Legislature(2011 - 2012)

03/26/2011 01:41 PM FIN

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01:41:27 PM Start
01:42:58 PM HB 110
04:05:39 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 110                                                                                                            
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
1:42:58 PM                                                                                                                    
Co-Chair   Stoltze   announced   to   the   committee   that                                                                    
Representative Hawker would be  the designated alternate for                                                                    
Representative  Neuman, who  was out  of town  because of  a                                                                    
family emergency.                                                                                                               
Representative Doogan  asked if Representative  Hawker would                                                                    
be  able to  debate and  vote with  the committee.  Co-Chair                                                                    
Stoltze replied  that as an alternate  Representative Hawker                                                                    
would be both debating and voting.                                                                                              
Representative  Doogan announced  to the  committee that  he                                                                    
had   obtained   a   legal    opinion   that   stated   that                                                                    
Representative Hawker was forbidden from voting.                                                                                
Co-Chair  Stoltze  replied that  he  could  produce a  legal                                                                    
opinion to  the contrary.  He noted  Representative Doogan's                                                                    
objection  and  forthcoming  legal  opinion.  Representative                                                                    
Doogan  maintained  that  Representative Hawker  should  not                                                                    
have a vote on the committee.                                                                                                   
BRYAN   BUTCHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
provided  a PowerPoint  presentation,  "Proposed Changes  to                                                                    
the Oil  and Gas  Production Tax,  March 26,  2011."(copy on                                                                    
file). He cited Slide 3, "HB 110 Goals":                                                                                        
       1. Improve investment climate                                                                                            
       2. Increase production                                                                                                   
       3. Create jobs for Alaskans                                                                                            
Commissioner Butcher continued to Slide 4, "The Problem":                                                                   
        1. Oil production is declining in Alaska, faster                                                                        
          than the rest of the U.S.                                                                                             
        2. Higher taxes have chilled investment in Alaska                                                                       
        3. Alaska's economy is fueled by a robust oil patch,                                                                    
          however the pipeline currently runs twothirds                                                                         
        4. Low throughput levels increase maintenance costs                                                                     
          and threaten a shutdown.                                                                                              
1:45:57 PM                                                                                                                    
Commissioner Butcher discussed Slide 5, "The Solution":                                                                   
     We MUST:                                                                                                                   
        1. Reform our oil taxes to be globally competitive.                                                                     
        2. Provide tax credits for drilling in technically                                                                      
          challenged fields.                                                                                                    
        3. Lower the tax rate for drilling new, untapped                                                                        
        4. Cap taxes to encourage more immediate investment                                                                     
          at higher oil prices.                                                                                                 
Commissioner Butcher stated that  Alaska had the highest oil                                                                    
taxes in North  America. High taxes coupled  with the remote                                                                    
location  of  the  state  had  made  it  difficult  for  new                                                                    
exploration and new development to occur in Alaska.                                                                             
1:46:48 PM                                                                                                                    
Commissioner  Butcher continued  to  Slide  6, "North  Slope                                                                  
Production," which  was a graph  depicting the  annual North                                                                  
Slope production and contribution  of fields. He shared that                                                                    
the  department would  be  presenting  a preliminary  spring                                                                    
forecast to  the committee. He  explained that  the forecast                                                                    
was preliminary  because the  department waited  until after                                                                    
March  31st,  when the  oil  companies  would balance  their                                                                    
numbers form 2010, to project their actual numbers.                                                                             
Commissioner  Butcher continued  to  Slide  7, "North  Slope                                                              
Development  Drilling,"  which  was a  bar  graph  depicting                                                                  
development and  service wells drilled  on the  North Slope.                                                                    
He emphasized that current levels  were not as high as those                                                                    
previously seen.                                                                                                                
Commissioner  Butcher   discussed  Slide  8,   "North  Slope                                                                  
Exploration   Drilling,"  which   was  a   bar  graph   that                                                                    
illustrated  that exploration  drilling had  peaked in  2001                                                                    
and  again in  2007,  but had  significantly declined  since                                                                    
Commissioner  Butcher discussed  Slide 9,  "There's lots  of                                                              
oil left in Alaska…":                                                                                                         
     ·  Cumulative production through 2010 has  been over 16                                                                    
        billion barrels                                                                                                         
     ·  Remaining North Slope  recoverable volumes  exceed 5                                                                    
        billion barrels                                                                                                         
     ·  Geologybased  estimates  of  total oil  volumes  are                                                                    
        much higher. For instance, we do  not include any of                                                                    
        the approximately  20 billion  barrels in  the giant                                                                    
        Ugnu deposit, or  offshore volumes from  the Chukchi                                                                    
        or Beaufort Seas, in our forecast                                                                                       
1:49:53 PM                                                                                                                    
Commissioner  Butcher  read  from  the  2009  United  States                                                                    
Department of Energy Report on North Slope Potential:                                                                         
     From an  exploration perspective,  the North  Slope and                                                                    
     adjacent  areas  are  far   from  resembling  a  mature                                                                    
     petroleum province.  The majority of the  wells in both                                                                  
     the  state  onshore  and near-shore  Beaufort  Sea  are                                                                
     clustered along the  Barrow arch trend with  only 47 of                                                                  
     the 323  exploration wells located  south of  70º north                                                                
     latitude  Figure  2-2).  The  area south  of  70  north                                                                  
     latitude constitutes  nearly 75% of the  state acreage.                                                                    
     This southern portion of the  state land holdings has a                                                                
     well density  of one  well per  367 square  miles. Thus                                                                  
     only  the area  along the  Colville-Canning portion  of                                                                    
     the  Barrow  arch  and  the  adjacent  portion  of  the                                                                    
     Beaufort   Sea  has   experienced   moderate  to   high                                                                    
     exploration  drilling  activity.   Here,  the  drilling                                                                  
     density is  approximately one  exploration well  per 21                                                                
     square miles.                                                                                                            
[The full report can be found at www.doe.gov.]                                                                                  
Commissioner  Butcher  surmised  that   the  state  was  not                                                                    
looking at a mature basin,  tens of billions of barrels were                                                                    
yet  to be  discovered on  the  North Slope,  and the  state                                                                    
should focus  on the giant area  south of where most  of the                                                                    
development  had occurred;  this  was  where the  department                                                                    
believed  great  exploration,  development,  and  production                                                                    
would occur as a result of the HB 110 incentives.                                                                               
Commissioner  Butcher continued  to  Slide 10,  "Development                                                                
Timeline  for North  Slope Oil  Fields," with  a line  graph                                                                  
illustrating development  timelines for fields on  the North                                                                    
Slope.  The department  believed that  much of  the in-field                                                                    
development for legacy fields could  occur more quickly. New                                                                    
fields  that   were  further  from  infrastructure   had  an                                                                    
ultimate  timeline of  up to  seven years.  He stressed  the                                                                    
importance that the state acts right away.                                                                                      
Representative Gara  understood that  according to  Slide 7,                                                                    
decline in  recent years was  not due to Alaska's  Clear and                                                                    
Equitable  Share  (ACES),  but  began  declining  under  the                                                                    
Economic Limit  Factor (ELF). He  wondered how  the drilling                                                                    
of  wells on  the uptake  under ACES  and decline  under ELF                                                                    
related to  HB 110. Commissioner Butcher  replied that there                                                                    
had been  a one year  uptake in 2010  - all other  years had                                                                    
been the  lowest seen by  the state  in 15 years.  He shared                                                                    
that  much of  the  capital  had been  put  into the  legacy                                                                    
fields and  that something had  to be done to  encourage new                                                                    
Representative Gara pointed out the  second worst year in 15                                                                    
years had  been 2006, which had  been under ELF. He  did not                                                                    
believe  that  the  graph was  convincing  in  relating  the                                                                    
decline to ACES.                                                                                                                
1:53:30 PM                                                                                                                    
Commissioner Butcher maintained  that the difference between                                                                    
the  exploration  in  the  last  five  years  and  the  more                                                                    
successful years in the past was startling.                                                                                     
Representative Wilson  asked what current  available credits                                                                    
could be used  in producing wells, and how  they compared to                                                                    
exploratory credits.                                                                                                            
LENNIE  DEES,  AUDIT  MASTER, TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE  (via teleconference),  replied  that  a 20  percent                                                                    
credit  was  currently  available for  development  drilling                                                                    
under  AS  43.55.023 (tax  credits  for  certain losses  and                                                                    
expenditures). Credits for  exploration wells were dependent                                                                    
on location, and  ranged from 20 to 40  percent. In addition                                                                    
to  exploration,  if  the company  was  experiencing  a  net                                                                    
operating loss, a  25 percent net operating  loss credit was                                                                    
1:57:55 PM                                                                                                                    
Representative Wilson asked if  numbers could be provided to                                                                    
highlight  where  development  was  still  occurring  versus                                                                    
where it had declined. She  wondered if the decline had been                                                                    
in existing fields or in new areas.                                                                                             
Mr. Dees  assumed that the  wells depicted on Slide  8 would                                                                    
qualify  for  the  40  percent  credit  under  AS  43.55.025                                                                    
(alternative tax  credit for oil  and gas  exploration). The                                                                    
wells on  Slide 7, to the  extent that they were  located in                                                                    
existing fields, would qualify for the 20 percent credit.                                                                       
Commissioner  Butcher continued  with  the presentation.  He                                                                    
introduced Slide 12, "Main proposed changes":                                                                             
     Progressivity  Rates  &  Cap: Progressivity  levied  as                                                                    
     discrete   brackets,  rather   than  as   a  continuous                                                                    
    function, and applied only to incremental revenue.                                                                          
     Base  Tax  Rate: Base  tax  rate  of 15  percent,  plus                                                                    
     progressivity   for   leases  or   properties   neither                                                                    
     unitized nor  producing as of 12/31/2008.  Base rate of                                                                    
     25 percent  plus progressivity for  currently producing                                                                    
     Tax  Credits:  Extension  of   40  percent  well  lease                                                                    
     expenditure  tax credits  to North  Slope. Tax  credits                                                                    
     can be claimed in a single year instead of two years.                                                                      
     Tax  Calculation:  Yearly   tax  calculation  based  on                                                                    
     average  prices  and  costs,  instead  of  monthly  tax                                                                    
     calculation  impacted  by  short term  price  and  cost                                                                    
2:02:34 PM                                                                                                                    
Commissioner Butcher  discussed Slide  13, "HB  110 compared                                                                
to ELF  and ACES," which was  a bar graph showing  where the                                                                  
department saw ACES if the bill  did not pass, and where ELF                                                                    
would  be in  terms of  production tax  revenue if  ACES had                                                                    
never been passed.  He said that the  production tax revenue                                                                    
under  ACES needed  to be  addressed. The  legislation would                                                                    
keep the  revenue higher than under  ELF but not as  high as                                                                    
under  ACES. Under  ACES, the  department believed  that too                                                                    
much  was  being   given  to  the  state.   Under  ELF,  the                                                                    
department  believed   too  much  was  going   to  industry.                                                                    
Therefore, the department had worked to find a balance.                                                                         
Vice-chair Fairclough asked whether  the analysis showed any                                                                    
increase production that the state  could expect by offering                                                                    
the  incentives. Commissioner  Butcher replied  that it  did                                                                    
not. The  analysis reflected where the  department predicted                                                                    
the future would be under the current scenario.                                                                                 
Representative Gara  wondered if the bar  graph included the                                                                    
loss  in revenue  that would  be incurred  by shifting  from                                                                    
monthly to annually.                                                                                                            
BRUCE  TANGEMAN, DEPUTY  COMMISSION, DEPARTMENT  OF REVENUE,                                                                    
responded no.  He explained that  oil prices  were projected                                                                    
annually  and not  monthly. He  stated that  the monthly-to-                                                                    
annually calculation was  different from month-to-month, and                                                                    
that the department did not project from month-to-month.                                                                        
Representative Gara  opined that  the loss  was significant.                                                                    
He  reminded the  committee that  in  2008, the  legislation                                                                    
would  have cost  the state  $400  million, had  it been  in                                                                    
place. He believed  that the loss should  have been included                                                                    
in  the  analysis.  Commissioner  Butcher  interjected  that                                                                    
based on  the previous  two years the  loss would  have been                                                                    
$10   million  to   $20   million,   which  was   relatively                                                                    
insignificant. He said that there  could be situations where                                                                    
the  number was  negative,  but that  it  was impossible  to                                                                    
determine how to calculate the loss into the analysis.                                                                          
Representative Gara  offered that  there were  two companies                                                                    
already  proposing projects;  Repsol and  Great Bear  on the                                                                    
North  Slope.  He  wondered  if lowering  the  tax  rate  on                                                                    
projects  that  had already  been  planned  to move  forward                                                                    
would result in a loss of revenue.                                                                                              
2:06:11 PM                                                                                                                    
Commissioner Butcher  replied that the department  had heard                                                                    
nothing  about the  exploration  wells.  Petroleum News  had                                                                    
alluded to Repsol  spending $768 million on  the North Slope                                                                    
project. However,  the total investment  could be  much more                                                                    
if HB  110 were  to pass.  He thought  that having  a Repsol                                                                    
representative on  hand during the  HB 110 debates  would be                                                                    
beneficial.  He reminded  the committee  that  the plan  was                                                                    
preliminary and could drastically change  as a result of the                                                                    
passing of HB 110.                                                                                                              
Co-Chair Stoltze informed the  committee that invitations to                                                                    
the meetings  had been distributed universally.  Repsol Oil,                                                                    
among others, had chosen not to be present.                                                                                     
Mr.   Tangeman  noted   that   the   fields  referenced   by                                                                    
Representative  Gara had  not been  included  in the  budget                                                                    
forecast for the department.                                                                                                    
Representative   Guttenberg   referenced   the   development                                                                    
timeline  on Slide  10.  He stated  that  the Kuparuk  River                                                                    
meltwater  development  timeline   was  uniquely  short.  He                                                                    
wondered  when  the department  expected  new  fields to  be                                                                    
online,  and  if  different   timelines  were  expected  for                                                                    
infield  and outer-field  development. Commissioner  Butcher                                                                    
expected  potential  infield  development  to  occur  before                                                                    
outer-field development.                                                                                                        
Representative Guttenberg asked  if there was any  of way of                                                                    
projecting  the timeline.  Commissioner  Butcher replied  in                                                                    
the negative.                                                                                                                   
Representative Doogan asked if  the department could project                                                                    
the possible  losses or  gains HB  110 would  have generated                                                                    
within the  last five years.  Commissioner Butcher  said the                                                                    
information would be provided to the committee.                                                                                 
Mr. Tangeman highlighted that  proposed development in Umiat                                                                    
was included in the department's forecast.                                                                                      
2:10:17 PM                                                                                                                    
Representative Gara wondered if  the legislation was similar                                                                    
to the Petroleum Production  Tax (PPT). Commissioner Butcher                                                                    
offered to provide comparison information.                                                                                      
Representative Wilson  questioned the average  barrel dollar                                                                    
amount for each year from 2013 to 2015.                                                                                         
Commissioner Butcher listed the dollar amounts:                                                                                 
     FY 13 - $95.79                                                                                                             
     FY 14 - $96.33                                                                                                             
     FY 15 - $100.76                                                                                                            
     FY 16 - $103.60                                                                                                            
Representative Wilson requested the  FY 11 per barrel dollar                                                                    
amount. Commissioner  Butcher replied that the  estimate for                                                                    
FY 11 was $91.13; FY 12 was estimated at $94.70.                                                                                
2:12:04 PM                                                                                                                    
AT EASE                                                                                                                         
2:13:08 PM                                                                                                                    
Commissioner  Butcher added  that the  FY 10  oil price  per                                                                    
barrel was $74.90.                                                                                                              
Representative Hawker  questioned the success the  state had                                                                    
had in  achieving past production  forecasts. He  noted that                                                                    
the analysis on Slide 13 was  based on the fall 2010 revenue                                                                    
forecast. He queried whether  the department anticipated the                                                                    
numbers to  be higher in  the spring forecast  when updated.                                                                    
Commissioner  Butcher  replied that  the  price  of oil  was                                                                    
expected to be higher.                                                                                                          
Representative Hawker  asked about  the volume  numbers. Mr.                                                                    
Tangeman said that an initial  drop was anticipated in 2013.                                                                    
Volume  numbers were  expected to  increase slightly  in the                                                                    
years following.                                                                                                                
Representative  Hawker   wondered  if  the   department  had                                                                    
researched the  historic underachievement of  the production                                                                    
forecasts. Commissioner Butcher  admitted that the forecasts                                                                    
could be optimistic when compared  to the actual numbers. He                                                                    
offered  that  the actual  numbers  were  often affected  by                                                                    
project delays.                                                                                                                 
2:15:41 PM                                                                                                                    
Representative Joule  asked whether  the forecasts  would be                                                                    
more accurate  if the projects  were on target.  He wondered                                                                    
if the department  could study the pattern  of projects that                                                                    
had  eventually been  completed,  but not  in the  projected                                                                    
timeframe.   Commissioner    Butcher   imagined    that   an                                                                    
examination  of projections  over  the last  20 years  would                                                                    
reveal that  some projects  had been  delayed, and  some had                                                                    
never  come  to fruition.  He  believed  that if  a  pattern                                                                    
existed, it would  take a tremendous amount  of work examine                                                                    
its effects.                                                                                                                    
Mr.  Tangeman  added  that  there   were  two  variables  to                                                                    
consider when examining the projections: time and quantity.                                                                     
Vice-chair  Fairclough said  that  the Palin  Administration                                                                    
had proposed  a bill for  ACES that included the  25 percent                                                                    
flat tax.  She explained that amendments  to the legislation                                                                    
had  changed  progressivity  to a  "Draconian  take,"  which                                                                    
prompted her to vote no  on the legislation. She relayed the                                                                    
desire  to view  the Palin  introduction bill.  Commissioner                                                                    
Butcher offered to get the information to the committee.                                                                        
2:19:13 PM                                                                                                                    
Commissioner  Butcher continued  to Slide  14, "Outline  for                                                                
Presentation: Outlook and Conclusion."                                                                                        
Commissioner  Butcher   cited  Slide  15,  "HB   110  Fiscal                                                                
   · General Fund Revenue, General Fund Appropriations, and                                                                     
     Savings Balances (CBR / SBR only).                                                                                         
   · Based on 10year Fiscal Model developed by DOR Tax                                                                          
     Division, DOR Treasury, and OMB.                                                                                           
   · Incorporates preliminary Spring 2011 revenue forecast,                                                                     
     production forecast, and investment forecasts.                                                                             
   · Spending projections using LFD presentation from March                                                                     
     1, 2011.                                                                                                                   
   · Key provisions of HB 110 / SB 49 added - tax rate                                                                          
     change, tax calculation, well lease expenditure                                                                            
   · Alternative production scenarios & associated costs                                                                        
     developed to evaluate various possible outcomes                                                                            
Commissioner Butcher discussed  the five possible scenarios.                                                                    
Based  on the  preliminary  spring forecast,  which was  not                                                                    
concrete,  the  department  would be  laying  out  potential                                                                    
scenarios predicting  future production. The  department did                                                                    
not  know  what  would  happen, but  wanted  to  offer  many                                                                    
scenarios. The department  would also show the  effect of HB                                                                    
110 with no  new development and would  compare the possible                                                                    
revenue with  the Legislative Finance Division  (LFD) budget                                                                    
predictions. All of the projections  would vary from year to                                                                    
year. He  stated that the projections  would include General                                                                    
Fund revenue,  General Fund  appropriations, and  the saving                                                                    
balance.  Projections would  be based  on a  ten-year fiscal                                                                    
model established by DORs Tax  and Treasury Division and the                                                                    
Office of  Management and Budget  (OMB). He added  that when                                                                    
looking at  HB 110 the  department had also factored  in the                                                                    
credit increase of  15 percent. Not only  was the department                                                                    
looking at what the potential  increase in revenue would be,                                                                    
but  also  removing   the  increased  capital  expenditures,                                                                    
operating expenditures, and credits.                                                                                            
Representative  Hawker  understood   that  the  spring  2011                                                                    
forecast had been used in  the development of the scenarios.                                                                    
He asked  if the department  was factoring in  any increased                                                                    
production  as  a result  of  HB  110 passing.  Commissioner                                                                    
Butcher  replied that  the department  would have  scenarios                                                                    
that  would show  increased production  as a  result of  the                                                                    
passing of  HB 110.  Representative Hawker clarified  that a                                                                    
full  spectrum   of  potential  new  development   would  be                                                                    
presented to the committee.  Commissioner Butcher replied in                                                                    
the affirmative.                                                                                                                
2:22:44 PM                                                                                                                    
Commissioner  Butcher continued  to  Slide 16,  "Preliminary                                                                  
Spring  2011 forecast  compared to  Fall 2010  forecast." He                                                                  
noted  that  there  were  changes at  the  bottom  level  of                                                                    
production, but  the larger changes between  fall and spring                                                                    
occurred with the price of oil.  He noted that unrest in the                                                                    
Middle East  would result in  increased oil prices  into the                                                                    
future. He  added that  more detail on  the matter  would be                                                                    
available in the spring forecast.                                                                                               
Commissioner  Butcher discussed  Slide  17, "Forecasted  ANS                                                                    
production  FY 2010  - 2020,"  which illustrated  historical                                                                    
decline, as  well as the  breakdown of the  spring forecast:                                                                    
under   evaluation,   under   development,   and   currently                                                                    
producing.  Currently producing  included: base  production,                                                                    
fields  that   were  currently  producing,  and   where  the                                                                    
department  saw  continuing  production  over  the  next  10                                                                    
years. The  decline curve mirrored  what the curve  had been                                                                    
over the  last 10 years.  It was projected that  current oil                                                                    
production  was  forecasted to  decline  an  average of  9.3                                                                    
percent per  year.  The under  development projects included                                                                    
projects  that  were  currently  funded,  or  were  awaiting                                                                    
project   sanction.  The   projects  were   not  guaranteed;                                                                    
projections were  an estimate based  on when  the department                                                                    
believed they  would come online. The  under evaluation area                                                                    
represented  technically viable  projects, with  an emphasis                                                                    
on engineering  cost and  reward. He  stated that  the under                                                                    
evaluation area  was the most  vulnerable in  the difference                                                                    
between  the current  tax structure  and the  passing of  HB                                                                    
Representative Guttenberg  asked whether the  forecast would                                                                    
change  from fall  to spring.  Commissioner Butcher  replied                                                                    
there would be changes. For  example, when the fall forecast                                                                    
was created the department  had expected the Liberty project                                                                    
would  begin production  in 2012  but the  project had  been                                                                    
2:26:12 PM                                                                                                                    
Representative  Guttenberg thought  that future  legislators                                                                    
would  appreciate the  documentation  of  the variables  and                                                                    
patterns  that affected  oil revenues.  Commissioner Butcher                                                                    
replied that it  sounded like a great deal of  work. He said                                                                    
he could see the potential  value of researching the effects                                                                    
of   year-to-year  delays,   smaller  output   numbers,  and                                                                    
permanently shelved projects on the forecast.                                                                                   
Representative Gara asked  if a major factor  of the decline                                                                    
in production since 1990 was  that the fields at Kuparuk and                                                                    
Prudhoe  Bay  had  naturally  declined   at  a  steep  rate.                                                                    
Commissioner  Butcher replied  the department  believed that                                                                    
the state was  not in harvest mode but in  a growth mode. He                                                                    
said  that a  very small  amount of  the area  on the  North                                                                    
Slope  had been  explored, and  it was  rumored that  a very                                                                    
large field  would be found.  He maintained that  there were                                                                    
potential  tens of  billions of  barrels yet  to be  drilled                                                                    
that would mitigate the decline.                                                                                                
Representative  Gara  repeated  the  question.  Commissioner                                                                    
Butcher agreed that  the natural decline could  be a factor.                                                                    
He  said that  all fields  declined over  time but  that the                                                                    
decline would vary from field to field.                                                                                         
2:30:38 PM                                                                                                                    
Vice-chair Fairclough  referred to Slide 6.  She stated that                                                                    
the state's largest fields had  hit a place where production                                                                    
could be maintained. She said  that looking at 2007 forward,                                                                    
producers had found  a way to flatten decline  on the larger                                                                    
fields. She pointed out to  the committee that doing more to                                                                    
develop the  fields already identified  as having  oil could                                                                    
be as beneficial as an entirely new discovery.                                                                                  
Representative Hawker  recalled a presentation  given during                                                                    
the original  ACES legislation that  had used the  North Sea                                                                    
as an example  of natural decline. The example  was that the                                                                    
North  Sea  had reached  its  peak  and was  in  precipitous                                                                    
decline,  much  like  the  charts  currently  presented  for                                                                    
Alaska.  He relayed  that  at  that time  there  had been  a                                                                    
windfall profits tax  in place, which was  repealed in 1993.                                                                    
The production  recovery after the tax  was repealed brought                                                                    
the North Sea back up to  peak levels. He suggested that the                                                                    
department  consider the  fact  that  natural decline  could                                                                    
very  well  be  impacted   by  tax  decisions.  Commissioner                                                                    
Butcher agreed to look into the presentation.                                                                                   
Commissioner  Butcher continued  to Slide  18, "Scenario  1:                                                                
ACES  Tax  Structure,  No 'Under  Evaluation'  and  only  75                                                                  
percent of  'Under Development' Production." The  line graph                                                                  
depicted  numbers  working  under the  assumption  that  the                                                                    
under  evaluation  component of  the  DOR  forecast did  not                                                                    
materialize, and  only 75  percent the  of under-development                                                                    
component materialized.                                                                                                         
2:35:00 PM                                                                                                                    
Commissioner  Butcher continued  to Slide  19, "Scenario  1:                                                                
ACES  Tax  Structure,  No 'Under  Evaluation'  and  only  75                                                                    
percent of 'Under Development' Production,"  which was a bar                                                                  
graph  illustrating what  Scenario 1  might look  like going                                                                    
forward  using  the   current  tax  structure.  Year-to-year                                                                    
production  was anticipated  to  drop  to approximately  370                                                                    
barrels  in  FY  20.  The bottom  of  the  page  illustrated                                                                    
through  2020:  the  forecasted   oil  price,  General  Fund                                                                    
revenues,    General     Fund    expenses,     and    Budget                                                                    
Surplus/(Deficit); total reserves were  predicted to drop to                                                                    
$12,775 billion.                                                                                                                
Commissioner  Butcher continued  to  Slide  20 "Scenario  2:                                                                
Preliminary Spring 2011 Forecast."  Scenario 2 examined what                                                                  
was predicted  to happen if HB  110 passed and if  there was                                                                    
no new production other  than production already anticipated                                                                    
by   the   department.   He  believed   the   scenario   was                                                                    
unrealistic, as did the governor.  He said that the scenario                                                                    
would occur  only if  the legislature  and the  governor did                                                                    
nothing  after  lowering the  tax.  Slide  21, "Scenario  2:                                                                    
Impact  of  HB 110  on  Preliminary  Spring 2011  Forecast,"                                                                    
assumed the  DOR spring production  forecast. The  bottom of                                                                    
the  page  illustrated  through  2020:  the  forecasted  oil                                                                    
price,  General Fund  revenues, General  Fund expenses,  and                                                                    
Budget Surplus/(Deficit);  total reserves were  predicted to                                                                    
drop to $10,378 billion.                                                                                                        
Representative  Gara queried  the assumed  percentage growth                                                                    
of the  General Fund. Commissioner Butcher  believed that it                                                                    
would be 6.8 percent per year, over a 10 year period.                                                                           
Representative  Gara surmised  that the  biggest reason  why                                                                    
the surplus  did not  disappear in  both charts  was because                                                                    
the oil prices predicted were  higher than almost every year                                                                    
in the  history of  the world. Commissioner  Butcher replied                                                                    
that the numbers  were assumptions. He added  that there was                                                                    
a belief that in the out  years, the price of oil would rise                                                                    
with the rebound of the global economy.                                                                                         
2:38:53 PM                                                                                                                    
Representative   Gara  wondered   about   the  process   the                                                                    
department had used in the  development of the projected oil                                                                    
prices.  Commissioner  Butcher  responded  that  the  Delphi                                                                    
method was applied  in the fall; adjustments  were then made                                                                    
by  a  smaller  group   of  production  forecasters  and  an                                                                    
economics team.                                                                                                                 
Representative Gara  asked if  the prices  projected through                                                                    
the Delphi  were the  same or less  than the  smaller group.                                                                    
Commissioner Butcher replied  that in the fall  of 2010, the                                                                    
Delphi had  projected lower numbers, but  that all forecasts                                                                    
were currently different than they had been in in fall.                                                                         
2:39:51 PM                                                                                                                    
Representative  Hawker  commented  that the  Federal  Energy                                                                    
Information Administration was working  with $130 per barrel                                                                    
in 2020.  He stated  that to him  the scenario  presented on                                                                    
Slide 21  was unacceptable.  He believed that  the situation                                                                    
was unsustainable for Alaska's  public. He realized that the                                                                    
7  percent used  by LFD  to predict  the growth  of Alaska's                                                                    
budget  was based  on historic  trends in  recent years.  He                                                                    
thought that the slide defined  the situation that the state                                                                    
was  currently  in:  an unsustainable  situation  that  held                                                                    
Alaska  at risk.  He said  that  the future  success of  the                                                                    
state  would take  both the  revenue  work done  by DOR  and                                                                    
spending cuts in the budget.                                                                                                    
2:42:05 PM                                                                                                                    
Commissioner  Butcher discussed  Slide 22,  "Scenario 3:  10                                                                    
percent Additional  Production From  All Fields."  He stated                                                                    
that the  slide included  some new production.  The scenario                                                                    
assumed that production would be  10 percent higher than the                                                                    
DOR forecast  beginning in FY 13.  The 10 percent was  not a                                                                    
magic number and had been  chosen for illustrative purposes.                                                                    
He  reminded  the  committee   that  the  scenario  included                                                                    
additional credits  and capital  expenditures that  would be                                                                    
expected.  The   line  graph  illustrated   that  production                                                                    
through 2020 was expected to  decline, but at a lesser slope                                                                    
than currently projected.                                                                                                       
Commissioner  Butcher  discussed   Slide  23:  "Scenario  3:                                                                    
Impact of  HB 110 on  Preliminary Spring 2011  Forecast with                                                                    
10  percent  Additional  Production From  All  Fields."  The                                                                    
bottom of the page  illustrated through 2020: the forecasted                                                                    
oil  price, General  Fund revenues,  General Fund  expenses,                                                                    
and Budget Surplus/(Deficit);  total reserves were predicted                                                                    
at $14,524 billion.                                                                                                             
Representative  Doogan noticed  that  the  chart depicted  a                                                                    
steady increase  in revenue. Commissioner  Butcher explained                                                                    
that  the revenue  was  charted to  increase  10 percent  in                                                                    
2013,  with that  amount carrying  forward for  the next  10                                                                    
Representative Doogan understood that  there was going to be                                                                    
a constant 10  percent increase beginning in  2013. He asked                                                                    
where the  10 percent was  going to come  from. Commissioner                                                                    
Butcher  replied   that  he  did   not  have   the  specific                                                                    
information on  exactly what amount,  or where,  the revenue                                                                    
would  come  from.  The department  could  not  predict  the                                                                    
future; these were simply potential scenarios.                                                                                  
2:46:54 PM                                                                                                                    
Co-Chair Thomas added that  the administration could predict                                                                    
only 1 percent growth.  Commissioner Butcher stated that was                                                                    
correct. He  informed the committee that  the department had                                                                    
been requested  to draft the  scenarios in order to  lay out                                                                    
the possibilities.                                                                                                              
Mr.   Tangeman  pointed   out  that   Vice-Chair  Fairclough                                                                    
mentioned  a  1  percent  increase  to  currently  producing                                                                    
fields;  scenario   three  would  be  the   closest  to  her                                                                    
Representative  Doogan  assured   committee  that  his  only                                                                    
critique was that projections were  often wrong. However, he                                                                    
respected the academic exercise.                                                                                                
2:48:26 PM                                                                                                                    
Vice-chair Fairclough  maintained that  the state  could see                                                                    
60 thousand barrels of oil  per day if greater recovery were                                                                    
allowed on the North Slope.                                                                                                     
Representative Wilson  asked if any of  the credits expected                                                                    
under HB 110 were already  available under ACES. She assumed                                                                    
the blue line on  Slide 22 represented appropriations coming                                                                    
in based  on projected  oil revenue  numbers, and  the black                                                                    
line  represented  the  difference   made  by  HB  110.  She                                                                    
understood  that the  difference between  the two  lines was                                                                    
the deficit that  the state would experience  until more oil                                                                    
was  brought online.  Commissioner Butcher  stated that  the                                                                    
two could be  overlaid. He said that during  the creation of                                                                    
the  presentation, the  department had  imagined that  there                                                                    
would  be potential  scenarios  that  would require  further                                                                    
Representative  Wilson reiterated  her  desire  to know  how                                                                    
much revenue the state could possibly lose each year.                                                                           
Mr. Tangeman stated  that the fiscal impacts of  HB 110 were                                                                    
included in the scenarios.  He understood she was requesting                                                                    
further definition.                                                                                                             
2:51:49 PM                                                                                                                    
Representative Wilson  clarified that she wished  to compare                                                                    
the two tax regimes.                                                                                                            
Vice-chair Fairclough pointed out  that Scenario 1 reflected                                                                    
the tax structure under ACES.                                                                                                   
2:52:34 PM                                                                                                                    
Representative Edgmon  wondered which of the  five scenarios                                                                    
in  the   presentation  was   favored  by   the  department.                                                                    
Commissioner  Butcher  replied   that  choosing  a  favorite                                                                    
scenario would  be difficult.  He did  not believe  that DOR                                                                    
should be the department to  make the choice. He stated that                                                                    
even with  all of  the knowledge  gained by  researching the                                                                    
scenarios, predicting  which scenario  was going to  be best                                                                    
for the state was impossible.                                                                                                   
Representative  Edgmon  expressed   concern  about  crafting                                                                    
policy   to  match   the   probability   presented  by   the                                                                    
2:54:49 PM                                                                                                                    
Mr. Tangeman responded  that Scenario 1 showed  the ACES tax                                                                    
structure  and   each  scenario  thereafter   reflected  the                                                                    
structure under  HB 110. Each  scenario added more  and more                                                                    
production.  The administration  believed that  it would  be                                                                    
foolish to  show what additional production  would look like                                                                    
under ACES because they did  not believe that ACES was going                                                                    
to draw  the investment that  would lead to  oil production.                                                                    
He  stressed   that  additional  production   would  require                                                                    
significant   capital.    He   asserted   that    from   the                                                                    
administration's point of view,  charting the effect of ACES                                                                    
through 2020 was disingenuous. He  trusted that HB 110 would                                                                    
have a positive effect on future investment and production.                                                                     
Representative Edgmon requested  composite that detailed the                                                                    
range of outcomes under HB 110.                                                                                                 
2:56:56 PM                                                                                                                    
Representative  Hawker  highlighted Vice-chair  Fairclough's                                                                    
observation that  Slide 19 illustrated  the status  quo with                                                                    
ACES in current revenue and expanding projections.                                                                              
Representative  Joule   understood  that  the   current  tax                                                                    
structure did not offer incentive  for activity. He recalled                                                                    
a previous  question to the  commissioner of  DNR concerning                                                                    
whether the industry would allow  the pipeline to shut down.                                                                    
He asked  if the pipeline  would be  shut down if  no future                                                                    
activity   occurred   under   ACES.   Commissioner   Butcher                                                                    
responded  that  the  Trans-Alaska Pipeline  had  tremendous                                                                    
value to the  producers. He hoped that a  shutdown would not                                                                    
be  a  step taken  by  producers.  However, producers  could                                                                    
drill for  oil elsewhere. He  reminded the committee  of the                                                                    
shock felt when  the Liquefied Natural Gas  plant in Nikiski                                                                    
was closed down. He warned that  the state had to be careful                                                                    
what kind of a message was being sent to industry.                                                                              
Co-Chair Thomas  assumed that the  department had  models in                                                                    
place that showed  the difference in the  projected price of                                                                    
oil  per   barrel  as  it   raised  from  $94.70   to  $108.                                                                    
Commissioner Butcher agreed to supply the information.                                                                          
3:00:42 PM                                                                                                                    
Representative Gara noted that any  loss to the state due to                                                                    
switching  from monthly  to annually  had not  been factored                                                                    
into the projection  scenarios. Commissioner Butcher replied                                                                    
that that was correct. He added  that in most years the loss                                                                    
was  fairly minimal.  He reiterated  that  it was  virtually                                                                    
impossible  for the  department  to attempt  to assume  what                                                                    
would occur in the future.                                                                                                      
Representative  Gara he  reminded the  commissioner that  he                                                                    
had  previously noted  for  the committee  a  year when  the                                                                    
state would  have lost  $500 million  under the  switch from                                                                    
monthly to  annually. He expressed  concern that no  loss at                                                                    
all was factored  into the scenarios. He  queried that DOR's                                                                    
second scenario had shown 520  thousand barrels in 2020, but                                                                    
Slide 19  listed 370,000 barrels in  that year. Commissioner                                                                    
Butcher  said  that  Scenario  1  had  been  crafted  in  in                                                                    
response   to  request   by   Representative  Costello   and                                                                    
Representative  Hawker to  show a  less optimistic  forecast                                                                    
based on historical numbers.                                                                                                    
Representative  Gara noted  that  LFD had  created a  budget                                                                    
forecast  using  the  projected  prices  determined  by  the                                                                    
Delphi method. The division assumed  a loss of approximately                                                                    
$200 million per  year from going from  monthly to annually.                                                                    
Also,  in the  LFD  projections the  surplus  came close  to                                                                    
disappearing in  FY 20. He  thought it was strange  that DOR                                                                    
would  assume   no  loss  for  switching   from  monthly  to                                                                    
annually, and use a higher  price than the one determined by                                                                    
the Delphi method when  creating the scenarios. Commissioner                                                                    
Butcher  explained  that  that was  the  biggest  difference                                                                    
between the  LFD and DOR forecasts.  The division's forecast                                                                    
was based  on numbers from  six months ago; all  the numbers                                                                    
looked very different now.                                                                                                      
3:04:10 PM                                                                                                                    
Representative Guttenberg said that  the department made the                                                                    
assumptions for Scenario  1 under the idea  that there would                                                                    
be no uptick in oil  production; there was no oil production                                                                    
forecasted   into  the   future.  He   perceived  that   the                                                                    
department was working under the  belief that there would be                                                                    
no  uptick  under the  current  system,  and therefore  only                                                                    
represented    possible   decline.    Commissioner   Butcher                                                                    
countered  that the  department  had started  with the  most                                                                    
conservative numbers in Scenario 1  and built to Scenario 5,                                                                    
which was  the most optimistic.  He felt that  the scenarios                                                                    
covered the  full range  from the  most conservative  to the                                                                    
most optimistic.                                                                                                                
Representative  Guttenberg  reiterated that  the  assumption                                                                    
for Scenario 1 only  reflected decline. Commissioner Butcher                                                                    
rebutted that  the scenario was generated  by the department                                                                    
specifically  at the  request of  Representative Hawker  and                                                                    
Representative Costello: it had  been intended to illustrate                                                                    
a scenario using historic, not current, forecast numbers.                                                                       
Representative  Guttenberg  pointed  out  that  every  other                                                                    
scenario  showed  an  increase  in  production,  except  the                                                                    
current scenario.  Commissioner Butcher replied that  it had                                                                    
been   anticipated  that   there  would   be  requests   for                                                                    
additional  scenarios,  which   could  be  provided  without                                                                    
Co-Chair  Stoltze  advised  that  the  line  of  questioning                                                                    
should cease. He asked the  commissioner to proceed with his                                                                    
3:07:49 PM                                                                                                                    
Commissioner  Butcher continued  to Slide  24, "Scenario  4:                                                                    
10%  Additional  +  New  Alpine-Size   Field  +  New  Fields                                                                    
Development." He  explained that the department  had figured                                                                    
in the  10 percent  production uptick  from Scenario  3, and                                                                    
then added a hypothetical  Alpine-sized field online in 2018                                                                    
and  new   field  development   expected  by   Brooks  Range                                                                    
Petroleum. The  department used the  15 percent  tax bracket                                                                    
in  the projection  because it  was  an already  established                                                                    
Commissioner Butcher cited Slide  25, which incorporated the                                                                    
HB  110  tax  regime,  the  preliminary  spring  2011  price                                                                    
projections, and  the LFD budget projections.  The bottom of                                                                    
the  page  illustrated  through  2020:  the  forecasted  oil                                                                    
price,  General Fund  revenues, General  Fund expenses,  and                                                                    
Budget Surplus/(Deficit);  total reserves were  predicted at                                                                    
$16,110 billion.                                                                                                                
Representative Doogan probed the  process of cost and credit                                                                    
estimations. Mr.  Tangeman responded  that the  numbers were                                                                    
based on  presentations given by  the industry early  in the                                                                    
process.  The  department  had  made  assumptions  based  on                                                                    
graphs  used  by  industry and  had  incorporated  real-life                                                                    
knowledge of  actual fields.  Educated guesses  were applied                                                                    
to the types of fields described by other presenters.                                                                           
Representative  Doogan  asked if  the  credits  used in  the                                                                    
assumptions  were the  credits as  described in  the current                                                                    
bill. Mr. Tangeman replied in the affirmative.                                                                                  
3:10:59 PM                                                                                                                    
Representative Wilson  asked why  the numbers of  barrels of                                                                    
oil per day decreased between 2019 and 2012.                                                                                    
DAN STICKEL,  PETROLEUM ECONOMIST, TAX  DIVISION, DEPARTMENT                                                                    
OF REVENUE, explained that the  new field scenario presented                                                                    
by  Brooks Range  Petroleum  had shown  that  the number  of                                                                    
barrels per day  were expected to decline in  2020. He noted                                                                    
that  production  was predicted  to  start  strong and  that                                                                    
multiple  fields  were  being   layered  in  over  time.  He                                                                    
reiterated that  the baseline  production forecast  showed a                                                                    
decline in 2020.                                                                                                                
Representative  Wilson asked  if  the  same natural  decline                                                                    
that the state  was currently experiencing would  be seen in                                                                    
2020. Mr.  Tangeman said  yes. He  relayed that  an increase                                                                    
would be seen in 2013 that  would climb until 2019, at which                                                                    
time the numbers were projected to decline.                                                                                     
Representative Wilson requested  the approximate lifespan of                                                                    
an  oil  field.  Commissioner  Butcher  responded  that  the                                                                    
lifespans of  fields varied vastly  because of the  range in                                                                    
field size.  He said that an  answer could be provided  at a                                                                    
later date.                                                                                                                     
Representative  Gara understood  that a  lower tax  rate was                                                                    
necessary for  new fields because  producing the  fields was                                                                    
more expensive.  He requested  an estimate  of the  range of                                                                    
possible  per-barrel lifting  costs  at Umiat  or the  Great                                                                    
Bear Petroleum  site. Commissioner Butcher thought  that the                                                                    
question was better suited to DNR.                                                                                              
3:14:30 PM                                                                                                                    
Representative  Gara maintained  his  disagreement that  tax                                                                    
rates should  be lowered for  new fields. He said  that ACES                                                                    
had a built in lower rate  for new fields. He contended that                                                                    
the rate for more challenged  fields was already lower under                                                                    
ACES. Commissioner  Butcher replied  in the  affirmative. He                                                                    
added that  more exploration should  be occurring  given the                                                                    
historically high oil  prices, as well as the  amount of oil                                                                    
available as estimated by the state and federal government.                                                                     
Vice-Chair Fairclough asked  whether smaller explorers would                                                                    
be deterred by a tax rate  that would not be profitable once                                                                    
production  began.   She  said   that  producers   had  made                                                                    
commitments to the state under  ACES, and then ACES changed.                                                                    
She wondered if producers, both  large and small, would seek                                                                    
a  higher  rate of  return  in  other  areas of  the  globe.                                                                    
Commissioner  Butcher relayed  that  smaller explorers  that                                                                    
had  been excited  by  the  tax credits  and  found oil  had                                                                    
experienced difficulty  finding companies willing  to invest                                                                    
in production.                                                                                                                  
3:17:53 PM                                                                                                                    
Commissioner Butcher  discussed Slide  26, "Scenario  5: 20%                                                                    
Additional   +   New   Alpine-Size  Field   +   New   Fields                                                                    
Development."  The slide  included  the  10 percent  uptick,                                                                    
with an additional ten percent  uptick in 2017. The scenario                                                                    
was  the most  optimistic of  the five.  He cited  Slide 27,                                                                    
which incorporated  the HB 110  tax regime,  the preliminary                                                                    
spring   2011  price   projections   and   the  LFD   budget                                                                    
projections.  The bottom  of  the  page illustrated  through                                                                    
2020:  the  forecasted  oil price,  General  Fund  revenues,                                                                    
General Fund  expenses, and Budget  Surplus/(Deficit); total                                                                    
reserves were predicted at $18,259 billion.                                                                                     
Commissioner   Butcher   added   that  "Scenario   5b:   20%                                                                    
Additional  +  New Alpine  Field  +  New Fields  Development                                                                    
(with 5  % annual spending  growth)" on Slide  28 emphasized                                                                    
the   increased   production   and  department   oil   price                                                                    
estimates.  He   said  that  one  major   variable  was  the                                                                    
projected  budget  numbers.   Each  scenario  presented  had                                                                    
reflected  the LFD  number of  6.8 percent  estimated growth                                                                    
over the  next decade. Scenario  5(b) suggested a  5 percent                                                                    
annual  spending  growth  rate.   The  bottom  of  the  page                                                                    
illustrated through 2020: the  forecasted oil price, General                                                                    
Fund   revenues,   General   Fund   expenses,   and   Budget                                                                    
Surplus/(Deficit); total reserves  were predicted at $21,900                                                                    
Representative  Edgmon   asked  if   a  scenario   had  been                                                                    
considered that  illustrated the lack of  enough resource to                                                                    
accommodate all possible investors.                                                                                             
3:21:37 PM                                                                                                                    
Commissioner  Butcher  replied  that  he did  not  know.  He                                                                    
believed that  Alaska was  unique among  states in  terms of                                                                    
potential production.  He asserted  that no other  states in                                                                    
the  Lower 48  had  the kind  of  production potential  that                                                                    
Alaska had. He  mentioned the assertion made  earlier in the                                                                    
meeting  that  North Dakota  could  surpass  Alaska in  five                                                                    
years in oil  production, but North Dakota did  not have the                                                                    
estimated reserves that Alaska did in the North Slope.                                                                          
Representative Edgmon  thought that the competition  for the                                                                    
resources  available on  the North  Slope could  increase in                                                                    
the future. Commissioner Butcher agreed.                                                                                        
Commissioner   Butcher  continued   to  Slide   29,  "Fiscal                                                                    
Projections Scenario Assumptions":                                                                                              
   · DOR forecast - uses the full production forecast per                                                                       
     Spring   2011  revenue   forecast  (preliminary)   plus                                                                    
     associated  lease expenditures  and credits.  These are                                                                    
     preliminary numbers  based on  the forecast  which will                                                                    
     be released in early April.                                                                                                
   · Scenario 1 - removes "Under Evaluation" and 25% of                                                                         
   · Development" from the forecast along with associated                                                                       
     lease expenditures and credits.                                                                                            
   · Scenario 2 - 10% production increment - adds an                                                                            
     additional 10% to forecast across the board, and an                                                                        
     associated increase in lease expenditures and credits.                                                                     
   · Scenarios 3, 4, 5 - Add hypothetical Alpinesize field                                                                      
     in 2018, and new fields development                                                                                        
        o Alpine size field in 2018 - production profile                                                                        
          developed based on presentation by AOGCC to House                                                                     
          Finance on 3/16/11. This development receives the                                                                     
          25% base tax rate under HB 110.                                                                                       
        o New fields development - production profile                                                                           
          developed based on presentation by Brooks Range                                                                       
          to House Finance on 3/23/11. This development                                                                         
          receives the 15% base tax rate under HB 110.                                                                          
   · LFD spending scenario - 10year spending projections as                                                                     
     presented in House Finance on 3/1/11 - averaging 6.4%                                                                      
     yearly budget growth FY 1320.                                                                                              
3:23:40 PM                                                                                                                    
Commissioner Butcher continued to Slide 30, "Other Oil that                                                                     
is not in our scenarios":                                                                                                       
   · Shale oil                                                                                                                  
   · Heavy and viscous oil                                                                                                      
   · Most of the oil in the NPR-A                                                                                               
   · Nearly all of the federal Outer Continental Shelf                                                                          
   · Arctic National Wildlife Refuge (ANSR)                                                                                     
Commissioner Butcher finished the presentation with Slide                                                                       
31, "In Conclusion":                                                                                                            
     1. Tax rates must be lowered to  improve the investment                                                                    
        climate in Alaska.                                                                                                      
     2. Our economy is at  risk if we decide  to do nothing.                                                                    
        Our future is at stake!                                                                                                 
     3. The decisions made now will  affect Alaska's economy                                                                    
        for decades to come.                                                                                                    
     4. Without major  new  investment,  new  drilling  will                                                                    
        continue to suffer in Alaska.                                                                                           
     5. Oil  exploration   and   development   will   create                                                                    
        immediate return in jobs for Alaskans.                                                                                  
     6. Just one  exploratory well  creates dozen  of direct                                                                    
        jobs and hundreds of indirect jobs.                                                                                     
     7. Industry  investment   and  exploration   should  be                                                                    
        closely monitored to make sure HB 110 has the                                                                           
        desired effects.                                                                                                        
Commissioner Butcher  recapped that Alaska was  not weighing                                                                    
in competitively  with other states  in terms  of investment                                                                    
and exploration.  He warned that  the economy and  future of                                                                    
the state was  at risk if nothing was done  to alter the tax                                                                    
Co-Chair  Stoltze  asked  what  percent of  the  budget  had                                                                    
consisted of oil revenue when  Governor Sean Parnell was Co-                                                                    
Chair of  the House Finance  Committee and the price  of oil                                                                    
was  $9 per  barrel.  Commissioner Butcher  shared that  the                                                                    
price per barrel at the time was approximately 50 percent.                                                                      
Commissioner Butcher emphasized the  importance of acting as                                                                    
soon  as  possible. He  reiterated  that  without major  new                                                                    
investment,  new drilling  would continue  to suffer  in the                                                                    
state. He  offered the caveat  that the  industry investment                                                                    
and exploration should be closely  monitored to be sure that                                                                    
the legislation had the desired effect.                                                                                         
3:28:10 PM                                                                                                                    
Representative Joule  pointed out to the  committee that the                                                                    
resources listed  on Slide  30 were not  listed in  the five                                                                    
scenarios  presented. He  requested the  anticipated credits                                                                    
that would  be offered for  heavy and viscous oils,  and how                                                                    
the credits changed in HB  110. Mr. Tangeman replied that an                                                                    
immediate drop in revenue due  to capital credits already in                                                                    
place  would be  seen  if  the heavy  and  viscous oil  were                                                                    
incorporated into the scenarios.  The heavy and viscous oils                                                                    
required considerable capital in advance.                                                                                       
Representative  Joule  said  that   the  tax  credits  would                                                                    
hopefully lead  to enough production  to offset  the capital                                                                    
investment  if a  credit was  offered that  changed explorer                                                                    
behavior.  He stated  that the  heavy viscous  oils were  in                                                                    
current wells  and did  not need  exploration. He  asked how                                                                    
the  credits that  might  be offered  related  to heavy  and                                                                    
viscous oil,  and whether a way  had been found to  lift the                                                                    
Commissioner Butcher  responded that  BP was  optimistic and                                                                    
making progress in the area.  The heavy and viscous oils had                                                                    
not been  considered in the scenarios  because they included                                                                    
too many  variables. He explained  that the majority  of the                                                                    
Outer  Continental  Shelf  (OCS)  was on  federal  land  and                                                                    
Alaska  would  not  get  a production  tax  off  that  land.                                                                    
However,  the  state's  tariff  in  the  pipeline  would  be                                                                    
positively  affected   and  more  jobs  would   be  created.                                                                    
Ultimately, more through-put would  improve the life of TAPS                                                                    
and help with  the heavy and viscous oil that  would need an                                                                    
estimated 50 percent mix of  light oil to travel through the                                                                    
3:32:28 PM                                                                                                                    
Representative  Guttenberg wondered  what  action the  state                                                                    
would take if the expected  changes to industry behavior did                                                                    
not manifest due to the passage of HB 110.                                                                                      
Commissioner  Butcher  replied  that  it  was  difficult  to                                                                    
imagine the legislature and the  governor would sit back and                                                                    
watch  nothing  happen  after reducing  taxes  in  order  to                                                                    
incentive the industry.                                                                                                         
Representative   Guttenberg  asked   how  the   state  would                                                                    
determine  whether  the  tax  changes in  HB  110  were  not                                                                    
Commissioner Butcher replied that  it would be determined on                                                                    
a year-to-year basis.                                                                                                           
3:35:12 PM                                                                                                                    
Representative  Gara   understood  that  the   credits  were                                                                    
"stackable";  companies could  benefit  from  more than  one                                                                    
credit at  a time. He  believed all the stackable  state and                                                                    
federal credits  and deductions for the  production of heavy                                                                    
and  viscous oil  would be  over 50  percent of  any capital                                                                    
investment.  He  contested  that  the  significance  of  the                                                                    
credits already on the books had not been emphasized.                                                                           
Representative Gara  noted that the same  presentation (tied                                                                    
to  a  completely different  bill)  had  been shown  to  the                                                                    
committee  the year  prior. He  wondered what  was different                                                                    
about HB  110 that  would inspire  confidence that  it would                                                                    
benefit Alaska.                                                                                                                 
Commissioner Butcher  responded that  he could not  speak to                                                                    
the previous  year's bill.  He said that  in the  few months                                                                    
that he had been working  for the governor, the governor had                                                                    
applied a "full-court press."  He furthered that discussions                                                                    
concerning the  future of  the state  had involved  Roads to                                                                    
Resources and  expanding the  involvement of  the Department                                                                    
of  Transportation  and  Public  Facilities  (DOT/PF).  Also                                                                    
involved were  the Department of  Environmental Conservation                                                                    
(DEC) and  the Department  of Law  (DOL). From  his personal                                                                    
viewpoint  the administration  had done  everything possible                                                                    
to craft a comprehensive bill.                                                                                                  
3:39:54 PM                                                                                                                    
Co-Chair   Thomas   expressed    concern   with   the   term                                                                    
"retroactivity,"   which   had   been  written   into   past                                                                    
incarnations of the legislation.                                                                                                
Representative  Wilson  requested  the simple  analysis  and                                                                    
fiscal   ramifications  of   each  section   of  the   bill.                                                                    
Commissioner Butcher agreed to provide the information.                                                                         
3:42:27 PM                                                                                                                    
3:48:50 PM                                                                                                                    
Representative  Hawker stated  that  the Legislative  Budget                                                                    
and Audit  Committee had received a  competitive proposal to                                                                    
procure  economic consultants  for  the HB  110 debates.  He                                                                    
informed the committee that he  had requested a presentation                                                                    
from a  consultant. The presentation  used the same  data as                                                                    
the presentations made by DOR  and proposed that with only a                                                                    
five percent increase in production  in five years the state                                                                    
would  have a  break even  revenue scenario  if HB  110 were                                                                    
ROGER  MARKS,  CONSULTANT,   LEGISLATIVE  BUDGET  AND  AUDIT                                                                    
COMMITTEE,  argued that  it was  plausible that  due to  the                                                                    
relative    international    uncompetativeness   of    ACES,                                                                    
investment capital had  been diverted to other  parts of the                                                                    
globe,  which  had  suppressed   production  in  the  state.                                                                    
Conversely, it  was plausible that  with a  more competitive                                                                    
fiscal system the  capital could be drawn  back and increase                                                                    
production.  He contended  that when  comparing the  revenue                                                                    
stream with and  without HB 110 it was  inappropriate to use                                                                    
the same number of barrels per day under the status quo.                                                                        
Mr.  Marks  introduced  the  presentation  "HB  110  &  ACES                                                                    
Revenue Sensitivities  to Production (Logsdon  & Associates,                                                                    
House Finance, March 26, 2010. copy on file)."                                                                                  
Mr. Marks began with Slide 1: "Framework":                                                                                      
   • Over the  past 10 years,  looking 5 years  forward, the                                                                    
     DOR  production forecast  has  averaged  about 20%  too                                                                    
   • The  DOR forecast  does not  take  the availability  of                                                                    
     capital into  account in  the production  forecast. The                                                                    
     availability  of  capital   is  crucial  for  producing                                                                    
   • It is  plausible due to the  relative international un-                                                                    
     competitiveness of ACES that  capital has been diverted                                                                    
     elsewhere and production has been suppressed.                                                                              
   • For this  exercise we assume  the Fall  2010 production                                                                    
     forecast  under ACES  is  10% too  high  for 2016,  and                                                                    
     looked at total oil revenues under ACES.                                                                                   
   • It  is plausible  that with  a more  competitive fiscal                                                                    
     system   Alaska   would   attract  more   capital   and                                                                    
     production would be enhanced.                                                                                              
   • For  this  exercise we  looked  at  total oil  revenues                                                                    
     under  HB 110  at a  spectrum of  percentage production                                                                    
     increases over the Fall 2010 forecast for 2016.                                                                            
   • We looked at $80, $100, and $120/bbl prices.                                                                               
   • We looked at HB 110 both  with and without the 40% well                                                                    
     expenditure credit.                                                                                                        
   • Total  oil revenues  include restricted  royalties that                                                                    
     go to the Permanent Fund.                                                                                                  
3:55:25 PM                                                                                                                    
Mr. Marks  continued with  Slide 2:  "Total Oil  Revenues HB                                                                    
110  vs.  ACES: 2016  @  $100/bbl($mm),"  which charted  the                                                                    
comparison of total oil revenues  under ACES and HB 110. The                                                                    
chart included  restricted royalties without the  40 percent                                                                    
well credit  for HB  110. The  chart illustrated  that under                                                                    
ACES,  with production  10 percent  below the  DOR forecast,                                                                    
total oil  revenue would be approximately  $6.2 billion. Mr.                                                                    
Marks noted  that the chart  reflected that the  state would                                                                    
make more money under HB 110.                                                                                                   
3:56:18 PM                                                                                                                    
Mr. Marks  continued with  Slide 3:  "Total Oil  Revenues HB                                                                    
110  vs.  ACES: 2016@  $100/bbl  ($mm).  The chart  included                                                                    
restricted royalties with the 40  percent credit for HB 110.                                                                    
Without  the  well  credit,   production  was  projected  to                                                                    
increase  4   percent.  With  the  credit,   production  was                                                                    
anticipated to  increase 10 percent. He  believed the higher                                                                    
oil prices  got under ACES  made the state  less competitive                                                                    
with other areas in the world.                                                                                                  
3:58:07 PM                                                                                                                    
Mr. Marks skipped to Slide 8: "Crossover Points":                                                                               
     Increased Percentage Production where HB 110 Revenues                                                                      
     Exceed ACES Revenues:                                                                                                      
   • Without 40 percent well expenditure credit                                                                                 
        - $80/bbl             0 percent                                                                                         
        - $100/bbl            4 percent                                                                                         
        - $120/bbl            11 percent                                                                                        
   • With 40% well expenditure credit                                                                                           
        - $80/bbl             5 percent                                                                                         
        - $100/bbl            10 percent                                                                                        
        - $120/bbl            15 percent                                                                                        
3:58:24 PM                                                                                                                    
Representative  Gara noticed  that  the presentation  worked                                                                    
under the  negative assumption that no  new production would                                                                    
occur  under ACES  by Great  Bear Petroleum,  Repsol, or  in                                                                    
Umiat. Also assumed  was that the state would  lose the case                                                                    
surrounding the  National Petroleum  Reserve - Alaska.   Mr.                                                                    
Marks replied  that the presentational data  assumed the DOR                                                                    
production numbers for 2016 under ACES.                                                                                         
Representative Gara restated the question.                                                                                      
Mr. Marks  DOR relayed that  he had used the  DOR production                                                                    
forecast five  years out coupled  with the  historical error                                                                    
rate and had throttled the error rate down.                                                                                     
Representative   Doogan    took   issue   with    the   term                                                                    
"plausibility."  He  wondered  if  there  was  any  concrete                                                                    
information that  could be extracted from  the presentation.                                                                    
Mr. Marks  emphasized that regardless  of what  would happen                                                                    
with or without the bill  every plausible scenario should be                                                                    
taken into consideration.                                                                                                       
4:02:28 PM                                                                                                                    
Representative   Doogan  disagreed.   He  argued   that  the                                                                    
committee would have  to consider a fiscal note  if the bill                                                                    
reported out. He  believed that the assumptions  made in the                                                                    
presentation lacked credit to affect the fiscal note.                                                                           
Mr. Marks  replied that the  basic argument laid out  in the                                                                    
presentation was backed up  by rationality; investments went                                                                    
where  the  most  money  could  be  made.  He  felt  he  had                                                                    
presented  a sound  argument on  why  investors were  making                                                                    
more return by investing dollars elsewhere in the world.                                                                        
Representative  Edgmon asked  Mr. Marks  to choose  from the                                                                    
five  DOR scenarios  which would  best represent  a mid-case                                                                    
scenario.  Mr. Marks  replied that  he would  need to  study                                                                    
each  scenario more  in-depth before  giving a  response. He                                                                    
requested more time.                                                                                                            
Representative     Edgmon    expressed     frustration    in                                                                    
understanding  which  scenario  best  represented  a  middle                                                                    
point. He  hoped for further enlightening  discussion on the                                                                    
4:05:39 PM                                                                                                                    

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