out the "exuberance"  expressed by  oil companies                                                                   
during previous testimony, concluding  that if oil prices are                                                                   
as high  as predicted,  the tax  structure  would not be  the                                                                   
3:06:00 PM                                                                                                                    
Mr. Zager  added that the  Legislature could control  the tax                                                                   
structure  but not  oil prices.    He recommended  exercising                                                                   
"discipline"  in  establishing  fiscal policies  and  thought                                                                   
that   speculation  on   long-term   oil   prices  might   be                                                                   
3:06:58 PM                                                                                                                    
Representative Kerttula observed       that     progressivity                                                                   
provides an ability to react to  the price and that Alaska is                                                                   
a different  field  from the rest  of the  marketplace.   Mr.                                                                   
Zager  agreed   that  individual  areas  should   be  treated                                                                   
differently;  however, the situation  discussed is  unique in                                                                   
Cook Inlet.                                                                                                                     
Mr. Barnes said that the Cook  Inlet fields are challenged at                                                                   
operating  margins.    Mr. Dickinson  observed  that  if  the                                                                   
margin  was  low, profits  would  be  low.   In  Cook  Inlet,                                                                   
operating costs are high, which should be considered.                                                                           
3:09:23 PM                                                                                                                    
Mr. Hanley referenced  earlier   comments  by  Mr.  Johnston,                                                                   
noting  that many companies  have indicated  interest  in the                                                                   
State for oil economics.  As the  prices go up, the amount of                                                                   
recoverable oil  also increases.   He referred to a  chart by                                                                   
EconOne,   comparing    the   amount   of    exploration   to                                                                   
productivity.  He thought that  the North Slope provides more                                                                   
opportunity  for productivity.   Raising  the tax lowers  the                                                                   
size of economic minimum field for companies.                                                                                   
Mr.    Hanley   observed    global   discussions    regarding                                                                   
progressivity and  that larger  fields in a portfolio  change                                                                   
the economic prospects; however,  such fields are remote.  If                                                                   
the  State wants  to  dictate  the amount  a  company can  be                                                                   
guaranteed   per   barrel   that   makes   discussions   more                                                                   
productive.  He  pointed out the risks taken  by companies at                                                                   
lower barrel  prices.  Those  rates are weighed  against risk                                                                   
and  progressivity, different  from existing  fields and  new                                                                   
exploration.   He suggested a  break-even point would  be $25                                                                   
per  barrel  and that  he  did  not see  incentives  for  new                                                                   
3:14:53 PM                                                                                                                    
Co-Chair Meyer referred the EconOne  presentation, which uses                                                                   
the $40-$50 per  barrel price range.  He referred  to a chart                                                                   
reflecting  the decline in  tax rates,  as well as  increased                                                                   
investment  rates, showing  a  correlation.   He pointed  out                                                                   
that  Pioneer  Oil  is  active  both  in  Texas  and  Alaska,                                                                   
observing the  impact of timeline differences  and permitting                                                                   
productivity.    He mentioned  earlier  discussion  regarding                                                                   
differences in the  costs between the two areas,  with Alaska                                                                   
more costly.   He  asked the PPT  intended rate to  encourage                                                                   
companies like Pioneer to compete with places like Texas.                                                                       
3:17:53 PM                                                                                                                    
Mr. Foley referred to  previous testimony, pointing  out that                                                                   
if  Alaska  wants  to encourage  companies  like  Pioneer  to                                                                   
invest, they need  to make fiscal terms more  attractive.  He                                                                   
compared  the structure  to  Oklahoma,  with severance  rates                                                                   
dramatically less  than that being proposed.   Co-Chair Meyer                                                                   
suggested  that a  20/20 rate  would be  more competitive  to                                                                   
other states.                                                                                                                   
Mr.  Johnston voiced  concern  with the  comments  concluding                                                                   
that lower taxes mean higher production,  not compared to oil                                                                   
prices.   He  agreed  that  Alaska presents  some  challenges                                                                   
compared to  other areas and that  has always been true.   He                                                                   
pointed out that those present  at the table have proved that                                                                   
other  circumstances  obviously   mitigate  such  challenges;                                                                   
otherwise, there would be no exploration in Alaska.                                                                             
Co-Chair Meyer advised  that for many  years, only  the three                                                                   
major producers existed in Alaska,  noting that Shell Oil had                                                                   
just  returned  after  a  15-year   hiatus.    He  encouraged                                                                   
consideration of those factors.                                                                                                 
3:22:11 PM                                                                                                                    
Mr. Zager interjected   that   the   largest   advantage   to                                                                   
exploring  in Alaska  is  lack of  competition  and that  the                                                                   
access to land is easier.                                                                                                       
Mr. Dickinson  added   that  to  "truly  compare   taxes"  to                                                                   
investment,  it would  be  wise to  include  a larger  sample                                                                   
3:23:22 PM                                                                                                                    
Representative Kelly referenced  the 5/20 gap; he inquired if                                                                   
smaller  oil  companies had  requested  other  considerations                                                                   
that were not brought forward in the Governor's bill.                                                                           
3:24:55 PM                                                                                                                    
Mr. Barnes responded  that  the 5/20  was  a complicated  tax                                                                   
bill.   He  noted that  the 5%  calibrated  with the  current                                                                   
severance tax with intent to hold  the 20% tax credit, a good                                                                   
stimulus for Cook Inlet.  He pointed  out that the status quo                                                                   
was not  acceptable because there  is not enough  activity in                                                                   
the Cook  Inlet.  He pointed  out greater levels  of activity                                                                   
in the  Lower 48.   He stated  the Governor's bill  structure                                                                   
was an attempt not to lose more ground.                                                                                         
3:26:20 PM                                                                                                                    
Mr.  Barnes discussed  the potential  benefit  of higher  oil                                                                   
prices, noting that companies  would compete.  He stated that                                                                   
other places  in the  world are not  as burdened  with costs,                                                                   
regulations  and fiscal  uncertainty.   He stressed  the need                                                                   
for capital investment.                                                                                                         
3:27:18 PM                                                                                                                    
Mr. Zager noted  that  his  company  operates  75%  of  their                                                                   
production out of Cook Inlet and  right now pays no severance                                                                   
tax.   If there  is sufficient  capital, they could  generate                                                                   
credits out of Cook Inlet, paying more in royalties.                                                                            
3:28:29 PM                                                                                                                    
Representative Kelly concluded  that smaller companies prefer                                                                   
to be "left alone".  Mr. Zagerresponded   that  putting   PPT                                                                   
into effect statewide would be  the best policy for the State                                                                   
since it  increases activity  in Cook  Inlet and creates  new                                                                   
incentives in less productive areas.                                                                                            
3:29:51 PM                                                                                                                    
Mr. Dickinson  interjected   that    Mr.   Zager's   comments                                                                   
reflected the  Administration's analysis.  He  noted that the                                                                   
decision  to invest  would  drive the  tax  structure in  the                                                                   
future, which is the intent.                                                                                                    
3:30:42 PM                                                                                                                    
Representative Holm  pointed   out  that   there  are   fewer                                                                   
companies in  Alaska.   He asked if  changing the  tax regime                                                                   
would  realistically increase  the  number  of explorers  and                                                                   
investment  dollars spent.   He  referenced earlier  comments                                                                   
that the price  was as influential of a factor  as is the tax                                                                   
structure.     He   observed  everyone's   desire  for   more                                                                   
production,  but  voiced concern  that  everything  discussed                                                                   
offers incentives to encourage further production.                                                                              
3:32:22 PM                                                                                                                    
Mr. Zager advised that  the oil companies follow  patterns of                                                                   
success.   To  attract  other oil  companies,  there must  be                                                                   
success, an  important component  of taxation as  is geology,                                                                   
infrastructure  and regulations.   Changing the structure  of                                                                   
taxation  does not  guarantee  success.   He  noted that  the                                                                   
success of companies  like Pioneer, attract  other companies.                                                                   
He  proposed that  in five  to ten  years, there  will be  no                                                                   
further  grass-root  exploration   on  the  North  Slope  and                                                                   
referenced new recovery technologies.                                                                                           
3:34:19 PM                                                                                                                    
Mr. Johnston thought several situations  could overshadow tax                                                                   
   · A strong signal to the industry that a gas pipeline was                                                                    
     going in and making it clear to the industry that they                                                                     
     would have a fair and equal access to that pipeline.                                                                       
   · If Alaska National Wildlife Refuge (ANWR) opens, it                                                                        
     could dwarf other considerations.                                                                                          
   · High oil prices could drive exploration.  (If prices                                                                       
     dropped below $25 or $30 per barrel, it would not                                                                          
     matter what tax structure was in place).                                                                                   
3:36:33 PM                                                                                                                    
Mr. Barnes  pointed out that  some small companies  have come                                                                   
and gone,  with some  investment in Cook  Inlet.   He thought                                                                   
small operators  could be  enticed.  He  thought it  could be                                                                   
the "peak of new activity".                                                                                                     
3:38:18 PM                                                                                                                    
Representative  Hawker  referred  to  economic  differentials                                                                   
between fields.   He spoke  to field operation  differentials                                                                   
and the definitions  of the point of production  and how that                                                                   
affects someone working outside of the North Slope.                                                                             
Mr. Hanley noted  that the bill currently defines  the "point                                                                   
of production" for oil, at the  point, which pipeline quality                                                                   
crude  enters the  system.   Gas has  a different  definition                                                                   
relating   to  processing  (separation   of  carbons)   below                                                                   
downstream  from   processing  and  still   needs  treatment.                                                                   
Treatment is down-stream  and processing is upstream.   There                                                                   
is a  need for  new treatment  and processing facilities  and                                                                   
the treatment  would not be  eligible for credits,  but would                                                                   
be  treated as  transportation.   He  expressed concern  with                                                                   
that  element and  maintained  that it  should  be the  point                                                                   
where it is ready  to enter the pipeline.  He  argued that it                                                                   
might be less economic than oil-10%  gas, 12%-15% oil.  There                                                                   
are no  run gas economics statistics  yet and that  those are                                                                   
important numbers.                                                                                                              
3:44:19 PM                                                                                                                    
Representative  Hawker   questioned  why  the   Governor  had                                                                   
defined a  "point of  production" like  that.  Mr.  Dickinson                                                                   
responded  that  many  downstream   costs,  the  upstream  is                                                                   
utilized  in  the  net.   He  spoke  to  the  downstream  and                                                                   
upstream deduction  and credit.  The bill moved  the point of                                                                   
production  downstream;  otherwise,  under  current  statute,                                                                   
they would  both be considered  transportation costs.   There                                                                   
were  no  requests  to  change  the  status  quo  before  the                                                                   
legislation.   The  question remains  how  far downstream  it                                                                   
should be  moved; it is  a policy call.   If gas is  found in                                                                   
the  foothills, a  facility  would  need to  be  built.   The                                                                   
question remains  if Alaska  can get a  line and  should they                                                                   
provide a deduction.                                                                                                            
3:48:50 PM                                                                                                                    
Representative Hawker  summarized the difference  between the                                                                   
GDT and  one operating in the  foothills.  He  requested some                                                                   
kind of differential for that exclusion.                                                                                        
3:49:31 PM                                                                                                                    
Vice  Chair Stoltze  questioned  if  the truce  [with  larger                                                                   
companies]  has  taken certain  items  off the  table  [which                                                                   
would  benefit the  smaller companies].    Mr. Hanley  stated                                                                   
that the issues  center on the $73 million  dollar allowance,                                                                   
which  is more  valuable to  the smaller  companies.   Larger                                                                   
companies would benefit more from  dismissing the $73 million                                                                   
deduction.   Generally, lower tax  rates are better,  but the                                                                   
allowance  is   significant  and  that  offsetting   the  tax                                                                   
increases  with  credits,  is  more valuable  to  the  larger                                                                   
3:52:39 PM                                                                                                                    
Mr. Dickinson explained that the  Department of Revenue hoped                                                                   
to encourage investment with the  package through discussions                                                                   
with  producers,  focusing  on  that effect.    The  Governor                                                                   
included all  the small players  in those discussions.   With                                                                   
new investment, new players and exploration are important.                                                                      
3:54:12 PM                                                                                                                    
Mr.  Zager maintained  that Cook  Inlet  producers are  being                                                                   
conservative and playing "defense" in that area.                                                                                
3:54:57 PM                                                                                                                    
Mr. Foley interjected  that the issues are not  company size,                                                                   
but  rather, where  they are  in the  investment life  cycle.                                                                   
Without  investment   considerations,  the   most  leveraging                                                                   
aspects  would be  credits & tax  exemptions.   On the  other                                                                   
hand,  in  the harvest  mode,  tax  rate  is critical.    The                                                                   
Governor's  bill  fits the  intent  of  all companies.    The                                                                   
exemptions should  not be discriminatory and  there should be                                                                   
no  sunset  or  phase out.    All  companies  should  benefit                                                                   
3:56:50 PM                                                                                                                    
Mr. Johnston  agreed that  the concerns  differ according  to                                                                   
where a  company is in  their life cycle.   He believed  that                                                                   
the  structure proposed  by the  Administration  is the  best                                                                   
intent for balancing it all.   He voiced concern with the $73                                                                   
million allowance  and agreed that the sunset  proposed would                                                                   
be severe, but worried about no sunset also.                                                                                    
3:58:38 PM                                                                                                                    
Co-Chair Meyer  inquired what the recommended  effective date                                                                   
was for a severance  tax.  Mr. Barnes spoke in  support of an                                                                   
effective date placed in front  of the enactment of the bill.                                                                   
3:59:59 PM                                                                                                                    
Mr. Dickinson advised  that the Governor's bill  set the date                                                                   
at  July 1.    He  pointed  out that  both  House and  Senate                                                                   
versions  offer a  six-month period  rule,  based on  current                                                                   
4:00:43 PM                                                                                                                    
Mr. Zager commented that July  1  should be the earliest date                                                                   
considered.  Writing  regulations could take  time and affect                                                                   
the date.   However,  moving the date  too far forward  could                                                                   
give  companies the  opportunity to  change their  investment                                                                   
4:01:53 PM                                                                                                                    
Mr. Johnston  said Alaskans might  be paying for each  day it                                                                   
takes to  enact the  tax change;  it could be  as high  as $1                                                                   
million per day.   To be fair, it could be  addressed earlier                                                                   
and he thought January 1 was reasonable.                                                                                        
4:03:24 PM                                                                                                                    
Mr. Hanley  added that while  incorporating a  look-back, his                                                                   
company  could  pay  less  due  to  satellites.    Generally,                                                                   
companies  prefer  the bill  move  into  effect after  it  is                                                                   
passed, July 1 or later.                                                                                                        
4:04:57 PM                                                                                                                    
Mr. Foley commented  that  from  a fairness  perspective,  it                                                                   
would be best  to make the effective date,  the first quarter                                                                   
after it  becomes law.   From the company's perspective,  the                                                                   
earlier the better because of transition capital spent.                                                                         
4:06:18 PM                                                                                                                    
Representative Kelly asked   if    smaller   companies   were                                                                   
adequately considered during the  discussions.  He referenced                                                                   
the gas pipeline and the affect on utility prices.                                                                              
4:08:24 PM                                                                                                                    
Mr. Dickinson  pointed  out that  the 4   through 6   largest                                                                   
producers were present  at the table and completely  aware of                                                                   
that  position   in  those  negotiations.     He   noted  the                                                                   
importance of  meeting conflicting goals of  production size.                                                                   
He suggested  that when  considering Cook Inlet,  legislators                                                                   
should  be aware  of changes,  such as  tying exploration  to                                                                   
world prices  and other  complex issues.   He warned  that if                                                                   
prices move to reflect world markets,  it must affect the tax                                                                   
structure.  The smaller producers  are less likely to support                                                                   
the proposed new structure, but is not prohibitive.                                                                             
4:10:57 PM                                                                                                                    
Representative Kelly reiterated  his  concern.    Mr.  Barnes                                                                   
pointed out that the State is  in a transition regarding Cook                                                                   
Inlet gas.   He noted the process of negotiating  a contract,                                                                   
and   then  receiving   review  and   approval  through   the                                                                   
regulatory commission.   He noted  that the attorney  general                                                                   
would  advocate  for  lower  prices   to  protect  consumers,                                                                   
although,  energy  producers  argue for  higher  than  world-                                                                   
prices.   He  thought  that having  lower  than world  prices                                                                   
could send a negative signal.   He stressed that the price in                                                                   
the Cook Inlet was still being determined.                                                                                      
4:13:30 PM                                                                                                                    
Co-Chair Chenault echoed concern  about prices in Cook Inlet,                                                                   
offering  less  volume than  the  North  Slope.   Cook  Inlet                                                                   
affects many Alaskans' lives.                                                                                                   
4:14:15 PM                                                                                                                    
Mr. Foley provided a  perspective of the small  producer with                                                                   
an unestablished  production.   He pointed out  the advantage                                                                   
of  credits sold  to other  producers at  a discount,  asking                                                                   
legislators to consider ways of  enabling them to retain full                                                                   
value of such credits.                                                                                                          
4:15:17 PM                                                                                                                    
Mr. Johnston voiced support for that idea.                                                                                      
Co-Chair Chenault concluded discussion and testimony.                                                                           
HB 488 was HELD in Committee for further consideration.                                                                         

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