Legislature(2013 - 2014)HOUSE FINANCE 519

04/06/2013 12:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 6:00 pm Today --
Moved HCS CSSB 23(FIN) Out of Committee
Heard & Held
Scheduled But Not Heard
<Pending Referral>
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)                                                                                    
     "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;                                                                    
     providing a  tax credit against the  corporation income                                                                    
     tax  for   qualified  oil  and  gas   service  industry                                                                    
     expenditures; relating  to the  oil and  gas production                                                                    
     tax rate; relating  to gas used in  the state; relating                                                                    
     to  monthly installment  payments  of the  oil and  gas                                                                    
     production tax; relating to oil  and gas production tax                                                                    
     credits for  certain losses and  expenditures; relating                                                                    
     to  oil and  gas  production  tax credit  certificates;                                                                    
     relating  to  nontransferable   tax  credits  based  on                                                                    
     production;  relating to  the  oil and  gas tax  credit                                                                    
     fund; relating  to annual  statements by  producers and                                                                    
     explorers;    establishing    the     Oil    and    Gas                                                                    
     Competitiveness  Review  Board; and  making  conforming                                                                    
12:36:04 PM                                                                                                                   
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT  OF  REVENUE,  concluded his  sectional  analysis                                                                    
titled  "Department of  Revenue  Sectional  Review HCS  CSSB
21(RES) April 5, 2013" (copy  on file). The presentation was                                                                    
initiated in an earlier  House Finance Committee meeting. He                                                                    
mentioned page  25, line 4  of the bill,  referenced earlier                                                                    
by Deputy Commissioner Balash. He  noted that the Department                                                                    
of Revenue  (DOR) was  using the  "small d."  The additional                                                                    
test  for the  third  part of  the  Gross Revenue  Exclusion                                                                    
(GRE)  must prove  to the  Department  of Natural  Resources                                                                    
(DNR)  that the  new acreage  was geologically  required for                                                                    
expansion  into the  existing area  and that  industry could                                                                    
account for  the barrels. He  recalled discussion  about the                                                                    
counting  of  the  barrels.  He  saw  the  provision  as  an                                                                    
opportunity  to   advance  certain  aspects  of   heavy  oil                                                                    
production.   He  added   that  geology   versus  artificial                                                                    
definitions determined whether the oil was considered new.                                                                      
Co-Chair   Austerman   referred   to   slide   10   of   the                                                                    
presentation: "For oil  and gas produced north  of 8 degrees                                                                    
North latitude, the  gross value at the  point of production                                                                    
is reduced by 20 percent for the oil or gas produced from."                                                                     
12:39:00 PM                                                                                                                   
Co-Chair Austerman  interpreted that 20 percent  was reduced                                                                    
from the 33  percent tax base. Mr.  Pawlowski responded that                                                                    
the   production  tax   calculation  utilized   an  equation                                                                    
beginning with  the price of a  barrel of oil in  the market                                                                    
and subtracting the cost of  transporting the oil to market,                                                                    
which   determined  the   gross  value   at  the   point  of                                                                    
production.  The equation's  value  was then  reduced by  20                                                                    
percent  in  the  provision.  The  cost  of  production  was                                                                    
subtracted to determine the production tax value.                                                                               
Representative  Gara asked  if the  20 percent  reduction as                                                                    
defined in  the bill equaled  a 40 percent reduction  in the                                                                    
tax  rate.  Mr. Pawlowski  replied  that  the price  of  oil                                                                    
determined  the tax  rate. He  noted that  consultants would                                                                    
present charts  illustrating the effect between  the varying                                                                    
prices of oil.                                                                                                                  
Representative Gara  clarified that the calculation  of a 20                                                                    
percent  reduction  in  the tax  rate  was  inaccurate.  Mr.                                                                    
Pawlowski confirmed  that the reduction  in the  gross value                                                                    
led into the equation for determining the tax rate.                                                                             
12:41:12 PM                                                                                                                   
Representative  Gara   asked  Mr.   Balash  about   the  oil                                                                    
development  planned  under  Alaska's  Clear  and  Equitable                                                                    
Share (ACES). He asked about  the new oil incentive provided                                                                    
to  the  projects,  which he  understood  would  incentivize                                                                    
future events.                                                                                                                  
JOE  BALASH,  DEPUTY  COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES,  stated   that  the  CD5  project   was  not  yet                                                                    
sanctioned. He noted that Umiat  moved forward with drilling                                                                    
to  firm-up the  productive capacity  of the  reservoir, but                                                                    
was not  sanctioned either. He  stated that the  Division of                                                                    
Oil  and  Gas received  plans  of  development annually.  He                                                                    
mentioned  the  development   of  the  production  forecast.                                                                    
Distinguishing  between new  and old  production required  a                                                                    
"bright line"  to prevent  quibbling. The  department wished                                                                    
to rely on established processes and tools.                                                                                     
12:44:34 PM                                                                                                                   
Representative  Gara   commented  that   ConocoPhillips  was                                                                    
planning  to  move  ahead  with CD5.  He  was  unsure  about                                                                    
Oooguruk and Nakiachuk oil fields.  He asked if those fields                                                                    
would  receive the  new oil  benefit under  the legislation.                                                                    
Mr.  Balash replied  yes. The  legislation was  crafted with                                                                    
the awareness that Oooguruk and Nakiachuk would qualify.                                                                        
Representative  Gara disagreed  with  Mr.  Balash about  the                                                                    
definition of new  oil. He asked why new  oil was considered                                                                    
oil produced by 2011.                                                                                                           
Mr. Balash  responded that the  dates indicated  had changed                                                                    
from  version  to version  of  the  bill. He  explained  the                                                                    
importance of  granting the Production Area  (PA), drilling,                                                                    
and achieving production.  The use of the  date December 31,                                                                    
2011  for a  new participating  area employed  a process  of                                                                    
approval for  a participating area and  further development.                                                                    
He  was  unaware  of  approvals   of  PAs  that  would  have                                                                    
otherwise qualified in the new  unit category. He offered to                                                                    
provide additional  data and noted that  the committee could                                                                    
choose a different date if they wished.                                                                                         
Mr. Pawlowski stated that page  24, line 25 illustrated that                                                                    
the identification  of units formed after  2003. He stressed                                                                    
that the benefit was in the  future as opposed to one with a                                                                    
retroactive application.                                                                                                        
12:48:11 PM                                                                                                                   
Representative    Gara    recalled   that    "Representative                                                                    
Fairclough's"  statement  that  all  oil would  be  new  oil                                                                    
eventually.  The 20  percent GRE  for old  oil would  affect                                                                    
state revenues dramatically as a  discount off of an already                                                                    
reduced tax rate. He asked how  much new oil would be in the                                                                    
pipeline  to produce  a  similar amount  of  revenue as  the                                                                    
current system.                                                                                                                 
Mr.  Pawlowski  replied  that the  provision  had  undergone                                                                    
multiple  revisions  in  the process.  The  House  Resources                                                                    
Committee  refined  the  provision  drastically  because  of                                                                    
questions  regarding new  oil. He  stated that  DOR saw  the                                                                    
vast majority of  Alaska's oil coming from  areas that would                                                                    
not  qualify  for  GRE.  He  stated  that  a  projection  of                                                                    
percentages  was  difficult  to make.  Consultants  provided                                                                    
analysis regarding the  amount of oil that  must be produced                                                                    
over the  long term to  provide a break-even for  the state.                                                                    
The analysis assumed that every  barrel was eligible for the                                                                    
Co-Chair Stoltze  clarified that Anna Fairclough  was indeed                                                                    
a  Senator  versus  a  Representative.  Representative  Gara                                                                    
concurred.  His recollection  was that  her statement  about                                                                    
new oil was made this year as a Senator.                                                                                        
12:51:49 PM                                                                                                                   
Representative  Gara  referenced  the term  "new  geological                                                                    
area" as  stated in SB  21 when introduced by  the governor.                                                                    
The  revised  definition  was  at   the  discretion  of  the                                                                    
Commissioner, which concerned him.  He stated that companies                                                                    
tended  to be  interested  in expansion.  He  asked why  the                                                                    
definition for GRE was changed.                                                                                                 
Mr.  Balash responded  that a  timeline for  the application                                                                    
for  GRE  arose  when  the  amount  was  established  at  30                                                                    
percent. At 30  percent, the time limit was  discussed for a                                                                    
provision  with that  level  of impact  on  the overall  tax                                                                    
12:56:08 PM                                                                                                                   
Mr. Pawlowski  stated that  the bill  was a  process through                                                                    
multiple committees with policy  calls developed through the                                                                    
legislative  process.  When  productivity  declined  on  any                                                                    
given oil  well, the  costs increased,  which could  lead to                                                                    
inefficient   economic  results.   The   risk  of   creating                                                                    
incentives   was   prematurely    discontinuing   a   well's                                                                    
production or drilling  another well to gain  the benefit of                                                                    
GRE.   He   stated   that   qualifications   of   particular                                                                    
productions and the gained benefit  of GRE were addressed in                                                                    
two categories;  either a  new unit  or a  new participating                                                                    
area  in  an  old  unit. The  third  category  attempted  to                                                                    
provide  some measure  of effect  for  the GRE  to apply  to                                                                    
additions in  the legacy fields  to old PAs. He  stated that                                                                    
he could present a set of slides to illustrate the example.                                                                     
Mr.  Pawlowski  added  that  the bill  had  been  through  a                                                                    
collaborative  process in  multiple  committees. The  policy                                                                    
regarding the extent  of new additions in  the legacy fields                                                                    
was determined in the legislative process.                                                                                      
12:56:52 PM                                                                                                                   
Representative  Holmes understood  that the  prior committee                                                                    
added a "hard floor" of 4  percent to legacy oil, but not to                                                                    
GRE  new  oil.  She  asked   if  the  hard  floor  might  be                                                                    
applicable to GRE.                                                                                                              
Mr.  Pawlowski responded  that  new  participating areas  in                                                                    
existing units  were not economic. He  added that expansions                                                                    
were  complicated  and  new  units   were  clearly  new.  He                                                                    
advocated for  balance of  the incentives  to arrive  at new                                                                    
development. He  noted that the  timing for  new development                                                                    
happened  in   the  future.   He  encouraged   caution  when                                                                    
incentivizing new developments.                                                                                                 
12:59:27 PM                                                                                                                   
Co-Chair Austerman  asked for clarification about  slide 10:                                                                    
"Leases in  a unit  established after  January 1,  2003." He                                                                    
understood  that application  would be  for two  units only.                                                                    
Mr. Balash replied that two  currently producing units would                                                                    
apply.  Other   units  formed   would  eventually   lead  to                                                                    
Co-Chair  Austerman understood  that  the  slide applied  to                                                                    
units  established  after  January 1,  2014.  Mr.  Pawlowski                                                                    
Co-Chair  Austerman clarified  that the  indication was  for                                                                    
currently producing  fields. Mr. Balash agreed  that the two                                                                    
fields, Oooguruk and Nakiachuk would  be eligible for GRE in                                                                    
2014 and after.                                                                                                                 
Co-Chair Austerman  clarified that  the detail was  a policy                                                                    
call.  He  asked  about  the  impact  on  the  bill  if  the                                                                    
statement  was removed.  Mr. Balash  wondered if  the change                                                                    
would   include  the   application   of  GRE   to  all   new                                                                    
participating areas  formed regardless of where  or when the                                                                    
unit  itself   was  formed.  If  the   second  category  was                                                                    
preserved, then every participating  area in new units would                                                                    
qualify, but the two currently producing areas would not.                                                                       
1:01:51 PM                                                                                                                    
Co-Chair Austerman planned to  follow-up with the department                                                                    
Mr. Balash  revisited the concern  regarding the  hard floor                                                                    
and taxes expressed by  Representative Holmes. Regarding the                                                                    
newer areas  on state land, the  focus was on leases  with a                                                                    
one sixth  royalty share.  The royalty  rates for  the newer                                                                    
areas were higher than the legacy royalty rates.                                                                                
1:03:17 PM                                                                                                                    
Mr. Pawlowski discussed slide 11: "Lease Expenditures."                                                                         
   · Lease expenditures are ordinary and necessary cost of                                                                      
     upstream operations  for exploration,  development, and                                                                    
     production tax value.  Currently lease expenditures are                                                                    
     allowed    by   regulation    as    required   by    AS                                                                    
   · The bill restores 2006 language that allows Revenue to                                                                     
     consider JIBs that are substantially similar to                                                                            
     Revenue's definition of lease                                                                                              
Mr. Pawlowski explained that the  slide covered sections 34-                                                                    
36 in  the bill found  on page 26,  line 3 through  page 28,                                                                    
line 29.  The provision  was added  in a  previous committee                                                                    
and  the  attempt was  to  recreate  language from  previous                                                                    
versions of  tax legislation. The  language directed  DOR to                                                                    
rely on  audits performed  by joint-interest owners  via the                                                                    
Joint  Interest Billing  (JIB) process.  He stated  that the                                                                    
technical piece had  an effect on how  the department viewed                                                                    
lease expenditures. He  pointed out the dates  listed in the                                                                    
Co-Chair  Stoltze   asked  which  legislator   proposed  the                                                                    
provision. Mr. Pawlowski replied  that the changes were made                                                                    
in the [House] resources committee.                                                                                             
Co-Chair Stoltze requested  clarification regarding portions                                                                    
of the bill that differed from the sponsor's intent.                                                                            
1:06:10 PM                                                                                                                    
Mr. Pawlowski  stated that section  34 began on page  26. He                                                                    
noted  that Legislative  Legal made  a technical  correction                                                                    
removing the  date established by  the provision.  He stated                                                                    
that the  provision was created  by an amendment  offered by                                                                    
Representative Hawker.  He continued  that page 26;  line 23                                                                    
was section 35, which ended on page 27, line 9.                                                                                 
Representative  Gara asked  about the  section of  the bill.                                                                    
Ms. Pollard replied section 34, page 26.                                                                                        
Representative Gara discussed  the strict auditing standards                                                                    
in ACES.  He opined that  the provision minimized  the state                                                                    
overview of  the costs deducted  by the companies.  He asked                                                                    
how the provision might weaken  the state's ability to audit                                                                    
a company's costs and profits.                                                                                                  
JOHN LARSEN, AUDIT MASTER,  DEPARTMENT OF REVENUE, ANCHORAGE                                                                    
(via  teleconference), replied  that  the prior  committee's                                                                    
amendments implemented  the auditing standards that  were in                                                                    
place under  the Petroleum Production  Tax (PPT). He  was in                                                                    
the process  of evaluating  the legislation and  whether the                                                                    
use of JIB  was necessary. The department  had established a                                                                    
set  of lease  expenditure  regulations  that would  provide                                                                    
transparency about deductible costs.                                                                                            
1:10:05 PM                                                                                                                    
Mr.  Larsen explained  that the  regulations were  developed                                                                    
based  on industry  standards. He  mentioned the  Council of                                                                    
Petroleum  Accountants  Societies   (COPAS),  which  was  an                                                                    
educational  organization dedicated  to  fair and  equitable                                                                    
accounting   standards.  He   pointed   out  that   industry                                                                    
participated  in  COPUS.  He  was  evaluating  the  bill  to                                                                    
determine  the  sponsor's   intent  regarding  the  auditing                                                                    
requirements, and he intended to collaborate with DOL.                                                                          
Mr. Tangeman  added that Mr. Larsen  provided the department                                                                    
details regarding  the information available to  assist with                                                                    
audits. He  mentioned the  department's access  to JIB  as a                                                                    
tool for the  provision. He noted that  the document existed                                                                    
between   two   companies.   He  highlighted   the   state's                                                                    
responsibility to  audit the taxpayer,  and did not  wish to                                                                    
rely on JIB solely.                                                                                                             
1:13:12 PM                                                                                                                    
Representative  Gara  asked  if  the  department  wished  to                                                                    
retain  its existing  auditing powers.  He  wondered if  the                                                                    
process  might weaken  the state's  ability to  detect costs                                                                    
that should not be deducted.                                                                                                    
Mr.  Tangeman  replied  that   the  department  had  several                                                                    
different tools,  but using one exclusively  might limit the                                                                    
ability to  use other valuable  tools. He stressed  that the                                                                    
department required  multiple resources to  accomplish their                                                                    
auditing job.                                                                                                                   
Co-Chair  Stoltze remarked  that he  was confused  about the                                                                    
audit,  but  understood that  the  master  auditor was  also                                                                    
Mr. Tangeman  emphasized that the  department had  access to                                                                    
JIB and employed the tool in its auditing process.                                                                              
Mr. Pawlowski  clarified language  on page  26, line  14 and                                                                    
page 27 lines  18 through 19. He highlighted  that the costs                                                                    
were not  prohibited under  (e) of  the section,  which were                                                                    
costs defined as items that were not lease costs.                                                                               
1:15:49 PM                                                                                                                    
Representative Holmes  asked if  the provision  would reduce                                                                    
the available amount of information for auditors.                                                                               
Mr.  Tangeman responded  that the  provision might  redirect                                                                    
the department  to one specific  document as opposed  to the                                                                    
plethora of information provided in ACES.                                                                                       
Vice-Chair  Neuman  understood  that  the  department  would                                                                    
receive less  information with the  provision. He  wished to                                                                    
see the  language that  was removed or  replaced by  the new                                                                    
Mr.  Tangeman responded  that  the  parameters addressed  in                                                                    
2006 provided  new territory  at ACES's  implementation. The                                                                    
department had  access to much more  information under ACES.                                                                    
He stated  that multiple sources of  information were relied                                                                    
upon to complete the auditing process.                                                                                          
1:19:09 PM                                                                                                                    
Mr.   Tangeman  stated   that  a   reference  to   2006  was                                                                    
unwarranted,   because   the   department   had   a   better                                                                    
understanding of options in 2013.                                                                                               
Mr.  Pawlowski  stated  that 15  AAC  260(d)  described  the                                                                    
process used  to determine lease costs  when multiple owners                                                                    
were involved in a field.                                                                                                       
Mr. Tangeman added that the  department had implemented over                                                                    
70 regulations in order to proceed in the audit process.                                                                        
Vice-Chair Neuman  commented that  DOR received  ample funds                                                                    
for  the  purpose  of  updating   programs  needed  for  the                                                                    
auditing process.                                                                                                               
1:21:29 PM                                                                                                                    
Mr. Pawlowski  discussed slide  12: "Other  Key Provisions."                                                                    
He mentioned  Section 42 on page  30, line 27, which  was an                                                                    
amendment,   added    in   the   resources    committee   by                                                                    
Representative Seaton.                                                                                                          
   · Allows the Alaska Industrial Development and Export                                                                        
     authority to issue bonds for an oil processing                                                                             
     facility   and   to   establish    an   oil   and   gas                                                                    
     infrastructure fund.                                                                                                       
Mr.  Pawlowski  explained  that   the  language  provided  a                                                                    
mechanism  through which  the legislature  could appropriate                                                                    
funds  for  financing  and  construction   of  oil  and  gas                                                                    
Co-Chair Stoltze asked if a  pipeline to the peninsula might                                                                    
be hypothetically funded with the mechanism.                                                                                    
Representative   Costello  requested   a   summary  of   the                                                                    
competitiveness review board in  the previous version of the                                                                    
Representative Gara pointed out line  3 and the reference to                                                                    
gas  processing   facilities  and  relating   pipelines.  He                                                                    
understood that  a new producer  might acquire  financing to                                                                    
build their own processing facility.                                                                                            
Mr. Pawlowski concurred and directed  members to section 47,                                                                    
page 31,  line 28. He  explained that the  section addressed                                                                    
bond   authorization  language   for   AIDEA.  The   section                                                                    
established the  fund in AIDEA  and authorized  the issuance                                                                    
of the bonds to begin the financing of a facility.                                                                              
Representative Gara stressed the  importance of enabling new                                                                    
producers financing  for processing  facilities. He  heard a                                                                    
rumor about a  10 percent interest rate  for such financing.                                                                    
Mr. Pawlowski could not comment on a financing agreement.                                                                       
Mr. Pawlowski  stated that the 10  percent estimate provided                                                                    
an opportunity.  He reminded  members about  past investment                                                                    
in  a  facility that  neglected  to  produce much  oil.  The                                                                    
interest  rate was  entertained  as an  opportunity for  the                                                                    
state  to  partner  and  participate   in  the  creation  of                                                                    
targeted facilities.                                                                                                            
1:26:16 PM                                                                                                                    
Mr. Pawlowski pointed  out page 28, line  31, which provided                                                                    
the   description  of   the   surface  infrastructure.   The                                                                    
provision discussed  the competitiveness review board  as an                                                                    
update to  AS 43.55.180(b).  The update  was a  direction to                                                                    
DOR to prepare a report  analyzing the effect. The reporting                                                                    
provisions  were put  in place  in 2006  when tax  laws were                                                                    
revised. The  department was required to  review the various                                                                    
credits and issues identified in  the sections and provide a                                                                    
report  back to  the legislature  on the  effectiveness. The                                                                    
due date  for the  report was  before the  first day  of the                                                                    
2016 regular  session of the legislature.  The amendment was                                                                    
made to  the existing reporting provision,  which expired on                                                                    
page 29, line 1 in 2011.                                                                                                        
1:27:53 PM                                                                                                                    
Representative  Costello  requested  a  description  of  the                                                                    
previous version's "competitiveness review board."                                                                              
Mr. Pawlowski replied that  the competitiveness review board                                                                    
had the goal  of depoliticizing the conversation  of oil and                                                                    
gas  competitiveness as  modeled  by  Alberta. He  explained                                                                    
that a board would be  created to review the competitiveness                                                                    
issues in the  state with a focus  on taxes, infrastructure,                                                                    
regulatory    environments   and    labor   and    workforce                                                                    
availability. The goal  was an ongoing look at  what was the                                                                    
most important industry from a state revenue perspective.                                                                       
1:29:33 PM                                                                                                                    
Representative  Edgmon  requested  an interactive  model  to                                                                    
help understand the moving parts of the bill.                                                                                   
Co-Chair Stoltze noted the request for colorful charts.                                                                         
Representative Edgmon  requested a summary analysis  of what                                                                    
the  bill  might  produce  as  far  as  fiscal  impacts  and                                                                    
scenarios  of   an  increase  of   the  revenue   curve.  He                                                                    
referenced similar charts during ACES deliberations.                                                                            
Co-Chair Stoltze  offered to  work on  the logistics  of the                                                                    
requested  presentation.   He  expressed  interest   of  the                                                                    
parameters expected.                                                                                                            
Representative  Edgmon   asked  the  administration   for  a                                                                    
summary analysis  of what  the bill  might produce  within a                                                                    
five  or ten  year  period. He  stated  that increasing  the                                                                    
revenue curve was of interest to  him. He wished to know the                                                                    
fiscal  impacts of  the legislation.  He  stressed that  the                                                                    
bill's intentions were to raise  the revenue curve. Co-Chair                                                                    
Stoltze  noted that  the revenue  curve would  increase with                                                                    
the production curve.                                                                                                           
Mr.  Pawlowski appreciated  the  committee's engagement.  He                                                                    
stated that the consultant's  presentation would provide the                                                                    
requested information. He stressed  that the initial plan to                                                                    
equalize production.  Co-Chair Stoltze stated that  time was                                                                    
Representative Gara  requested that  the model  include some                                                                    
level  of   lever  allowing   data  from   progressivity  at                                                                    
different prices.                                                                                                               
1:34:19 PM                                                                                                                    
Mr. Pawlowski discussed slide 13: "Summary."                                                                                    
     Four principles:                                                                                                           
     Tax reform that is fair to Alaska                                                                                          
     To encourage new production.                                                                                               
     Simple and balanced system                                                                                                 
     Competitive for the long-term                                                                                              
1:36:03 PM                                                                                                                    
AT EASE                                                                                                                         
1:54:41 PM                                                                                                                    
BARRY PULLIAM,  MANAGING DIRECTOR,  ECON ONE  RESEARCH, INC.                                                                    
provided  a  brief  history about  himself.  He  provided  a                                                                    
PowerPoint  presentation  "ACES,   SB21/HB72  and  HCS  CSSB
21(RES) CS SB21  (RES) for House Finance  Committee (copy on                                                                    
Mr. Pulliam explained  that he had worked  with Alaska since                                                                    
the  late  1980s  on issues  involving  royalties,  tax  and                                                                    
gasline  forecasting. He  stated  that the  majority of  his                                                                    
work was  done on behalf  of the administration, but  he had                                                                    
also  worked  as a  consultant  for  Legislative Budget  and                                                                    
Audit (LB&A).  He worked  for other states  as well  such as                                                                    
California,  Texas, Louisiana  and Oklahoma  and had  worked                                                                    
for  the  Federal  Trade Commission  in  the  Department  of                                                                    
Interior.  He noted  history working  with oil  refiners and                                                                    
gas and oil processors in both the Lower 48 and in Alaska.                                                                      
1:58:25 PM                                                                                                                    
Mr.  Pulliam  discussed  slide 2:  "Key  Features  of  ACES,                                                                    
SB21/HB72 and HCS CS SB21  (RES)" He mentioned the operation                                                                    
of the tax system in Alaska under ACES.                                                                                         
Co-Chair Stoltze  requested that  Mr. Pulliam  delineate the                                                                    
section referenced throughout the presentation.                                                                                 
Mr. Pulliam continued  with slide 2: "Key  Features of ACES,                                                                    
SB 21/HB72  and HCS  CSSB 21(RES)."  He began  by discussing                                                                    
production tax  in Alaska. Prior  to ACES, tax was  based on                                                                    
the gross value of the oil.  In 2006, PPT was adopted, which                                                                    
was modified in 2007 to ACES.  He noted that ACES moved from                                                                    
a tax on  the gross value to  a tax on the net  value of the                                                                    
oil. He  explained that SB  21 also  taxed the net  value as                                                                    
opposed to  the gross  value. He  noted that  ACES had  a 25                                                                    
percent base rate  and a progressive tax when  the net value                                                                    
of the oil rose above $30  per barrel and tapered off at $92                                                                    
per barrel.  The maximum rate  would be 25 percent  base and                                                                    
50 percent  progressive. He  explained that  ACES had  a tax                                                                    
credit system that provided 20  percent of qualified capital                                                                    
expenditure. A  company that spent  $100 million  in capital                                                                    
would  get  $20 million  refunded  in  taxes. He  noted  the                                                                    
absence of  GRE in ACES.  He added  that ACES had  a minimum                                                                    
tax of 4 percent when west  coast prices were over $25 along                                                                    
with a small producer credit.                                                                                                   
2:02:55 PM                                                                                                                    
Mr. Pulliam  continued with  the second  column on  slide 2.                                                                    
The second  column was titled  "SB71/HB72" and  depicted the                                                                    
bill as introduced.  The base tax rate remained  the same at                                                                    
25  percent. The  progressive portion  of ACES  was removed,                                                                    
leaving  the maximum  tax  rate at  25  percent. The  credit                                                                    
system was  removed. A  GRE was included  for new  units and                                                                    
PAs,  which  reduced  the  value  of  the  oil  in  the  tax                                                                    
Co-Chair Stoltze  noted that the  reference to SB 71  in the                                                                    
column was  incorrect, since  the bill  in committee  was SB
21.  Mr. Pulliam  agreed. He  continued that  companies that                                                                    
did not  have a  tax obligation  could carry  forward losses                                                                    
and  increase at  15 percent  a year.  The process  differed                                                                    
from the monetization in ACES.  The minimum tax remained the                                                                    
same. The small producer tax credit was extended to 2022.                                                                       
Mr.  Pulliam continued  with slide  2 and  the third  column                                                                    
"HCS CS  SB21 (RES)."  The 25 percent  rate increased  to 33                                                                    
percent.  No  progressive  tax  above  the  33  percent  and                                                                    
credits  were  reintroduced  in the  form  of  a  per-barrel                                                                    
credit. He noted two credit  systems, one for those that did                                                                    
not  qualify  for  GRE  and another  for  barrels  that  did                                                                    
qualify for  GRE. He noted  that GRE remained at  20 percent                                                                    
and  was  applied  to  new  units and  PAs  as  well  as  PA                                                                    
expansions.  The monetization  of net  operating losses  was                                                                    
reintroduced. The gross minimum  tax remained applicable for                                                                    
volumes that did not qualify for GRE (legacy production).                                                                       
2:06:59 PM                                                                                                                    
Mr.  Pulliam  discussed  slide  3:  "Tax  Calculation  Under                                                                    
ACES."  He  stated  that  taxes  under  four  different  tax                                                                    
scenarios  were used  for the  demonstration. He  began with                                                                    
$100 per  barrel leaving  a gross value  of $90  per barrel.                                                                    
Production costs were  then subtracted to arrive  at the net                                                                    
value of  $60 per  barrel, which  is what  the tax  would be                                                                    
based on. He pointed out the  base tax of 25 percent and the                                                                    
progressive tax of  12 percent, based on the  net value. The                                                                    
total tax  rate was 37 percent  in the example or  $22.20. A                                                                    
$3  credit was  offered,  since $15  was  spent in  capital,                                                                    
which reduced the tax level to $19.20.                                                                                          
2:09:44 PM                                                                                                                    
Co-Chair  Stoltze   asked  if  the  chart   applied  to  the                                                                    
production tax. Mr. Pulliam replied  that the chart referred                                                                    
to  the  production tax  alone.  Other  components would  be                                                                    
addressed further along in the presentation.                                                                                    
2:11:08 PM                                                                                                                    
Mr.  Pulliam explained  that the  last two  rows on  slide 3                                                                    
depicted the  effective tax  rate on the  net value  and the                                                                    
gross  value  of  the  oil. In  the  example  provided,  the                                                                    
effective tax rate on net value of the oil was 32 percent.                                                                      
2:12:06 PM                                                                                                                    
Mr. Pulliam discussed slide 4:  "Tax Calculation Under ACES:                                                                    
Varying  Costs."  The  slide  depicted  variations  using  a                                                                    
constant $100 per  barrel price. The variables  in the chart                                                                    
were the operating costs and  capital expenditures. He noted                                                                    
that the increase in costs  reduced the progressive tax rate                                                                    
and  increasing  the  credit with  the  additional  capital.                                                                    
Ultimately, the 32  percent rate was reduced  to 25 percent.                                                                    
When costs were reduced, tax rates increased.                                                                                   
2:13:31 PM                                                                                                                    
Mr.  Pulliam  explained that  when  the  cost of  production                                                                    
increased, the  net value and  tax rate decreased.  He added                                                                    
that a  new development can  also reduce tax on  the barrels                                                                    
2:15:11 PM                                                                                                                    
Representative  Gara pointed  out  page 4,  lines  d and  e,                                                                    
where the lower production costs gave a higher tax rate.                                                                        
Mr.  Pulliam replied  that he  was not  suggesting that  the                                                                    
idea was  bad. He agreed  that the  feature was part  of the                                                                    
design.  He suggested  that  the  incentives for  efficiency                                                                    
were eliminated by the feature.                                                                                                 
2:17:32 PM                                                                                                                    
Representative Gara offered that  ACES was designed to allow                                                                    
for greater profits  with the higher tax  rates. Mr. Pulliam                                                                    
agreed  that  the profits  would  increase  marginally at  a                                                                    
diminishing rate.                                                                                                               
Representative  Gara questioned  the notion  that a  company                                                                    
might  avoid  spending efficiently  to  avoid  a higher  tax                                                                    
rate. Mr.  Pulliam replied  that the  feature of  ACES muted                                                                    
the  normal  incentive  for  efficiency.  He  mentioned  the                                                                    
practice  of viewing  investments as  "economic" because  of                                                                    
the ability  to buy a tax  rate down. He mentioned  that the                                                                    
incentive  to produce  a high-cost  field could  be made  to                                                                    
look economic in  the system. The funds would  come from the                                                                    
reduction in taxes.                                                                                                             
Representative  Gara  understood   that  ACES  attempted  to                                                                    
incentivize projects.                                                                                                           
Mr.  Pulliam   stated  that  he  was   not  complaining.  He                                                                    
questioned the effect of the "incentive" on the industry.                                                                       
2:21:07 PM                                                                                                                    
Vice-Chair  Neuman  asked  what  components  would  increase                                                                    
capital  expenditure   (Capex)  and   operating  expenditure                                                                    
(Opex). Mr.  Pulliam responded  that the  price on  the west                                                                    
coast was the  same. He explained that  the different fields                                                                    
on the North  Slope had different cost  structures. He added                                                                    
that different  cost structures  could be  found on  a given                                                                    
field. He  pointed out that operating  in another geological                                                                    
area with distance to facilities  could increase or decrease                                                                    
2:23:05 PM                                                                                                                    
Vice-Chair Neuman  understood that buying down  the Capex an                                                                    
Opex  increased the  net value.  Mr.  Pulliam concurred.  As                                                                    
costs decreased, the progressive rate increased under ACES.                                                                     
2:23:48 PM                                                                                                                    
Representative Costello asked about  slide 2. She understood                                                                    
that the  comparison of tax  regimes showed that both  SB 21                                                                    
and ACES  allowed industry the  ability to buy down  the tax                                                                    
Mr.  Pulliam  responded  that the  price  rates  illustrated                                                                    
lower  tax than  the  maximum rate.  He  offered to  provide                                                                    
comparisons  between  ACES rates  and  those  of HCS  CS  SB
21(RES), to enable the committee to view the differences.                                                                       
Representative  Costello  wished  to motivate  companies  to                                                                    
invest  and  produce  in  Alaska  by  manipulating  the  tax                                                                    
structure. She asked for further  explanation of the purpose                                                                    
of a  fixed dollar  per barrel credit.  She stated  that the                                                                    
assumption when creating ACES was  that the credits provided                                                                    
for investment would provide the motivation required.                                                                           
2:26:40 PM                                                                                                                    
Mr.  Pulliam  responded  that ACES  provided  a  25  percent                                                                    
capital  credit  and  spending  more  money  allowed  for  a                                                                    
reduction in the tax credit.  The system with the per-barrel                                                                    
credit was simpler  to apply for industry.  The marginal tax                                                                    
rate of  33 percent was  consistent and the credit  was tied                                                                    
to the  oil produced in  HCS CS  SB 21(RES). He  opined that                                                                    
the predictability of  HCS CS SB 21(RES)  was more difficult                                                                    
to model in ACES.                                                                                                               
Representative  Costello  asked why  the  loss/carry-forward                                                                    
percentage and the base tax  rate were the same. Mr. Pulliam                                                                    
explained  that parity  was provided  by  the net  operating                                                                    
loss credit for  someone who was not paying  taxes. A higher                                                                    
rate would  introduce inefficiencies and a  lower rate would                                                                    
skew   the  economics   of  the   project  making   it  less                                                                    
2:30:15 PM                                                                                                                    
Representative  Wilson pointed  to slide  4. She  noted that                                                                    
difficult-to-capture oil  yielded $12.50 in tax  paid to the                                                                    
state per-barrel  of oil. She  opined that ACES  would yield                                                                    
less  money in  the long  run because  of the  difficult-to-                                                                    
process oil in the legacy fields.                                                                                               
Mr. Pulliam  agreed and noted  that the higher the  costs to                                                                    
the  industry  the lower  the  effective  tax rate  for  the                                                                    
state. When  the price  of oil is  lower, and  the operating                                                                    
and capital costs  remain high, then the  effective tax rate                                                                    
is lower  still. The ACES  tax rate  was both a  function of                                                                    
price and costs.                                                                                                                
Representative  Wilson asked  if the  state would  yield the                                                                    
same revenue under HCS CS SB 21(RES) as in ACES.                                                                                
Mr.  Pulliam  responded that  the  revenue  would have  been                                                                    
similar under the  governor's version of SB 21  when oil was                                                                    
at $100 per barrel.                                                                                                             
2:32:37 PM                                                                                                                    
Mr. Pulliam discussed slide 5:  "HCS CSSB 21(RES) Per-Barrel                                                                    
Credits  Non-GRE  Volumes  (Stepped Scale)  v.  GRE  Volumes                                                                    
(Fixed)." The  chart displayed the two  different credits in                                                                    
HCS CS  SB 21(RES).  The "stepped scale"  started at  $8 per                                                                    
barrel and  phased out  as prices  increased and  applied to                                                                    
non-GRE eligible  volumes. The "fixed $5"  credit applied to                                                                    
the GRE eligible volumes. The  effect of either credit would                                                                    
make the 33 percent tax rate slightly progressive.                                                                              
2:34:52 PM                                                                                                                    
Mr.  Pulliam  discussed  slide  6:  "Tax  Calculation  Using                                                                    
Stepped  Scale production  Credit  (Volumes  Not Subject  to                                                                    
Gross Revenue Exclusion)." The chart  provided an example of                                                                    
how the tax  would work. The tax was shown  for barrels that                                                                    
were  not   subject  to  GRE.   The  column  with   the  box                                                                    
illustrated the  $100 per barrel calculation.  The effect of                                                                    
the tax credit lowered the tax  rate from 23 percent to 15.3                                                                    
percent. In the  example, the percentage of  the gross value                                                                    
was approximately  15 percent. The effective  tax rate would                                                                    
top-out at 33 percent by phasing-out the credit.                                                                                
2:36:59 PM                                                                                                                    
Mr. Pulliam  discussed slide 7:  "Effective Tax  Rates under                                                                    
HCS  CSSB 21  (RES) (Volumes  Not Subject  to Gross  Revenue                                                                    
Exclusion.)" The graph displayed  the tax rates discussed in                                                                    
the previous spreadsheet.  The solid line on  top showed the                                                                    
effective tax rate on the net  value of the oil.  The dashed                                                                    
line showed the tax, as a percent of the gross value.                                                                           
2:38:05 PM                                                                                                                    
Mr. Pulliam discussed slide 8:  "Tax Calculation Using Fixed                                                                    
$5  Production  Credit  (Volumes Subject  to  Gross  revenue                                                                    
Exclusion)."  The  20  percent  GRE was  calculated  in  the                                                                    
chart. The GRE reduction  allowed for fewer taxable dollars.                                                                    
For oil  at $100 per barrel,  the effective tax rate  on the                                                                    
net  value was  14.8 percent  and 9.8  percent on  the gross                                                                    
value. The  credit was  fixed at  $5, but  the value  of the                                                                    
credit dropped as the price of oil increased.                                                                                   
2:40:14 PM                                                                                                                    
Mr. Pulliam  discussed slide 9:  "Effective Tax  Rates under                                                                    
HCS  CSSB  21  (RES)   (Volumes  Subject  to  Gross  Revenue                                                                    
Exclusion)." The slide  showed the net and  gross rates over                                                                    
the price range. He noted that  the barrels did not have the                                                                    
4 percent gross tax floor, so  the tax rate would be reduced                                                                    
to zero.                                                                                                                        
Representative Costello asked about  slide 8. She understood                                                                    
that  the purpose  of  the legislation  was  to address  new                                                                    
fields  and units.  She asked  why the  chart showed  static                                                                    
lease  expenditures. Mr.  Pulliam responded  that the  chart                                                                    
allowed a comparison  of the different tax  rates, using the                                                                    
same cost assumptions.                                                                                                          
Representative   Gara   discussed  the   calculations   that                                                                    
utilized  the GRE  for  new  fields. He  noted  that the  20                                                                    
percent GRE  equated to a  40 percent reduction in  tax. Mr.                                                                    
Pulliam replied  that without the  GRE at $100 per  barrel a                                                                    
23 percent  tax rate  was calculated  while the  GRE yielded                                                                    
approximately 15 percent.                                                                                                       
Representative  Gara  replied  that  the GRE  allowed  a  40                                                                    
percent  reduction  in  tax.   Mr.  Pulliam  concurred,  but                                                                    
admitted  that  he  had not  performed  exact  calculations.                                                                    
Representative Gara requested exact calculations.                                                                               
2:43:47 PM                                                                                                                    
Representative Gara pointed to slide  9 and asked if the tax                                                                    
rate  took credits  and other  deductions into  account. Mr.                                                                    
Pulliam concurred.                                                                                                              
Mr.   Pulliam   answered  Representative   Gara's   previous                                                                    
question with 35 versus 40 percent tax reduction.                                                                               
2:45:22 PM                                                                                                                    
Representative Gara  asked if the  state would  be protected                                                                    
with  the GRE  in  the event  of the  discovery  of a  large                                                                    
Co-Chair Austerman  questioned the fairness of  the question                                                                    
that  would   be  decided  by  the   administration  or  the                                                                    
Representative  Gara thought  that  the tax  rate should  be                                                                    
higher for larger, more profitable fields.                                                                                      
Mr.  Pulliam  stated  that  he did  not  have  a  conceptual                                                                    
problem with a larger field  encountering a higher tax rate,                                                                    
but  a fair  share was  not an  economic concept.  He stated                                                                    
that finding a larger field was unlikely.                                                                                       
2:49:00 PM                                                                                                                    
Vice-Chair Neuman opined that a  larger field had more value                                                                    
because it would last longer.  He stated that the production                                                                    
tax would level out within  five years but the corporate tax                                                                    
would increase leading to greater  profit for the state. Mr.                                                                    
Pulliam  agreed   that  larger  fields   yielded  additional                                                                    
benefits.  He opined  that finding  a large  field would  be                                                                    
wonderful for  the state,  but he did  not believe  that the                                                                    
state had large fields to offer.                                                                                                
2:50:25 PM                                                                                                                    
Representative  Costello asked  if fields  that applied  for                                                                    
the GRE  required greater lease expenditures  because of the                                                                    
structure.  She questioned  the  comparison offered  because                                                                    
the lease expenditures for fields  with GRE were the same as                                                                    
existing  fields.  She  thought  that  the  purpose  of  the                                                                    
comparison  was  to  illustrate   the  difficulty  and  cost                                                                    
related to  new oil  exploration and production.  She wished                                                                    
to see  other lease  expenditures listed in  the calculation                                                                    
of the effective tax rate.                                                                                                      
Mr. Pulliam  explained that varying lease  expenditures were                                                                    
provided in  his presentation.  He stated  that the  cost of                                                                    
production for  legacy fields was lower  because investments                                                                    
were  already made.  He noted  that  legacy fields  required                                                                    
ongoing  investments,  which  were sometimes  equivalent  to                                                                    
development costs in the new fields.                                                                                            
2:52:59 PM                                                                                                                    
Representative Costello heard that  the natural decline rate                                                                    
of  the  fields would  be  15  to  20 percent.  Mr.  Pulliam                                                                    
replied 15  to 20 percent  decline rate without  any further                                                                    
investment.  The  decline  rate  was  stemmed  by  continued                                                                    
drilling in the fields.                                                                                                         
2:54:03 PM                                                                                                                    
Mr.  Pulliam   discussed  slide  10:  "State,   Federal  and                                                                    
Producer  Take  at  Various  $2012 WC  ANS  Prices  for  All                                                                    
Producers (FY 2015-FY 2019) ACES  and HCS CSSB 21(RES)." The                                                                    
graph depicted a comparison of  state, federal, and producer                                                                    
take. The graph  showed the amount of money  after costs the                                                                    
government or producers received.                                                                                               
Co-Chair  Stoltze   asked  if  royalties  were   counted  in                                                                    
"government-take."  Mr. Pulliam  replied  yes. Even  private                                                                    
royalty was calculated.                                                                                                         
Co-Chair  Stoltze asked  if the  terms listed  were "general                                                                    
Mr. Pulliam  concurred and explained that  Alaska had public                                                                    
land primarily, so the royalties  went to the government. He                                                                    
noted that  in slide  10, the green  bar depicted  the state                                                                    
take. The  graph included royalties, production  tax, income                                                                    
tax  and  property  tax.  He added  that  ACES,  because  of                                                                    
progressivity allowed  for increases in the  state take, but                                                                    
reductions in  the federal in  producer take when  the price                                                                    
of oil increased.  The bottom section of the  chart showed a                                                                    
graph depicting the same data under HCS CSSB 21(RES).                                                                           
2:58:29 PM                                                                                                                    
Representative  Edgmon  asked  if   producer  take  was  the                                                                    
equivalent of producer profit. Mr.  Pulliam replied that the                                                                    
terms  were similar  in concept.  He noted  that the  "take"                                                                    
included  the  cash flows,  while  "profit"  was largely  an                                                                    
accounting measure.                                                                                                             
2:59:05 PM                                                                                                                    
Mr. Pulliam detailed slide  11: "Average Government-take for                                                                    
All  Existing  Producers  (FY   2015-FY  2019)."  The  chart                                                                    
provided different  iterations of  the bill along  with ACES                                                                    
and  the varying  government-take  using prices  of $60  per                                                                    
barrel to $160 per barrel.                                                                                                      
3:01:03 PM                                                                                                                    
Mr.  Pulliam noted  slide 12:  "Average Government-take  for                                                                    
All Existing  Producers (FY 2015-FY2019) ACES  v. SB21/HB72,                                                                    
CS SB  21 (FIN)  and HCS CSSB  21(RES)." The  graph depicted                                                                    
the information shown on slide  11. The red line illustrated                                                                    
government-take for  ACES, while the green  line illustrated                                                                    
HCS CSSB 21(RES).                                                                                                               
3:02:26 PM                                                                                                                    
Mr.  Pulliam discussed  slide 13:  "Effective  Tax Rates  on                                                                    
Gross Value  for Legacy Production  ACES vs.  SB21/HB72, HCS                                                                    
CSSB  21(RES)  and  Other Large  Oil-Producing  States  with                                                                    
Production  Taxes   at  $100  Wellhead  Value."   The  chart                                                                    
differed  in  illustrating  the  effective  tax  rate  after                                                                    
deductions and credits.                                                                                                         
3:02:54 PM                                                                                                                    
Mr.  Pulliam  detailed slide  14:  "Effective  Tax Rates  on                                                                    
Gross Value  for Legacy Production  ACES vs.  SB21/HB72, HCS                                                                    
CSSB  21(RES)  and  other large  oil-producing  states  with                                                                    
production  taxes at  $100 wellhead  value." The  comparison                                                                    
showed  that the  taxes  in Alaska  were  higher than  other                                                                    
states. The  graph used volume  and cost from the  past year                                                                    
and compared data  to other producing states  in the country                                                                    
that utilize a gross tax system.                                                                                                
3:04:17 PM                                                                                                                    
Vice-Chair Neuman asked about the  effective tax rate on the                                                                    
chart.  He asked  how the  chart would  look if  the federal                                                                    
take was subtracted and the state take was visible.                                                                             
Mr.  Pulliam replied  that the  tax shown  in the  chart was                                                                    
simply production tax. He explained  that the chart required                                                                    
royalties and  income tax  to show  total state  take, which                                                                    
would make  the ACES rate  even higher. The  new calculation                                                                    
would bring  HCS CSSB  21(RES) into an  even place  with the                                                                    
other states on the graph.                                                                                                      
3:06:12 PM                                                                                                                    
Co-Chair  Austerman asked  about slide  12 and  the variance                                                                    
shown for  HCS CSSB 21(RES)  in the  graph. He asked  if the                                                                    
variance  was due  to new  or old  oil. Mr.  Pulliam replied                                                                    
that the data would  vary according to companies' specifics.                                                                    
The graph provided an aggregate  across all producers, based                                                                    
on the forecast  over the next several years.  He added that                                                                    
the data illustrated primarily non-GRE oil.                                                                                     
3:07:09 PM                                                                                                                    
Representative  Holmes asked  about  slide  14. She  assumed                                                                    
that  lower  prices  would  change  the  data.  Mr.  Pulliam                                                                    
concurred and stated  that at a lower  price level, Alaska's                                                                    
tax  rates  would  decline, while  the  other  states  would                                                                    
remain static.                                                                                                                  
3:08:43 PM                                                                                                                    
Representative  Kawasaki asked  about slides  10 and  12. He                                                                    
asked about  the graph on slide  10, under ACES at  $100 per                                                                    
barrel,  the take  was approximately  20  percent while  HCS                                                                    
CSSB 21(RES) was greater than  20 percent. Mr. Pulliam asked                                                                    
if  Representative  Kawasaki  was  referencing  the  federal                                                                    
take. Representative Kawasaki  concurred. Mr. Pulliam agreed                                                                    
with the  assessment. He noted  that the  federal government                                                                    
was  a claimant  on  profits after  the  state. The  federal                                                                    
government tax rate was 35  percent, with deductions allowed                                                                    
for the cost of operations,  royalties, severance as well as                                                                    
income taxes.  As the state's  severance taxes  increased, a                                                                    
lower tax base was available for the federal government.                                                                        
Representative  Kawasaki  asked  if the  federal  government                                                                    
received more money  when the state taxed  less. Mr. Pulliam                                                                    
replied  yes. If  a company  was a  dollar more  profitable,                                                                    
then 35 percent would go to the federal government.                                                                             
3:11:08 PM                                                                                                                    
Representative  Kawasaki pointed  to slide  12. He  observed                                                                    
that the state would not benefit  from low or high prices of                                                                    
oil  with HCS  CSSB  21(RES). Mr.  Pulliam  agreed that  the                                                                    
range  was narrower  with  HCS CSSB  21(RES)  than ACES.  He                                                                    
pointed out that  upon the inception of ACES,  prices of $60                                                                    
per barrel  were considered high.  He stated that  the gross                                                                    
floor kicked in at $25 per barrel.                                                                                              
Representative Gara  pointed to  slide 10. He  observed that                                                                    
the state's share increased as  prices increased under ACES.                                                                    
The  producer's  overall  profit increased  in  tandem.  Mr.                                                                    
Pulliam  agreed that  profits increased  under ACES  but the                                                                    
margin  decreased. He  added that  profits in  other state's                                                                    
tax  structures increased  at a  more dramatic  rate due  to                                                                    
their  lack  of  progressivity.  The  industry  finds  those                                                                    
profits much less attractive.                                                                                                   
Representative  Gara  stated  that   reducing  taxes  by  $1                                                                    
billion,  then   $350  million  would  go   to  the  federal                                                                    
government  and  the other  $650  million  would go  to  the                                                                    
industry. Mr.  Pulliam concurred,  but added that  the state                                                                    
would benefit from income taxes.                                                                                                
3:15:35 PM                                                                                                                    
Representative  Gara stated  that the  state income  tax was                                                                    
only  9  percent.  Mr.  Pulliam replied  that  he  used  6.5                                                                    
percent for his calculations.                                                                                                   
Representative Gara  understood the  government-take numbers                                                                    
but he  believed the profitability numbers  would be useful.                                                                    
He understood  that the profitability  rate was  higher than                                                                    
most fields in the Lower 48.                                                                                                    
Mr.  Pulliam stated  that a  field where  an investment  had                                                                    
been made  in the past  would see higher  profitability than                                                                    
an area requiring investments.  The new investments provided                                                                    
the greatest challenges.                                                                                                        
3:17:39 PM                                                                                                                    
Representative Gara understood that  cost for higher profits                                                                    
existed. He  asked whether the profitability  of the state's                                                                    
legacy  fields   ranked  highly   in  comparison   to  other                                                                    
locations.   Mr.  Pulliam   disagreed   because  the   other                                                                    
locations would also have old investments with lower takes.                                                                     
3:19:40 PM                                                                                                                    
Mr.  Pulliam   pointed  to  slide  15   titled  "Summary  of                                                                    
Investment Measures  for New Participant 50  MMBO Alaska Oil                                                                    
Development ACES  and HCS CSSB 21(RES)  v. Benchmark Areas."                                                                    
He noted  that previous committees performed  ample analysis                                                                    
comparing production  with capital investment in  Alaska and                                                                    
elsewhere.  Profitability and  investment metrics  were also                                                                    
observed  for new  investments in  Alaska relative  to other                                                                    
Mr.  Pulliam directed  attention  to the  left  side of  the                                                                    
slide related to  West Coast ANS price.  The assumption used                                                                    
a new  50 million  barrel field  that cost  approximately $1                                                                    
billion to  develop. The  chart compared  ACES and  HCS CSSB
21(RES) using two different royalties  with regimes in other                                                                    
parts  of  the world.  He  used  a profitability  index  and                                                                    
explained  that   the  greater  numbers  were   better.  The                                                                    
internal  rate  of return  represented  a  calculation of  a                                                                    
certain return established by a company.                                                                                        
3:23:43 PM                                                                                                                    
Mr. Pulliam continued  to address slide 15.  Raising the tax                                                                    
rate  could  increase  the Internal  Rate  of  Return  (IRR)                                                                    
because of  the buy-down effect.  He cautioned that  IRRs at                                                                    
100 percent did  not necessarily mean they  were better than                                                                    
lower IRRs. The final  column related to government-take. He                                                                    
noted that  the ACES column was  in a 70 percent  range. The                                                                    
state's take  was shown in  the net present value  (NPV). As                                                                    
present  value went  up for  producers the  state take  went                                                                    
down. He mentioned items that  a producer would consider all                                                                    
aspects of the information provided  in the slide along with                                                                    
the geology,  stability and other opportunities  involved in                                                                    
the investment.  He compared  column 1 to  column 3  and the                                                                    
differing net present value,  which was significantly higher                                                                    
under the proposed legislation than under ACES.                                                                                 
Mr.   Pulliam   further   discussed   the   GRE   that   was                                                                    
significantly higher  in HCS CSSB  21(RES) than  under ACES.                                                                    
The government-take  would drop  with a  $100 barrel  of oil                                                                    
price.   He  discussed   non-Alaska  projects   modeled.  He                                                                    
mentioned stability,  geopolitical items, and  other issues.                                                                    
The  HCS CSSB  21(RES) version  was generally  attractive in                                                                    
comparison with the non-Alaska projects.                                                                                        
3:27:57 PM                                                                                                                    
Mr. Pulliam  stated that the economics  were standalone with                                                                    
the perspective  of a  new participant.   He  explained that                                                                    
the data was presented in  the form of incremental economics                                                                    
from the standpoint of an  incumbent. The chart incorporated                                                                    
the buy-down effect discussed earlier.  Under ACES, the NPVs                                                                    
were  higher because  of  the benefit  of  tax reduction  on                                                                    
existing production.  He pointed out the  cash margins under                                                                    
ACES in  column 1, where a  $40 increase in price  yields $8                                                                    
for the producer. For HCS CSSB  21(RES) in column 3 the same                                                                    
comparison  increased  from $23  to  $39,  meaning that  the                                                                    
producer would keep  a larger share of the  upside as prices                                                                    
3:30:28 PM                                                                                                                    
Mr. Pulliam  turned to  slide 17  titled "State  Support for                                                                    
Capital Spending  Under ACES  and HCS  CSSB 21(RES)  at $100                                                                    
West Coast ANS ($2012)."  The graph depicted the differences                                                                    
in  systems  regarding  the state's  assistance  in  upfront                                                                    
development. He pointed  out the third bar in  the graph and                                                                    
explained  that the  state would  participate by  45 percent                                                                    
through  credits  and purchase  of  the  Net Operating  Loss                                                                    
(NOL). Under  the ACES "new participant"  category, when the                                                                    
producer spent $1 billion, the  state would issue credits of                                                                    
$450  million. An  incumbent, displayed  in  the second  bar                                                                    
received  the   benefit  of   reducing  taxes   on  existing                                                                    
production, which  amounted to  an additional 60  percent of                                                                    
the cost  of new spending covering  approximately 80 percent                                                                    
of the capital spending.                                                                                                        
Mr.  Pulliam pointed  to the  right  side of  the bar  graph                                                                    
depicting the  effect of the proposed  legislation. Both the                                                                    
new participant  and the incumbent would  receive 33 percent                                                                    
in either tax reduction or NOL credits.                                                                                         
3:33:36 PM                                                                                                                    
Co-Chair  Austerman  asked  about   slides  15  and  16.  He                                                                    
interpreted  that Alaska  would  have lower  government-take                                                                    
than  the  other  areas  listed.  He  anticipated  that  his                                                                    
constituents would question the decision.                                                                                       
Mr.  Pulliam replied  that  chart  addressed new  production                                                                    
opportunities. He  opined that  government-take was  not the                                                                    
most  important metric  when determining  whether a  project                                                                    
would get  sanctioned. He suggested a  comparison with Eagle                                                                    
Ford  which  showed  a 68  percent  government-take  with  a                                                                    
higher NPV. He  noted that the investment in  Eagle Ford was                                                                    
quick  (one   year)  relative  to  Alaska.   In  Alaska,  an                                                                    
investment will  not yield  oil for four  or five  years. So                                                                    
even  with  a greater  government-take  in  Eagle Ford,  the                                                                    
project would  be viewed as  more attractive because  of the                                                                    
shorter investment time.                                                                                                        
Co-Chair Austerman  appreciated the information,  but stated                                                                    
that  a simplified  number was  often  found in  government-                                                                    
3:38:21 PM                                                                                                                    
Mr.  Pulliam appreciated  the debate  and he  understood the                                                                    
tendency to  focus on government-take and  IRR. He cautioned                                                                    
constituents to review the overall set of information.                                                                          
Co-Chair Austerman  joked that  he would recommend  that his                                                                    
constituents review the profitability  index 12 and the NPV.                                                                    
Mr.  Pulliam agreed  and added  that  shorter times  between                                                                    
investment and production existed in the Lower 48.                                                                              
3:39:54 PM                                                                                                                    
Representative  Wilson asked  Mr.  Pulliam  for his  opinion                                                                    
regarding  the best  course of  action. Mr.  Pulliam replied                                                                    
that  the  presentation  included   a  distillation  of  the                                                                    
numbers  and provided  a variety  of  charts that  depicting                                                                    
different levels of analysis.  He stressed that the decision                                                                    
was  not  a  simple  one.   He  provided  an  analysis  that                                                                    
companies  might look  at when  observing opportunities.  He                                                                    
was not able to provide a "magic number."                                                                                       
3:43:10 PM                                                                                                                    
Representative Wilson  pointed out slides 15  and 16, column                                                                    
5 to column 11. She wondered  where Alaska wanted to be when                                                                    
compared to those columns regarding increased production.                                                                       
Mr. Pulliam  replied that the  potential in Alaska  was less                                                                    
than  Canada. He  proposed the  North  Sea and  the Gulf  of                                                                    
Mexico  offshore  as  potential  sites  for  comparison.  He                                                                    
mentioned that  the United Kingdom  (UK) had  struggled with                                                                    
declining production and recently  modified their tax system                                                                    
by  instituting  the  Brownfield Allowance.  The  Brownfield                                                                    
Allowance was similar to GRE.                                                                                                   
3:46:34 PM                                                                                                                    
Representative  Gara pointed  to  slide 16  asked about  new                                                                    
oil. He noted that  schools, roads, and other infrastructure                                                                    
were funded  with the  revenue from  legacy fields.  At $120                                                                    
per  barrel, the  profitability  index was  higher than  the                                                                    
other areas listed  in the chart. He did  not understand the                                                                    
proposal to lower taxes on  legacy fields, yielding a higher                                                                    
profitability index than other countries.                                                                                       
Mr. Pulliam  replied that the  analysis was  incremental and                                                                    
included  the  buy-down  on  the   tax  production.  He  had                                                                    
questioned  the approach  and incentive  for the  metrics of                                                                    
the analysis.  He wondered  if the  producers looked  at the                                                                    
benefit  in the  way it  was intended.  He pointed  out that                                                                    
ACES did  not work  as the state  had intended.  Other areas                                                                    
lacked restrictions encountered in ACES.                                                                                        
Representative Gara  saw that the  UK protected  the revenue                                                                    
on legacy fields  with the higher tax rate  while new fields                                                                    
and expansions had a lower tax rate.                                                                                            
Mr. Pulliam replied that the  UK had two basic taxes. Fields                                                                    
developed  prior  to 1993  had  a  higher rate  than  fields                                                                    
developed  after   1993.  Both   sets  of  fields   had  the                                                                    
Brownfield  Allowance.  The  allowance was  doubled  on  the                                                                    
older fields.                                                                                                                   
Representative   Gara    questioned   the    comparison   to                                                                    
Organization  for  Economic   Co-operation  and  Development                                                                    
(OECD)    countries.   He    understood   that    investment                                                                    
opportunities spanned  the world.  He wondered why  not make                                                                    
comparisons to the high-tax areas worldwide.                                                                                    
Mr. Pulliam  responded that Alaska did  look more attractive                                                                    
than other countries. He mentioned  that the areas in slides                                                                    
15 and 16 were chosen  because an increase in investment was                                                                    
observed with  increased prices. He chose  the areas because                                                                    
they were most appropriate  and because they were attracting                                                                    
3:54:25 PM                                                                                                                    
Representative Thompson stated that  a company may invest $1                                                                    
billion and expect a 15  percent return on their investment.                                                                    
He asked  how a company  would calculate options with  the 4                                                                    
to 5 year wait in Alaska.  Mr. Pulliam replied that a faster                                                                    
production time  yielded a higher  return and would  thus be                                                                    
more   attractive.  He   stated  that   government-take,  as                                                                    
depicted  in  the  presentation,  was  averaged  across  the                                                                    
lifecycle of the development.                                                                                                   
3:56:36 PM                                                                                                                    
Mr. Pulliam  discussed slide 18: "Annual  State Revenues and                                                                    
Producer Cash Flows  at $100 West Coast ANS  ($2012) 50 MMBO                                                                    
Alaska  Oil  Development  New  Participant  in  Alaska."  He                                                                    
explained that  the graph depicted a  hypothetical cash flow                                                                    
situation under  ACES and  HCS CSSB  21(RES). The  top panel                                                                    
depicted the  producer while the  bottom panel  depicted the                                                                    
4:00:40 PM                                                                                                                    
Mr. Pulliam  discussed slide 19: "Annual  State Revenues and                                                                    
Producer Cash Flows  at $100 West Coast ANS  ($2012) 50 MMBO                                                                    
Alaska  Oil Development  Incumbent  Participant in  Alaska."                                                                    
The buy-down effect was provided initially by the state.                                                                        
Mr. Pulliam discussed slide 20:  "Annual Producer Cash Flows                                                                    
at  $100   West  Coast  ANS   (2012)  50  MMBO   Alaska  Oil                                                                    
Development." The chart compared  the incumbent with the new                                                                    
participant. The  net present value  of the  new participant                                                                    
was  lower  than  the  net present  value  under  ACES.  The                                                                    
proposed   legislation  showed   similar  results   for  the                                                                    
incumbent and  the new participant.  The parity  would serve                                                                    
as an attractive feature for industry.                                                                                          
4:02:18 PM                                                                                                                    
Mr. Pulliam discussed slide 21:  "Additional Volumes Need to                                                                    
Offset Projected  Fiscal Impact of HCS  CSSB 21(RES) (FY2014                                                                    
-  FY2043)."  The last  section  viewed  the tax  reduction,                                                                    
which would cost  the state in revenue.  The slide addressed                                                                    
the additional  production required to restore  the lost tax                                                                    
Co-Chair  Stoltze asked  for elaboration  about fields  with                                                                    
higher royalty payments.                                                                                                        
Mr. Pulliam  responded with two  different royalty  rates in                                                                    
slide 21. He assumed that  the new development would qualify                                                                    
for GRE. He  determined that with a  16 royalty development,                                                                    
the combined  effect of production  and more oil  would lead                                                                    
to approximately  29 barrels  of oil.  The amount  needed to                                                                    
develop to cover the projected  losses was approximately 500                                                                    
million per  year. Using  the per-barrel  amount from  a new                                                                    
development would require  approximately 500 million barrels                                                                    
over  the  next 30  years  to  bridge  the revenue  gap.  He                                                                    
understood  that 500  million barrels  equaled approximately                                                                    
18  million  barrels  from new  development  per  year.  The                                                                    
equation amounted  to a daily  production of between  45 and                                                                    
50 thousand barrels per day.                                                                                                    
4:06:47 PM                                                                                                                    
Mr. Pulliam  discussed slide 22: "Testing  Reasonableness of                                                                    
Achieving Breakeven  Development Capital  Required ($2012)."                                                                    
He queried whether the production  was reasonable to expect.                                                                    
Slide 22  provided a "reasonableness test"  to ascertain the                                                                    
viability  of  the  plan.   The  additional  annual  capital                                                                    
required was approximately $315  million. He noted that 2012                                                                    
was $2.4  billion, so the  spending increase would  equal 13                                                                    
4:07:46 PM                                                                                                                    
Mr. Pulliam discussed slide  23: "Estimated Capital Spending                                                                    
for Exploration and Development  Alaska North Slope vs. U.S.                                                                    
and  Worldwide Spending*  2003 -  2012." The  slide compared                                                                    
Alaskan investment to that in  other places in the world for                                                                    
exploration and  development spending.  He pointed  out that                                                                    
investment outside  of Alaska jumped  sharply in  the recent                                                                    
years. The spending levels were  indexed to a starting point                                                                    
of  one. The  graph demonstrated  that spending  leveled-off                                                                    
while spending in the rest of the world grew.                                                                                   
4:09:19 PM                                                                                                                    
Mr. Pulliam  discussed slide 24: "Testing  Reasonableness of                                                                    
Achieving  Breakeven Development  Capital Spending  Increase                                                                    
at  Worldwide  Pace."  The chart  attempted  to  answer  the                                                                    
question  regarding Alaska  spending  bridging  the gap.  In                                                                    
2003,  Alaska had  $1  billion in  spending  and since  that                                                                    
time,  worldwide  spending  increased  by  400  percent.  He                                                                    
hypothesized  that an  additional $1.6  billion would  allow                                                                    
development of 88 billion barrels of oil.                                                                                       
4:10:19 PM                                                                                                                    
Mr. Pulliam  discussed slide 25: "Testing  Reasonableness of                                                                    
Achieving Breakeven Gerking, et  al. Study of Sensitivity of                                                                    
Drilling to  Tax Rates." He  mentioned a study  performed by                                                                    
economists  in  the  early 2000s  viewing  the  relationship                                                                    
between severance  tax rates,  production and  drilling. The                                                                    
analysis  was applied  to Wyoming.  A simulated  doubling of                                                                    
the tax  showed that drilling  would decline by  23 percent.                                                                    
Production would  not decline as  a result of the  change in                                                                    
taxes.  He  noted  that  new   wells  in  Wyoming  bring  on                                                                    
approximately 25 barrels per day  so the addition of the new                                                                    
wells did not  impact new production. The  increase in taxes                                                                    
on  production  that  was already  occurring  from  existing                                                                    
investments  was not  as great.  The study  showed that  the                                                                    
impact on new wells was large.                                                                                                  
Mr. Pulliam  presented a similar  study here in  Alaska with                                                                    
the 10  percent change in  the tax rate, which  would amount                                                                    
to a 40  percent change in drilling starts or  24 new wells.                                                                    
A  typical  well  would  produce  approximately  67  million                                                                    
barrels. He  admitted that  the study was  old and  that the                                                                    
drilling  relationship   between  Wyoming  and   Alaska  was                                                                    
4:14:32 PM                                                                                                                    
Mr.    Pulliam   continued    with   slide    26:   "Testing                                                                    
Reasonableness    of    Achieving   Breakeven    Development                                                                    
Relationship   between  Drilling   Increases  and   Expected                                                                    
Barrels  Developed Annually."  He  opined  that the  changes                                                                    
proposed in  HCS CSSB 21(RES)  would send the  right message                                                                    
to investors  about the willingness to  be competitive while                                                                    
offering the expected returns.                                                                                                  
Mr.  Pulliam  discussed slide  27:  "HCS  CSSB 21(RES)  Per-                                                                    
Barrel  Credits   for  Non-GRE  Volumes  Stepped   Scale  v.                                                                    
Smoothed Scale."  He explained  that the graph  depicted the                                                                    
stepped  scale nature  of  the credit  offered  in HCS  CSSB
21(RES).  He  suggested a  straight  linear  function as  an                                                                    
alternative  that would  eliminate  the  abrupt changes  and                                                                    
might be more appealing.                                                                                                        
Co-Chair  Austerman  asked whether  the  stair  step gave  a                                                                    
definitive  tax rate.  Mr. Pulliam  answered that  the stair                                                                    
step would  require oil  price analysis.  He noted  that the                                                                    
tax  credit  would  change  at every  $10  increment.  If  a                                                                    
straight linear function were employed,  the credit would be                                                                    
more fluid,  while remaining simple  to model and  plan for.                                                                    
He  thought that  the elimination  of  abrupt changes  would                                                                    
provide  a  more stable  system  with  less opportunity  for                                                                    
disputes in an auditing process.                                                                                                
4:19:28 PM                                                                                                                    
Representative Thompson understood  the break-even point and                                                                    
asked  if   the  projected  6  percent   decline  in  legacy                                                                    
production was taken into account.                                                                                              
Mr. Pulliam  relayed that the forecast  projected a decline.                                                                    
He supposed that the proposed rate would stem the decline.                                                                      
Representative  Gara asked  if  the decline  rate was  lower                                                                    
than expected, would the number  of barrels required to make                                                                    
up  for the  loss  be  larger. He  wondered  if the  revenue                                                                    
difference  between  HCS  CSSB  21(RES) and  ACES  would  be                                                                    
larger  as a  result of  a lower  decline rate.  Mr. Pulliam                                                                    
replied in the affirmative.                                                                                                     
Representative Gara asked about  slide 22 and the assumption                                                                    
of the  need to invest  an additional $315 million  per year                                                                    
and the  $18 lifting cost.  He wondered if the  lifting cost                                                                    
was reasonable  for the  remaining oil  on the  North Slope.                                                                    
Mr.  Pulliam  answered  that  the   lifting  cost  might  be                                                                    
greater,  but he  found that  the up-front  development cost                                                                    
was   consistent  with   other  Alaska   development  costs.                                                                    
Representative  Gara asked  if Mr.  Pulliam was  referencing                                                                    
new fields. Mr. Pulliam concurred.                                                                                              
4:22:27 PM                                                                                                                    
Representative  Gara pointed  to  slide 23  and asked  about                                                                    
years   2007-2012  on   Alaska  capital   investment,  which                                                                    
displayed expenditures  that had  increased very  little. He                                                                    
noted  that   DOR  cited   that  capital   expenditures  had                                                                    
increased  by  over 100  percent  or  $1.5 billion  to  $3.8                                                                    
billion. He  expressed curiosity  about the  data presented.                                                                    
Mr. Pulliam replied that he used data provided by DOR.                                                                          
Representative  Gara  cited  slide  24  and  Alaska  capital                                                                    
spending  shown   at  $2.4  billion,  while   the  committee                                                                    
received  the  figure $3.8  billion  from  DOR. Mr.  Pulliam                                                                    
4:24:43 PM                                                                                                                    
6:10:44 PM                                                                                                                    
JANEK  MAYER,  MANAGER,  UPSTREAM,  PFC  ENERGY,  introduced                                                                    
himself  and   provided  information  about  the   firm.  He                                                                    
initiated  a PowerPoint  presentation titled  "House Finance                                                                    
Committee Alaska  Fiscal System  Discussion Slides  April 6,                                                                    
2013"  (copy on  file). He  noted that  his company  advised                                                                    
about oil  and gas  issues with  a focus  on macroeconomics,                                                                    
oil  market  forecasting,  global  gas  supply  and  demand,                                                                    
competitive strategies  and other  key above  ground issues.                                                                    
The  terms set  by a  government's fiscal  regimes were  his                                                                    
area of expertise.                                                                                                              
Co-Chair  Stoltze   asked  about   Mr.  Mayer's   length  of                                                                    
engagement with the  Alaska legislature and its  oil and gas                                                                    
issues. Mr.  Mayer replied  that he  spent the  last several                                                                    
years  addressing  oil  and gas  regime  issues,  and  began                                                                    
working in Alaska last year for the entire session.                                                                             
Co-Chair  Stoltze  pointed  out  that Mr.  Mayer  was  under                                                                    
contract  with LB&A  for service  with  the legislature.  He                                                                    
noted  that  PFC  had accompanied  the  legislature  through                                                                    
various iterations of the issue. Mr. Mayer agreed.                                                                              
6:15:18 PM                                                                                                                    
Mr. Mayer moved to slide 2 titled "ACES: Key Issues."                                                                           
   · High Government Take and high degree of progressivity                                                                      
     means uncompetitive for investment at current prices                                                                       
   · High marginal rates mean little incentive for producer                                                                     
   · "Buydown" effect means incremental and standalone                                                                          
     economics very different - with very different impacts                                                                     
     for incumbent vs new producer                                                                                              
   · Credits create significant downside exposure to state                                                                      
     in low price environments, for high cost projects, and                                                                     
     projects not on state lands                                                                                                
   · Large scale gas sales would reduce taxes on oil                                                                            
  · Complex system, with often counter-intuitive effects                                                                        
Mr. Mayer discussed various calculations  under ACES and HCS                                                                    
CSSB 21(RES).  He addressed  fundamental problems  under the                                                                    
ACES tax system. He communicated  the issues in ACES related                                                                    
to the  levels and structure of  progressivity. He discussed                                                                    
a  question of  magnitude relating  to progressivity  noting                                                                    
that  Alaska's  government  take  was  relatively  high.  He                                                                    
stressed   that  Alaska   failed  to   be  competitive   for                                                                    
investment.   He  stated   that  the   basic  structure   of                                                                    
progressivity as defined  by ACES created a  series of other                                                                    
problems.  He  furthered  that there  were  counterintuitive                                                                    
effects; the economics  for a project for  a new development                                                                    
could  be very  different. He  expounded that  credits under                                                                    
the ACES  system created a significant  downside exposure to                                                                    
state in low price environments  for both high cost projects                                                                    
and projects not  on state lands. He pointed  to large scale                                                                    
gas  sales that  would reduce  taxes  on oil  and a  complex                                                                    
system, with often counter-intuitive effects.                                                                                   
6:20:16 PM                                                                                                                    
Mr. Mayer moved to slide  3 titled "Regime Competitiveness -                                                                    
$80/bbl." The graph depicted the  average government take of                                                                    
global fiscal  regimes at $80/bbl.  The view modeled  by PFC                                                                    
displayed a  very broad range  of fiscal regimes  around the                                                                    
world.  The  yellow  bars  represented  OECD  countries.  He                                                                    
explained  that the  countries with  the lowest  government-                                                                    
take had  the least resource representation  and offered the                                                                    
lower level to incentivize investment.  The top of the chart                                                                    
displayed countries  with large resource  opportunities. For                                                                    
an existing producer, at $80/bbl with ACES the government-                                                                      
take  was  approximately  65 percent.  He  added  that  ACES                                                                    
government-take for a  new producer was higher,  from 69 and                                                                    
72 percent. An  incumbent producer could buy  down their tax                                                                    
rate  through   spending  or   investment,  whereas   a  new                                                                    
developer  received   the  benefit  of  a   25  percent  net                                                                    
operating  loss credit  versus the  higher buy-down  effect.                                                                    
Both the  incumbent and new  producer were eligible  for the                                                                    
20 percent  capital credit. He  added that new units  on the                                                                    
North Slope occurred with a 16.7 percent royalty.                                                                               
6:24:40 PM                                                                                                                    
Mr. Mayer  turned to slide 4  titled "Regime Competitiveness                                                                    
- $100/bbl." The graph  depicted the average government-take                                                                    
of global fiscal  regimes at $100/bbl. At  the price, Alaska                                                                    
had  the second  highest  levels of  government-take in  the                                                                    
OECD,  with  ACES for  new  development  at a  16.7  percent                                                                    
royalty  directly  under  Norway.  He skipped  to  slide  6:                                                                    
"Government Take Competitiveness  - Most Relevant Competitor                                                                    
Regimes."   The  chart   offered  a   different  method   of                                                                    
Representative Holmes stated that  the version in the packet                                                                    
was different from  the one on the  screen. Co-Chair Stoltze                                                                    
requested further definition as well.                                                                                           
Mr. Mayer further explained the  different prices related to                                                                    
government-take  as displayed  in  the  chart. He  explained                                                                    
that the  steep slope  displayed by  ACES resulted  from the                                                                    
progressivity feature.  By comparison, other  regimes tended                                                                    
to be regressive, because the  royalty rates were fixed. All                                                                    
fixed royalty  regimes were inherently regressive.  He added                                                                    
that the  UK and  Australia had  profit based  regimes, with                                                                    
systems similar to ACES minus the progressivity.                                                                                
Representative  Gara  asked  about  tax rates  for  new  and                                                                    
existing oil  producers. He understood  that the UK  had two                                                                    
separate  tax rates.  He asked  if  the depiction  of UK  on                                                                    
slide  4 encompassed  a blending  of the  two different  tax                                                                    
rates. Mr. Mayer replied that  the UK, as displayed on slide                                                                    
4, did  not account for  the Brownfield Allowance.  The data                                                                    
displayed in the chart resulted from existing projects.                                                                         
6:31:27 PM                                                                                                                    
Representative   Gara  pointed   to   slide   4  where   the                                                                    
government-take  for  existing  producers  at  $100/bbl.  He                                                                    
asked  about investment  in non-OECD  countries like  Russia                                                                    
and Venezuela  and wondered why Mr.  Mayer focused primarily                                                                    
on OECD  countries. Mr. Mayer  replied that the  three major                                                                    
oil companies with  investments on the North  Slope also had                                                                    
investments in  other non-OECD countries. He  explained that                                                                    
extraordinary  resource  companies sometimes  attracted  the                                                                    
investment  that justified  the  high  level of  government-                                                                    
take. He added  that the United States was  declining in oil                                                                    
production five  years ago  because investment  was directed                                                                    
to places like  the deep water of Angola. A  reversal of the                                                                    
trend had occurred  recently and investment in  the Lower 48                                                                    
had risen. He  noted that the Lower 48 was  now the greatest                                                                    
competitor with Alaska.                                                                                                         
6:34:19 PM                                                                                                                    
Representative Gara asked for  confirmation that while shale                                                                    
gas production  had increased dramatically in  the Lower 48,                                                                    
conventional  oil production  had not  increased. Mr.  Mayer                                                                    
responded that he would check  the overall numbers, but knew                                                                    
of  many  conventional  plays   that  had  seen  significant                                                                    
increases in the Lower 48.                                                                                                      
Representative Wilson  asked if the committee  would address                                                                    
SB 23. Co-Chair Stoltze replied in the affirmative.                                                                             
6:36:41 PM                                                                                                                    
Representative Kawasaki  asked if  there were  other metrics                                                                    
that  could   be  used  to   show  comparisons   aside  from                                                                    
government-take. With the data provided,  he asked why areas                                                                    
such as Ireland and New  Zealand were not experiencing major                                                                    
production, since the government-take  was so low. Mr. Mayer                                                                    
replied that  there were multiple metrics  to consider apart                                                                    
from government-take. He elaborated  that the work presented                                                                    
by Mr.  Pulliam allowed  information from  a wider  range of                                                                    
metrics. He responded that a  balance was sought between the                                                                    
quality  of  a country's  resource  base  and the  level  of                                                                    
government-take sustained.  He stated  that Ireland  had few                                                                    
resources  and  the lower  level  of  government take  might                                                                    
encourage exploration.                                                                                                          
Representative  Kawasaki discussed  Mr. Pulliam's  statement                                                                    
that   policy  makers   should  view   metrics  other   than                                                                    
government take when making decisions  about tax regimes. He                                                                    
requested a  comparison of  resource bases  or profitability                                                                    
in the various global regimes.                                                                                                  
Mr. Mayer  recommended viewing the information  presented by                                                                    
Mr. Pulliam.  He agreed that  the balance between  the broad                                                                    
metrics was  important. He explained  that he  presented the                                                                    
chart  because  the  information   was  easily  grasped  and                                                                    
6:40:39 PM                                                                                                                    
Mr. Mayer turned to slide 7 titled "ACES: Key Issues."                                                                          
   · High Government Take and high degree of progressivity                                                                      
     means uncompetitive for investment at current prices                                                                       
   · High marginal rates mean little incentive for producer                                                                     
   · "Buydown" effect means incremental and standalone                                                                          
     economics very different - with very different impacts                                                                     
     for incumbent vs new producer                                                                                              
   · Credits create significant downside exposure to state                                                                      
     in low price environments, for high cost projects, and                                                                     
     projects not on state lands                                                                                                
   · Large scale gas sales would reduce taxes on oil                                                                            
  · Complex system, with often counter-intuitive effects.                                                                       
Mr. Mayer continued  with slide 8 titled  "ACES: Average and                                                                    
Marginal  Production Tax  Rates."  The  graph displayed  the                                                                    
comparison   between   average   and  marginal   tax   rates                                                                    
illustrating the  sharp increase  in the marginal  rate with                                                                    
an increase  in the price  of oil. With the  higher marginal                                                                    
tax rate,  there was  very little  market price  signal from                                                                    
movements in  the oil  price. Producers  in Alaska  see very                                                                    
little benefit from increases in oil prices.                                                                                    
6:43:58 PM                                                                                                                    
Mr. Mayer  continued to  address slide  8. There  was little                                                                    
incentive  to  create  spending efficiency.  Accounting  for                                                                    
costs  related to  tax was  the  "heart" of  a profit  based                                                                    
taxation  system.  Taxing  the  gross  value  was  far  less                                                                    
efficient,  but  taxing  profits  required  adjustments  for                                                                    
6:47:13 PM                                                                                                                    
Mr. Mayer continued to discuss  slide 8. He stated that ACES                                                                    
incentivized  spending, but  not  cost  control, which  then                                                                    
disincentivized new spending  needed to increase production.                                                                    
He  suggested   a  hypothetical   tax  rate  with   a  steep                                                                    
progressive slope.  He argued that  new investment  would be                                                                    
nonexistent without  the tax  incentive in  the hypothetical                                                                    
situation.  He added  that in  the  situation, the  marginal                                                                    
benefit of  every dollar spent became  enormous. He compared                                                                    
the difference  between spending on short  term interests in                                                                    
a mature basin versus making an investment decision.                                                                            
6:51:02 PM                                                                                                                    
Mr.  Mayer  looked  at  slide  9  briefly,  which  had  been                                                                    
introduced initially  by Mr. Pulliam. The  slide illustrated                                                                    
a calculation of ACES tax and additional capital spending.                                                                      
Mr. Mayer discussed slide 10: "ACES - Key Issues."                                                                              
   · High Government Take and high degree of progressivity                                                                      
     means uncompetitive for investment at current prices                                                                       
   · High marginal rates mean little incentive for producer                                                                     
   · "Buydown" effect means incremental and standalone                                                                          
     economics very different - with very different impacts                                                                     
     for incumbent vs new producer                                                                                              
   · Credits create significant downside exposure to state                                                                      
     in low price environments, for high cost projects, and                                                                     
     projects not on state lands                                                                                                
   · Large scale gas sales would reduce taxes on oil                                                                            
  · Complex system, with often counter-intuitive effects                                                                        
Mr. Mayer discussed the graphs  on slide 11: "ACES - $18/bbl                                                                    
Capex  New  Development,  Standalone." He  pointed  out  the                                                                    
graph  in  the  upper-left  quadrant  of  the  graph,  which                                                                    
depicted  a  range  of   government-take  at  different  oil                                                                    
prices. The top level of  the bars indicated the total level                                                                    
of   government-take.  The   colored   bars  indicated   the                                                                    
different   components  of   the   regime  that   constitute                                                                    
government-take. The  data showed  that the royalty  in ACES                                                                    
was  indeed  regressive.  He added  the  highly  progressive                                                                    
nature of the  Profit Based Production Tax  (PPT), which was                                                                    
the key component of ACES.                                                                                                      
Mr.  Mayer continued  with slide  11  and the  graph in  the                                                                    
upper-right quadrant  showing a  split of net  present value                                                                    
of production.  The graph illustrated  new development  on a                                                                    
standalone basis.  The data  showed a  shallow line  for the                                                                    
company due  to the impact  of progressivity, compared  to a                                                                    
steep line for the state.                                                                                                       
6:56:02 PM                                                                                                                    
Mr. Mayer continued  with slide 11 and the  graph located in                                                                    
the  lower-left quadrant.  The graph  depicted  a cash  flow                                                                    
analysis  at $100/bbl.  The green  bars illustrated  revenue                                                                    
from a  project. The other  colored bars depicted  the costs                                                                    
associated  with production.  The after-tax  cash flow  line                                                                    
often determined the economic  attractiveness of the project                                                                    
to the  producer along  with all  of the  different economic                                                                    
metrics. Finally,  he pointed out  a quick  economic summary                                                                    
detailed in  the lower-left  quadrant of  the slide  for the                                                                    
hypothetical    $18/bbl,   12.5    percent   royalty,    new                                                                    
development,  standalone project.  He opined  that ACES  was                                                                    
adopted  under the  argument of  incremental economics.  The                                                                    
fundamental information  was the internal rate  of return of                                                                    
the project.                                                                                                                    
7:00:33 PM                                                                                                                    
Mr.  Mayer compared  slide  12: "ACES  -  $18/bbl Capex  New                                                                    
Development, Incremental to Incumbent"  with slide 1. When a                                                                    
project was  viewed in a  standalone basis, it  was analyzed                                                                    
alone.  With  the  incremental basis  view,  a  project  was                                                                    
analyzed  with both  the base  production portfolio  and the                                                                    
new project in  tandem. The base cash  flows were subtracted                                                                    
from the  combined cash  flows in  the incremental  basis to                                                                    
ascertain  the  changes  stemming from  new  investment.  He                                                                    
corrected  an  error  in  the slide  noting  that  the  word                                                                    
standalone did not belong in the title.                                                                                         
7:02:54 PM                                                                                                                    
Mr.  Mayer  discussed slide  12  and  noted effects  of  the                                                                    
marginal tax rate.  He stated that the peak  in the marginal                                                                    
tax rate had an effect on  the overall value to the project.                                                                    
The  company lost  money with  the increase  in oil  prices,                                                                    
while the  state benefitted. He mentioned  the high internal                                                                    
rates of  return, which  warranted further  investigation of                                                                    
marginal versus standalone economics.                                                                                           
7:07:47 PM                                                                                                                    
Representative Gara pointed to  decreasing oil production in                                                                    
major oil producing states in  the Lower 48. Mr. Mayer would                                                                    
answer the question later.                                                                                                      
Representative  Gara   looked  at  slide  8   and  asked  if                                                                    
companies  in  Alaska  paid   approximately  37  percent  in                                                                    
production tax. He  asked if the rate provided  was prior to                                                                    
deductions  and credits.  Mr. Mayer  replied  that the  rate                                                                    
provided  was  after  deductions   but  before  credits.  He                                                                    
thought  that including  credits in  the calculations  would                                                                    
show even higher government support for spending.                                                                               
Representative  Gara  asked about  slide  8  and the  "upper                                                                    
line." He  asked if  the data included  the lower  rate paid                                                                    
for  credits. Mr.  Mayer concurred  and  added that  credits                                                                    
would reduce the tax rate.                                                                                                      
Representative  Costello clarified  that the  return on  the                                                                    
capital  employed was  the decision  that drove  investment.                                                                    
Mr. Mayer  replied that  the return on  the capital  was the                                                                    
way  that  large oil  and  gas  companies benchmarked  their                                                                    
performance to demonstrate  it to the market.  He added that                                                                    
small oil  and gas companies  were focused on  growth, while                                                                    
large oil and gas companied focused on efficiency.                                                                              
7:12:11 PM                                                                                                                    
Representative  Costello pointed  to the  buydown effect  on                                                                    
the overall  system. Since HCS  CSSB 21(RES)  eliminated the                                                                    
ability to buydown, she asked  about the significance of the                                                                    
action versus  the progressivity  factor. Mr.  Mayer replied                                                                    
that  the  progressivity and  the  ability  to buydown  were                                                                    
inextricably  linked. He  noted  that progressivity  created                                                                    
the buydown  effect, under the  ACES structure.  The buydown                                                                    
would not  exist with  the same  progressivity based  on the                                                                    
price of  oil rather than  production value. The level  of a                                                                    
company's spending would determine  the tax base rather than                                                                    
tax rate. He opined that the  buydown aspect in ACES did not                                                                    
help  sanction  a  difficult project.  He  opined  that  the                                                                    
project  must  have  attractive economics  on  a  standalone                                                                    
7:14:20 PM                                                                                                                    
Representative  Wilson asked  what the  committee should  do                                                                    
and the reason why.                                                                                                             
Mr. Mayer  replied that a  more neutral system that  did not                                                                    
artificially create  results, but  instead created  a simple                                                                    
and predictable tax regime that  was competitive overall. He                                                                    
believed that HCS CSSB 21(RES)  went a long way in achieving                                                                    
the goal. He  noted that the different versions  of the bill                                                                    
had a  more neutral  tax rate. He  pointed out  that results                                                                    
were  more  difficult  to evaluate  under  the  ACES  regime                                                                    
because of the progressivity.  When he modeled results under                                                                    
HCS CSSB  21(RES), he was  able to relate them  to different                                                                    
scenarios that made sense.                                                                                                      
7:17:07 PM                                                                                                                    
Representative  Munoz  noted   that  the  last  presentation                                                                    
yielded  data  that Alaska  was  less  competitive with  new                                                                    
participation  categories. She  requested comment  and asked                                                                    
what aspect encouraged investment.  Mr. Mayer responded that                                                                    
the structure  of HCS CSSB  21(RES) presented  a fundamental                                                                    
difference when a  project was viewed on  a standalone basis                                                                    
versus when  viewed in an  incremental basis in  a portfolio                                                                    
of an existing  producer. Using HCS CSSB  21(RES), the basic                                                                    
economics were identical.                                                                                                       
7:19:36 PM                                                                                                                    
Representative Gara  reported to  the committee  that Conoco                                                                    
Phillips  stated  publically the  good  rates  of return  in                                                                    
Alaska for  the incumbent fields.  He wondered if  ACES with                                                                    
altered levels  of progressivity  might be  more attractive.                                                                    
He  asked about  following Mr.  Mayer's advice  for a  lower                                                                    
rate on new fields  and proposed that government-takes would                                                                    
be somewhere near the middle.                                                                                                   
Mr.  Mayer responded  that the  government-take was  not the                                                                    
most  important  method of  analyzing  a  new producer.  The                                                                    
artificial  rates of  manufacturing high  internal rates  of                                                                    
return through buydown created  undesirable side effects. He                                                                    
advocated for a simpler, cleaner structure.                                                                                     
7:22:00 PM                                                                                                                    
Mr. Mayer moved to slide 13: "ACES - Key Issues."                                                                               
   · High Government Take and high degree of progressivity                                                                      
     means uncompetitive for investment at current prices                                                                       
   · High marginal rates mean little incentive for producer                                                                     
   · "Buydown" effect means incremental and standalone                                                                          
     economics very different - with very different impacts                                                                     
     for incumbent vs new producer                                                                                              
   · Credits create significant downside exposure to state                                                                      
     in low price environments, for high cost projects, and                                                                     
     projects not on state lands                                                                                                
   · Large scale gas sales would reduce taxes on oil                                                                            
  · Complex system, with often counter-intuitive effects                                                                        
7:23:08 PM                                                                                                                    
Mr.  Mayer discussed  slide  14: "ACES  -  $25/bb Capex  New                                                                    
Development, Incremental  to Incumbent." The  model utilized                                                                    
the base and new  production while subtracting the economics                                                                    
of the base to arrive  at the incremental result. He pointed                                                                    
out the  overall split of  net present value  of production.                                                                    
"At  $75/bbl  oil, the  Net  Present  Value (NPV)  of  state                                                                    
spending  on credits  is higher  than the  NPV of  all state                                                                    
government take for the project.  However, the project still                                                                    
generated positive  NPV for  the company  - a  major concern                                                                    
for  liability  to the  state."  The  price value  presented                                                                    
total  positive value  to  the company.  The  effect of  the                                                                    
buydown was lower  to the state than to the  company, so the                                                                    
company was able to continue to generate NPV at the price.                                                                      
Representative  Holmes  asked  about the  subtitles  in  the                                                                    
presentation. Mr.  Mayer repeated his apology  about the use                                                                    
of "standalone" in the subtitle.                                                                                                
Mr.  Mayer  continued  that   the  data  representing  total                                                                    
government-take included the federal corporate income tax.                                                                      
7:26:24 PM                                                                                                                    
Mr.  Mayer discussed  slide 15:  "ACES -  $35/bbl Capex  New                                                                    
Development,  Incremental  to Incumbent."  Progressivity  as                                                                    
implemented in  ACES created a  liability to the  state. The                                                                    
state subsidized  the prices.  He stressed  that government-                                                                    
take was only  a small piece of  relevant information, while                                                                    
other distortions presented in ACES were also important.                                                                        
7:27:38 PM                                                                                                                    
Mr. Mayer discussed slide 16: "ACES: Key Issues."                                                                               
   · High Government Take and high degree of progressivity                                                                      
     means uncompetitive for investment at current prices                                                                       
   · High marginal rates mean little incentive for producer                                                                     
   · "Buydown" effect means incremental and standalone                                                                          
     economics very different - with very different impacts                                                                     
     for incumbent vs new producer                                                                                              
   · Credits create significant downside exposure to state                                                                      
     in low price environments, for high cost projects, and                                                                     
     projects not on state lands                                                                                                
   · Large scale gas sales would reduce taxes on oil                                                                            
  · Complex system, with often counter-intuitive effects                                                                        
Co-Chair  Stoltze  recalled  hearing  testimony  from  other                                                                    
committees regarding  areas paying 16.7 percent  royalty. He                                                                    
wondered if the higher royalty  rate made the outlying areas                                                                    
less competitive.  Mr. Mayer  replied that  a change  in the                                                                    
royalty would upset  companies that did not  bid on projects                                                                    
because  of   the  high   royalty  rate.   Co-Chair  Stoltze                                                                    
clarified that the process would not be fair.                                                                                   
Mr. Mayer  replied yes. He  added that the high  royalty did                                                                    
raise  government-take.  He   suggested  that  leveling  the                                                                    
playing field could  be addressed in the new  tax system. He                                                                    
mentioned that  the small  producer credit  was reintroduced                                                                    
to HCS  CSSB 21(RES) by  the resources committee.  He argued                                                                    
that the establishment  of the small producer  credit in HCS                                                                    
CSSB 21(RES) was less than  ideal and provided incentive for                                                                    
companies to cease growth beyond the threshold provided.                                                                        
7:31:42 PM                                                                                                                    
Mr. Mayer  questioned the efficiency  of the  small producer                                                                    
credit. Since small producers had  the higher royalties, the                                                                    
GRE might be manipulated to compensate.                                                                                         
7:32:45 PM                                                                                                                    
Representative Wilson  asked if the credits  were important.                                                                    
Mr. Mayer replied  that eliminating all the  credits was the                                                                    
governor's initial proposal with  SB 21. The flat production                                                                    
tax  rate on  top  of the  royalty  created a  fundamentally                                                                    
regressive system. He commented that  the flat $5 per barrel                                                                    
credit  provided an  incentive for  production and  balanced                                                                    
out the regressive nature of the royalty.                                                                                       
7:34:42 PM                                                                                                                    
Mr.  Mayer discussed  slide 17:  "Impact of  Large-Scale Gas                                                                    
Sales on Tax Rates."                                                                                                            
   · Under ACES, production tax value is assessed on a                                                                          
     combined BTU-equivalent basis for both oil and gas                                                                         
        o So long as no major gas export project is under                                                                       
          development, this has no impact                                                                                       
        o In the event of the development of a major gas                                                                        
          export project, however, when gas prices are                                                                          
          significantly lower than oil prices, this could                                                                       
          lead to significant reductions in Government Take                                                                     
7:35:45 PM                                                                                                                    
Mr. Mayer discussed slide 18: "ACES: Key Issues."                                                                               
   · High Government Take and high degree of progressivity                                                                      
     means uncompetitive for investment at current prices                                                                       
   · High marginal rates mean little incentive for producer                                                                     
   · "Buydown" effect means incremental and standalone                                                                          
     economics very different-with very different impacts                                                                       
     for incumbent vs new producer                                                                                              
   · Credits create significant downside exposure to state                                                                      
     in low price environments, for high cost projects, and                                                                     
     projects not on state lands                                                                                                
   · Large scale gas sales would reduce taxes on oil                                                                            
  · Complex system, with often counter-intuitive effects                                                                        
7:36:58 PM                                                                                                                    
Mr. Mayer  discussed slide 19:  "ACES and SB 21:  Issues and                                                                    
   · ACES - Issues                                                                                                              
        o High   Government   Take   and  high   degree   of                                                                    
          progressivity means uncompetitive for investment                                                                      
          at current prices                                                                                                     
        o Credits  create significant  downside exposure  to                                                                    
          state in low price environments, for high cost                                                                        
         projects, and projects not on state lands                                                                              
        o "Buydown" effect means  incremental and standalone                                                                    
          economics very different - with very different                                                                        
          impacts for incumbent vs new producer                                                                                 
        o High  marginal  rates  mean little  incentive  for                                                                    
          producer efficiency                                                                                                   
        o Complex   system,  with   often  counter-intuitive                                                                    
   · SB21 AIMS                                                                                                                  
        o Relatively  neutral  at  a  competitive  level  of                                                                    
          Government    Take,   while    further   improving                                                                    
          competitiveness for new projects                                                                                      
        o Limit downside risk to state from credits                                                                             
        o Balance system with even  impacts for incumbent vs                                                                    
          new producer                                                                                                          
        o More   neutral   regime  creates   low,   constant                                                                    
          marginal rates - strong incentive for producer                                                                        
        o Simplify the fiscal system                                                                                            
7:39:41 PM                                                                                                                    
Mr. Mayer briefly  discussed slide 20: "ACES and  SB 21: Key                                                                    
Changes." He  noted that  the slide  presented a  high level                                                                    
analysis of the key changes.                                                                                                    
7:40:11 PM                                                                                                                    
Mr. Mayer discussed  slide 21: "ACES and  SB 21: Government-                                                                    
take Comparison  Base Production." He stated  that the graph                                                                    
depicted  three different  iterations of  SB 21  compared to                                                                    
ACES.  He  noted that  SB  21  removed the  capital  credits                                                                    
leaving a  regressive structure. The  aim of CSSB 21  was to                                                                    
create  a  neutral  system, by  eliminating  the  regressive                                                                    
nature and  raising the base  rate to 35 percent  and adding                                                                    
the $5  per barrel  credit. He stated  that CSSB  21 created                                                                    
sufficient  progressivity   to  counteract   the  regressive                                                                    
nature of the royalty.                                                                                                          
7:43:18 PM                                                                                                                    
Mr.  Mayer  noted  that  HCS CSSB  21(RES)  used  the  basic                                                                    
structure  and  increased  the  credits  to  further  reduce                                                                    
government take  at the low  end without creating  an impact                                                                    
at $100/bbl level.                                                                                                              
7:44:10 PM                                                                                                                    
Mr. Mayer discussed  slide 22: "ACES and  SB 21: Government-                                                                    
take  Comparison $18/bbl  New  Development, Standalone."  He                                                                    
pointed  out  the difference  between  the  finance and  the                                                                    
House  resources   version  of  SB  21.   The  reduction  in                                                                    
government-take was  due to the  incorporation of  the small                                                                    
producer tax credit.  The credit was a fixed  amount and had                                                                    
a  greater  impact  at  low  prices  than  high  prices  and                                                                    
substantially reduced the overall level of government take.                                                                     
7:46:02 PM                                                                                                                    
Mr. Mayer discussed slide 24:  " ACES and SB 21: Government-                                                                    
take  Comparison $18/bbl  New Development,  Standalone." The                                                                    
graph  depicted  marginal and  average  rates  for HCS  CSSB
21(RES). The basic structure of  HCS CSSB 21(RES) was a flat                                                                    
rate of  either 33 or 35  percent across all prices.  The $5                                                                    
per barrel credit  applied brought the average  rate down as                                                                    
prices  decreased. He  opined that  the  flat marginal  rate                                                                    
provided incentives for new producers and incumbents.                                                                           
7:47:41 PM                                                                                                                    
Mr. Mayer  discussed slide 25:  "Linear Function  for Credit                                                                    
may be preferable to Step  Function." He pointed out that an                                                                    
impact  of the  step  function was  the  creation of  sudden                                                                    
spikes every $10  due to credits. He noted  that Mr. Pulliam                                                                    
suggested a linear credit as an alternative.                                                                                    
7:48:24 PM                                                                                                                    
Mr. Mayer  discussed slide 26:  "Credits -  NOL, Exploration                                                                    
and Small Producer."                                                                                                            
   · Impact of ACES on project economics is very different                                                                      
     for an incumbent vs a new producer                                                                                         
        o At current prices, incumbent experiences impact                                                                       
          of "buydown" effect, with new spending reducing                                                                       
          tax rate from levels above 25 percent NOL credit                                                                      
          (plus also impact of capital credit)                                                                                  
        o New producer receives only impact of 25 percent                                                                       
          NOL credit (plus capital credit)                                                                                      
   · Fully monetizable NOL credit for small producers evens                                                                     
     this playing field                                                                                                         
        o All producers receive effective 33 percent                                                                            
          government support for spending, whether new or                                                                       
             ƒFlat, low marginal rate maintains strong                                                                         
               incentive for efficiencies and cost control                                                                      
             ƒNo undue exposure to the state from higher                                                                       
               cost projects at low prices                                                                                      
   · Aim is to even the playing field and limit the level                                                                       
     of support for exploration as well as other forms of                                                                       
        o Allowing the Exploration credit to sunset, but                                                                        
          having the fully monetizable 33 percent NOL                                                                           
          credit means 33 percent government support for                                                                        
          exploration spending                                                                                                  
        o again, even impact between incumbent vs new                                                                           
   · When the impacts of the system are even between                                                                            
     incumbent vs new producer, strong argument that                                                                            
    extending "small producer" credit is less warranted                                                                         
   · Overall impact is to significantly simplify the system                                                                     
7:49:31 PM                                                                                                                    
Mr.    Mayer    discussed   slide    27:    "Government-take                                                                    
Competitiveness." He  explained that the arrows  on the left                                                                    
depicted  the new  development incorporating  the impact  of                                                                    
the small  producer tax  credit. Without  the impact  of the                                                                    
small producer tax credit, a  couple of percentage points of                                                                    
government take could be added.                                                                                                 
7:50:56 PM                                                                                                                    
Co-Chair Stoltze  asked if the information  presented by PFC                                                                    
Energy  could be  shared  in  legislator's newsletters.  Mr.                                                                    
Mayer replied yes.                                                                                                              
Representative  Wilson asked  about series  one, two,  three                                                                    
and four. Mr. Mayer replied  that the chart was not properly                                                                    
labeled. He extended his apologies.                                                                                             
7:52:00 PM                                                                                                                    
Representative Edgmon asked if  more investment had occurred                                                                    
in the  North Slope  under ACES,  would the  presentation be                                                                    
different.  Mr.  Mayer   replied  that  structural  problems                                                                    
involved   in  ACES   along  with   the  overall   level  of                                                                    
government-take were  the premises of his  presentation. His                                                                    
presentation  would remain  consistent about  the structural                                                                    
issues in  ACES. He  added that the  last five  years, under                                                                    
ACES provided compelling evidence for Alaska.                                                                                   
Representative  Edgmon mentioned  the great  emphasis placed                                                                    
on government-take  in the last  two presentations  with the                                                                    
caveat  that oil  companies used  other metrics  when making                                                                    
business  decisions.  He  wondered if  the  committee  would                                                                    
receive  further  information  for  use  in  their  decision                                                                    
making process.                                                                                                                 
Mr.  Mayer responded  that a  focus  on government-take  was                                                                    
important,  but  did  not  provide  the  whole  picture.  He                                                                    
attempted  to present  a range  of  metrics while  comparing                                                                    
7:56:05 PM                                                                                                                    
Representative Edgmon  asked if  the committee  could expect                                                                    
to gain additional information  to effectively benchmark the                                                                    
reasons   behind  the   low  investment.   Co-Chair  Stoltze                                                                    
discussed a Saturday Night Live skit.                                                                                           
Representative Gara  asked about slide 21.  He recalled that                                                                    
Pedro Van Meurs advocated  for a 72 percent government-take.                                                                    
Mr. Mayer  stated that the  decision rested in the  hands of                                                                    
the  policy makers.  He agreed  that 72  percent government-                                                                    
take  was reasonable  for maintenance  of legacy  production                                                                    
along  its current  decline. If  the legislature  wished for                                                                    
substantial  new investment  in the  legacy fields,  then an                                                                    
incentive must be provided.                                                                                                     
8:01:28 PM                                                                                                                    
Representative  Gara  asked   if  government-take  could  be                                                                    
increased  to  65 percent  under  a  new tax  system,  while                                                                    
offering similar  incentives to industry. Mr.  Mayer replied                                                                    
that the price of oil was  the issue. When competing for new                                                                    
investment, a higher government-take was not competitive.                                                                       
Representative  Gara  asked if  the  state  could collect  a                                                                    
better share when  oil was above $110 per  barrel. Mr. Mayer                                                                    
replied that  policy makers could  determine the  answer. He                                                                    
noted  that HCS  CSSB  21(RES) reviewed  the neutral  Senate                                                                    
version and modified it to be more progressive.                                                                                 
Co-Chair Stoltze  clarified that Mr. Mayer  was obligated to                                                                    
provide information, but not to make policy judgments.                                                                          
8:03:12 PM                                                                                                                    
Vice-Chair  Neuman pointed  out the  decline curve  faced by                                                                    
Alaska. He  noted that different charts  in the presentation                                                                    
showed  the decline  curve  and  the loss  of  funds of  $40                                                                    
million per day or $1.5 billion  per year. He asked if other                                                                    
countries  tended  to  lower  their  government-take  during                                                                    
times of declining production.                                                                                                  
Mr.  Mayer  provided  the example  of  Alberta,  which  made                                                                    
similar  assumptions about  a  mature  basin without  taking                                                                    
into  account  the  high  oil  prices.  He  noted  that  the                                                                    
increase of lease sales for  investment occurred in Alberta.                                                                    
He added  that the UK government  raised the government-take                                                                    
and introduced  the ground fuel credit  for new development,                                                                    
which  reduced  government-take  on  incremental  production                                                                    
from legacy fields.                                                                                                             
8:05:53 PM                                                                                                                    
Co-Chair  Stoltze encouraged  committee members  to schedule                                                                    
time with Mr.  Mayer. He valued assistance  from veterans on                                                                    
the issue.                                                                                                                      
CSSB 21(FIN) am(efd fld) was  HEARD  and HELD  in  committee                                                                    
for further consideration.                                                                                                      
8:08:30 PM                                                                                                                    
AT EASE                                                                                                                         
8:12:10 PM                                                                                                                    

Document Name Date/Time Subjects
SB 21 House Finance DNR GRE Presentation_4-6-13.pdf HFIN 4/6/2013 12:30:00 PM
SB 21
SB 23 AIDEA - AEA response to HF question.pdf HFIN 4/6/2013 12:30:00 PM
SB 23
SB 23 HCS FIN WORKDRAFT R.pdf HFIN 4/6/2013 12:30:00 PM
SB 23
SB 23 NEW FN CS(FIN)-DCCED-AIDEA-04-05-13B.pdf HFIN 4/6/2013 12:30:00 PM
SB 23
SB 23NEW FN CS(FIN)-DCCED-AIDEA-04-05-13.pdf HFIN 4/6/2013 12:30:00 PM
SB 23
Econ One Presentation For House Finance (4-06-13).pdf HFIN 4/6/2013 12:30:00 PM
SB 21
SB 21 Handout Gara Petroleum News.pdf HFIN 4/6/2013 12:30:00 PM
SB 21
SB 21 13.04.07 HFIN DOR follow up.pdf HFIN 4/6/2013 12:30:00 PM
SB 21
SB 21 PFC HFIN 6 April 2013.pdf HFIN 4/6/2013 12:30:00 PM
SB 21