Legislature(2007 - 2008)HOUSE FINANCE 519

10/21/2007 01:00 PM OIL & GAS

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01:04:47 PM Start
01:06:02 PM HB2001|| SB2001
08:48:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Joint with Senate Resources Committee
Heard & Held
Tentative agenda: Presentation of bill
by the Administration
-- Testimony <Invitation Only> --
HB2001-OIL & GAS TAX AMENDMENTS                                                                                               
SB2001-OIL & GAS TAX AMENDMENTS                                                                                               
1:06:02 PM                                                                                                                    
CHAIR OLSON  announced that the  only order of business  would be                                                               
HOUSE BILL  NO. 2001, "An Act  relating to the production  tax on                                                               
oil and  gas and to  conservation surcharges on oil;  relating to                                                               
the issuance of advisory bulletins  and the disclosure of certain                                                               
information  relating  to  the production  tax  and  the  sharing                                                               
between  agencies   of  certain   information  relating   to  the                                                               
production tax  and to oil and  gas or gas only  leases; amending                                                               
the State  Personnel Act to  place in the exempt  service certain                                                               
state  oil  and gas  auditors  and  their immediate  supervisors;                                                               
establishing  an oil  and  gas tax  credit  fund and  authorizing                                                               
payment from that fund; providing  for retroactive application of                                                               
certain  statutory  and  regulatory provisions  relating  to  the                                                               
production  tax on  oil and  gas and  conservation surcharges  on                                                               
oil;  making   conforming  amendments;   and  providing   for  an                                                               
effective date."  and  SENATE  BILL NO. 2001, "An Act relating to                                                               
the production tax on oil  and gas and to conservation surcharges                                                               
on oil;  relating to the  issuance of advisory bulletins  and the                                                               
disclosure of certain information  relating to the production tax                                                               
and the sharing between agencies  of certain information relating                                                               
to the  production tax  and to  oil and gas  or gas  only leases;                                                               
amending the State  Personnel Act to place in  the exempt service                                                               
certain  state   oil  and  gas   auditors  and   their  immediate                                                               
supervisors;  establishing an  oil and  gas tax  credit fund  and                                                               
authorizing  payment from  that fund;  providing for  retroactive                                                               
application  of  certain   statutory  and  regulatory  provisions                                                               
relating to  the production tax  on oil and gas  and conservation                                                               
surcharges on  oil; making  conforming amendments;  and providing                                                               
for an effective date."                                                                                                         
1:06:45 PM                                                                                                                    
PAT  GALVIN, Commissioner,  Department of  Revenue, informed  the                                                               
committees that the  focus will be on the impact  the tax program                                                               
has on  the investment climate.   Also, the analysis done  by the                                                               
Department of  Revenue (DOR) and Department  of Natural Resources                                                               
(DNR) on that issue will be  shared.  He then reviewed an outline                                                               
of what the administration would present today.                                                                                 
1:08:48 PM                                                                                                                    
TOM  IRWIN,   Commissioner,  Department  of   Natural  Resources,                                                               
reminded the  committees that  in May  the governor  directed the                                                               
commissioner  of  DOR to  undertake  a  review of  the  petroleum                                                               
production  profits  tax  (PPT)  in   a  manner  that  ensures  a                                                               
transparent process, that  the state is getting  a an appropriate                                                               
share, and that the state  provides a healthy investment climate.                                                               
He opined  that DNR certainly  agreed with those principles.   He                                                               
then informed  the committees that  DNR was asked  to participate                                                               
and  it has  participated  in this  evaluation  process from  the                                                               
beginning.   Commissioner  Irwin opined  that Alaska's  Clear and                                                               
Equitable Share (ACES) [HB 2001]  provides a good balance between                                                               
encouraging investment and providing a fair share to the state.                                                                 
COMMISSIONER IRWIN then  recalled discussions of PPT  in which he                                                               
and  the deputy  commissioner were  very  vocal in  support of  a                                                               
gross tax  alternative.  He  said although he maintains  his like                                                               
of a simple concept, one couldn't  be identified.  He opined that                                                               
the  lack  of  communications  between departments  lead  to  the                                                               
strong gross versus  net positions.  However, now  both sides are                                                               
more  knowledgeable and  closer to  making an  informed decision.                                                               
Commissioner  Irwin  said, "We  support  what  the Department  of                                                               
Revenue  is  presenting today  and  this  information led  us  to                                                               
recognize the limitations of just a pure gross system."                                                                         
1:13:21 PM                                                                                                                    
CHAIR HUGGINS requested a copy of the May directive cited.                                                                      
COMMISSIONER IRWIN recalled  that it was a  verbal request rather                                                               
than a written request.                                                                                                         
1:13:58 PM                                                                                                                    
SENATOR WIELECHOWSKI  recalled that  Commissioner Irwin  has been                                                               
an advocate for  the gross.  He further recalled  that there have                                                               
been press  reports relating that  during the ACES  process there                                                               
was division with regard to  going forward with gross versus net.                                                               
Were those press reports true, he asked.                                                                                        
COMMISSIONER  IRWIN  stressed  that  he  spent  untold  hours  in                                                               
meetings with  the governor,  DNR, and DOR  as well  as technical                                                               
staff  within  the  department  and  from  outside  of  it.    He                                                               
mentioned  the goal  with  this  administration has  consistently                                                               
been what's best for the state.   During review of the gross, the                                                               
matter  of developing  correct incentives  had  to be  addressed.                                                               
The first thought  was to use a fixed number,  but the variety of                                                               
wells and  situations is complex,  particularly with  heavy oils.                                                               
The thought  then was to  have the  companies put forth  what the                                                               
incentives should  be by  the cost, which  resulted in  data that                                                               
pointed "virtually back to net."   Commissioner Irwin opined that                                                               
ACES,  with  its gross  protected  floor  and net  approach  with                                                               
significant incentives,  is sort of  a marrying  of the two.   He                                                               
emphasized that no one was ever precluded from providing input.                                                                 
1:17:37 PM                                                                                                                    
SENATOR STEVENS inquired as to  why the governor has transitioned                                                               
from a gross tax to a net tax.                                                                                                  
COMMISSIONER GALVIN related that the  intention is to lay out the                                                               
full  discussion  and  what  was   discovered  that  led  to  the                                                               
development of ACES.                                                                                                            
1:18:56 PM                                                                                                                    
CHAIR HUGGINS  opined that it's important  that whatever happened                                                               
in  the meetings  resulting  in  ACES comes  out  in this  public                                                               
COMMISSIONER  IRWIN  said  that's   why  these  hearings  are  so                                                               
important.   "Again,  everybody in  this room  is for  Alaska; we                                                               
want to  choose what's  right for Alaska."   He  highlighted that                                                               
ACES includes  both gross and  net as  there are merits  to both.                                                               
He  opined  that  today's  meeting   should  relate  the  process                                                               
utilized to get to the ACES proposal.                                                                                           
1:21:28 PM                                                                                                                    
CHERYL  NIENHUIS, Petroleum  Economist, Department  of Revenue  ,                                                               
said  she  would  begin  with how  production  tax  revenues  are                                                               
forecast.   Referring to  slide 2, she  explained that  under the                                                               
PPT there  are three unknowns of  which some are more  known than                                                               
others, such as  with production.  The department  actually has a                                                               
petroleum engineer who does the  production forecast and has been                                                               
for a  number of  years.   Production, which  is utilized  in the                                                               
production tax calculation, is updated  every six months.  Still,                                                               
it's  somewhat of  an unknown,  particularly so  lately as  there                                                               
have  been some  production  disruptions.   The  next unknown  is                                                               
price.    For  price  forecasting,  almost  all  of  the  state's                                                               
economists  come together  for  a day  and  discuss oil  markets,                                                               
various drivers of  demand and supply, and worldwide  prices.  At                                                               
the end day,  [each economist] specifies what  he/she believes to                                                               
be the best  price forecast, which is included in  the short- and                                                               
long-term forecast.   The price is another of  the variables that                                                               
is considered in  the production tax calculation.   Under the PPT                                                               
there is a third unknown, which  is the cost of production.  Cost                                                               
can be  viewed simply  as cost  or as investment.   Cost  has two                                                               
basic elements:   the operating  expenditures (opex)  and capital                                                               
expenditures  (capex).   Ms.  Nienhuis  explained that  operating                                                               
costs are  generally those  costs that go  into producing  oil or                                                               
gas.   The operating  costs can  be fixed  or variable.   Capital                                                               
costs are  those costs that  are generally incurred  for expenses                                                               
that  lead to  some  sort  of asset  or  development that  either                                                               
furthers  production or  somehow  is beyond  the operating  cost.                                                               
Both the capex  and the opex are important to  the calculation of                                                               
the tax.                                                                                                                        
1:24:57 PM                                                                                                                    
MS.  NIENHUIS then  turned to  slide 3  titled "2006  PPT Costs."                                                               
She explained  that during  the PPT  debates the  cost assumption                                                               
sources used  were basically historical  data from 2002  to 2004,                                                               
such  as  federal  partnership  tax  returns,  some  departmental                                                               
information on  capital spending  in Alaska  on the  North Slope,                                                               
some  confidential information  received through  the negotiation                                                               
process for  the gasline, and  NPSL lease-cost  information, some                                                               
of which was  a little older.  There were  also published reports                                                               
from  different firms,  such as  CERA [Cambridge  Energy Research                                                               
Associates] and  Wood Mackenzie as well  as financial information                                                               
from  companies.   A lot  of publicly  available information  was                                                               
also available.   Additionally, the department  had consultations                                                               
with industry  staff and [during]  the gasline  negotiations some                                                               
confidential  information  was  received.   She  emphasized  that                                                               
throughout  the  process  industry  was involved  as  there  were                                                               
formal  and  informal  discussions   with  them  about  the  cost                                                               
structure.    Ms.  Nienhuis  reminded  the  committees  that  the                                                               
department's cost  estimates were  reviewed by  the legislature's                                                               
consultants, and  therefore were  aware of the  department's cost                                                               
1:27:08 PM                                                                                                                    
MS.  NIENHUIS,   referring  to  slide  4   titled  "PPT  Forecast                                                               
Timeline", informed  the committees that the  first cost forecast                                                               
was put  together in  the fall  of 2005 when  [the state]  was in                                                               
negotiations with  the industry  on the gasline  and there  was a                                                               
push  to change  the oil  tax.   At that  time, a  number of  the                                                               
department's  economists obtained  as  much  information as  they                                                               
could and put together a cost  forecast, which became part of the                                                               
fiscal  note  for   House  Bill  3001  [in  2006].     She  said,                                                               
"Basically, what it amounted to  is somewhere in the neighborhood                                                               
of  $7 a  barrel."   However,  she  noted that  it  wasn't all  a                                                               
variable cost  as there were  different mechanisms  included that                                                               
weren't totally  variable.  In  August 2006, the fiscal  note for                                                               
House Bill 3001 was put out for  the current PPT tax system.  She                                                               
pointed  out that  throughout the  PPT's  debate, the  department                                                               
made a  point of not changing  its cost estimates because  it was                                                               
important to  not bias  one different tax  plan or  proposal over                                                               
another.  Furthermore,  there wasn't the time  to re-evaluate the                                                               
costs.  Ms.  Nienhuis opined that the department felt  it had the                                                               
costs right and there was lots  of support for that.  In November                                                               
2006 a  revenue forecast  was put  together.   At that  time, the                                                               
department  re-evaluated the  costs as  it realized  that capital                                                               
costs had increased.   In fact, the price of  steel and labor had                                                               
rose  significantly, and  therefore the  department adjusted  its                                                               
forecast to increase capital costs.                                                                                             
1:29:23 PM                                                                                                                    
SENATOR WAGONER inquired  as to what information  is available to                                                               
substantiate that the price of labor has increased considerably.                                                                
MS.  NIENHUIS   said  she  is   speaking  from  two   sources  of                                                               
information,  which  include  industry discussions.    The  other                                                               
source  is the  knowledge that  certain job  classifications have                                                               
had higher labor cost increases  than others.  For example, there                                                               
is a  shortage of  engineers, which has  caused the  salaries for                                                               
some of  those engineers to increase  as well as for  some of the                                                               
actual mechanics and workers in the field.                                                                                      
SENATOR WAGONER opined  that it should be easy  to document those                                                               
increases.   He  expressed interest  in  seeing a  list of  those                                                               
increases and the  total effect of those.  The  largest number of                                                               
those  working in  the petroleum  industry are  those working  in                                                               
operations  and maintenance,  which probably  haven't experienced                                                               
much of an increase in their wages.                                                                                             
COMMISSIONER  GALVIN clarified  that Ms.  Nienhuis mentions  that                                                               
primarily to  note what  occurred between  the time  the original                                                               
fiscal note  assumptions were  made and prior  to the  receipt of                                                               
the  reports from  the  taxpayers that  resulted  in the  current                                                               
level  of expectation.   He  further clarified,  "I think  it's a                                                               
fair question  to ask  industry ... since  they're the  ones that                                                               
talk about these  things.  We're just reporting back  to you what                                                               
we're  hearing  from  them.    We  don't  have  those  particular                                                               
sources."   He  said that  [ACES]  wasn't built  on a  particular                                                               
source, nor did a particular source change a number.                                                                            
1:32:12 PM                                                                                                                    
SENATOR  STEDMAN highlighted  that there  can be  a situation  in                                                               
which there are hourly and  salary increases when there's $70-$80                                                               
a  barrel oil  with  $7 costs.   He  emphasized  that there's  an                                                               
important  delineation  between  more  employment  in  the  basin                                                               
versus actual salary increases.                                                                                                 
COMMISSIONER   GALVIN  said   that's   precisely   the  type   of                                                               
information  the  ACES   information  provision  should  acquire.                                                               
There  is no  knowledge as  to whether  the costs  are increasing                                                               
because the price  of a particular item is  increasing or whether                                                               
more items are being purchased.                                                                                                 
SENATOR  STEDMAN opined  that the  goal, creating  incentives for                                                               
oil and gas development in  Alaska and obtaining the state's fair                                                               
share of revenue during high  price periods, of ACES seem similar                                                               
to  that  of  PPT.   He  then  asked  if  PPT is  delivering  the                                                               
beginnings of a wave of expansion in the oil basin.                                                                             
COMMISSIONER GALVIN related that  DOR's view and industry experts                                                               
have said  that the timeframe thus  far isn't an indication  of a                                                               
change in  behavior as a result  of PPT having passed.   Although                                                               
the industry  has related that  this year  it will be  ramping up                                                               
costs,  the industry  doesn't  directly cite  the  change in  the                                                               
credit  system for  PPT but  rather discusses  the need  for more                                                               
system integrity.   The question would be appropriate  to ask the                                                               
SENATOR  STEDMAN  said  that  if the  industry  is  changing  its                                                               
behavior and  [PPT] is doing  what is  desired, then he  asked if                                                               
it's it too early to act.                                                                                                       
COMMISSIONER GALVIN said the question  is whether or not a change                                                               
in the oil tax proposed by  ACES will modify that same incentive.                                                               
The basic incentives  included in PPT and intended  to drive that                                                               
decision  remain within  ACES.   The  information being  provided                                                               
today  is regarding  whether the  change recommended  will dampen                                                               
PPT, to  which the  administration's response is  no.   He opined                                                               
that  ACES should  result  in  the same  amount  of incentive  to                                                               
increase that  behavior because the  credits and  other incentive                                                               
vehicles remain within the system.                                                                                              
1:36:02 PM                                                                                                                    
SENATOR WIELECHOWSKI  turned to  the forecasting errors  of 2006,                                                               
which he characterized  as fundamental errors.  He  asked if ACES                                                               
is  addressing  those  errors  in  order  to  prevent  them  from                                                               
MS. NIENHUIS said she believes so.   The department has much more                                                               
information  now than  it had  at  the time.   Furthermore,  ACES                                                               
requires better reporting, both in  the current month and the tax                                                               
return at the end of the  year.  Moreover, companies are required                                                               
to provide  forward-looking information with regard  to what they                                                               
expect for costs in the next year.                                                                                              
1:37:25 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  suggested  setting aside  the  tax  rate                                                               
question and assume that the  department has enough auditors, and                                                               
asked if the  audit would be able to relate  whether the price of                                                               
a  widget  has  increased  or  whether  more  widgets  are  being                                                               
purchased.   He  noted his  agreement with  Senator Wagoner  that                                                               
labor  costs  couldn't  have  risen that  much  in  three  years.                                                               
However, the cost increase could be due to hiring more people.                                                                  
COMMISSIONER  GALVIN  related  his  belief  that  the  department                                                               
should be  able to  get a  lot closer to  that issue  because the                                                               
information  from the  audit would  allow a  determination as  to                                                               
whether there was an increase in  man hours or other factors.  As                                                               
a result of both the  requirement for information and the audit's                                                               
ability  to confirm  that, more  information  would be  available                                                               
[regarding the cost of labor].                                                                                                  
1:38:53 PM                                                                                                                    
CHAIR  HUGGINS inquired  as  to what  if  Commissioner Galvin  is                                                               
wrong.   He then  expressed concern  with what  isn't known.   He                                                               
opined that  he didn't want to  enter a fourth year  dealing with                                                               
this issue.                                                                                                                     
COMMISSIONER  GALVIN highlighted  that  the professionals  within                                                               
the agency  are dealing  with the numbers.   He  then highlighted                                                               
that a year  ago [departmental professionals] were  asked to make                                                               
an  assumption about  the current  costs.   Although they  didn't                                                               
have adequate information from the  companies, they made the best                                                               
assumptions possible.   A few  months later the numbers  from the                                                               
companies were available and  [the department professionals] were                                                               
off  by 50  percent.   The  numbers being  used  from that  point                                                               
forward are based  upon those reports.   Therefore, the deviation                                                               
will be a matter of changes  in the environment and the economics                                                               
of  the field.   Today,  decisions are  being based  on the  best                                                               
information available  now because  that reported  information is                                                               
CHAIR HUGGINS  noted his appreciation  and emphasized  his desire                                                               
to get  this correct.   He then recalled  that Dr. Van  Meurs has                                                               
said  that the  cost data  being relied  upon isn't  reliable and                                                               
suggested that  it needs to  be audited because  it's overstated.                                                               
Furthermore, Dr. Van  Meurs has said that  Alaska's gasline isn't                                                               
economically feasible  at this  time.   The aforementioned  is of                                                               
concern, he stressed.                                                                                                           
COMMISSIONER GALVIN  noted his agreement  with wanting to  get it                                                               
correct also.   He  expressed the  need to  realize that  Dr. Van                                                               
Meurs has  been gone from the  state for a year,  and furthermore                                                               
he has  expertise in  certain areas  but not  others, such  as in                                                               
accounting  and  cost forecasting.    However,  staff within  the                                                               
agency have been working on the  issue daily for the last year in                                                               
order  to  understand  what was  the  difference.    Commissioner                                                               
Galvin  said, "There's  a  significant  difference in  confidence                                                               
that I would  have that I would have in  comparing what my agency                                                               
staff have  brought to  the table  today, in  terms of  what they                                                               
used a year ago compared to  what information they have today, as                                                               
opposed to  Dr. Van Meurs coming  in a year later  ... saying ...                                                               
this is what I think might have happened."                                                                                      
1:44:00 PM                                                                                                                    
CHAIR  OLSON  recalled that  in  Ms.  Nienhuis' presentation  she                                                               
indicated that the  decision was made with respect  to the fiscal                                                               
note  for  House Bill  3001  to  use the  $7  a  barrel cost  and                                                               
continue  using  it although  the  department  was aware  of  the                                                               
change.  He inquired as to who specifically made that decision.                                                                 
MS.   NIENHUIS  clarified   that  she   wouldn't  say   that  the                                                               
[department] was  aware of any  change or didn't  contemplate any                                                               
change until the  fall forecast.  She further  clarified that the                                                               
[department] had no reason to suspect its numbers were wrong.                                                                   
1:44:51 PM                                                                                                                    
REPRESENTATIVE  DOOGAN  asked  if   the  difference  between  the                                                               
projection  and the  situation the  department is  in now  is the                                                               
difference  between  a  guess  and  a  claim.    He  related  his                                                               
understanding that  the knowledge that  is available now  is only                                                               
that information that has been  claimed, since there haven't been                                                               
COMMISSIONER  GALVIN  said  that  the discussion  today  and  the                                                               
projections   are   based  upon   the   reported   costs.     The                                                               
aforementioned  is something  the department  is willing  to rely                                                               
upon  as  it reflects  what  the  industry  says are  the  costs.                                                               
However, a  year ago,  [the projections]  were an  educated guess                                                               
that proved to  be an inaccurate reflection of  what the reported                                                               
costs would be.                                                                                                                 
REPRESENTATIVE  DOOGAN related  his  understanding from  previous                                                               
testimony that  there's essentially  no penalty for  the industry                                                               
if it over reports its claim.                                                                                                   
COMMISSIONER  GALVIN said  that  there  are penalties  associated                                                               
with  interest  that is  accrued  for  the unreported  or  unpaid                                                               
REPRESENTATIVE DOOGAN  opined that the  state won't "hit  them in                                                               
the bank  account" if the  company has  over reported by  say, 20                                                               
COMMISSIONER GALVIN replied no, not under the current PPT.                                                                      
REPRESENTATIVE  DOOGAN  asked  if  this problem  is  an  inherent                                                               
problem with a net tax because  in order to determine whether the                                                               
state is  getting what it  thought, a  process that is  likely to                                                               
include an audit is required and perhaps even lead to a lawsuit.                                                                
COMMISSIONER GALVIN  explained that  with a system  that requires                                                               
companies to report costs, there  are a series of clarifications.                                                               
The first  clarification occurs  when the  company has  to report                                                               
its  costs  the   first  time.    Under  the   current  PPT,  the                                                               
aforementioned occurs  at the end  of the year, while  under ACES                                                               
it would  occur monthly.   There  is also  clarification provided                                                               
from the auditing process and  if there are conflicts with regard                                                               
to the  lawsuit.  Commissioner  Galvin opined that  anytime there                                                               
are deductions based upon cost, this issue will arise.                                                                          
1:48:16 PM                                                                                                                    
SENATOR MCGUIRE echoed the earlier  sentiments to get this right.                                                               
She asked  if [ACES includes]  independent experts who  know what                                                               
the costs should be and the  best field practices.  She expressed                                                               
the need to be able to  justify and understand any change and why                                                               
the costs are what they are.                                                                                                    
COMMISSIONER  GALVIN said  the  he  views [the  administration's]                                                               
responsibility  as   providing  the  committees  with   the  best                                                               
information available today,  in context of where  things will go                                                               
from here.  He said that  he's merely pointing out the experience                                                               
the  economists had  in putting  together the  numbers that  went                                                               
into the fiscal note from a  year ago and operating with the best                                                               
information available  at the  time, although  that proved  to be                                                               
wholly  different than  what was  experienced just  a short  time                                                               
later.    Looking forward,  the  reported  costs are  now  known.                                                               
Still, he reminded  the committees that as more  is learned, it's                                                               
refined.   With regard to  whether the  decision on the  tax rate                                                               
should  be  deferred,  he  pointed  out  that  there  is  a  cost                                                               
associated with that.   He then related that there  is a level of                                                               
confidence that  exists in  today's numbers  that didn't  exist a                                                               
year ago.   Commissioner  Galvin said that  if this  is addressed                                                               
again it  will likely be because  the costs have deviated  due to                                                               
two things.   If the changes have occurred because  the world has                                                               
changed, then he  opined that it isn't necessarily  valid to come                                                               
back because  it's a  net-based tax  and the  costs are  taken as                                                               
they come.   However, if the change occurs  because of inaccurate                                                               
reportings, it  would be an  entirely different  situation, which                                                               
he didn't anticipate.                                                                                                           
SENATOR MCGUIRE returned to  Representative Doogan's comment that                                                               
this is  a claim, and there's  no basis in reality  for assessing                                                               
that  claim.    Therefore,  part  of  the  equation  is  missing.                                                               
Although she said  she didn't disagree that  through [ACES] there                                                               
is a better  method of obtaining information  from the producers,                                                               
it  still relies  on  what  the industry  says.   Therefore,  she                                                               
inquired  as to  what is  embedded in  the process,  in terms  of                                                               
experts and personnel  that have an objective  ability to analyze                                                               
[the claims].                                                                                                                   
COMMISSIONER GALVIN answered that one  can try to rely upon these                                                               
experts, such  as Dr.  Van Meurs,  Mr. Johnston,  Wood Mackenzie,                                                               
etcetera.   Those  were  the  types of  experts  who  led to  the                                                               
assumptions  made a  year ago.    The question  becomes:   "Who's                                                               
going  to tell  you  those  numbers?"   The  end  result is  that                                                               
currently the numbers are coming  from the source in a documented                                                               
statement that  had to be  certified and described  versus merely                                                               
public  statements, which  provides a  wholly different  level of                                                               
1:55:17 PM                                                                                                                    
CHAIR HUGGINS  said that  he would  give Commissioner  Galvin and                                                               
his staff a  list of categories of tax projections  and how valid                                                               
they were or weren't for discussion.   He indicated that the list                                                               
relates the  expectations and  reality for  various taxes  in the                                                               
COMMISSIONER  GALVIN  said [the  department]  would  be happy  to                                                               
review that.   He opined that's it's important  to recognize that                                                               
DOR is responsible for looking  to the future and evaluating what                                                               
will happen  and determine  a single number  that will  result in                                                               
the  state's  revenue.    The   aforementioned  means  that  [the                                                               
department] must  recognize what  it can identify  and accurately                                                               
predict and  those components for which  it can only take  a best                                                               
guess.   Within the  area of cigarette  taxes although  the sales                                                               
are  unknown, the  department can  calculate a  trend and  have a                                                               
certain level of confidence in that  number.  On the oil tax side                                                               
there  are three  different variables:    production, price,  and                                                               
costs.    He   explained  that  if  the  costs   are  wrong,  the                                                               
expectations at a  particular price or production  will be wrong.                                                               
If  the  aforementioned is  something  that  we can  improve  and                                                               
achieve  a  higher  level  of confidence  on,  then  the  overall                                                               
estimating can  be better  and more  precise.   Furthermore, then                                                               
the  acceptance of  the price  and  productivity variability  are                                                               
just that.  Commissioner Galvin  said, "Here, we're saying we can                                                               
give you a number that has  a greater degree of confidence than a                                                               
year ago."                                                                                                                      
1:59:21 PM                                                                                                                    
SENATOR STEDMAN  inquired as  to what  level of  confidence there                                                               
will  be.   He further  inquired as  to what  percentage plus  or                                                               
minus, [the projections] will be.                                                                                               
COMMISSIONER  GALVIN said  that  Ms. Nienhuis  will discuss  that                                                               
during her presentation.                                                                                                        
2:00:01 PM                                                                                                                    
MICHAEL WILLIAMS,  Chief Economist,  Tax Division,  Department of                                                               
Revenue, pointed out  that the U.S. Department  of Energy's files                                                               
for  cost  of  all  the  production areas  in  the  U.S.  doesn't                                                               
included Alaska.    At the time [the division]  was preparing the                                                               
fiscal  note [for  House Bill  3001],  it was  realized that  DOE                                                               
didn't  have the  information on  Alaska and  that there  weren't                                                               
large  changes.    Only   anecdotal  information  was  available.                                                               
Publications   such  as   "Middle  East   Economic  Survey"   and                                                               
"Petroleum  Intelligence  Weekly"  would,   every  two  to  three                                                               
months, have an  article reporting an increase  in capital costs.                                                               
For example,  a 50  percent increase in  capital costs  in Badami                                                               
was reported.   Although the  [division] wasn't clear  about what                                                               
was  going on,  consultations with  the oil  companies left  them                                                               
feeling  pretty  good.     He  recalled  Representative  Doogan's                                                               
earlier question regarding  whether it would be easier  to have a                                                               
gross   tax  with   credits.     However,  credits   are  capital                                                               
expenditures and  thus in  order to  forecast credits,  which are                                                               
directly deductible  from tax liability,  one must know  what the                                                               
costs are.  The aforementioned would  be the case even in a gross                                                               
system  with  credits.    He   then  recalled  Senator  McGuire's                                                               
questions regarding  consultants and  pointed out that  review of                                                               
some  of the  cost data  provided by  the consultants  shows that                                                               
they  were off  just as  much as  the state,  possibly more.   He                                                               
related that  Cambridge Energy Research Associates  has a capital                                                               
cost forum in  which organizations can pay $50,000 a  year to sit                                                               
in on  the forum,  which tracks projects  in 28  countries around                                                               
the  world  to understand  what's  going  on with  capital  cost.                                                               
After inquiring about joining that, he  was told that one must be                                                               
an  oil  company and  thus  the  state  wasn't allowed  to  join.                                                               
However, they  offered to  sell their  consulting services.   Mr.                                                               
Williams   concluded  by   saying   that   determining  cost   is                                                               
challenging and  difficult as the companies  keep the information                                                               
very well guarded.                                                                                                              
2:03:16 PM                                                                                                                    
COMMISSIONER GALVIN,  in response to Representative  Ramras, said                                                               
that in  the next few  days the  department will provide  a slide                                                               
relating what particular fields will  look like if the investment                                                               
doesn't come forth.                                                                                                             
2:04:29 PM                                                                                                                    
REPRESENTATIVE NEUMAN  inquired as to whether  anyone can specify                                                               
whether the reinvestment  in Alaska is more valuable  in terms of                                                               
returning it to government or jobs.                                                                                             
MR.  WILLIAMS  answered  that there  are  national  and  regional                                                               
studies illustrating  the impact of  investments.  A  company out                                                               
of Minnesota  has an  input output model.   The  [department] has                                                               
attempted to do  an input output model with the  state.  In fact,                                                               
at one point the department  negotiated with a company to develop                                                               
a  model.    However,  it  was discovered  that  Alaska  is  very                                                               
different from other  states.  So different, in  fact, that major                                                               
economic consulting companies don't have  a model in which it can                                                               
see  the  input and  output  effects  of  investment in  the  oil                                                               
industry in  Alaska.   The department struggled  with that  for a                                                               
year and a half and received  no response.  Therefore, he said he                                                               
is reluctant to say [the department] can do it.                                                                                 
COMMISSIONER GALVIN  said that there  are economists who  will be                                                               
able to  relate the affects of  the oil industry within  the rest                                                               
of  the economy  as  there  are a  number  of statewide  economic                                                               
studies.      However,   one  of   the   points   he   understood                                                               
Representative  Neuman   to  be  making  draws   upon  the  false                                                               
assumption that $1  less tax income equals $1  less investment in                                                               
Alaska's  oil industry.    The aforementioned  is  a truly  false                                                               
assumption,  he  opined.    Commissioner  Galvin  specified  that                                                               
through  ACES, the  administration  is suggesting  that the  same                                                               
level of investment and more money  can be brought in because the                                                               
money being  brought in is money  that would otherwise go  to the                                                               
company outside of  Alaska.  He clarified that he  didn't want to                                                               
leave  the committees  with  the impression  that  it's making  a                                                               
choice between  taking more  money as part  of the  state's share                                                               
and that money otherwise going into the field.                                                                                  
2:08:48 PM                                                                                                                    
REPRESENTATIVE NEUMAN said that he  realizes that it's not dollar                                                               
for  dollar.   He  surmised  that  perhaps  he should  talk  with                                                               
Department  of Labor  &  Workforce Development  staff.   He  then                                                               
inquired as  to how  closely does  the government  work together.                                                               
Representative Neuman  emphasized that  his concern is  in regard                                                               
to the  impact on jobs.   He expressed his desire  for the dollar                                                               
to stay in Alaska.                                                                                                              
COMMISSIONER GALVIN  said that will  be discussed  throughout the                                                               
2:09:43 PM                                                                                                                    
CHAIR HUGGINS recalled use of  the term "lumping" and inquired as                                                               
to its meaning.                                                                                                                 
MR.  WILLIAMS  explained that  a  company  may spend  $2  million                                                               
before the  first barrel of oil  is produced.  The  large capital                                                               
investment up-front is to what the term refers.                                                                                 
CHAIR  HUGGINS  further  recalled  that  a  consultant  cautioned                                                               
against drawing conclusions with one-year reviews.                                                                              
2:11:14 PM                                                                                                                    
SENATOR GREEN  commented that  she would hate  to take  anyone to                                                               
task for errors  with fiscal notes because they  are rarely right                                                               
as they are nothing more than a best guess estimate.                                                                            
2:12:41 PM                                                                                                                    
MS. NIENHUIS returned  to slide 4, and  highlighted that February                                                               
2007 was when the first PPT  returns were received, and they were                                                               
quite close to  the forecast.  The true-up  returns were received                                                               
from  the  oil companies  in  April  2007, and  the  department's                                                               
estimates were  a bit off.   Also in April 2007  was DOR's spring                                                               
revenue  forecast, which  was the  last official  forecast.   The                                                               
department  is  now working  on  the  fall  forecast.   For  this                                                               
particular exercise, the price forecast  has been updated and the                                                               
petroleum  engineer  has  provided  new  production  numbers  for                                                               
fiscal year  (FY) 2008, which  is some 40,000 barrels  below what                                                               
was predicted in the spring of 2007.                                                                                            
2:14:07 PM                                                                                                                    
MS. NIENHUIS continued  with slide 5 titled  "How our Assumptions                                                               
Changed".   The largest change since  the adoption of the  PPT is                                                               
the level of information available.   In fact, the department has                                                               
adjusted  its models  based  on actual  PPT  tax return  filings.                                                               
Furthermore, costs are  now expressed in nominal  dollars with an                                                               
inflation  component.   She noted  that although  nominal dollars                                                               
may look  as if they're increasing,  it might not be  the case in                                                               
real  dollars.    She  then  informed  the  committees  that  the                                                               
department  has reviewed  production  profiles, which  illustrate                                                               
that production  is increasing through 2012.   The aforementioned                                                               
was an  important component  of the cost  estimates that  has now                                                               
been added into the model.                                                                                                      
2:15:16 PM                                                                                                                    
REPRESENTATIVE  RAMRAS expressed  frustration  that the  governor                                                               
isn't present.   He  then recalled his  belief that  this special                                                               
session is bad policy  and ACES is a bad plan.   He then recalled                                                               
attending a town hall meeting  during which the governor was very                                                               
adept at articulating how her luggage  was lost, but not adept at                                                               
articulating  the ACES  policy.   "I  just don't  get what  we're                                                               
doing  here," he  said.   He  questioned  this broad  overarching                                                               
assumption  that  the  existing  policy can  be  tweaked  without                                                               
impacting  the outcome.   Representative  Ramras stressed  that a                                                               
sweeping assumption  can't be made  based on one year's  worth of                                                               
data.    He opined  that  there  must  have been  a  conversation                                                               
between the  commissioner and the  governor in which there  was a                                                               
catalyst  that led  to this  [special  session].   Representative                                                               
Ramras said  that he  would rather have  the governor  present to                                                               
articulate economic  policy as  this matter  is the  lifeblood of                                                               
2:20:37 PM                                                                                                                    
COMMISSIONER GALVIN stated that the  governor has been very clear                                                               
about why  the legislature  is in session  today and  the reasons                                                               
why  the  issue  must  be addressed  now.    Commissioner  Galvin                                                               
specified that  the issue  of cost  is only one  part of  why the                                                               
legislature is  in session.  He  characterized it as an  issue of                                                               
public confidence.   The governor  requested that  the department                                                               
review  the situation  and  make a  recommendation  based on  the                                                               
information available now.   The new information  resulted in the                                                               
need to  change the assumptions  used a year ago.   Additionally,                                                               
DOR and  DNR [are  present] to provide  the committees  with this                                                               
newly available  detailed information  that is necessary  to make                                                               
the decision today.  "We believe  that it makes a compelling case                                                               
that we  can make a change  and still have that  proper balance,"                                                               
he opined.   The governor  has been  very much involved  in every                                                               
step of this.  However, the  governor is charged with running the                                                               
state  and  it's   not  her  responsibility  to   be  before  the                                                               
committees.   The  aforementioned  is the  responsibility of  the                                                               
commissioners [and department staff].                                                                                           
2:23:05 PM                                                                                                                    
SENATOR  STEDMAN pointed  out that  there  has been  a road  show                                                               
around the  state discussing  the $800  million gap  between what                                                               
would be expected  under the PPT versus ACES.   With an effective                                                               
date of January  1, the gap is reduced to  $400 million.  Senator                                                               
Stedman opined that  there's no reason why this  couldn't be done                                                               
during the next regular session  and have a retroactive effective                                                               
COMMISSIONER  GALVIN  clarified  that  when  ACES  was  presented                                                               
throughout the  state, there wasn't  a slide in  the presentation                                                               
discussing  the  gap   because  that's  not  the   target.    The                                                               
information with  regard to  the difference  was revealed  in the                                                               
analysis  of the  PPT.   He specified  that he  wasn't given  the                                                               
directive nor was ACES designed  to recover that money.  However,                                                               
it's correct that on September  3rd when information was provided                                                               
about ACES, the  slides did show an $800 million  gap between the                                                               
existing  PPT and  ACES.   He noted  that ACES  was projected  to                                                               
bring in $600 million more than  the existing PPT.  Subsequent to                                                               
that there  was a decision  not to  make ACES retroactive  to the                                                               
entire  fiscal year,  and therefore  the numbers  presented today                                                               
show the  difference for FY  '08 aren't  for a full  fiscal year.                                                               
Commissioner  Galvin opined  that the  desire was  to design  the                                                               
best system for the long term.                                                                                                  
2:26:39 PM                                                                                                                    
SENATOR STEDMAN  inquired as to  when the legislature  can expect                                                               
to view the algorithm that will be used.                                                                                        
COMMISSIONER GALVIN said that the  department is working with the                                                               
consultants  "to   replicate  as  best  they   can"  because  the                                                               
[algorithm]  includes  confidential  information  that  can't  be                                                               
2:27:38 PM                                                                                                                    
REPRESENTATIVE SAMUELS indicated that  the production in the last                                                               
three months  [has been lower]  than the initial projection.   He                                                               
inquired  as to  how much  of the  loss is  the result  of higher                                                               
costs over  fewer barrels.   He said that the  administration can                                                               
get this answer later.                                                                                                          
2:30:35 PM                                                                                                                    
MS. NIENHUIS,  continuing her presentation,  referred to  slide 6                                                               
titled "Capital  Spending as Reported  in PPT Tax  Returns, March                                                               
2007 and  2007 Forecast."   She reminded the committees  that the                                                               
PPT  includes  a  provision   called  the  transition  investment                                                               
expenditures,  which  is  the  TIE  credit.   In  order  for  the                                                               
taxpayer to  receive credits  for the  TIE credits,  the taxpayer                                                               
must file  a form  with the  department stating  the expenditures                                                               
during the  five-year period of  April 1, 2001 through  March 31,                                                               
2006.   The information on  slide 6 illustrates that  in calendar                                                               
year  2002 there  was  about $1.3  billion  in capital  spending,                                                               
which remains  fairly flat  through 2005.   In 2006  it increased                                                               
about $400 million over the  previous year.  The capital spending                                                               
specified for 2007 is a forecast.   Ms. Nienhuis opined that it's                                                               
too early  to say  whether the  PPT had anything  to do  with the                                                               
additional  capital spending.    She  then moved  on  to slide  7                                                               
titled  "Cost Forecasts",  which compares  what was  projected in                                                               
the  fiscal note  for  House  Bill 3001  versus  the spring  2007                                                               
forecast.  Based  on the tax returns, the  total costs increased,                                                               
as  is  reflected  in  the  spring 2007  forecast,  to  about  $4                                                               
billion.  Therefore, there was almost a doubling, she said.                                                                     
2:33:37 PM                                                                                                                    
REPRESENTATIVE SAMUELS turned to the  capital costs in the fiscal                                                               
note.   He  asked whether  the fiscal  note for  House Bill  3001                                                               
included Pioneer's  project at Oooguruk where  it spent $500-$600                                                               
MS.  NIENHUIS  explained that  there  was  a certain  amount  per                                                               
barrel for developmental capital,  which was for capital projects                                                               
coming on  line in the next  couple of years.   Therefore, it was                                                               
incorporated in  that analysis, although not  specifically at any                                                               
particular field.                                                                                                               
REPRESENTATIVE  SAMUELS  asked  if  there were  any  other  large                                                               
dollar expenditures  across the  North Slope  other than  that by                                                               
MS. NIENHUIS said she wasn't sure  how much she could disclose in                                                               
regard  to  specific  projects.   Furthermore,  [the  department]                                                               
doesn't have a level of detail as it has cost by unit.                                                                          
2:35:34 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  if any  of the  costs specified  are                                                               
retroactive  costs, attributable  to the  claw back  provision of                                                               
MS.  NIENHUIS replied  no.   Any  transition or  claw back  costs                                                               
would've been declared  prior to this as these  are current year,                                                               
fiscal year 2008, costs.                                                                                                        
COMMISSIONER GALVIN  explained that  slide 7 relates  what amount                                                               
of  capital costs  were  reported that  qualified  for a  certain                                                               
amount of TIE  credit.  In this instance, when  a company applies                                                               
for credits, it received an extra bump in value.                                                                                
SENATOR WIELECHOWSKI  surmised then that  none of the  numbers on                                                               
slide 6 are increased because of the claw back provision.                                                                       
COMMISSIONER GALVIN related his agreement.                                                                                      
2:37:14 PM                                                                                                                    
REPRESENTATIVE  DOOGAN asked  if  slide 6  reflects everyone  who                                                               
could  have  claimed  TIE  credits.   He  asked  if  the  numbers                                                               
specified are  the total  for capital  expenditures on  the North                                                               
Slope or might  there be more capital  expenditures which weren't                                                               
COMMISSIONER GALVIN responded that  potentially the only category                                                               
would  be those  taxpayers that  had capital  expenditures during                                                               
that  period, but  didn't  last  year and  thus  didn't have  any                                                               
reason to claim  a TIE credit referenced back.   He said that not                                                               
many in that category come to mind.                                                                                             
REPRESENTATIVE DOOGAN  recalled that yesterday the  committee was                                                               
told that  the total  cost per  barrel is  $22, although  slide 7                                                               
uses a forecast of $14.56 in total cost per barrel.                                                                             
MS. NIENHUIS  clarified that the $22  includes the transportation                                                               
costs to  transport the oil from  the North Slope to  the market,                                                               
which is  a downstream cost.   The  costs [presented on  slide 7]                                                               
are upstream costs as they're above the point of production.                                                                    
2:39:08 PM                                                                                                                    
COMMISSIONER  GALVIN, in  response  to  Chair Huggins,  explained                                                               
that review  of the  economic drivers  that drive  investment and                                                               
the  revenue  that  can  be generated  by  changing  the  numbers                                                               
identified  that  the  state's  share could  be  increased  while                                                               
protecting the investment climate.   The [numbers on slide 7] are                                                               
merely the  numbers that were  input into  the model in  order to                                                               
ensure that there was accurate  information.  In further response                                                               
to  Chair   Huggins,  Commissioner  Galvin  specified   that  the                                                               
modeling is based upon the $14.56 total cost per barrel.                                                                        
2:40:21 PM                                                                                                                    
CHAIR  HUGGINS, referring  to  a slide  from  the previous  day's                                                               
meeting, highlighted that  a single year [view]  can be deceptive                                                               
and that large  costs are often incurred  at discrete timeframes,                                                               
lumpiness.   The slide goes  on to say  that a single  year can't                                                               
depict the economic picture.                                                                                                    
COMMISSIONER GALVIN  clarified that  these are the  numbers being                                                               
forecast based on the information  that is available.  He further                                                               
clarified  that  last  year's  numbers,  conversations  with  the                                                               
industry,  and  understanding the  trends  were  used to  project                                                               
forward  because one  can't simply  say  that last  year will  be                                                               
replicated  each  year  going  forward.     He  opined  that  the                                                               
department's numbers  are more  accurate today  than they  were a                                                               
year ago  because of  the large  data dump in  the middle  of the                                                               
year   when  the   companies  provided   their  returns.     That                                                               
information was used to project going forward.                                                                                  
2:41:32 PM                                                                                                                    
SENATOR WIELECHOWSKI  opined that  these numbers and  charts seem                                                               
to coincide with  PPT.  He asked if PPT  is causing this increase                                                               
in investment.                                                                                                                  
COMMISSIONER  GALVIN reminded  the  committees that  the PPT  was                                                               
passed in August  2006 and the amount of time  it takes a company                                                               
to go from an investment  decision to actually expending the cost                                                               
is a  significant lag time.   Therefore, it's  extremely unlikely                                                               
that  there  were  significant expenditures  resulting  from  the                                                               
passage of the PPT.                                                                                                             
2:42:24 PM                                                                                                                    
COMMISSIONER  GALVIN, in  response to  Senator Stedman,  referred                                                               
the committees  to slide 4.   He explained that when  the true-up                                                               
payment was received  in April 2007 a lot  of information pointed                                                               
to  the   significant  deviation  from   the  fiscal  note.     A                                                               
modification was made  in the fall, the true-up  was received and                                                               
the   department  realized   it  was   still  off.     Therefore,                                                               
conversations  with the  industry  ensued in  order to  determine                                                               
what  was occurring.   Commissioner  Galvin said,  "It was  based                                                               
upon the information that came in with the annual return."                                                                      
SENATOR STEDMAN inquired as to how quarterly data is handled.                                                                   
MS.  NIENHUIS said  that  this  will be  addressed  later in  her                                                               
presentation.   However,  she informed  the  committees that  the                                                               
department does  receive information  at least quarterly  and the                                                               
models are  adjusted as new  information becomes available.   The                                                               
information mainly comes from credit applications.                                                                              
2:45:02 PM                                                                                                                    
REPRESENTATIVE RAMRAS posed  a scenario in which  ACES passes and                                                               
it's wrong.   In such a  scenario, he inquired as  to how quickly                                                               
the  department will  return to  the legislature  to implement  a                                                               
major policy change.                                                                                                            
COMMISSIONER   GALVIN   emphasized,    "There's   a   significant                                                               
difference between  the reason  why we're  here today  and simply                                                               
the fact that  these numbers are wrong.  That  was a contributing                                                               
factor."  Commissioner  Galvin said he didn't  expect that entire                                                               
series  of events  to occur  again and  result in  revisiting the                                                               
matter due to an error in a forecasting number.                                                                                 
REPRESENTATIVE  RAMRAS  surmised then  that  if  the numbers  are                                                               
incorrect, there won't  be a review of the  policy unless there's                                                               
another cataclysmic situation in the legislature.                                                                               
COMMISSIONER  GALVIN said  that  he could  assure the  committees                                                               
that the  numbers will be  incorrect because they  are forecasts.                                                               
The question  is whether  the department  should use  the numbers                                                               
and data it has to make the  decision necessary at this time.  He                                                               
opined  that  it's  inaccurate  to say  that  the  department  is                                                               
present  today because  the numbers  are inaccurate;  it's not  a                                                               
true  reflection   of  why  the  administration   is  before  the                                                               
legislature.  Furthermore, it's not  an indication of whether the                                                               
matter  will be  revisited.   "The administration  is not  of the                                                               
mindset that  we need to revisit  this once we have  resolved the                                                               
issue at this time," he stated.                                                                                                 
2:47:15 PM                                                                                                                    
SENATOR  GREEN suggested  that  people on  the  street have  been                                                               
given the  idea that  the $800  million delta  is the  reason the                                                               
legislature is in session.                                                                                                      
COMMISSIONER GALVIN  acknowledged that the dollar  figure is easy                                                               
to grab on to.                                                                                                                  
2:47:58 PM                                                                                                                    
SENATOR  MCGUIRE asked  whether the  department is  privy to  the                                                               
U.S. Securities and Exchange Commission  (SEC) filings.  She also                                                               
asked  if there  is any  provision for  information sharing  with                                                               
federal  agencies, such  as the  Internal Revenue  Service (IRS),                                                               
that have more resources available to them.                                                                                     
COMMISSIONER GALVIN  answered that  he doesn't believe  there's a                                                               
method  for the  department  to  obtain confidential  information                                                               
from the SEC or the IRS.                                                                                                        
MS.  NIENHUIS  interjected  that   the  department  does  receive                                                               
federal  partnership   return  information,  which   is  somewhat                                                               
useful.  However,  she noted that it's a little  bit farther from                                                               
the PPT  calculation as it  describes projects or  something that                                                               
isn't  entirely unit  operation.   The primary  focus, she  said,                                                               
will be on the required reporting from the taxpayers under ACES.                                                                
2:49:11 PM                                                                                                                    
SENATOR  MCGUIRE recalled  that the  fiscal note  for House  Bill                                                               
3001,  production,   and  the  spring  forecast   have  a  slight                                                               
deviation.   However,  the difference  in  operating and  capital                                                               
costs is double.  From that  one could assume that PPT stimulated                                                               
investment or has  altered the behavior of oil  companies and how                                                               
they  report.     She  inquired   as  to  the  response   of  the                                                               
aforementioned from the administration.                                                                                         
COMMISSIONER  GALVIN said  that the  opex  is less  likely to  be                                                               
impacted by decisions to invest more  in Alaska.  When looking at                                                               
stimulating investment,  it's initially expected to  be reflected                                                               
in an  increased level of  capital expenditures that  would, over                                                               
time,  add to  the operating  expenditures as  new equipment  and                                                               
responsibilities  are added.   He  related that  the [department]                                                               
was  most troubled  by the  increase in  opex and  the fact  that                                                               
there  was such  a  gap between  what was  assumed  and what  was                                                               
reported.   In  regard  to  a change  in  reporting behavior,  he                                                               
related his belief  that there's a question as to  whether or not                                                               
the  level to  which there  was  some over  reporting or  whether                                                               
there  was   a  lack  of   information  of  the   true  operating                                                               
expenditures, which won't be revealed for some time.                                                                            
2:51:49 PM                                                                                                                    
REPRESENTATIVE SAMUELS asked whether  [the department] has access                                                               
to billings sent between companies.                                                                                             
COMMISSIONER GALVIN  noted that the department's  accountants are                                                               
more familiar  with the  reporting being  received.   However, he                                                               
did  inform the  committees  that [the  department] does  receive                                                               
joint  interest billings,  a part  of which  includes reports  of                                                               
billings between partners.  Therefore,  [the department] does see                                                               
what partners charge each other.                                                                                                
2:53:09 PM                                                                                                                    
REPRESENTATIVE SAMUELS  asked if  the larger  problem for  DOR is                                                               
when there's a  sole operator, such as the Milne  Point Unit, for                                                               
which there are no billings between companies.                                                                                  
COMMISSIONER  GALVIN explained  that  under HB  2001 [ACES],  the                                                               
desire is to obtain more  flexibility with joint interest billing                                                               
and the information  it will use.  The expectation  is that there                                                               
will be  more readily available  information by an  operator that                                                               
has to  report to partners as  opposed to one that  merely has to                                                               
generate internal reports.                                                                                                      
2:55:09 PM                                                                                                                    
MS. NIENHUIS turned  the committees' attention to  slide 8 titled                                                               
"Current Revenue  Forecasts".   She explained  that she  has laid                                                               
out actual  estimated production tax payments  that were received                                                               
for the  first three months  of the fiscal  year.  There  is also                                                               
information regarding the production levels  and the price.  From                                                               
the  aforementioned  information,  the department  can  calculate                                                               
what  the  tax  payments  should  be.   Rather  than  doing  each                                                               
separately, she has  lumped them together and took  an average of                                                               
production and  price.  She  then utilized those averages  on the                                                               
right-hand side  of slide 8 to  do DOR's forecast for  the three-                                                               
month tax calculation.                                                                                                          
2:57:51 PM                                                                                                                    
SENATOR  WAGONER  inquired as  to  where  the wellhead  value  is                                                               
COMMISSIONER GALVIN answered that  the wellhead value is measured                                                               
after treatment, basically at the top of the pipe.                                                                              
2:58:14 PM                                                                                                                    
MS. NIENHUIS continued reviewing  the DOR calculation utilized to                                                               
arrive at DOR's  forecast.   She pointed out  that DOR's forecast                                                               
is fairly close to the actual payments.                                                                                         
3:00:10 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  there is an  estimate of  the oil                                                               
companies' profits during the same timeframe.                                                                                   
MS. NIENHUIS replied no.                                                                                                        
COMMISSIONER GALVIN offered to request  that information from the                                                               
section that would have it.                                                                                                     
The committees took an at-ease from 3:00:58 PM to 3:29:10 PM.                                                               
3:29:50 PM                                                                                                                    
MS. NIENHUIS moved  on to slide 9, titled  "Tools for Forecasting                                                               
Costs".    One of  the tools  for forecasting cost  includes cost                                                               
reporting.    Currently, cost  reporting  and  the annual  filing                                                               
isn't consistent  across taxpayers.   Therefore,  the goal  is to                                                               
make  it a  bit  more  consistent in  order  to  obtain the  data                                                               
necessary  in  a more  timely  fashion.   Under  ACES  forecasted                                                               
information will  be required.  The  aforementioned would enhance                                                               
the  department's   ability  to  forecast  revenues,   she  said.                                                               
Another tool  for forecasting costs is  monitoring data submitted                                                               
to  DOR,  such as  the  information  received  by way  of  credit                                                               
applications.   The hope, she  opined, is  that the data  will be                                                               
better.   Another tool is  the ability to monitor  data submitted                                                               
to other agencies,  such as plans of development.   The last tool                                                               
is monitoring  publicly available  information, which  is already                                                               
occurring.     The  department  keeps  abreast   of  developments                                                               
worldwide, she noted.                                                                                                           
MS.  NIENHUIS  continued  on  to  slide  10  titled  "Three  Cost                                                               
Forecasts".  The fiscal note  and various publications relate the                                                               
department's best  guess forecast, which  she referred to  as the                                                               
mid  forecast.   She  said that  this time  around  there is  the                                                               
belief  in  the  need  to  put out  some  cost  sensitivities  in                                                               
relation  to various  what-if scenarios.    Therefore, the  model                                                               
includes  mid,  low, and  high  cost  scenarios.   The  low  cost                                                               
scenario   has   different    assumptions   regarding   unplanned                                                               
maintenance costs  and spending behavior, and  therefore it's not                                                               
necessarily a built-in margin.  The  low cost scenario is plus or                                                               
minus 5-6  percent of  what is  being spent  in the  current high                                                               
cost scenarios.   The department  can run sensitivities  to cost.                                                               
In  fact,  the  model  currently   includes  some  of  that  cost                                                               
sensitivity.  The  models also include cost  adjustments based on                                                               
price as the  department believes that the  cost adjustments over                                                               
the last  few years  are related  to high oil  prices.   She then                                                               
turned  to  slide  11  titled  "Impact  of  Low,  Mid,  and  High                                                               
Forecasts  on  Tax  Revenues",  which  illustrates  a  cumulative                                                               
forecast production of  tax revenues over three years  with a $60                                                               
per barrel price.  The  production tax revenue forecast for three                                                               
years for the low, mid, and  high price scenarios are around $6.5                                                               
billion, $5.5  billion, and $4.5  billion, respectively.   Moving                                                               
on  to  slide  12  titled "Forecast  Adjustments",  Ms.  Nienhuis                                                               
reminded the  committees that forecasting  is a  dynamic process.                                                               
In  fact,  the  department  updates   its  price  and  production                                                               
forecast every six  months.  With cost  forecasts, the department                                                               
expects to  do something similar,  perhaps even  more frequently.                                                               
The  department  receives  information at  least  quarterly,  and                                                               
sometimes more often.   If a change or trend in  costs or a large                                                               
expenditure  on behalf  of  a taxpayer  is  seen, the  department                                                               
plans  to build  it  into the  forecast and  become  part of  the                                                               
assumptions  going  forward.   Ms.  Nienhuis  suggested that  the                                                               
department will get better at forecasting.                                                                                      
3:36:20 PM                                                                                                                    
SENATOR STEDMAN  inquired as to  when the fall forecast  could be                                                               
COMMISSIONER GALVIN  said that the  model will be  available over                                                               
the  course of  the next  week.   The official  forecast will  be                                                               
complete during  the first week  of November.  The  department is                                                               
trying  to provide  those [forecasts]  relevant to  the oil  side                                                               
3:37:28 PM                                                                                                                    
MS. NIENHUIS  directed attention to slide  13 titled "Forecasting                                                               
Improved Through ACES".  This  legislation requires more complete                                                               
cost  reporting, both  monthly  and  annually; requires  forward-                                                               
looking information; provides clearer  rules for defining leases;                                                               
and improves  the audit  function.   She opined  that all  of the                                                               
aforementioned   will  improve   the   department's  ability   to                                                               
forecast.    She  moved  on  to slide  14  titled  "Costs  Policy                                                               
Implications" and  related that costs of  production shouldn't be                                                               
ignored  in  tax  policy  because  understanding  industry  costs                                                               
provides knowledge  with regard to  how dollars are spent  on the                                                               
North Slope.   Also cost charging through credits  puts the state                                                               
in   "partnership"  with   the  industry   from  which   everyone                                                               
ultimately benefits, she opined.                                                                                                
3:39:54 PM                                                                                                                    
REPRESENTATIVE  DOOGAN   said  that   typically  entities   in  a                                                               
partnership  share  the  costs,  risks, and  rewards.    However,                                                               
[under ACES]  the state  is giving tax  credits to  the companies                                                               
and the state isn't receiving an equity position.                                                                               
COMMISSIONER GALVIN  confirmed that the state  isn't receiving an                                                               
equity position.   However, upcoming slides  will illustrate that                                                               
the  state   receives  a  benefit.     In  further   response  to                                                               
Representative Doogan,  Commissioner Galvin  said he  is prepared                                                               
to defend  the use of  the term  "partnership" in the  sense that                                                               
there is a mutual benefit and a mutual risk.                                                                                    
3:40:35 PM                                                                                                                    
COMMISSIONER  GALVIN  turned  the   committees'  attention  to  a                                                               
PowerPoint  titled  "The  Palin-Parnell  Administration  presents                                                               
3:42:06 PM                                                                                                                    
ANTHONY  FINIZZA,  Ph.  D.,  Consultant,  to  the  Department  of                                                               
Revenue,  reviewed  his background,  including  25  years as  the                                                               
chief economist  at ARCO.  He  said that he currently  works as a                                                               
consultant  in the  energy area  and is  a university  teacher on                                                               
energy,  economics,  forecasting,  and  industrial  organization.                                                               
Dr.  Finizza began  by stating  that some  of today's  discussion                                                               
reminds him of  his forecasting class in which he  takes at least                                                               
a week to  discuss the bias that is brought  to forecasting.  The                                                               
strongest bias of everyone is  hindsight bias, which he cautioned                                                               
against.    He  then  informed  the  committees  that  he  became                                                               
involved with [the  ACES process] in August and  was charged with                                                               
pulling together the work between  the department and the outside                                                               
consultants  and  make   any  recommendations  or  communications                                                               
deemed necessary.   He related  that he participated in  a number                                                               
of economic team  meetings comprised of staff from  DOR, DNR, and                                                               
outsiders during  which he  didn't see  any bias  toward choosing                                                               
the net versus gross philosophy.   All on the team contributed to                                                               
the  analysis and  developed ideas  that contributed  to the  net                                                               
system  and others  to the  gross system.   In  fact, during  the                                                               
first  week he  was called  upon to  develop a  scheme to  help a                                                               
heavy oil field in a gross  system that might be impacted by high                                                               
3:45:51 PM                                                                                                                    
DR. FINIZZA said  that he would begin by  reviewing the framework                                                               
and methodology for  analysis to develop an  improved tax system.                                                               
Referring  to  slide 4  titled  "Producer  Economic Metrics",  he                                                               
highlighted that  net present  value (NPV),  the value  of future                                                               
cash flows as  well as the capital investment made  on a project,                                                               
is the main producer economic metric.   The NPV is a way to think                                                               
about  whether  a  project  adds  value  to  a  firm.    Slide  5                                                               
illustrates  a balancing  act  to  ensure that  a  tax system  in                                                               
place, from the producers' point  of view, allows for projects to                                                               
be attractive to the producers and  the state.  He explained that                                                               
producer economics will be evaluated  on whether the project adds                                                               
present value  if undertaken.   From the  state's point  of view,                                                               
the critical  question is  in regard to  how much  the government                                                               
take  is.   With  regard to  legacy fields,  fields  that are  in                                                               
production,  the important  metric is  marginal government  take.                                                               
The marginal  government take is how  much, at a given  price, an                                                               
additional  dollar brings  to the  state.   For  new fields,  the                                                               
metric for  examining government take is  a discounted government                                                               
take over the life of a field.                                                                                                  
3:49:28 PM                                                                                                                    
DR. FINIZZA, referring to slide 6,  explained that an NPV of zero                                                               
means that the company has  captured its return on investment and                                                               
thus anything  beyond zero is  profit.  He then  turned attention                                                               
to slide  7 titled "Stylized  Project Cash Flow"  and highlighted                                                               
that typically  there's a very heavy  up-front capital investment                                                               
prior to any  positive revenue from the investment.   The flow is                                                               
returned to  the investor in the  future.  He noted  that there's                                                               
an uncertainty about  the cash flow and the  time-value of money,                                                               
and therefore the cash flow  [of the up-front capital investment]                                                               
has to be balanced with the  return on investment.  Slide 8 "Cash                                                               
Flows  for  New  Fields"  has  graphs  illustrating  an  explicit                                                               
production  profile  that  draws   from  characteristics  of  the                                                               
particular field.   He reviewed  the three graphs for  the annual                                                               
production,  capital and  operating  costs, and  annual net  cash                                                               
3:53:49 PM                                                                                                                    
SENATOR WAGONER  asked if there is  a general rule of  thumb that                                                               
companies use with regard to amortization of investment.                                                                        
DR. FINIZZA  noted that appreciation  schedules are  followed for                                                               
both federal and state income  tax purposes.  In further response                                                               
to Senator  Wagoner, Dr. Finizza  said that the break  even point                                                               
varies, although he suggested that  in some high risk projects it                                                               
occurs a few years after production.                                                                                            
COMMISSIONER   GALVIN  interjected   that  representatives   from                                                               
Gaffney Cline can speak to that during their presentation.                                                                      
3:55:22 PM                                                                                                                    
DR. FINIZZA,  continuing with  slide 9  "Producer View  of Future                                                               
Oil  Prices",  highlighted  the need  to  determine  whether  the                                                               
fiscal regime  will encourage investment, not  impair investment.                                                               
The first item  for review is in  regard to the set  of prices at                                                               
which one should  perform the analysis.  He pointed  out that the                                                               
forecasting of oil prices is  very difficult and the industry has                                                               
been burned by  being optimistic with regard to  high oil prices.                                                               
He said,  "The consequences of  error are not symmetrical."   The                                                               
producer does  have a view toward  the future with a  price path,                                                               
which he  suggested is  around $50  a barrel of  oil.   These are                                                               
long-term  investments,  he  noted.     In  terms  of  investment                                                               
analysis,  he   suggested  mimicking   how  the   producers  view                                                               
evaluating projects.   One way is to ensure that  the project can                                                               
pass the  stress test  case, such  that if  there was  a downside                                                               
price fall  the project  would still return  enough to  cover the                                                               
investment.  He related that today's  stress price would be $40 a                                                               
barrel.    Referring   to  slide  10,  he   reviewed  the  common                                                               
assumptions used in analyses.                                                                                                   
3:58:49 PM                                                                                                                    
REPRESENTATIVE  RAMRAS requested  review of  the source  of funds                                                               
for these types of projects.                                                                                                    
DR. FINIZZA said  that for the purpose of  economic evaluation of                                                               
the goodness of  the project, the analysis is  independent of how                                                               
it's financed.   Therefore, the  question is whether  the project                                                               
stands on its own.  He said  that oil companies will make a later                                                               
decision with regard  to how to finance a project,  much of which                                                               
will be through retained earnings.                                                                                              
3:59:57 PM                                                                                                                    
DR.  FINIZZA, referring  to slide  10, explained  that there  are                                                               
assumptions  in   order  to  maintain  uniformity:     3  percent                                                               
inflation; a  producer discount  rate at 10  and 15  percent with                                                               
today's results shown  at 10 percent; and state  discount rate of                                                               
5 percent and 8 percent with  today's results shown at 5 percent.                                                               
He then reviewed  slide 11 titled "Tax  Plan Evaluation Process",                                                               
which reviews the  tax plan evaluation process.   The process was                                                               
geared toward finding good net tax  and good gross tax plans.  He                                                               
explained  that  the  process begins  by  considering  tax  plans                                                               
falling  within  the  $1,400-$2,200  million  revenue  range  and                                                               
viewed  in  terms  of  new   field  economics  and  mature  field                                                               
economics.   The  question for  new fields  is whether  new field                                                               
economics are  preserved such that  a positive net  present value                                                               
is  achieved at  the $40  stress test  price.   The question  for                                                               
mature fields is  whether the tax plan  also preserves investment                                                               
in mature fields such that positive NPV is achieved.                                                                            
4:03:16 PM                                                                                                                    
SENATOR WIELECHOWSKI  requested an explanation of  the meaning of                                                               
reinvestment in legacy fields.                                                                                                  
DR.  FINIZZA answered  that it's  investment  to prevent  natural                                                               
decline and  keep decline at  a lower a  rate.  Dr.  Finizza said                                                               
that he would address the specifics later.                                                                                      
4:04:25 PM                                                                                                                    
DR.  FINIZZA  moved  on  to slide  13  titled  "Seven  New-Fields                                                               
Analysis", which  utilizes data from  known fields to  create the                                                               
hypothetical fields.    Slide 14 reviewed  the characteristics of                                                               
the seven  fields one  would typically  expect in  development in                                                               
Alaska.   The  seven fields  are as  follows:   medium heavy  oil                                                               
satellite  in  existing  mature unit,  offshore  small  reserves,                                                               
satellite  in existing  unit, remote  field, new  unit with  very                                                               
heavy oil,  offshore medium  reserves, and  new unity  with large                                                               
reserves.   The  fields  range in  reserves  from 40-300  million                                                               
barrels  with  various  combinations  of  ownership.    Slide  15                                                               
provides more  detail with regard  to the characteristics  of the                                                               
4:06:25 PM                                                                                                                    
REPRESENTATIVE RAMRAS  asked if this exercise/model  was designed                                                               
to  help the  legislature understand  or  was it  developed in  a                                                               
series  of meetings  with  DOR and  DNR to  develop  a theory  to                                                               
implement ACES.                                                                                                                 
DR. FINIZZA said  that the seven fields model  was developed with                                                               
the notion of analyzing new fields.                                                                                             
COMMISSIONER GALVIN  specified, "This  was put together  in order                                                               
to  provide  us  with  a  tool  to decide  where  to  go  with  a                                                               
recommendation on the  tax structure."  The  committees are being                                                               
provided with a representation of  that model and the mountain of                                                               
data behind it.                                                                                                                 
REPRESENTATIVE  RAMRAS  asked  then  if  the  legislators  should                                                               
presume that this  model was used to develop  the economic theory                                                               
behind ACES.                                                                                                                    
COMMISSIONER GALVIN  clarified that this  was the model  used for                                                               
the policymakers and the governor  to understand the implications                                                               
of various  choices and upon  which they could make  a reasonable                                                               
decision  on what  to  move  forward with  the  knowledge of  its                                                               
4:08:32 PM                                                                                                                    
SENATOR STEDMAN  requested that Dr.  Finizza provide  a timeframe                                                               
with regard  to when he  was engaged with the  administration and                                                               
the  evolution of  the process.   The  aforementioned relates  to                                                               
what went on  at the administrative level during  the change from                                                               
a gross to a net.                                                                                                               
DR.  FINIZZA related  that when  he started  in the  beginning of                                                               
August,  the process  had already  been under  way and  the seven                                                               
fields model had already been developed.   He said he didn't know                                                               
when the model started.                                                                                                         
COMMISSIONER  GALVIN interjected  that the  model comes  from DNR                                                               
and is one that  it has had for many years in  various parts.  He                                                               
informed  the committees  that back  in May,  June, and  July the                                                               
model  was  combined with  a  discussion  with  DOR in  terms  of                                                               
revenue  of  generation such  that  the  actual field  impact  of                                                               
various structures  was reviewed.   When Dr. Finizza  entered the                                                               
scene, most  of the analysis  had already been performed  and Dr.                                                               
Finizza  participated in  analyzing  the  different outcomes  and                                                               
choosing  amongst  the  impacts  and refining  it.    In  further                                                               
response to  Senator Stedman, Commissioner Galvin  clarified that                                                               
there  are two  major models  involved:   the seven  fields model                                                               
from DNR, and a revenue estimation  model from DOR.  The decision                                                               
making  within the  model  and the  results  occurred within  the                                                               
conversations between the departments and the governor's office.                                                                
SENATOR STEDMAN  inquired as  to the tweaks  Dr. Finizza  made to                                                               
the model.                                                                                                                      
4:12:59 PM                                                                                                                    
DR. FINIZZA  returned to slide  11, and  stated that each  of the                                                               
three boxes is  a model.  For example, the  left box represents a                                                               
revenue model.   The  first step is  to start with  a set  of tax                                                               
assumptions  to satisfy  some revenue  range being  sought.   The                                                               
results, which are characteristics of  the tax plan, are the same                                                               
features  used  in  the  second   model,  the  new  fields  model                                                               
developed by  DNR, in  the second  box.  The  third model  is the                                                               
mature  fields  model,  which  is  simpler.   He  noted  that  he                                                               
contributed to the third model as  it wasn't finished at the time                                                               
he became involved.                                                                                                             
4:14:59 PM                                                                                                                    
SENATOR WIELECHOWSKI directed attention  to slide 15, and related                                                               
his understanding that for Field A  the capex is $11 a barrel and                                                               
the opex is  $7 a barrel with  an additional $7 a  barrel for the                                                               
tariff,  which amounts  to  $25  a barrel  to  bring  the oil  to                                                               
market.  Therefore,  at $40 a barrel money will  be made on Field                                                               
A, he surmised.                                                                                                                 
DR. FINIZZA pointed out that with  Field A the capital is put up-                                                               
front and the  profit comes much later.  In  fact, the time value                                                               
of money has  the potential to destroy the value  of that project                                                               
because of the heavy up-front capital piece.                                                                                    
SENATOR  WIELECHOWSKI said  that Field  D  seems to  be the  most                                                               
expensive of  the fields listed  on slide  15.  However,  all the                                                               
fields listed are profitable at $40 a barrel.                                                                                   
DR. FINIZZA  reiterated that  all the  fields have  high up-front                                                               
capital  costs prior  to oil  flowing.   Profit comes  many years                                                               
later, probably well after the peak  and thus it could be perhaps                                                               
seven to  eight years  before profits arrive.   Dr.  Finizza said                                                               
that  the snapshot  would  seem  to relate  that  the fields  are                                                               
profitable from day  one, but that would only be  the case if the                                                               
capital side  of the  equation is eliminated.   Dr.  Finizza said                                                               
that although  he didn't develop  the seven fields model,  he did                                                               
[review] it  to ensure  that it accomplished  what he  thought it                                                               
4:17:44 PM                                                                                                                    
REPRESENTATIVE SAMUELS,  referring to slide  11, asked if  in the                                                               
tax  plan one  would  also consider  the  potential of  increased                                                               
royalties  with increased  production.   From  the economics,  he                                                               
asked  if  the  extra  royalty  or a  steep  decline  curve  when                                                               
investments are made  is incorporated or is it kept  at 6 percent                                                               
or 8 percent in this model.                                                                                                     
DR. FINIZZA explained  that all the analysis is  performed at the                                                               
same  price  and  production  profile.    Dr.  Finizza  requested                                                               
clarification of the question.                                                                                                  
REPRESENTATIVE  SAMUELS  asked  whether  a  different  production                                                               
profile is used  if an investment isn't made.   As costs decrease                                                               
because spending  isn't occurring, does the  production drop from                                                               
6 to 6.5 percent, he asked.                                                                                                     
DR. FINIZZA  explained that  [the process]  was examined  for the                                                               
existing fields.  He noted that  the revenue target is short term                                                               
and compared to the new  fields, which doesn't impact the revenue                                                               
range looked at over the next few years.                                                                                        
COMMISSIONER GALVIN  said that the  box illustrates the  cycle of                                                               
the analysis, not how one reaches  the decision as to what is the                                                               
optimal choice.   He explained  that one  must review a  range of                                                               
revenue-generating taxes simply to bracket  the sample size.  The                                                               
objective, he opined, is to ensure  that no projects are lost and                                                               
to only select  those tax systems to move into  the next level of                                                               
evaluation that wouldn't result in  a decline in production.  "It                                                               
wasn't  so much  that  we had  to  build in  an  assumption of  a                                                               
decline  curve because  we chose  a revenue  stream that  was too                                                               
high to allow  for those projects to go forward  because once ...                                                               
it resulted in  a loss project, it was no  longer considered," he                                                               
explained.   He  noted that  the  mature fields  are a  different                                                               
model in  which they were reviewed  in relation to the  impact to                                                               
existing  fields and  what that  would do  to the  mature fields.                                                               
The mature field  model was determined to be  less sensitive than                                                               
the new field  model.  Therefore, the new field  model became the                                                               
driver and  the mature field  model became the  confirmation that                                                               
it was okay.                                                                                                                    
4:22:27 PM                                                                                                                    
REPRESENTATIVE NEUMAN, referring to  slide 15, related his belief                                                               
that most  investments in new  fields are  reinvestment earnings.                                                               
He requested  [clarification] of  how the  net present  value and                                                               
the ratings apply in the different fields.                                                                                      
4:24:01 PM                                                                                                                    
DR.  FINIZZA  indicated  that  it may  become  clearer  with  the                                                               
results.  He  then turned the committees' attention  to the graph                                                               
referring to "Annual Net Cash Flow" on slide 8.  He explained:                                                                  
     The  one on  the  right, the  "Annual  Net Cash  Flow",                                                                    
     that's production  times revenue minus costs  and other                                                                    
     expenditures  that  you  make   in  that  year,  taxes,                                                                    
     etcetera, coming  out.  And  you're trying to say  if I                                                                    
     were standing at  a point in time, at  the beginning of                                                                    
     this chart, and I make  an investment of $1 billion ...                                                                    
     and if I  have a discount rate of 10  percent rate ...,                                                                    
     I would  expect to  be able  to earn  that kind  ... of                                                                    
     money each  and every  year.   The fact  that I  have a                                                                    
     negative outflow  at the beginning poses  a big burden,                                                                    
     it really requires me to do  very well in the future to                                                                    
     compensate that  because that dollar  in five  years is                                                                    
     lost its  time-value plus the opportunity  to make that                                                                    
4:25:39 PM                                                                                                                    
REPRESENTATIVE  NEUMAN   surmised  then   that  the   $1  billion                                                               
investment has  to equate  on top  of the  $32 per  barrel actual                                                               
cost of production.                                                                                                             
COMMISSIONER GALVIN suggested that once  one gets to the point of                                                               
producing, the  operating expenditures  are being  experienced as                                                               
a single  field.  The  profit in that  particular year will  be a                                                               
reflection of the operating expense  plus the transportation cost                                                               
which will be subtracted from the  price.  In a scenario in which                                                               
a $1  billion up-front investment  is made and the  discount rate                                                               
is 10 percent,  then a company would need to  make $100 million a                                                               
year to break even.  If  a company receives its $100 million each                                                               
year, then  the [project] would  be considered  to have a  NPV of                                                               
zero.   He explained that  a company  would take the  price minus                                                               
operating  and  transportation  expenses, and  determine  whether                                                               
it's  above or  below $100  million  year.   Anything about  $100                                                               
million a  year will  result in a  positive NPV  whereas anything                                                               
below  would  be  negative  and  "slide that  out"  for  all  the                                                               
expected positive cash flows.                                                                                                   
4:27:48 PM                                                                                                                    
COMMISSIONER  GALVIN,  in   response  to  Representative  Doogan,                                                               
clarified  that  if  a  field/project  that  would  otherwise  be                                                               
positive and receive  investment was placed in a  category of not                                                               
obtaining  investment  to   proceed,  that  field/project  wasn't                                                               
considered.   He  reminded the  committees that  the goal  was to                                                               
protect  the   investment  climate.    In   further  response  to                                                               
Representative Doogan,  Commissioner Galvin confirmed  that these                                                               
seven fields  were the only ones  used and the one  at the bottom                                                               
will become clear momentarily.                                                                                                  
4:29:12 PM                                                                                                                    
SENATOR STEDMAN, referring to the graph  on the right of slide 8,                                                               
suggested that  25 years ago there  would have been a  much lower                                                               
stress price  than $40.   He surmised  that the  particular field                                                               
would be  skewed if a project  was decided upon and  $40 a barrel                                                               
of  oil increased  to  $80 or  $90  a  barrel of  oil.   He  then                                                               
suggested that it would be  rational to assume that a 25-year-old                                                               
field  in  Alaska  that's  still producing  is  a  valuable  cash                                                               
generating asset at $60-$80 a barrel oil.                                                                                       
DR.  FINIZZA  replied yes,  adding  that  many such  fields  will                                                               
require capital to continue to produce.                                                                                         
4:30:36 PM                                                                                                                    
DR. FINIZZA moved  on to slide 16, which reviews  some of the 25-                                                               
plus  tax  scenarios  considered.   In  the  analysis  it  became                                                               
apparent that given the up-front  capital, a gross tax system was                                                               
enhanced and needed  with a credit "to make it  even come close."                                                               
Still, the  gross tax  system wasn't  found to  be overwhelmingly                                                               
favorable.   He  then highlighted  that  one of  the gross  plans                                                               
utilized a tax table with  a five-year tax holiday, progressivity                                                               
as the  price increased, and a  high tax rate for  mature fields.                                                               
He continued with  slide 17 that provides a description  of a new                                                               
field  model.   The  aforementioned  is a  cash  flow model  that                                                               
mirrors the production process and tax system.                                                                                  
4:34:36 PM                                                                                                                    
DR. FINIZZA turned attention to  slides 18-19, and specified that                                                               
the left portion  of the spreadsheet contains  the assumptions of                                                               
the tax  plan and  is segregated  into net taxes  on the  top and                                                               
gross taxes on the bottom.   The right side of the spreadsheet is                                                               
the NPV at $40  a barrel for each of the  seven fields.  Although                                                               
the model  traces the NPV  at all  prices, the critical  point is                                                               
where  the  stress price  is.    After  reviewing the  plan,  the                                                               
question  would be  whether the  plan preserves  economics.   Dr.                                                               
Finizza then  walked the committees  through ACES, as  is, versus                                                               
the PPT  and highlighted that ACES  has a higher value.   He then                                                               
moved on to the gross tax  system and highlighted that there's no                                                               
gross tax scheme in the  first four rows that preserved economics                                                               
such that it would be positive  in a net system.  He acknowledged                                                               
the entry  for the  progressive tax  table in  the amount  of $40                                                               
million,  and   explained  that   in  trying  to   implement  the                                                               
aforementioned  tax table  the difficulty  in treating  the field                                                               
lives  differently  was discovered.    He  then highlighted  that                                                               
Field E,  which has one of  the highest costs, doesn't  fair well                                                               
under either  a net  or gross system.   The  negatives throughout                                                               
the  gross production  tax scenarios  suggest that  they wouldn't                                                               
work over  a wide range of  real fields that Alaska  could expect                                                               
in its future.                                                                                                                  
4:40:14 PM                                                                                                                    
SENATOR WIELECHOWSKI  related his  understanding that  under ACES                                                               
all the fields are fairly comparable,  save Field A.  He inquired                                                               
as to  why such  a large  disparity exists  with the  various net                                                               
production tax scenarios for Field A.   He further inquired as to                                                               
whether  there are  a  lot fields  on the  North  Slope that  are                                                               
comparable to Field A.                                                                                                          
COMMISSIONER  GALVIN  reminded the  committees  that  Field A  is                                                               
within a  legacy field and  is a  heavy oil project,  which means                                                               
that it  has the  strained economics  of the  heavy oil  and will                                                               
potentially be  impacted by the  gross tax floor.   The crossover                                                               
point with  the gross tax floor  is around $40, $41.   Therefore,                                                               
when  one  assumes  $40  across  the line,  it  will  impact  the                                                               
economics of that particular field.                                                                                             
SENATOR WIELECHOWSKI suggested that there  would be the desire to                                                               
treat heavy oil fields differently,  since there's a lot of heavy                                                               
oil on the North Slope.                                                                                                         
COMMISSIONER GALVIN  said that various options  were reviewed and                                                               
it was determined  that a net-based system is  the most effective                                                               
means  to target  the heavy  oil.   The  methods of  manipulation                                                               
available for a gross-based system  aren't precise.  Furthermore,                                                               
such methods won't necessarily reflect  the actual economics of a                                                               
particular project because a proxy for  a cost will be chosen and                                                               
it's likely to miss the mark  and won't be as effective as simply                                                               
allowing the deduction of the  costs of the marginally challenged                                                               
4:42:39 PM                                                                                                                    
SENATOR  WIELECHOWSKI opined  that  if the  goal  is to  maximize                                                               
benefits to  Alaskans and to  maximize investment, then  a tiered                                                               
system could  be tailored such  that maximum benefit  is received                                                               
from legacy  fields while  treating the  viscous oil,  heavy oil,                                                               
and legacy oil  fields differently and having some form  of a net                                                               
profits tax on the exploration  fields.  The aforementioned would                                                               
seem to achieve the best of all possible worlds, he said.                                                                       
COMMISSIONER  GALVIN said  he would  agree,  but emphasized  that                                                               
thus  far  no one  within  Alaska  has identified  an  integrated                                                               
system  in  which  there  is   a  method  to  segregate  and  tax                                                               
separately one  type of  oil for  another.   He noted  that [DOR]                                                               
spent a great  deal of time working with DNR,  which would be the                                                               
entity upon which segregation of the  oil would fall.  The result                                                               
of the conversation  was the recognition that it  wasn't going to                                                               
be  a practical  outcome  because of  the  inherent incentive  to                                                               
identify  all  new  projects  as  new  oil  and  the  lack  of  a                                                               
technically verifiable method to  specify whether it's really new                                                               
or not.                                                                                                                         
SENATOR  WIELECHOWSKI  surmised that's  the  point  at which  the                                                               
auditors enter.   If the aforementioned is done  elsewhere in the                                                               
world, he said he has faith it can be accomplished in Alaska.                                                                   
COMMISSIONER  GALVIN said  that once  the  oil comes  out of  the                                                               
ground,  the  auditors would  be  the  least knowledgeable  about                                                               
whether it  came out of  what's considered  a new pool  versus an                                                               
existing  pool.   The conversations  resulted in  the realization                                                               
that the  state doesn't  have the  necessary tool,  and therefore                                                               
other options had to be reviewed.                                                                                               
4:46:32 PM                                                                                                                    
REPRESENTATIVE SAMUELS  pointed out  that the effective  tax rate                                                               
increases once  the floor  is reached,  although that's  the time                                                               
when investment is needed the most,  in a scenario in which there                                                               
are falling  oil prices  and profits.   The  aforementioned seems                                                               
backwards, he opined.                                                                                                           
DR. FINIZZA highlighted  that it's important to  review a project                                                               
in terms of prices.  He related  his belief that a floor would be                                                               
valuable to protect the state against falling prices.                                                                           
REPRESENTATIVE  SAMUELS,   with  regard  to   attracting  ongoing                                                               
investment  in Prudhoe  Bay and  Kuparuk,  surmised that  ongoing                                                               
investment is necessary to keep the decline curve up.                                                                           
DR.  FINIZZA  noted his  agreement,  and  added  that one,  as  a                                                               
producer of those types of  fields, should expect a very cyclical                                                               
pattern of revenue over time.   He clarified that he's portraying                                                               
that  there wouldn't  be a  serious impact  on investment  to say                                                               
that the project will make sense  at $60 a barrel on average with                                                               
deviations to $40 and $80 from time to time.                                                                                    
4:49:42 PM                                                                                                                    
REPRESENTATIVE  DOOGAN recalled  testimony that  most of  the oil                                                               
revenue from  the production  tax comes  from the  legacy fields.                                                               
However, only  one legacy  field project was  modeled and  it was                                                               
the most  difficult one  at that.   He inquired  as to  why there                                                               
seems to be disproportionate modeling  with only one legacy field                                                               
when that's from where most of the oil revenue comes.                                                                           
COMMISSIONER GALVIN  explained that a  new heavy oil  project out                                                               
of a  legacy field is  considered a new  venture, a new  level of                                                               
investment, and a  new target.  Therefore, it's treated  as a new                                                               
field  so  the  investment  question   is  analogous  to  similar                                                               
questions  directed outside  the legacy  fields.   At the  legacy                                                               
mature  field  level of  analysis  there's  a certain  amount  of                                                               
investment necessary  to maintain production at  certain level of                                                               
decline.   The  gap between  not investing  and investing  can be                                                               
treated  as if  a  separate  project in  the  existing field  and                                                               
infrastructure, he  explained.  For  example, Field A  was placed                                                               
in the analysis of a new field  as opposed to being placed in the                                                               
overall  reinvestment  in  the   existing  fields.    In  further                                                               
response to Representative Doogan,  Commissioner Galvin said that                                                               
another model reviewed existing fields.                                                                                         
4:52:47 PM                                                                                                                    
REPRESENTATIVE  DOOGAN  related  his understanding  that  in  all                                                               
cases Field E is under water at  a $40 stress price.  He asked if                                                               
that's because  it has a  relatively high capital cost  and heavy                                                               
oil will be slow to produce.                                                                                                    
COMMISSIONER GALVIN replied yes.                                                                                                
REPRESENTATIVE DOOGAN  surmised then that adopting  a medium rate                                                               
gross  production tax  on the  new project  in the  legacy fields                                                               
would make money.                                                                                                               
DR. FINIZZA specified  that it's at 30 and compared  to ACES it's                                                               
less than [30] and considerably less than under the PPT.                                                                        
REPRESENTATIVE DOOGAN  further surmised  then that  although it's                                                               
less profitable, it's still profitable.                                                                                         
COMMISSIONER GALVIN interjected that  it's important to recognize                                                               
[that's  the   case]  under  this   model  and   the  information                                                               
REPRESENTATIVE  DOOGAN   pointed  out   that  for  Field   A  the                                                               
administration's proposal only  results in a 10  whereas a medium                                                               
rate gross tax is a 30.                                                                                                         
COMMISSIONER  GALVIN explained  that's because  of the  effect of                                                               
the floor  that kicks  in at  $40.  Therefore,  moving to  $42 or                                                               
$43, suddenly it's  at 120 whereas at the medium  rate gross, the                                                               
30 doesn't change much when moving from $41-$43.                                                                                
4:55:07 PM                                                                                                                    
COMMISSIONER  GALVIN,  in   further  response  to  Representative                                                               
Doogan, said that in order to  provide the numbers on the chart a                                                               
snapshot is taken.   The $40 price was recognized  as an adequate                                                               
stress price,  although different  companies will  have different                                                               
numbers.   He explained:   "We could show you  it at $45  and the                                                               
difference would be that the ACES  with the floor and without the                                                               
floor  would have  no change  at  any of  the fields.   But  that                                                               
wouldn't be ... a fair  representation of the potential impact of                                                               
the floor  on an economic  decision.  But  if we showed  you that                                                               
$45, the change in the impact  of that medium rate gross would be                                                               
fairly  small."    He  suggested that  companies  will  view  the                                                               
aforementioned  situations   differently  and  view  more   of  a                                                               
likelihood of  a less economic  situation at the  gross situation                                                               
rather than the floor situation.                                                                                                
DR.  FINIZZA clarified  that the  notion  was to  move away  from                                                               
picking an  entry in the table.   Therefore, the approach  was to                                                               
view a tax scenario across all fields.                                                                                          
4:57:07 PM                                                                                                                    
REPRESENTATIVE DOOGAN  opined that either these  are good numbers                                                               
or  not.   He further  opined that  an oil  company with  Field A                                                               
would like the medium rate  gross production tax better than ACES                                                               
because "it's using the stress  price that you're telling me they                                                               
use and making  the decision the way you're telling  me they make                                                               
it, that's a better deal for them."                                                                                             
COMMISSIONER  GALVIN  explained  that   he's  trying  to  provide                                                               
information that  represents the distinctions in  the programs in                                                               
a  way that  doesn't hide  any facts  while not  overwhelming the                                                               
committees with information at each  price.  He further explained                                                               
that  the  exercise was  extremely  dynamic  and he's  trying  to                                                               
condense  a   couple  of  months   of  work  for  the   two  hour                                                               
presentation  today.    He  indicated  that  this  isn't  a  pure                                                               
representation of  the economic  decision being made  and offered                                                               
to  provide  a broader  view  of  the sensitivities  between  the                                                               
different choices.                                                                                                              
4:59:47 PM                                                                                                                    
SENATOR STEDMAN  recalled the difficulties surrounding  the floor                                                               
and  the  progressivity  under  the   PPT.    He  said  that  the                                                               
progressivity was partially  utilized to have more  on the upside                                                               
at $60, $70, and $80 a barrel  oil.  After much debate, the floor                                                               
mechanisms  were deliberately  left  out because  there was  more                                                               
economic interest  for the state  to take a higher  percentage at                                                               
$60-$80 a barrel oil.   He  said that he will personally push for                                                               
the concept  of the  state taking a  larger percentage  at higher                                                               
oil prices.                                                                                                                     
COMMISSIONER  GALVIN characterized  that as  a legitimate  policy                                                               
call.   The information  being provided  is the  information that                                                               
lead the administration to its policy calls, he noted.                                                                          
5:03:04 PM                                                                                                                    
SENATOR STEDMAN  recalled that the  state was better off  when it                                                               
took a  couple of years  of a  larger percentage with  higher oil                                                               
prices than having  the floor.  The important caveat  is that the                                                               
state takes  the revenue during  the high revenue times  and roll                                                               
it  forward,  which is  occurring.    The aforementioned  is,  in                                                               
effect, preparing the state for the collapse of oil prices.                                                                     
5:03:45 PM                                                                                                                    
CHAIR HUGGINS related that he  received a call asking whether the                                                               
state is in high level negotiations  over the gasline to which he                                                               
responded that he didn't know.   He then recalled that during the                                                               
hearing  of  AGIA,   there  was  insistence  from   some  in  the                                                               
legislature  that   as  soon  as  requests   were  received,  the                                                               
legislature would see those and  there wouldn't be any surprises.                                                               
Therefore, he inquired  as to whether the state is  in high level                                                               
negotiations over the gasline.                                                                                                  
COMMISSIONER GALVIN replied  no, and added that  [AGIA] created a                                                               
public, competitive  process that will  provide the next  step in                                                               
discussions in the form of proposals that are received.                                                                         
5:06:01 PM                                                                                                                    
CHAIR  HUGGINS said  that he  was told  that on  KTUU one  of the                                                               
administration's special  assistants said, "We are  in high level                                                               
negotiations on the gas pipeline."                                                                                              
COMMISSIONER GALVIN responded:                                                                                                  
     That was  a turn of  phrase to represent that  when the                                                                    
     producers come  out publicly and make  a statement with                                                                    
     regard  to  what they  feel  about  the nature  or  the                                                                    
     likelihood of the pipeline going  forward, that it is a                                                                    
     representation   that   there's   a   great   deal   of                                                                    
     negotiation   going   on.       Very   publicly   these                                                                    
     negotiations are  going on where there's  an attempt to                                                                    
     influence  the   market,  influence  the   interest  in                                                                    
     participating in our competitive  process.  And that we                                                                    
     shouldn't  take  everything  at  face  value,  that  we                                                                    
     should recognize  that there is a  negotiation going on                                                                    
     out  in  the  public,  over  the  future  of  this  gas                                                                    
     pipeline.      And  that   was   the   point  of   that                                                                    
CHAIR HUGGINS suggested  that perhaps that needs  to be clarified                                                               
throughout the state.                                                                                                           
5:07:24 PM                                                                                                                    
COMMISSIONER IRWIN noted his  agreement with Commissioner Galvin.                                                               
He  explained  that  to ensure  there  are  no  behind-the-scenes                                                               
negotiations, as soon  as the request for  applications (RFA) was                                                               
put  out an  independent  blind portal  website was  established.                                                               
This website allows companies to  ask technical questions without                                                               
the administration  knowing from  whom the  question comes.   The                                                               
aforementioned illustrates  that the  administration has  gone to                                                               
great lengths to ensure that this is a fair and open process.                                                                   
5:09:20 PM                                                                                                                    
CHAIR  HUGGINS  suggested  that  to  the  extent  reasonable  the                                                               
conversations  the administration  is having  be shared  with the                                                               
legislature.  He  expressed interest in the  legislature being up                                                               
to speed when contracts are  received.  He then expressed concern                                                               
with regard  to Dr. Van  Meurs comment on the  economic viability                                                               
of a gasline.                                                                                                                   
COMMISSIONER IRWIN  commented that  consultants say  many things.                                                               
He then  related that he has  heard from multiple sources  in the                                                               
Lower 48 with regard to the extreme demand for Alaska's gas.                                                                    
5:11:01 PM                                                                                                                    
CHAIR HUGGINS emphasized the need to  listen to Dr. Van Meurs and                                                               
suggested  that it  bears  analysis  as to  why  he  came to  the                                                               
aforementioned  conclusion.   Chair  Huggins further  emphasized,                                                               
"This is about the revenue for ...  50 years out."  He then asked                                                               
if the  administration holds the  belief that the first  gas will                                                               
arrive in 2013.                                                                                                                 
COMMISSIONER GALVIN  responded that  in two  months more  will be                                                               
known.   On  behalf  of the  administration, Commissioner  Galvin                                                               
said that he  and Commissioner Irwin would know if  there are any                                                               
high  level negotiations  related to  the gasline.   Commissioner                                                               
Galvin specified that  no high level negotiations  with regard to                                                               
the  gasline   are  occurring.    Furthermore,   Dr.  Van  Meurs'                                                               
statements regarding  the viability of the  project were premised                                                               
on his assumptions  that the cost estimates used  seven years ago                                                               
were an  accurate reflection of  the cost  to get from  the North                                                               
Slope to  the market -  those costs having  doubled - and  on the                                                               
question of whether the market  could bear the price necessary to                                                               
account for the  doubling of those costs;  those assumptions will                                                               
be  proven one  way or  another in  a few  months.   Commissioner                                                               
Galvin  pointed  out the  need  to  have  the process  play  out,                                                               
receive the  applications, and receive the  information regarding                                                               
the current cost estimates.                                                                                                     
5:13:09 PM                                                                                                                    
CHAIR  HUGGINS recalled  that during  the earlier  mentioned KTUU                                                               
broadcast, it was said that the first gas will arrive in 2013.                                                                  
COMMISSIONER GALVIN  said that he  wouldn't back that  up because                                                               
he doesn't know upon what it's based.                                                                                           
COMMISSIONER IRWIN said  that the premise with AGIA  is to obtain                                                               
bidders and then recommend a winning applicant.                                                                                 
5:14:37 PM                                                                                                                    
SENATOR   GREEN  commented   that  it's   troublesome  that   the                                                               
administration has staff making such statements.                                                                                
5:15:07 PM                                                                                                                    
SENATOR WIELECHOWSKI, returning  to slide 15, inquired  as to the                                                               
most common types  of fields that the state  needs to incentivize                                                               
on the  North Slope.   A plan to  incentive whatever is  the most                                                               
common type of field should be crafted, he opined.                                                                              
COMMISSIONER  GALVIN  answered  that   there  are  a  variety  of                                                               
potential  developments that  are foreseen.   The  administration                                                               
isn't in  a position  of identifying which  field is  most likely                                                               
since  the industry  is  still  evaluating those  as  well.   The                                                               
administration, he  related, felt it inappropriate  to substitute                                                               
its judgment and  prioritize among the seven  fields.  Therefore,                                                               
the seven fields provides a spectrum.                                                                                           
SENATOR WIELECHOWSKI surmised that  heavy oil legacy fields, such                                                               
as Field A, are the type that should be incentivized.                                                                           
COMMISSIONER GALVIN  said that Field  A is a representation  of a                                                               
near-term heavy  oil project.   There  are probably  other fields                                                               
that would  be further down the  line, in terms of  more stressed                                                               
and  perhaps being  pursued  after  the state  has  had a  longer                                                               
experience  with  higher  prices.   Currently,  Field  A  is  the                                                               
state's best representation of a heavy oil field.                                                                               
5:17:24 PM                                                                                                                    
SENATOR WIELECHOWSKI said  it would be most helpful  to know what                                                               
type of  field the state  is trying  to incentivize on  the North                                                               
COMMISSIONER  GALVIN offered  to  have a  separate briefing  from                                                               
DNR.   He then pointed out  that one challenge in  an open public                                                               
forum is  to balance what can  and can't be revealed  with regard                                                               
to various aspects of these fields.                                                                                             
SENATOR  WIELECHOWSKI suggested  that perhaps  there should  be a                                                               
closed session because this is a  critical issue.  He opined that                                                               
the  legislature can't  be expected  to make  this decision  in a                                                               
COMMISSIONER GALVIN  acknowledged that the legislature  will have                                                               
to decide how much of the  information it will need and the steps                                                               
necessary  to   provide  the  information.     He   reminded  the                                                               
committees  that the  Department of  Law has  said that  once the                                                               
legislature is  in session,  there is more  of an  opportunity to                                                               
have  executive  sessions,   private  briefings,  confidentiality                                                               
agreements, and so forth.   Therefore, it's up to the legislature                                                               
to make a determination as to  whether it wants to engage more in                                                               
the details.                                                                                                                    
5:19:11 PM                                                                                                                    
SENATOR  STEDMAN  commented  that  he is  looking  for  more  oil                                                               
patches  to  be  developed.     He  then  recalled  that  earlier                                                               
Commissioner  Galvin had  said that  any high  level negotiations                                                               
were through the press or the news media.                                                                                       
COMMISSIONER  GALVIN clarified  that  he  was characterizing  the                                                               
intent of the  statement to which Chair Huggins  referred.  There                                                               
was  a statement  made in  response  to a  public statement  that                                                               
characterized  the nature  of the  project or  the likelihood  of                                                               
additional participants.   That statement  was to make  sure that                                                               
Alaskans recognize  that the  state is involved  in a  high level                                                               
negotiation as it  relates to the state's natural  resource.  The                                                               
aforementioned wasn't  intended to  mean that there  were private                                                               
negotiations between the administration  and a project proponent.                                                               
The aforementioned  was a way  that [the  administration's staff]                                                               
described  the public  discussion  occurring with  regard to  the                                                               
gasline project.                                                                                                                
The committees took an at-ease from 5:20:59 PM to 6:19:55 PM.                                                               
6:20:02 PM                                                                                                                    
DR. FINIZZA said  that slide 19 relates the  implications for the                                                               
state revenues from the various [net profit tax] scenarios.                                                                     
6:21:13 PM                                                                                                                    
COMMISSIONER  GALVIN  recalled  from   a  previous  hearing  that                                                               
Representative Doogan  had requested an indication  of the return                                                               
on the investment  the state is making.  This  is a reflection of                                                               
the net present  value to the state of the  cash flows that would                                                               
arrive through  the tax system  alone and demonstrates  the value                                                               
of the  projects going  forward.   Therefore, in  a sense  it's a                                                               
reflection of  the investment in the  form of the credits  and so                                                               
forth and  how much  the state will  receive because  the project                                                               
moved ahead.                                                                                                                    
6:21:49 PM                                                                                                                    
DR. FINIZZA moved on to slide  20, which refers to the government                                                               
take and the position of Alaska  in relation to the other tax and                                                               
royalty  regimes.   He  highlighted  that  the median  government                                                               
take, discounted at  10 percent for ACES, over  the six potential                                                               
new fields with a positive present value is 70 percent.                                                                         
6:22:32 PM                                                                                                                    
SENATOR  WIELECHOWSKI drew  attention  to  the median  government                                                               
take of 68  percent under the PPT, which varies  quite a bit from                                                               
the average tax  rate projected by Econ One last  year at which a                                                               
tax  rate at  $60 under  various proposals  resulted in  about 61                                                               
percent  government  take.   He  related  his understanding  that                                                               
under  ACES   the  state  boosts  its   tax  rate  significantly.                                                               
However,  ACES  raises less  money  than  what PPT  would  raise.                                                               
Therefore, he inquired as to how  ACES has a higher tax rate than                                                               
DR. FINIZZA  explained that  [the information  on slide  20] uses                                                               
today's  cost  structure  and  each   field  has  the  same  cost                                                               
structure.   The  Econ  One  information from  last  year used  a                                                               
different  concept and  was done  over  existing production,  and                                                               
thus there  was no  information regarding new  fields.   Also the                                                               
Econ  One  information  was looking  at  undiscounted  government                                                               
SENATOR  WIELECHOWSKI surmised  then that  the way  in which  the                                                               
calculation is  occurring is changing  under ACES.  He  said that                                                               
he  has a  much harder  time  understanding that  there's a  much                                                               
higher tax  rate under ACES  because the state is  receiving less                                                               
money under ACES than under PPT.                                                                                                
6:25:22 PM                                                                                                                    
COMMISSIONER GALVIN  clarified that  there are different  ways of                                                               
calculating  government tax.   The  61  percent is  based on  one                                                               
method of measurement  as current cash flows  are reviewed across                                                               
the entire North  Slope in current amounts.   However, [slide 20]                                                               
is looking at  future projects and reviewing them  from cradle to                                                               
grave over  the net  present value  of the cash  flows.   He then                                                               
highlighted the  need to  recognize that  the government  take is                                                               
inherently a calculation on the net.   When costs increase by 50-                                                               
100  percent,  that  alone  has   a  significant  impact  on  the                                                               
government  take  calculation   when  reviewing  Alaska  specific                                                               
economics.   Commissioner  Galvin said  that an  apples-to-apples                                                               
comparison would  be more analogous  to the slide  addressing the                                                               
current  cash  flow  and  the   difference  between  the  two  is                                                               
primarily the  cost.   Therefore, when  compared across  the same                                                               
method of calculation, the deviation is the cost story.                                                                         
SENATOR WIELECHOWSKI  inquired as to why  a different calculation                                                               
would be used this year as compared to last year.                                                                               
DR. FINIZZA echoed that [slide  20] is reviewing the fields where                                                               
the full  cycle, cradle to  grave, can  be measured.   Those were                                                               
calculated  in  fields under  production  for  a long  time,  and                                                               
therefore one wasn't  able to make the calculation  like that [in                                                               
slide 20].   This [calculation] isn't appropriate  for new fields                                                               
and [the Econ One analysis] didn't include new fields.                                                                          
SENATOR WIELECHOWSKI  related his  belief that  one would  want a                                                               
lower tax rate on new fields.                                                                                                   
COMMISSIONER GALVIN  said that it's  a matter of comparison.   He                                                               
     We're not saying  that the numbers that  were used last                                                                    
     year were the  appropriate target or not.   We used the                                                                    
     same  calculation  method  and   under  ACES,  it's  65                                                                    
     percent that we're going to  get to.  This time around,                                                                    
     because  we have  the  field models,  we  can also  ...                                                                    
     model  government take  based upon  the project's  life                                                                    
     cycle, which  is, frankly, the  one that you  find most                                                                    
     of  the  time  in the  government  comparisons  between                                                                    
     different regions.   And  so, we were  able to  do that                                                                    
     for  these ...  six  fields that  were  economic.   ...                                                                    
     we're not substituting one for  the other because we're                                                                    
     providing  them both.    But we're  saying  this is  an                                                                    
     additional tool for making that evaluation.                                                                                
6:28:46 PM                                                                                                                    
REPRESENTATIVE  DOOGAN requested  why, for  the government  take,                                                               
the calculation uses a 5 percent NPV and a $60 price.                                                                           
COMMISSIONER GALVIN,  with regard  to the  discount rate  and the                                                               
state's perspective,  clarified that the  time value of  money is                                                               
different  to the  state than  to private  industry.   Therefore,                                                               
it's appropriate  for the  state to review  the cash  flow stream                                                               
with  that  different  discount  factor.    From  the  industry's                                                               
perspective,  the  industry views  it  as  a higher  risk  factor                                                               
because it  wants to obtain a  higher return on its  money.  When                                                               
one  reviews the  industry's  investment  decision, the  industry                                                               
will test  it at the stress  test, $40, rather than  the expected                                                               
price.   However, it  would be  misleading for  the state  to say                                                               
that  it will  check what  revenues will  be available  at a  $40                                                               
price when  the state expects it  to be much higher  and thus the                                                               
state uses what's closer to the expected long-term price, $60.                                                                  
REPRESENTATIVE DOOGAN  surmised then that  $60 is closer  to what                                                               
the state is forecasting oil prices will be over the long term.                                                                 
COMMISSIONER GALVIN stated his agreement.                                                                                       
6:30:32 PM                                                                                                                    
DR. FINIZZA moved  on to slide 21, which places  the six projects                                                               
in the array  of all the projects in the  analysis that Petroleum                                                               
Finance Company  (PFC) did for tax  and royalty regimes.   As the                                                               
graph illustrates,  Alaska's government  take falls in  the third                                                               
6:31:00 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if it's  true that the  discount rate                                                               
is a huge factor.  He further asked  if it's fair to say that the                                                               
tax rate  can be adjusted, and  companies can bear it  when there                                                               
are high capital credits up-front.                                                                                              
COMMISSIONER GALVIN said yes.                                                                                                   
DR. FINIZZA nodded yes.                                                                                                         
6:31:45 PM                                                                                                                    
REPRESENTATIVE  RAMRAS inquired  as to  how to  address the  fact                                                               
that this is a significant tax policy change within 14 months.                                                                  
DR.  FINIZZA commented  that  various  factors beyond  government                                                               
take,   including  prospectivity   and   fiscal  stability,   are                                                               
considered in determining where someone  might invest and in that                                                               
sense,  it's a  factor.    However, it  isn't  a  factor in  this                                                               
analysis [before the committees today].                                                                                         
6:33:22 PM                                                                                                                    
REPRESENTATIVE RAMRAS  commented that  he has been  troubled with                                                               
regard to the  deviation to the KTUU news story  and said that he                                                               
thinks highly of the staff who was quoted by KTUU.                                                                              
6:34:13 PM                                                                                                                    
DR.  FINIZZA continued  with slide  22, which  concludes the  new                                                               
fields portion  of the  analysis.  After  all the  scenarios that                                                               
were run, it was determined that  the new fields would likely not                                                               
be developed  under a gross  tax system,  as a broad  tax policy.                                                               
For  these heavy  capital intensive  fields, capital  credits are                                                               
essential  to  preserve  investment   efficiency  and  keep  that                                                               
climate positive.   Dr.  Finizza pointed out  that ACES  tends to                                                               
level the  playing field for  small producers [and  new entrants]                                                               
because of the ability to monetize losses at the tax rate.                                                                      
6:35:03 PM                                                                                                                    
REPRESENTATIVE DOOGAN  related his understanding  that references                                                               
to a "gross tax system" refer to  a tax system with no credits or                                                               
deductions of any kind.                                                                                                         
DR. FINIZZA mentioned that things that  did have a tax credit for                                                               
investment were  included in the  gross tax system.   However, it                                                               
wasn't  a cost-based  system in  which operating  costs could  be                                                               
REPRESENTATIVE  DOOGAN surmised  then that  a gross  system is  a                                                               
system  in  which  the  companies  wouldn't  be  able  to  deduct                                                               
operating costs.                                                                                                                
COMMISSIONER  GALVIN indicated  agreement.   He then  highlighted                                                               
that missing from  this slide and the charts  is that comparisons                                                               
of the various  gross tax systems was performed  using an apples-                                                               
to-apples comparison.   In other  words, the goal was  to compare                                                               
the  net tax  with a  gross tax  that would  result in  a similar                                                               
amount of revenue.  The  various rates and investment impacts are                                                               
all on gross  tax-based systems that are expected to  result in a                                                               
similar amount of  revenue to the state.  Therefore,  on slide 22                                                               
when it says that new fields  would likely not be developed under                                                               
a gross tax  system, it's a gross tax system  that would bring in                                                               
a similar amount of revenue as would ACES, for example.                                                                         
6:37:11 PM                                                                                                                    
SENATOR  STEDMAN referred  to the  monetization of  credits.   He                                                               
asked if there has been an  analysis on the purchasing power loss                                                               
that  the  credits  will  produce.    He  expressed  interest  in                                                               
obtaining background as to why  the state should take an interest                                                               
COMMISSIONER GALVIN  explained that  the information on  slide 22                                                               
that  specifies,  "Can monetize  losses  at  same rate  as  large                                                               
producers"  refers  to net  operating  losses  an explorer  would                                                               
experience  when  that  explorer  doesn't  have  any  production.                                                               
Under PPT,  that's carried forward  the following year at  the 20                                                               
percent rate.  An existing producer  would be able to deduct that                                                               
at the 22.5  percent rate.  Under ACES the  explorer can carry it                                                               
forward at the  tax rate, and therefore it's  an equivalence with                                                               
a year delay.   The aforementioned is illustrated in  some of the                                                               
increase in value  between going from the PPT to  ACES on some of                                                               
the projects.   With regard to receiving 100 cents  on the dollar                                                               
for  credits,  Commissioner  Galvin   explained  that  the  state                                                               
doesn't receive  reports regarding  the amount for  which credits                                                               
were sold.   The reports received prior to the  August 3rd report                                                               
was that the  companies were having difficulty  finding a market,                                                               
but since that  time there have been reports  that companies have                                                               
sold a number  of credits close to  full value.  In  the end, the                                                               
administration believes  there's a  policy justification  for the                                                               
state providing  full value rather  than requiring it to  be sold                                                               
at a discount.   In terms of quantifying the  discount, that will                                                               
have to come from the companies.                                                                                                
SENATOR STEDMAN opined that with  issues such as this there seems                                                               
to be  a lack of  backup.  He further  opined that if  there were                                                               
issues in  a particular market,  the numerics of the  trade would                                                               
be  available to  illustrate  that there's  a  problem and  there                                                               
would be calculations  on the opportunity loss  of carrying these                                                               
[credits] forward.  He said he  wasn't sure that the state should                                                               
be all that  concerned.  In fact one of  the questions that needs                                                               
to be asked is whether the 20 percent credit is too much.                                                                       
COMMISSIONER GALVIN  reminded the committees that  it's a private                                                               
market with  private deals,  and thus  the parties  determine how                                                               
much information  they will make  available to the state.   Aside                                                               
from  that, it's  ripe for  a  policy discussion  with regard  to                                                               
whether it's appropriate  for the state to provide  full value or                                                               
not.  There  is also the question as to  whether explorers should                                                               
be  provided  with  the  same  level of  credits  as  others  are                                                               
SENATOR STEDMAN  recalled that  some of  these issues  were fully                                                               
debated under PPT while others weren't.                                                                                         
6:42:12 PM                                                                                                                    
DR. FINIZZA  directed the committees'  attention to  the analysis                                                               
of mature  fields, which he said  isn't as detailed as  the seven                                                               
fields  analysis as  there isn't  much knowledge  of the  project                                                               
specifics.   Still, some assumptions  can be made that  result in                                                               
the  conclusion that  a gross  tax doesn't  bode well  for mature                                                               
fields.    As specified  on  slide  24,  the assumption  is  that                                                               
reinvestment  in legacy  fields requires  substantial capital  in                                                               
order  to keep  the  decline  from occurring  very  quickly.   He                                                               
pointed out that  one mode to consider is placing  a mature field                                                               
in  a harvest  mode  in which  the field  is  allowed to  decline                                                               
naturally.   The  assumption  was 15  percent  decline per  year.                                                               
Another mode, reinvestment,  is one in which  capital is invested                                                               
to stem  the decline such  that it's at 3  percent per year.   If                                                               
each mode  is thought of as  a separate project, one  can perform                                                               
the analysis  in the same  sort of  net present value  manner and                                                               
compare  the economics  of investing  versus investing  less.   A                                                               
picture  of  that,  slide 25,  illustrates  a  reinvestment  mode                                                               
decline that's  a slow slope  and the  harvest mode with  a sharp                                                               
decline of 15 percent.                                                                                                          
6:44:23 PM                                                                                                                    
SENATOR WIELECHOWSKI inquired as to the mode under PPT.                                                                         
DR.  FINIZZA said  that currently  [the  state] is  close to  the                                                               
reinvestment mode,  which he  opined would  probably be  the case                                                               
for any net system.                                                                                                             
6:44:46 PM                                                                                                                    
REPRESENTATIVE RAMRAS  inquired as to  how a more  aggressive tax                                                               
would  impact  the harvest  mode.    He  related that  one  could                                                               
conclude  that the  more  is  harvested in  taxes,  the more  the                                                               
reinvestment mode could be hampered.                                                                                            
DR. FINIZZA answered  that in general, that's true.   However, at                                                               
a given net tax  rate, even if the tax rate  is higher than under                                                               
the PPT, one would still be  better off investing than adopting a                                                               
harvest mode.   He explained that the aforementioned  is the case                                                               
because the  net present  value is  still higher  to invest.   He                                                               
acknowledged that although it may be  lower in a lower tax world,                                                               
it would be better than the alternative.                                                                                        
REPRESENTATIVE RAMRAS  surmised that the alternative  is to leave                                                               
the oil in the ground.                                                                                                          
DR. FINIZZA replied yes, adding that  one could leave a lot of it                                                               
in the ground.                                                                                                                  
COMMISSIONER  GALVIN  pointed  out   that  the  oil  itself,  the                                                               
production of  the oil,  and the profits  that will  be generated                                                               
are  the motivators  to obtain  the investment.   The  tax system                                                               
won't make the decision.  Regardless  of whether it's PPT or ACES                                                               
if  the  value of  the  oil  remains  and making  the  investment                                                               
remains, the investment will be made.                                                                                           
6:46:28 PM                                                                                                                    
REPRESENTATIVE  RAMRAS  noted  his   agreement,  save  for  those                                                               
marginal  projects   that  are  lost,  the   dampened  investment                                                               
climate,  and   the  view  that   Alaska  becomes  a   basket  of                                                               
instability.   To shift tax  policy again and dampen  the broader                                                               
climate introduces  another variable,  that of  instability, that                                                               
hasn't  been articulated  in any  of today's  slides.   He opined                                                               
that tax  policy impacts behavior.   He  then inquired as  to Dr.                                                               
Finizza's  sense   of  the  variable  that   tax  policy  impacts                                                               
COMMISSIONER GALVIN reminded the  committees that yesterday there                                                               
was  discussion with  regard to  stability, which  is clearly  an                                                               
issue  as  it relates  to  the  attractiveness of  investment  in                                                               
Alaska.   Today the discussion  is centering around  the economic                                                               
side in which stability can't be quantified.                                                                                    
REPRESENTATIVE   RAMRAS  interjected   that  stability   will  be                                                               
discussed every day because it's a big deal.                                                                                    
COMMISSIONER GALVIN clarified that  these are economic models and                                                               
the  issue  of  stability  isn't  included in  each  slide.    He                                                               
emphasized that the issue of stability isn't being ignored.                                                                     
6:49:36 PM                                                                                                                    
CHAIR  OLSON  expressed  concern  with  the  work  product  being                                                               
produced  in this  short time.    He highlighted  that when  this                                                               
issue was addressed the last time it took eight months.                                                                         
6:49:54 PM                                                                                                                    
REPRESENTATIVE DOOGAN  inquired as  to from  where the  3 percent                                                               
and 15 percent came.                                                                                                            
DR.   FINIZZA  specified   that   those   percentage  came   from                                                               
information he  collected with regard to  the production forecast                                                               
that was made  for the state.   He noted that there  were a range                                                               
of potential volumes that seem to fit the harvest mode.                                                                         
REPRESENTATIVE DOOGAN  surmised then that Dr.  Finizza determined                                                               
that if  there was no reinvestment,  there would be a  15 percent                                                               
decline in  production.  He  inquired as to the  assumptions that                                                               
resulted in the 3 percent annual decline.                                                                                       
DR.  FINIZZA, referring  to slide  26, explained  expenditures of                                                               
$15 a barrel for the  reinvestment mode over the 20-year horizon.                                                               
In the harvest  mode, those things to keep the  field going would                                                               
result  in  about  $5  barrel.   The  critical  variable  is  the                                                               
difference  between the  two.   The assumptions  were applied  to                                                               
various sampling  of tax  cases.  Over  the 20-year  horizon, the                                                               
NPV of those  strategies with those tax  policies was calculated.                                                               
In the first column, the sustain  production mode, ACES had a NPV                                                               
a little over $8 billion.   In the harvest mode there would still                                                               
be a positive  NPV of about $6.9 billion.   Therefore, a producer                                                               
with these options would improve  its NPV by investing to sustain                                                               
a low  decline mode.   If there was a  switch to any  gross case,                                                               
the opposite conclusion  happens in each such  that the sustained                                                               
production load  had a  NPV lower than  just allowing  for strict                                                               
harvesting.  The  volume of oil recovery in both  cases is fairly                                                               
substantial as well, 1 billion barrels less.                                                                                    
6:53:31 PM                                                                                                                    
REPRESENTATIVE  DOOGAN surmised  then that  the lower  the taxes,                                                               
the more barrels  of oil will come  out of the ground.   He asked                                                               
if the  aforementioned is  why the  NPV under  the PPT  is higher                                                               
than the NPV under ACES.                                                                                                        
DR. FINIZZA explained  that the PPT has a higher  NPV because the                                                               
tax rate  is lower.   The NPV  under PPT of  doing nothing  or to                                                               
allow a rapid  decline by investing less is higher  than the ACES                                                               
case.   The difference between  the two still relates  that under                                                               
the PPT,  the NPV  is improved  with investment  as would  be the                                                               
case with ACES and even a higher tax rate.                                                                                      
REPRESENTATIVE DOOGAN  asked whether  the 3 percent  of sustained                                                               
production is  a prediction  of what will  happen if  the changes                                                               
the governor  recommends are  passed.  In  other words,  will the                                                               
decline rate be cut in half with the passage of HB 2001.                                                                        
DR. FINIZZA said that he made  no assumptions about any change in                                                               
the decline  rate as  a result of  any of the  tax policies.   In                                                               
further response  to Representative Doogan, he  confirmed that he                                                               
picked 3 percent and then ran the calculation.                                                                                  
6:55:35 PM                                                                                                                    
SENATOR  STEDMAN  inquired as  to  the  amount of  extra  capital                                                               
necessary to maintain 750,000 barrels  of oil per day or increase                                                               
to 1 million barrels on the Trans-Alaska Pipeline System.                                                                       
DR. FINIZZA said he couldn't answer that question.                                                                              
COMMISSIONER GALVIN related his  understanding that no matter how                                                               
much investment  is made  in the  legacy fields,  the [producers]                                                               
won't be able  to level it out.   With regard to  the question as                                                               
to whether  the decline  can be slowed  by investing  more money,                                                               
Commissioner Galvin  said yes.   However, the  question regarding                                                               
how much  the decline can be  slowed remains.  This  slide simply                                                               
illustrates  that the  amount [an  explorer] needs  to invest  to                                                               
stave off the production decline is  a decision that will be made                                                               
from  now  over  the  next  20   years.    He  opined  that  [the                                                               
administration]  wants  to  ensure  that  the  tax  code  doesn't                                                               
provide  a disincentive  for  that investment.    Based on  these                                                               
assumptions, under  ACES or PPT  the choice  will be to  make the                                                               
investment because more  money will be made from the  oil than if                                                               
the investment wasn't made.   However, under a gross tax scenario                                                               
on the  legacy fields, the  investment decision is  driven toward                                                               
not investing and letting the  field decline.  The aforementioned                                                               
isn't in the  state's interest.  Commissioner  Galvin pointed out                                                               
that  the aforementioned  led to  the  decision in  terms of  the                                                               
impact of  gross tax versus  a net tax  and where the  rate could                                                               
SENATOR STEDMAN recalled  discussions during the PPT  when it was                                                               
said that  an extra $1 billion  reinvestment a year in  the field                                                               
is necessary on  an ongoing basis to slow decline.   He expressed                                                               
interest in having some targets as the oil basin is monitored.                                                                  
6:59:52 PM                                                                                                                    
REPRESENTATIVE SAMUELS asked if the  15 percent decline refers to                                                               
normal reservoirs  around the  world or only  to Prudhoe  Bay and                                                               
DR.  FINIZZA  said  that's  probably  a  better  question  for  a                                                               
geologist  rather  than  an  economist.   He  said  that  he  has                                                               
received numbers  from geologists  relating to  Prudhoe Bay.   He                                                               
then recalled a similar decline rate in BP discussions.                                                                         
REPRESENTATIVE SAMUELS inquired as  to whether one could consider                                                               
that  all  reservoirs act  similar  in  that they  produce  10-15                                                               
percent a year  and then start to  decline.  He asked  if one can                                                               
determine  the amount  of investment  it would  take to  stop the                                                               
decline, or are all the fields different.                                                                                       
DR. FINIZZA  said that  he hasn't studied  that.   Although there                                                               
aren't  too  many  fields  around   of  this  size  to  make  the                                                               
comparison, it would be worth doing.                                                                                            
SENATOR  WIELECHOWSKI   opined  that  another  column   or  chart                                                               
specifying Alaska's  NPV is necessary  if a billion  more barrels                                                               
is received under the PPT.                                                                                                      
COMMISSIONER GALVIN specified that the  same amount of barrels is                                                               
received.    In further  response  to  Senator Stedman's  earlier                                                               
question, Commissioner Galvin explained  that the needed opex and                                                               
capex investment  of $15 per barrel  is similar to what  is being                                                               
experienced across the North Slope  with $14.56 per barrel, which                                                               
equates  to almost  a $2  billion capital  expenditure per  year.                                                               
"We're probably in the ballpark, if  not even pushing it a little                                                               
bit higher than  the billion dollars of  reinvestment required in                                                               
order  to  hit  this  same  number.   So,  I  think  ...  it's  a                                                               
comparable number than  what you were talking about  a year ago,"                                                               
he said.                                                                                                                        
7:03:29 PM                                                                                                                    
SENATOR STEDMAN  asked if there's  a chance that the  state might                                                               
be on track with PPT.                                                                                                           
COMMISSIONER  GALVIN opined  that hopefully  the state  is moving                                                               
toward  that   reinvestment  mode  and  getting   [explorers]  to                                                               
maximize their opportunity to produce  oil.  Furthermore, perhaps                                                               
the net  structure and up-front  credits will drive the  state to                                                               
that.  The  question become if the aforementioned  will be driven                                                               
away if the  state moves to ACES, which is  what this analysis is                                                               
intended to illustrate.                                                                                                         
7:04:25 PM                                                                                                                    
DR.  FINIZZA said  that another  gage, to  determine whether  the                                                               
state is driving investment away  is to review what the producers                                                               
are  actually keeping  out of  each additional  dollar, which  is                                                               
illustrated on slide 27.  The graph  on slide 28 plots all of the                                                               
ongoing  projects in  the  PFC database.    The graph  highlights                                                               
where  the Alaska  legacy  marginal take  is  relative to  mature                                                               
fields.   He related that  the [fields] with the  higher marginal                                                               
government take are in Norway and  the ones that are lower are in                                                               
Norway or Australia.                                                                                                            
7:05:40 PM                                                                                                                    
SENATOR  STEDMAN,  referring  to  slide 27,  surmised  that  it's                                                               
speaking to the  vast majority of the basin,  Kuparuk and Prudhoe                                                               
Bay.   Under the  PPT the  government take is  61 percent  of the                                                               
[$1.00] whereas last year Econ  One estimated that the government                                                               
take at $60  a barrel of oil is 60.4  percent, which he suggested                                                               
could be a rounding error.                                                                                                      
DR. FINIZZA said  that's fortuitous since the  run performed last                                                               
year  was  under  a  different   cost  structure  and  production                                                               
profile.   The information being  provided today uses  the latest                                                               
production forecast  as well  as the higher  costs.   Dr. Finizza                                                               
said that it was felt important  to use this metric as opposed to                                                               
what was used by Econ One  last year.  Furthermore, it provides a                                                               
way of comparing mature fields in other parts of the world.                                                                     
SENATOR STEDMAN requested written delineation of the two.                                                                       
7:08:30 PM                                                                                                                    
DR. FINIZZA concluded  with slide 30, which uses ACES  at $60 and                                                               
peels back  some of the features  of ACES in order  to relate how                                                               
much  each, when  relaxed, would  change total  revenues for  the                                                               
next three years.   He noted that there won't  be a very dramatic                                                               
fiscal  change in  2008  because  half of  that  year is  already                                                               
included.  Therefore, he suggested that  it may be best to review                                                               
the impact  on fiscal year 2009  to gauge the importance  of some                                                               
of these  pieces.  For  example, under  fiscal year 2009  ACES is                                                               
estimated  to  have tax  revenues  in  the  amount of  almost  $2                                                               
billion.    If  the  tax  rate  is moved  to  the  PPT  rate  and                                                               
everything else under  ACES remained the same,  $229 million less                                                               
would be  produced in  fiscal year  2009.   If ACES  remained the                                                               
same save  changing the progressivity  to the  PPT progressivity,                                                               
it would result  in approximately $150 million less in  2009.  He                                                               
reviewed the results of various changes to ACES.                                                                                
7:11:21 PM                                                                                                                    
DR.  FINIZZA, in  response to  Representative Samuels,  said that                                                               
the  assumption  for  [fiscal   years]  2008-2010  is  that  it's                                                               
declining.  The projects all  assume the mid cost numbers related                                                               
by Ms. Nienhuis.                                                                                                                
REPRESENTATIVE  SAMUELS then  requested  the production  forecast                                                               
for this particular model.                                                                                                      
7:12:29 PM                                                                                                                    
SENATOR  STEDMAN, returning  to  the government  take  of PPT  as                                                               
reported on  slide 27 and  projected under Econ One's  slide from                                                               
last  year, reiterated  his earlier  statement that  the two,  in                                                               
terms of the percentage of government  take, seem to be on top of                                                               
one another.                                                                                                                    
DR.  FINIZZA   restated  that  the  two   were  calculated  using                                                               
different methodologies.   Therefore, if the  current assumptions                                                               
were  utilized  with the  Econ  One  presentation of  last  year,                                                               
different numbers  would result because  of the use  of different                                                               
concepts.   If the same concepts  were used, the result  would be                                                               
fairly close.   "So, I  would not  think they would  quibble with                                                               
our percentages here," he said.                                                                                                 
7:14:22 PM                                                                                                                    
REPRESENTATIVE DOOGAN directed attention  to slide 18 and related                                                               
his understanding how a company  would rank the various scenarios                                                               
relative to Field A.  He asked if  there is any way for the state                                                               
to  determine  if a  company  would  be  satisfied and  make  the                                                               
investment with ACES  and no floor, although  it wouldn't produce                                                               
as much as under other scenarios.                                                                                               
DR. FINIZZA stated that a  company should be willing to undertake                                                               
a project that has positive NPV  at its stress price.  In further                                                               
response  to   Representative  Doogan,  Dr.  Finizza   said  that                                                               
basically anything  not in  parenthesis is  an investment  that a                                                               
company may make when viewed on that one metric.                                                                                
REPRESENTATIVE DOOGAN  surmised that  the reason  the information                                                               
in slide  18 is being  discussed at  length is because  the state                                                               
can't  do  anything  about  the  world market  price  of  oil  or                                                               
anything to  make more  oil on  the North Slope.   The  state can                                                               
only tinker with the taxes.                                                                                                     
DR. FINIZZA responded  that the state can tinker  with the taxes,                                                               
which includes  providing capital  credit investments  and things                                                               
of that nature.                                                                                                                 
REPRESENTATIVE  DOOGAN related  his understanding  that one  must                                                               
keep in mind  that if the price decreases or  increases, then, in                                                               
terms of investment decisions, this "goes right out the window."                                                                
DR. FINIZZA replied yes, if the new stress price is $50 or $60.                                                                 
7:17:30 PM                                                                                                                    
CHAIR HUGGINS  characterized this as  a rather sterile look.   He                                                               
then opined  that there  are many  risks beyond  NPV and  the tax                                                               
7:19:15 PM                                                                                                                    
SENATOR WIELECHOWSKI  highlighted that  the experts he  has heard                                                               
have said  this can be  done and more  money can be  made without                                                               
discouraging investment.   If the  state were to adopt  ACES, how                                                               
would a business person view the situation, he asked.                                                                           
DR. FINIZZA  opined that  the financial  view would  suggest that                                                               
the investments are  doable and considered on  the worldwide view                                                               
to be projects that would be undertaken.                                                                                        
7:21:02 PM                                                                                                                    
RICH  RUGGIERO,  Gaffney,  Cline  &  Associates,  said  that  the                                                               
decision "depends  upon where you  were when."  He  then recalled                                                               
working with  an oil company on  a major project in  another part                                                               
of world.   The  opportunity for NPV  growth was  tremendous, but                                                               
the  company wasn't  willing  to make  the  decision because  the                                                               
company had  a number of  other larger opportunities and  had, as                                                               
do  many  oil  companies,  limited ability  in  terms  of  people                                                               
resources.   There  are a  number of  different factors  that are                                                               
considered  in these  decisions, but  they probably  don't remain                                                               
the same over  time.  With regard to whether  the tax system will                                                               
be better  or worse  than the previous  tax system,  Mr. Ruggiero                                                               
related that investment  decisions were being made  much like the                                                               
oil companies  are doing today,  that is  around a wide  range of                                                               
tax systems  or fiscal  policies.   He suggested  that businesses                                                               
will  choose  a  situation  in  which  they  can  achieve  higher                                                               
production within  a realm of  manageable risks, although  it may                                                               
be at lower cost return.                                                                                                        
7:24:06 PM                                                                                                                    
REPRESENTATIVE RAMRAS inquired  as to the impact  of changing the                                                               
tax policy with such frequency.                                                                                                 
DR.  FINIZZA noted  that he  has reviewed  two recent  reports on                                                               
fiscal stability, the  PFC report and the  Wood Mackenzie report.                                                               
He related his belief that the  PFC report is correct in that the                                                               
fiscal stability in  Alaska is much closer to  a neutral position                                                               
rather than an extreme change.   Dr. Finizza said that personally                                                               
he  didn't  believe  one  should   view  Alaska  as  an  unstable                                                               
environment.    Furthermore, he  opined  that  he didn't  believe                                                               
producers would leave because of this proposed tax change.                                                                      
7:26:28 PM                                                                                                                    
SENATOR  STEDMAN asked  if  anything,  short of  nationalization,                                                               
could be done to completely drive  out the producers from a basin                                                               
that's 20-30 years old and on the magnitude of Kuparuk.                                                                         
DR. FINIZZA  said that  he has  no opinion  on that,  adding that                                                               
every change has  the potential to be followed  by other changes.                                                               
However, he didn't believe it's at that situation.                                                                              
SENATOR STEDMAN  related his understanding  that the risk  is not                                                               
the industry  leaving the oil  basin, but rather  not reinvesting                                                               
to help slow the decline.                                                                                                       
DR. FINIZZA replied yes.                                                                                                        
7:27:57 PM                                                                                                                    
REPRESENTATIVE  SAMUELS asked  if Dr.  Finizza does  modeling for                                                               
Alaska  for the  economy as  a  whole.   He asked  if the  models                                                               
review  how the  spending  circulates around  the  economy.   For                                                               
example, if the state raises the  tax to 40, the investment dries                                                               
up and  declines to 15  percent.  He  inquired as to  whether any                                                               
models review  the impact of  the aforementioned scenario  on the                                                               
private sector.                                                                                                                 
DR. FINIZZA  replied that  although such  hasn't been  done, it's                                                               
possible.   In the  example cited,  there would  be an  issue and                                                               
modeling should be performed.                                                                                                   
REPRESENTATIVE   SAMUELS  acknowledged   that  his   example  was                                                               
extreme,  but  highlighted that  Alaska's  economy  is small  and                                                               
susceptible  to  a  [slight  deviation]   from  oil  and  federal                                                               
government funds.                                                                                                               
DR. FINIZZA  said that  there are  economic consultants  who have                                                               
done  regional  impact  models with  input/output  analysis,  and                                                               
there's likely one for Alaska.                                                                                                  
7:30:04 PM                                                                                                                    
COMMISSIONER GALVIN  turned the discussion to  what ACES provides                                                               
as value  for explorers.   As  discussed earlier,  ACES primarily                                                               
provides cash  for credits earned  by explorers and  is exercised                                                               
through a  tax credit  fund that would  fund the  credit payments                                                               
from the  state.  Another  value is the ability  to carry-forward                                                               
value of investment at the full  tax rate.  He requested that Mr.                                                               
Ruggiero comment on isolating Alaska  as a place for new entrants                                                               
in comparison to the rest of the world.                                                                                         
7:32:14 PM                                                                                                                    
MR. RUGGIERO began by addressing  the attractiveness of Alaska or                                                               
any  regime  relative  to  any  other regime.    As  Dr.  Finizza                                                               
mentioned,  [companies]  look at  the  NPV  or internal  rate  of                                                               
return  (IRR) that  can  be made  as well  as  whether there  are                                                               
barriers to  entry for new  entrants as opposed to  an incumbent.                                                               
He then  recalled an earlier  question regarding  the expectation                                                               
on the  time to recover  an initial investment.   In much  of the                                                               
development of  oil fields it's not  uncommon for it to  take 3-6                                                               
years  to receive  the return  on the  capital expenditure.   For                                                               
gas, the return  on investment can be 5-9 years  as gas generally                                                               
has  a lot  of infrastructure.    The question  becomes where  [a                                                               
particular  project] stands  in  relation to  other countries  or                                                               
other regimes.  Under the  production sharing contract (PSC), the                                                               
recovery  of  costs is  commonly  known  as  "cost oil"  and  the                                                               
attractiveness  of  regimes  is  based on  how  quickly  one  can                                                               
recover  the  costs through  cost  oil.    He related  that  some                                                               
regimes place  no annual cap on  the ability to recover  and thus                                                               
every dollar received, as soon  as production occurs, goes to the                                                               
oil company's  account to repay  it for  the capital it  spent to                                                               
develop  the project  as  well as  for  current operating  costs.                                                               
However, in other  regimes there may be a cap  with regard to the                                                               
amount of  revenue each year  that can  be used against  the cost                                                               
oil account,  with the  remainder going to  profit oil  and split                                                               
with the  government.   Therefore, the  result is  that countries                                                               
will tweak various aspects to  make their system look better than                                                               
others, such  as with the uplift  and the share of  first tranche                                                               
petroleum, royalty.  In tax  and royalty regimes, the recovery is                                                               
basically  the  corporate  code   for  depreciation,  which  also                                                               
7:37:23 PM                                                                                                                    
MR.  RUGGIERO  highlighted  another  key impact  with  regard  to                                                               
attractiveness.   He  related that  a situation  in Trinidad  and                                                               
Tobago  when   then-Amoco  was  able  to   advance  [development]                                                               
relative to its  competitors in the country.  At  that time Amoco                                                               
was "Ring Fenced" in the country  and thus all the exploration to                                                               
find more gas and any  associated costs could be deducted against                                                               
current income  because the company  had other  active operations                                                               
in the area.   Basically, Amoco was able to write  off as soon as                                                               
there was an  expenditure and thus reap the tax  benefit.  Others                                                               
who were competing to place gas  in the train were part of single                                                               
field,  single-blocked ring  fenced  PSCs.   Therefore,  anything                                                               
those companies spent on exploration  had to wait until the field                                                               
was developed, put  on production, and had  revenue against which                                                               
it could be  deducted, which may mean 7-11  years of expenditures                                                               
before it  could be written off.   Therefore, the type  of factor                                                               
as well as the timing is a factor.                                                                                              
MR. RUGGIERO turned  to the question of how  important the timing                                                               
is  to  the decision-making  of  an  oil  company.   He  posed  a                                                               
scenario in which  in year zero an entity invests  20 and for the                                                               
next 10  years that entity  has an income of  10, for a  total of                                                               
100.   The entity splits that  income such that the  oil company,                                                               
contractor,  receives 32  and the  state receives  68.   He noted                                                               
that  the aforementioned  scenario  is a  10  percent IRR,  which                                                               
means that the NPV  10 is at zero, the break even point.   On a 5                                                               
percent discounting, the  state's NPV is 52.  At  this point, the                                                               
entity only has to tweak it a  bit, such as by allowing more cost                                                               
recovery early on, and suddenly  with the state still receiving a                                                               
total of 68 over 10 years  and the oil companies still getting 32                                                               
units  of cash  flow, it  becomes a  14 percent  IRR and  the NPV                                                               
becomes positive.   He noted that the state's  NPV would decrease                                                               
with  the  lower  discounting,  but   not  as  much  as  the  oil                                                               
companies'  NPV  increased.    At  this  point,  one  can  become                                                               
generous and  give credits  or 100  percent of  cash flow  in the                                                               
early  years  can  go  toward  recovery  of  the  20  investment.                                                               
Therefore, a little  up-front incentive creates a  19 percent IRR                                                               
while the  state's NPV 5  didn't drop much.   In the  extreme, if                                                               
the oil company  was to receive all 32 of  its units up-front and                                                               
the state  receives its  68 units  on the  backside, a  very good                                                               
project in  terms of  IRR and  NPV has been  created for  the oil                                                               
company.   Mr. Ruggiero said that  the way in which  a company is                                                               
allowed to  recover its investments  has a significant  impact in                                                               
the economics  and, from his  experience, on  decisions regarding                                                               
where to invest.                                                                                                                
7:42:01 PM                                                                                                                    
MR.  RUGGIERO  then  turned  to  the  question  of  the  relative                                                               
attractiveness of the  credit system on a worldwide  basis.  From                                                               
his perspective,  [Alaska's] credit system compares  favorably on                                                               
an international  basis.   Furthermore, it's done  in such  a way                                                               
that the  state and  the federal  government actually  become the                                                               
majority  investor in  exploration that  takes place.   Moreover,                                                               
the credit  system quite significantly  levels the  playing field                                                               
between a  new entrant and  an existing  player.  In  Alaska, the                                                               
ability to  obtain the  credits and  the ability  to take  a loss                                                               
forward and  turn into  another credit means  that a  company can                                                               
obtain  a  return  of  the  majority  of  the  investment  rather                                                               
quickly.  After taking into  account what can be deducted against                                                               
state  income  and  federal  income  and what  can  be  taken  as                                                               
credits, the net contractor share  of a new investment, depending                                                               
upon the rules  related to previous units and  existing wells, is                                                               
$.21  to $.36  on  the  dollar.   The  combination  of the  state                                                               
through  the credits  and the  federal government  through income                                                               
tax  deduction of  the  expenditure result  in  the two  together                                                               
paying 64-79  percent of the  investment.  The  aforementioned is                                                               
very  favorable on  a world  scale,  he emphasized,  as very  few                                                               
countries  allow  the  write  off of  credits  or  deductions  so                                                               
7:44:53 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if the system can  be structured with                                                               
the  credits up-front  in  order to  sustain  government at  it's                                                               
current [budget] plus 3-4 percent inflation and make it to 2020.                                                                
COMMISSIONER GALVIN  explained that  the purpose of  the analysis                                                               
thus far  has been  to identify  the investment  opportunity that                                                               
exists in  Alaska and to ensure  that the tax system  provides as                                                               
good  an  opportunity  to participate  in  those  investments  as                                                               
possible,  with  the  market  driving   the  rest.    He  further                                                               
explained that  the credit  program is  being utilized  to entice                                                               
new entrants and  attract new investment.  The is  goal to strike                                                               
a   balance  that   provides  maximum   opportunity  to   attract                                                               
7:47:24 PM                                                                                                                    
REPRESENTATIVE SAMUELS  related his  impression that many  of the                                                               
true  exploratory credits  aren't taken  advantage of.   He  then                                                               
asked  if some  of the  credit systems  Alaska offers  is in  the                                                               
7:48:37 PM                                                                                                                    
KEVIN BANKS, Acting  Director, Division of Oil  & Gas, Department                                                               
of Natural  Resources, informed the committees  that the division                                                               
is   receiving  paperwork   from   DOR  to   validate  the   data                                                               
requirements  and  the  targets   for  which  credits  are  being                                                               
applied.   Therefore, he  said he knows  that credits  are coming                                                               
and thus  are being used.   However, he said that  he didn't know                                                               
how much money  the state has paid out for  the credits that have                                                               
come in to this point.                                                                                                          
7:49:29 PM                                                                                                                    
REPRESENTATIVE SAMUELS  inquired as to the  percentage of credits                                                               
used  in Prudhoe  Bay,  Kuparuk,  and Alpine  as  opposed to  the                                                               
credits  used  in  the  outlying  areas  in  the  NPR-A  and  the                                                               
COMMISSIONER GALVIN highlighted that  it's important to recognize                                                               
that  the  20 percent  credit  is  equivalent  to the  basic  PPT                                                               
credit.    Therefore, the  analysis  specifying  [that the  state                                                               
pays] 64-79 percent  represents the value of  an in-field credit;                                                               
the  amount of  credit being  provided to  the existing  entities                                                               
drilling within the existing areas.                                                                                             
REPRESENTATIVE  SAMUELS inquired  as to  whether anyone  is doing                                                               
wildcat exploration.                                                                                                            
MR. BANKS replied yes.                                                                                                          
7:50:57 PM                                                                                                                    
CHAIR HUGGINS recalled that the  conversation of amending the PPT                                                               
began because the costs were  much higher than thought.  However,                                                               
now the discussion is how  attractive and beneficial this will be                                                               
to both  the state and the  industry.  He related  his assumption                                                               
that  some  of  the  more  generous  aspects  of  PPT  are  being                                                               
withdrawn,  such  as  the  claw  back.    He  then  requested  an                                                               
explanation of the  reasoning behind the expansion from  12 to 24                                                               
months for the cost expenditure recovery.                                                                                       
COMMISSIONER  GALVIN said  that for  new entrants  and explorers,                                                               
[ACES] would  be what  it [has  to deal  with] whereas  a company                                                               
that is in the process of  entering will experience a lower value                                                               
in the move  from the existing PPT to ACES.   Commissioner Galvin                                                               
said that  with regard to the  new entrants, the focus  is on net                                                               
positives while for existing players it  would be viewed as a net                                                               
negative.    Those   in  between  will  be   dependent  upon  the                                                               
individual company.                                                                                                             
7:54:54 PM                                                                                                                    
CHAIR  HUGGINS posed  a scenario  in which  a company  drills two                                                               
holes,  which are  dry  and  thus the  company  leaves within  18                                                               
months.  In  such a scenario would the company  lose anything, as                                                               
far as  cost recovery for  the investment, by departing  from the                                                               
state, under ACES.                                                                                                              
COMMISSIONER  GALVIN  answered  that the  aforementioned  company                                                               
would  receive more  money back  from the  state under  ACES than                                                               
under the existing PPT.                                                                                                         
7:56:16 PM                                                                                                                    
SENATOR  STEDMAN pointed  out that  there isn't  any data  on the                                                               
markets of these  credits, and therefore it's  difficult to place                                                               
a dollar value on it.                                                                                                           
COMMISSIONER  GALVIN said,  "Let's assume  $.96 and  the question                                                               
becomes if  it's $.96, is it  worthwhile to the state  to require                                                               
an explorer to earn a $1 credit  and get $.96 for it and existing                                                               
taxpayer to get $.04  and the state to be out a  $1 as opposed to                                                               
the state giving the explorer the full $1."                                                                                     
SENATOR  STEDMAN said  he understands  the state  will be  out $1                                                               
either way.  Senator Stedman  characterized the 20 percent credit                                                               
as huge and one  that will light the gas basin  on fire and cause                                                               
the  need to  return in  a  few years  to  ratchet it  back.   He                                                               
inquired as  to where in  the global  oil basins are  there 20-40                                                               
percent credits.   "Isn't  this 20  percent credit  an aggressive                                                               
credit and an  aggressive economic stimulus for  that oil basin,"                                                               
he asked.                                                                                                                       
COMMISSIONER GALVIN  replied yes.   However,  with regard  to the                                                               
nature  of the  transferability  of the  credit  the question  is                                                               
whether  the  state  is  offering  equal  value  whether  its  an                                                               
incumbent  or  a  new  explorer.    By  having  that  barrier  to                                                               
obtaining  full value  to the  explorer,  the incumbent  receives                                                               
full value plus the opportunity for a windfall.                                                                                 
SENATOR STEDMAN emphasized  that the state should be  able to see                                                               
what kind  of market  is actually there.   Some  historic trading                                                               
activity should be  available prior to modifying  this policy, he                                                               
COMMISSIONER GALVIN  remarked, "Well, I guess  the question would                                                               
be  if the  answer  was $.98  or  $.68  is there  going  to be  a                                                               
different answer."                                                                                                              
SENATOR  STEDMAN related  his  belief that  the  less liquid  the                                                               
credit, the wider  the discount because at some  point there will                                                               
be competition between the harvesters  to dilute their taxes.  He                                                               
recalled earlier  indications that  once HB 2001  was introduced,                                                               
the market  became more  liquid.   Is that  the case  within this                                                               
market, he asked.                                                                                                               
COMMISSIONER GALVIN said  that the identification of a  lack of a                                                               
market  was merely  a recognition  that the  situation was  worse                                                               
than expected.  Even if [the  credits] are being sold in a liquid                                                               
market,  they will  be sold  at a  discount.   The aforementioned                                                               
results  in a  policy question  for the  state regarding  whether                                                               
it's  an   appropriate  inequality   between  new   entrants  and                                                               
SENATOR STEDMAN  interjected that the aforementioned  was settled                                                               
under PPT and can be settled again.                                                                                             
8:00:30 PM                                                                                                                    
REPRESENTATIVE  DOOGAN  turned  to   the  earned  credits  of  20                                                               
percent, up  to 40  percent of qualifying  expenses and  asked if                                                               
that's under PPT or ACES.                                                                                                       
COMMISSIONER  GALVIN said  that it's  under both.   He  mentioned                                                               
that would be addressed in the next presentation.                                                                               
REPRESENTATIVE DOOGAN related his  understanding that the farther                                                               
out  one is  drilling,  the  larger the  credit.   Therefore,  an                                                               
independent explorer far  from the oil fields of  the North Slope                                                               
can get up to  79 percent of its costs paid for  by the state and                                                               
federal  government.   He inquired  as to  what part  of that  79                                                               
percent is from the federal government.                                                                                         
COMMISSIONER GALVIN  estimated that about  15 percent of  that 79                                                               
percent is from the federal government.                                                                                         
REPRESENTATIVE  DOOGAN surmised  then  that the  state is  paying                                                               
$.64 on the  dollar for the riskiest investment that  can be made                                                               
in the oil and gas industry in the state, under these credits.                                                                  
COMMISSIONER GALVIN noted his agreement.                                                                                        
8:02:26 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  recalled  that   when  PPT  passed,  the                                                               
largest loser  was ConocoPhillips Alaska, Inc.  because its large                                                               
field, Kuparuk,  had a  zero tax while  the second  largest loser                                                               
was the federal government, followed  by BP and ExxonMobil.  With                                                               
regard  to buying  the credits,  he recalled  that there  was the                                                               
desire to  ensure to  cap the  amount the  state could  buy until                                                               
2011  because of  the concern  with regard  to cash  flow to  the                                                               
state.  He asked if taking the cap off is of concern under ACES.                                                                
COMMISSIONER GALVIN explained that under  ACES there is a vehicle                                                               
to  provide  the  funding.    He said  that  the  issue  is  cash                                                               
management, in terms of whether the  state has the money with the                                                               
authorization  to  make the  payments.    The administration  has                                                               
recognized  that  it's  a  management   issue  in  terms  of  the                                                               
appropriation  process  and  thus   has  been  addressed  by  the                                                               
establishment of  that credit fund.   Currently, there is  a mini                                                               
version  of the  same  issue because  the  administration has  to                                                               
anticipate from  one year  to the next,  without that  fund, what                                                               
authorization  will be  requested  looking  a year-and-a-half  in                                                               
advance  to obtain  the  authorization to  pay  off the  credits.                                                               
Having the  fund in place  provides a buffer  in order to  have a                                                               
minimal affect.                                                                                                                 
The committees took an at-ease from 8:06:21 PM to 8:07:03 PM.                                                               
8:07:04 PM                                                                                                                    
MR.  BANKS  directed  attention to  his  PowerPoint  presentation                                                               
titled "Alternative Tax Credits for  Oil and Gas Exploration ACES                                                               
Amendments  to  AS  43.55.025".     He  noted  that  he  will  be                                                               
discussing credits that  were established prior to PPT.   He said                                                               
that  he  sometimes  thinks  of   these  credits  as  exploration                                                               
incentive credits (EICs) while others  refer to them as the 20:40                                                               
credits because  of the fact that  on some wells one  can receive                                                               
as much  as a 40 percent  credit, which is determined  by how far                                                               
away the  site is from existing  units.  In the  amendment [to AS                                                               
43.55.025]  a time  dimension would  be  added to  the number  of                                                               
wells for  which a credit could  be received from 50  days to 540                                                               
days.   The aforementioned provides  an explorer  the opportunity                                                               
to  work a  similar prospect  over  two drilling  seasons on  the                                                               
North  Slope.     There  is  also  a   definition  for  targeting                                                               
distinctly  separate targets,  which  means that  in addition  to                                                               
being 3  miles from an  existing well the same  horizon shouldn't                                                               
be penetrated.  In  spite of the fact that these  are some of the                                                               
riskiest  investments on  the North  Slope, the  state should  be                                                               
able to be  sure that new opportunities are being  targeted.  The                                                               
40 percent credit is allowed on  wells drilled more than 25 miles                                                               
from an existing  unit in the North Slope and  more than 10 miles                                                               
from an  existing unit in the  Cook Inlet.  He  then reminded the                                                               
committees  that under  the existing  law there  is a  40 percent                                                               
credit for  seismic surveys and  ACES adds  a new credit  for old                                                               
seismic  data, data  collected prior  to 2003.   This  new credit                                                               
provides  the state  the opportunity  to purchase  old data.   He                                                               
noted that  the commissioner of  DNR has to make  a determination                                                               
that the  data is of  appropriate quality,  is for a  location in                                                               
which  the  state is  interested,  and  is  in a  readily  usable                                                               
8:10:54 PM                                                                                                                    
REPRESENTATIVE SAMUELS  asked if  Point Thomson is  considered an                                                               
existing unit.                                                                                                                  
MR. BANKS answered  that Point Thomson is  considered an existing                                                               
unit as it is under PPT.                                                                                                        
8:11:18 PM                                                                                                                    
REPRESENTATIVE DOOGAN asked  if the reference to  within 25 miles                                                               
refers only to onshore units.                                                                                                   
MR. BANKS  said that  it would  only be  within state  waters and                                                               
8:11:34 PM                                                                                                                    
MR.  BANKS, in  response to  Representative Samuels,  related his                                                               
understanding that  the federal  government doesn't  have similar                                                               
credit  provisions   for  offshore   units.    He   reminded  the                                                               
committees that  in the  Gulf of  Mexico the  minerals management                                                               
offers a royalty holiday on  the first several million barrels of                                                               
oil produced.   There is  no pre-production  exploration offered.                                                               
The  state  can offer  royalty  relief,  which offers  a  similar                                                               
effect,  but  it's  only  the  success leg  that  the  relief  is                                                               
offered.    Therefore,  when it's  factored  into  an  explorer's                                                               
economics,  they are  discounting  the value  of  that credit  or                                                               
lower royalty on  a basis of the percentage of  its success.  The                                                               
royalty discount doesn't  have as much "horse power"  as a credit                                                               
awarded up-front.                                                                                                               
8:13:19 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked if  the  5  percent credit  for  old                                                               
seismic surveys is mandatory.                                                                                                   
MR. BANKS  said he interpreted  to be  left to the  discretion of                                                               
the  applicant to  sell  the  old seismic  surveys.   In  further                                                               
response  to  Senator Wielechowski,  Mr.  Banks  stated that  the                                                               
commissioner of DNR wouldn't purchase bad seismic data.                                                                         
8:14:11 PM                                                                                                                    
CHAIR HUGGINS asked if HB  2001 comprehensively covers the entire                                                               
MR.  BANKS replied  yes, noting  that there  are provisions  that                                                               
apply outside of the North Slope and into the Cook Inlet.                                                                       
8:15:09 PM                                                                                                                    
MR.  BANKS  returned  to  his  presentation.    He  informed  the                                                               
committees  that ACES  requires preapproval  of exploration  well                                                               
plans or seismic survey plans,  and therefore there is a judgment                                                               
up-front so that  an applicant doesn't have to  worry about being                                                               
turned  down after  drilling due  to a  misinterpretation of  the                                                               
statute or regulations.  Furthermore,  it protects the state from                                                               
being  obliged  to  pay  a  credit  on  a  prospect  that  wasn't                                                               
appropriately  drilled.     Mr.  Banks,  referring   to  slide  4                                                               
"Information  Requirements", noted  that many  of the  changes to                                                               
[AS 43.55.025]  have to do with  what the state receives  in turn                                                               
for its investment  in exploration.  To  date, the aforementioned                                                               
has  been  relatively limited.    The  state, he  opined,  should                                                               
strive to  acquire the information  and provide it to  others, if                                                               
the  state  so desires.    More  information would,  in  general,                                                               
enhance the value of the state's  prospects and be of interest to                                                               
potential  explorers.   Therefore, rules  will be  established so                                                               
that the  state obtains core  information, acquires  test fluids,                                                               
and obtains  seismic data.   Normally,  DNR receives  seismic and                                                               
well information  on all  wells drilled in  the state.   However,                                                               
the well information is made public after two years.                                                                            
8:20:38 PM                                                                                                                    
REPRESENTATIVE SAMUELS  posed a scenario  in which DNR acts  as a                                                               
commercial  agent  and sells  royalty-in-kind  (RIK)  oil in  the                                                               
marketplace.  In  such a situation, the  department having access                                                               
to  tax information  may  be  construed as  an  advantage in  the                                                               
marketplace over those who are now the commercial competitors.                                                                  
MR. BANKS pointed out that  there are differences in the missions                                                               
of DOR and DNR that impact the  cultures.  When DNR was given the                                                               
ability to  audit its  own royalties,  it changed  DNR's culture.                                                               
He explained  that if  DNR acquires  any taxpayer  information in                                                               
the pursuit  of an audit  in a royalty  case, DNR faces  the same                                                               
criminal penalties  as DOR if  that information is revealed.   He                                                               
then  turned  to the  issue  of  whether  the state  receives  an                                                               
advantage  when selling  RIK  gas  or oil  because  of access  to                                                               
taxpayer information.  Now that  DNR audits its own royalties and                                                               
because of  the provisions of  several of the  royalty settlement                                                               
agreements, DNR  does receive contract information  about oil and                                                               
gas sales from the lessees.   He pointed out that the information                                                               
is received  after it  has already  happened in  the marketplace.                                                               
He  further pointed  out that  DNR enters  this commercial  space                                                               
very rarely.  In fact, the  last time DNR engaged in RIK activity                                                               
was when  DNR sold oil to  Flint Hills for a  10-year contract in                                                               
2004.   Mr.  Banks  opined that  it's not  an  issue because  the                                                               
department  so seldom  participates in  that marketplace  and the                                                               
information DNR has is of  relatively limited valuable.  He added                                                               
that since 1984  [DNR] has only sold oil  to in-state refineries.                                                               
Furthermore, the last  time DNR sold oil to an  entity that would                                                               
export it  to the Lower 48  was done in a  bidding process, which                                                               
resulted in  fairly transparent  pricing.   Mr. Banks  noted that                                                               
when  DNR sells  in-state,  it takes  into  account the  economic                                                               
benefits beyond royalty revenues.                                                                                               
8:25:13 PM                                                                                                                    
REPRESENTATIVE  RAMRAS recalled  a conversation  with Jeff  Cook,                                                               
Flint  Hills, who  related that  Flint Hills  is nervous  that if                                                               
there  continues to  be a  decline in  oil production,  the state                                                               
will have difficulty  selling an adequate amount of  oil to Flint                                                               
Hills and Alyeska  Pipeline Service Company may opt  to batch oil                                                               
through TAPS  every 2-3  days.   He highlighted  the risk  to the                                                               
economy as there are 450 direct  jobs in the Fairbanks North Star                                                               
Borough  and the  proximity  of a  refinery  to Eielson  Airforce                                                               
Base.   He requested comment  about the issues  surrounding Flint                                                               
Hills and the result of declining production of TAPS.                                                                           
MR.  BANKS specified  that currently,  the  contract obliges  the                                                               
state to  deliver between 56,000  and 77,000  barrels a day.   If                                                               
the state fails  to meet that, Flint Hills takes  the risk.  When                                                               
the pipeline went  down last August, it was  a fairly significant                                                               
risk for  Flint Hills and DNR  scrambled to obtain more  oil from                                                               
other  units in  order to  supply  the refinery.   The  producers                                                               
cooperated by  excusing some  of the  notice requirements.   It's                                                               
possible  that  in the  future,  before  the expiration  of  this                                                               
contract  in  2014,  the  state  may not  be  able  to  meet  the                                                               
aforementioned requirements.                                                                                                    
REPRESENTATIVE RAMRAS related that  Flint Hills is concerned that                                                               
there could  be a  situation placing  them at  risk in  about 3-4                                                               
years.   With regard to the  different regions in the  state that                                                               
are vulnerable,  Representative Ramras  emphasized the  impact to                                                               
Fairbanks in  terms of jobs and  adding a risk factor  to Eielson                                                               
Air Force Base.  He then expressed the need for stability.                                                                      
8:30:18 PM                                                                                                                    
MR. BANKS returned to his  presentation and directed attention to                                                               
slide 5  titled "Timing Requirements".   Currently, it's possible                                                               
to receive a  credit for a well that's suspended  or in some sort                                                               
of  operational  shutdown.   [Under  ACES],  the credit  will  be                                                               
limited  to ensure  that the  wells are  completed or  abandoned.                                                               
Currently, wells  are kept confidential  for 24 months  and after                                                               
30-day  notice  the   information  can  be  made   public.    The                                                               
aforementioned  may  be  extended  by  permission  from  the  DNR                                                               
commissioner  if  there  is  land  near  the  well  that  remains                                                               
unleased.   He  noted that  it applies  to the  state as  well as                                                               
private and  federal land within the  state.  Under ACES,  if one                                                               
applies  for a  credit  that  potential extended  confidentiality                                                               
isn't received.   Similarly, seismic  surveys aren't  governed by                                                               
any limits to confidentiality.   He explained that the state only                                                               
acquires  seismic surveys  if  they were  shot  over state  land.                                                               
However,  under  ACES all  seismic  information,  no matter  from                                                               
where, would  be given  to DNR and  the confidentiality  would be                                                               
offered  for 10  years.   Under  the [AS  43.55.025] credits  the                                                               
applicant was  required to give  information to the  state within                                                               
30 days,  which is changed  to six months  under ACES.   When the                                                               
data is remitted the state offers the credit certificate.                                                                       
8:33:17 PM                                                                                                                    
MR.  BANKS referred  to a  map titled  "North Slope  Oil and  Gas                                                               
Activity 2006-2007".   He  directed attention  to the  cluster of                                                               
reddish wells  in the  center of the  map, which  represent wells                                                               
permitted by Chevron  in its White Hills prospect.   He said that                                                               
Chevron  probably won't  drill all  of those  wells and  would be                                                               
lucky  to drill  half  of them  in the  time  during which  their                                                               
permits  apply.   Focusing on  activities  in the  last year,  he                                                               
highlighted Cronus, Noatak,  and wells drilled by  Fedex (ph) and                                                               
PetroCanada not on the  map that are deep in the  NPR-A.  He then                                                               
turned attention to the Colville  River area where ConocoPhillips                                                               
has drilled exploration wells within  that unit.  He continued to                                                               
review the various wells and the  stages in which they are at the                                                               
moment.  With regard to an  earlier question, Mr. Banks said that                                                               
there  has  been  a  fair  amount  of  drilling  and  exploration                                                               
8:39:07 PM                                                                                                                    
REPRESENTATIVE  NEUMAN  highlighted  that Chevron's  White  Hills                                                               
wells are  away from developed  infrastructure.  He asked  if the                                                               
PPT credits could account for  the increase in activity away from                                                               
known infrastructure.                                                                                                           
MR. BANKS  said that he  doesn't know  because he said  he didn't                                                               
know how long ago those wells were planned.                                                                                     
8:40:41 PM                                                                                                                    
REPRESENTATIVE NEUMAN  expressed the  hope to  see more  [of such                                                               
development away  from existing infrastructure] in  the future as                                                               
it will spread  the infrastructure and make it  more feasible for                                                               
more wells to be drilled.                                                                                                       
MR. BANKS  pointed out  that in  the lower  left area  the shaded                                                               
areas  illustrate  gas  accumulations that  Anadarko  intends  to                                                               
drill.    Therefore, in  addition to  credits, gas is  becoming a                                                               
more likely  possibility for development  on the North  Slope, he                                                               
8:42:06 PM                                                                                                                    
SENATOR WAGONER inquired  as to the percentage of  liquids in the                                                               
Anadarko leases as they were drilled in the past.                                                                               
MR.  BANKS said  that if  that information  is available  and not                                                               
under  confidentiality restrictions,  he will  provide it  to the                                                               
8:42:43 PM                                                                                                                    
CHAIR HUGGINS,  referring to the distribution  of exploration and                                                               
potential  production, said  that  it looks  like  there will  be                                                               
quite the spider web of infrastructure for delivery to market.                                                                  
MR. BANKS  said that  the White  Hills prospect  is one  in which                                                               
folks have  known about for some  time and it hasn't  been proved                                                               
CHAIR  HUGGINS opined  that  it  will take  money  and people  to                                                               
develop  these wells  located far  from the  infrastructure.   He                                                               
inquired  as to  the  timeframe of  permitting and  construction,                                                               
assuming  that  there  is  success  in 90  percent  of  what  was                                                               
described on the map.                                                                                                           
MR. BANKS  said that probably  the fastest development  in recent                                                               
years is the  Oooguruk project, followed closely  by the Colville                                                               
River Alpine  prospect.  Those came  online in a matter  of seven                                                               
years or less.  Those  two represent an unusual situation because                                                               
they were located relatively  outside of existing infrastructure.                                                               
For prospects like  those of White Hills, it  will obviously take                                                               
CHAIR  HUGGINS clarified  that his  point  is that  it will  take                                                               
time, money, as  well as permitting.  He then  commented that the                                                               
number of jobs involved for Alaskans is dramatic.                                                                               
8:45:50 PM                                                                                                                    
SENATOR STEVENS  asked if  it's true  that as  one moves  west to                                                               
east there's less gas and more oil.                                                                                             
MR. BANKS said  that he wouldn't make that  generality.  However,                                                               
north to  south one finds more  of the gas prone  options because                                                               
the geology of  the foothills represent something  similar to the                                                               
American Rockies where much gas is found.                                                                                       
The committees took a brief at-ease.                                                                                            
8:47:20 PM                                                                                                                    
CHAIR OLSON announced that the sectional analysis will be heard                                                                 
in separate committees.                                                                                                         
[HB 2001 was held over.]                                                                                                      

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