Legislature(2013 - 2014)BARNES 124

02/13/2013 01:00 PM House RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 7:50 pm for HB 72 --
+= HB 72 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Presentation by Econ One
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 4 IN-STATE GASLINE DEVELOPMENT CORP TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Continued Presentation by Bill Sponsor
** Meeting will Recess at 3:00 pm and will
Reconvene at 3:30 pm for HB 4 Presentation **
                HB  72-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
1:04:06 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE announced  that  the first  order  of business  is                                                              
HOUSE BILL NO.  72, "An Act relating to appropriations  from taxes                                                              
paid under  the Alaska  Net Income  Tax Act;  relating to  the oil                                                              
and gas production  tax rate; relating  to gas used in  the state;                                                              
relating  to  monthly installment  payments  of  the oil  and  gas                                                              
production  tax; relating to  oil and  gas production tax  credits                                                              
for  certain losses  and  expenditures; relating  to  oil and  gas                                                              
production  tax credit certificates;  relating to  nontransferable                                                              
tax credits based  on production; relating to the oil  and gas tax                                                              
credit  fund;  relating  to annual  statements  by  producers  and                                                              
explorers;  relating to the  determination of  annual oil  and gas                                                              
production   tax  values   including   adjustments   based  on   a                                                              
percentage  of  gross  value  at  the  point  of  production  from                                                              
certain leases  or properties;  making conforming amendments;  and                                                              
providing for an effective date."                                                                                               
                                                                                                                                
Co-Chair  Feige  noted  today  would  be  a  continuation  of  the                                                              
administration's presentation from February 11, 2013.                                                                           
                                                                                                                                
1:04:22 PM                                                                                                                    
                                                                                                                                
MICHAEL PAWLOWSKI,  Oil & Gas Development Project  Manager, Office                                                              
of  the Commissioner,  Department of  Revenue (DOR),  noted he  is                                                              
the  advisor for  petroleum fiscal  systems to  the Department  of                                                              
Revenue.   He reminded  members that  during the committee's  last                                                              
meeting he  provided a PowerPoint  review of the  broad provisions                                                              
of  HB  72 and  where  those  are  located within  the  bill,  the                                                              
elimination of progressivity,  the elimination of  the North Slope                                                              
qualified capital  expenditure (QCE) credits, and  the North Slope                                                              
net operating  loss credits.   Continuing  that presentation  with                                                              
slide  5,  he turned  to  the  provision  for small  producer  tax                                                              
credits contained  in Section  16 of the  bill, page 16,  line 26.                                                              
The small  producer  tax credit is  in current  statute, he  said,                                                              
and is  a credit consistent  with the  treatment of other  credits                                                              
in the  North Slope  in the governor's  proposal in  that it  is a                                                              
nontransferable credit  that may only be taken  against production                                                              
taxes.   The current small  producer tax  credit is set  to expire                                                              
in 2016 for new  production, which means new production  under the                                                              
current  law would have  to come  into production  before 2016  to                                                              
qualify for  the credit.   Page  16, line  29, proposes  to change                                                              
the date to  2022.  Thus, HB  72 would maintain the  current small                                                              
producer tax credit,  but allows production to come  on line up to                                                              
2022 to qualify for the purposes of the credit.                                                                                 
                                                                                                                                
1:06:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired whether  there is any  interaction                                                              
between the small  producer tax credit extension  and the changing                                                              
of when the credits can be applied for and received.                                                                            
                                                                                                                                
MR.  PAWLOWSKI replied  the interaction  between  the two  credits                                                              
will be  discussed later  by Mr.  Pulliam [of  Econ One  Research,                                                              
Inc.] when  he reviews the lifecycle  economics of projects.   The                                                              
small producer credit  is for the first nine years  of production.                                                              
The carry  forward credit is  for 10 years.   They are  similar in                                                              
length, but there is not a direct nexus between the two.                                                                        
                                                                                                                                
1:07:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  said he  is  interested  not only  in  the                                                              
aforementioned,  but also what  classifies as  new oil.   He asked                                                              
whether  there is a  different definition  of  new oil that  would                                                              
qualify  for  the  small  producer tax  credit  than  the  current                                                              
definition.   He further asked whether  there is a change  in that                                                              
interaction that  changes the applicability of the  small producer                                                              
tax  credit;  for example,  would  some  of  the current  new  oil                                                              
production  that  qualifies  for  small  producer  tax  credit  be                                                              
eliminated by restrictions on where the oil comes from.                                                                         
                                                                                                                                
MR.  PAWLOWSKI  responded  a deeper  conversation  may  be  needed                                                              
about  the  nuances  of  the  relationship  between  the  specific                                                              
projects being  talked about  by Representative  Seaton.   He said                                                              
the small  producer credit is for  any producer that did  not have                                                              
commercial oil or  gas production from a lease or  property in the                                                              
state before  April 1, 2006.   So, that  is new production  coming                                                              
on  line  for  purposes  of  this  small  producer  credit.    The                                                              
provisions  in the  governor's bill  that  relate to  new oil  are                                                              
specifically   the   gross   revenue   exclusion,   which   Deputy                                                              
Commissioner  Balash  will  speak  to later.    A  producer  would                                                              
certainly qualify  for a small producer  tax credit and  the gross                                                              
revenue exclusion  depending on where  that production  came from.                                                              
So, stepping  forward,  it would  have to be  a new  participating                                                              
area or  unit formed after  2003 to qualify.   There is  no taking                                                              
away  of  the  credit, it  is  just  extending  the  qualification                                                              
period.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  SEATON requested  a  flowchart  that explains  how                                                              
the different credits  interact to show whether one  aspect of the                                                              
bill impacts another.                                                                                                           
                                                                                                                                
1:09:49 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI,  returning to his  sectional analysis,  stated that                                                              
Section 24 is the  main section of the bill for  the gross revenue                                                              
exclusion (GRE)  provision [slide 6].   He turned  over discussion                                                              
of this section to Deputy Commissioner Joe Balash.                                                                              
                                                                                                                                
1:10:09 PM                                                                                                                    
                                                                                                                                
JOE  BALASH,  Deputy Commissioner,  Office  of  the  Commissioner,                                                              
Department  of Natural  Resources  (DNR), explained  that  Section                                                              
24, page 23,  lines 1-10, is the primary incentive  being provided                                                              
in HB  72 for the  production of  new oil.   From the  debate over                                                              
the past couple  years, he said he thinks there is  a consensus on                                                              
a willingness  to provide reduced taxes  and a tax relief  for the                                                              
production of  new barrels.   The mechanism  employed in HB  72 is                                                              
through the  gross revenue  exclusion, which  starts at  the gross                                                              
value at  the point  of production.   The  GRE reduces that  value                                                              
before applying the  costs in the determination  of production tax                                                              
value against  which the tax  rate is applied.   It  basically has                                                              
the  effect of  reducing the  tax  rate.   There are  two ways  to                                                              
qualify for the  GRE on the barrels a taxpayer is  producing.  The                                                              
first is  if those  barrels are  being produced  from a  unit that                                                              
was  formed after  January 1,  2003, and  the second  is if  those                                                              
barrels are  being produced  from a  participating area  (PA) that                                                              
was approved by  DNR after January 1, 2012.  During  calendar year                                                              
2012 there  were no  new PAs  approved, so  there is not  anything                                                              
that  falls in  between, it  would  be anything  that is  approved                                                              
prospectively.    The  language  is  clear  that  a  taxpayer  can                                                              
qualify  one way  or  the other,  but  cannot  double dip,  cannot                                                              
qualify for two reductions.                                                                                                     
                                                                                                                                
1:12:12 PM                                                                                                                    
                                                                                                                                
MR.  BALASH defined  a participating  area,  explaining that  when                                                              
DNR  issues  a   lease,  an  oil  or  gas  deposit   found  during                                                              
exploration  of  the lease  area  does  not  confine itself  to  a                                                              
single lease.   It  is generally  present through multiple  leases                                                              
and the  leases then are  put together in  a block called  a unit.                                                              
Leases  in  units  are  measured  in two  dimensions  as  just  an                                                              
outline on  a map.   A participating  area measures that  property                                                              
in a third dimension  with depth.  For the property  to be part of                                                              
the PA,  it must be  contributing to production  in the  field, it                                                              
must be  contributing to oil  or gas in  the wellbore.   Tried and                                                              
true methodological  practices are used by the  geologists and the                                                              
petroleum reservoir  engineers to understand and agree  on what is                                                              
in and what  is not.  A  certain amount of tension  exists between                                                              
the various  owners inside the field  because each owner  wants to                                                              
ensure that  its barrels, its property,  is getting counted  if it                                                              
is producing;  the owner on the other  side of the table  wants to                                                              
ensure that  the other owner  is not getting  an extra  benefit by                                                              
counting barrels that  the other owner is not  actually producing.                                                              
Within those  columns of  earth are  pockets of  oil and  gas that                                                              
are being tapped  by the various wellbores.  Any  pool or separate                                                              
reservoir that is  not penetrated by a well, and  not contributing                                                              
to production,  is  not part  of a PA.   Companies  can come  back                                                              
later to  apply for a  new PA that  is separate and  distinct from                                                              
the existing  production, and that  is what is being  talked about                                                              
here - a  method to allow the GRE  to apply to new oil  inside the                                                              
legacy fields, but not part of the same legacy reservoir.                                                                       
                                                                                                                                
1:14:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recounted his tour of the  North Slope this                                                              
past  year  with  ConocoPhillips  Alaska,  Inc.  where  he  saw  a                                                              
working oil tube  rig that was re-drilling existing  wellbores and                                                              
putting  out  eight spiders  in  different  directions  to get  to                                                              
places  where  there was  not  good  continuity because  of  fault                                                              
blocks and  such, but it  was the same sands,  the same area.   He                                                              
asked whether  the ends of each  of those eight spiders  would now                                                              
be considered new participating areas.                                                                                          
                                                                                                                                
MR. BALASH  said  the answer  would be  no if it  is for  drilling                                                              
into  the same  reservoir  and  extending by  using  sophisticated                                                              
drilling techniques  that were  not possible 25  years ago.   That                                                              
would  be  an  expansion  or  extension  of  a  PA  because  DNR's                                                              
management system  for PAs  tries to keep  like rocks in  the same                                                              
system in  the same  PA.   Under the bill's  current language,  an                                                              
expanded PA would not  qualify; it must be a new PA.   That is not                                                              
to say  there could  not be a  conversation about  that kind  of a                                                              
mechanism.   Using  the  horizons  at Prudhoe  Bay  to provide  an                                                              
example,  he explained  that the  initial production  area in  the                                                              
Sadlerochit  Reservoir is  where the  most prolific  rocks are  in                                                              
reservoir and  production comes  from.   However, there  are other                                                              
horizons  that are  separate and  distinct  reservoirs within  the                                                              
Prudhoe  Bay Unit  and  over time  there  have  been multiple  PAs                                                              
formed  within  the Prudhoe  Bay  Unit.   It  is those  new  areas                                                              
within that  third dimension  of the unit  that are being  talking                                                              
about.    Prudhoe  Bay  has  been  pretty  heavily  developed  and                                                              
produced, but  an example of  something that likely  would qualify                                                              
at some point would  be the Ugnu Sands.  Ugnu  has not contributed                                                              
to  production to  date in  Prudhoe  Bay, so  a new  participating                                                              
area could be formed for the Ugnu layer at Prudhoe Bay.                                                                         
                                                                                                                                
1:17:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON understood  BP  was producing  about  6,000                                                              
barrels a  day of  heavy/viscous oil  from sands  as a  test pilot                                                              
[in the Milne  Point Unit].  He  asked whether that area  would be                                                              
considered  to have  contributed  production  and therefore  would                                                              
not qualify for the reduced tax rate of 20 percent.                                                                             
                                                                                                                                
MR. BALASH answered  he will double check that  specific case with                                                              
his  staff, but  offered his  understanding that  it is  sustained                                                              
commercial production  of oil and gas that is  being talked about.                                                              
He said  he does not  know off  the top of  his head whether  what                                                              
was being tested  at Milne is currently  in, or was in, a  PA.  He                                                              
suggested  having Director  Barron provide  a presentation  on how                                                              
DNR  utilizes  PAs  within  the  units  to  manage  the  resource.                                                              
Director Barron's  presentation has an animated  illustration that                                                              
shows  the different  horizons and  the different  pools that  are                                                              
not the same reservoir in those horizons.                                                                                       
                                                                                                                                
1:19:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON posited  he  can see  a  big incentive  for                                                              
shutting  down parts  of the  field  for a  while so  there is  no                                                              
longer sustained production  and then coming back so  as to reduce                                                              
the tax  rate by 5-7  percent.  He  therefore requested  that when                                                              
DNR comes  back with  a presentation  he would  like to  hear from                                                              
"legal" as to what  sustained production is and where  it does and                                                              
does not apply.                                                                                                                 
                                                                                                                                
MR.  PAWLOWSKI directed  attention to  page 23,  lines 8-9,  which                                                              
state, "the participating  area does not contain  a reservoir that                                                              
had previously  been in a participating  area ...."  So,  he said,                                                              
if it  had sustained production  at one  point and was  shut down,                                                              
it would  have been in  a participating  area.  That  language was                                                              
put in place  to specifically prohibit the aforementioned  type of                                                              
scenario.    He stated  he  will  work  with  "legal" to  get  the                                                              
requested analysis for the committee.                                                                                           
                                                                                                                                
1:21:27 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI resumed  his sectional  analysis,  noting the  vast                                                              
majority of the  bill is related to [Cook Inlet  and Middle Earth]                                                              
[slide 7].  Over  the years, different tax ceilings  and different                                                              
tax  treatments have  been put  into  place for  gas produced  and                                                              
used  in-state, oil  produced from  the Cook  Inlet, gas  produced                                                              
from the  Cook Inlet,  and gas produced  from Middle  Earth, which                                                              
is  the area  not  on  the North  Slope  and  not in  Cook  Inlet.                                                              
Because  the  legislature's  work   on  those  specific,  distinct                                                              
policy calls must  be preserved, much of the language  in HB 72 is                                                              
conforming language  to account for  those different  tax ceilings                                                              
and  the way  the  language  moves  around when  progressivity  is                                                              
repealed throughout the tax treatment.                                                                                          
                                                                                                                                
1:22:23 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI said  the main  change is  on page  2, lines  19-24                                                              
[Section 3] and  that this presented a bit of a  conundrum for the                                                              
departments in putting  the bill together.  Subsection  (o) of the                                                              
production  tax [AS  43.55.011] is  where preference  is given  to                                                              
gas produced in-state  and used in-state.  Senate  Bill 23, passed                                                              
[in 2012],  included  a separate  ceiling of 4  percent gross  for                                                              
gas and  oil produced from  the Middle Earth.   That  separate tax                                                              
treatment did  not distinguish  between gas  or oil produced  from                                                              
that area,  so the Department of  Law and the  administration went                                                              
with the most recent  treatment of that specific type  of gas with                                                              
the  understanding   that  during   that  process  operators   had                                                              
expressed  concerned   about  having  to  do  too   much  separate                                                              
accounting between  the oil  and gas that  were coming out  of the                                                              
same wellbore.   The thought was  that it was simpler to  have the                                                              
provisions  that  were passed  in  Senate  Bill  23, which  is  AS                                                              
43.55.011(p) and  which is the new  language seen on page  2, line                                                              
23.   This clearly  says that  gas produced  and used in-state  is                                                              
subject  to  the  existing  ceiling, unless  the  gas  comes  from                                                              
Middle  Earth  and  then  it  is   subject  to  the  Middle  Earth                                                              
provisions  that were  passed  last year.    The relationship  was                                                              
never  dealt with  in  the statute  when  Senate  Bill 23  passed.                                                              
Thus, this  is the one place  where there is a  difference between                                                              
the   treatment   of  existing   statute   and   recent   statute.                                                              
Everywhere   else  is  a   conforming  section.     For   example,                                                              
conforming  Section  4,  page  3, line  4,  is  the  clarification                                                              
language,  "not subject  to  AS 43.55.011(o)  or  (p)" which  gets                                                              
back to the different tax treatments and preserving them.                                                                       
                                                                                                                                
1:24:42 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  moved to conforming  Section 13, page 12,  line 18.                                                              
He  reminded   members  that   [Section  11]   changes  the   word                                                              
"certificates"  to "certificate"  because the  bill provides  that                                                              
the [qualified  capital expenditure]  credit will  be issued  in a                                                              
single certificate  [whether for north  of the North Slope  or for                                                              
south of  the North  Slope].   Continuing, he  stated that  "there                                                              
was already  a statute,  AS 43.55.023(m),  which said contrary  to                                                              
the statute  that says that you have  to take a credit  and divide                                                              
it into  two certificates,  if the credit  is earned south  of the                                                              
North  Slope it  can  be  taken as  one  certificate."   The  bill                                                              
repeals  AS 43.55.023(m),  so page  12, line 20,  states "of  this                                                              
section  or  former   (m)"  in  recognition  that   (m)  is  being                                                              
repealed.   These conforming sections  make it clear  the existing                                                              
credits that are retained can be taken as one certificate.                                                                      
                                                                                                                                
1:26:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON referred to  page 2 and said it  is hard                                                              
to visualize  because "in the  bill ...,  after this is  all done,                                                              
there is  going to be  a (p) even  though in  here there is  not a                                                              
(p)".                                                                                                                           
                                                                                                                                
MR. PAWLOWSKI  replied that AS  43.55.011(p) was the  provision in                                                              
Senate  Bill   23  that  passed   in  the  last   legislature  and                                                              
incorporating  that provision  throughout the  statute is  what is                                                              
going on here.                                                                                                                  
                                                                                                                                
1:27:19 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, proceeding  with  his sectional  analysis,  stated                                                              
these  conforming  sections  continue   throughout  HB  72.    For                                                              
example, Section 17,  page 17, lines 3-21, references  that at one                                                              
point  AS  43.55.023(m) existed.    In  that  there was  a  credit                                                              
issued under AS  43.55.023(m) that a company waited  several years                                                              
to bring  back to  the state,  there needs  to be  a reference  in                                                              
statute that  at one point a  section did exist that  allowed that                                                              
credit  to be  issued  as a  single  certificate  rather than  two                                                              
certificates.                                                                                                                   
                                                                                                                                
1:28:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted that  HB 72  pushes to limit  capital                                                              
credits so  during low prices the  state is not obligated  to take                                                              
money out  of its  savings to  pay for  credits.  However,  during                                                              
times of  low prices  and a poor  economy, would this  requirement                                                              
for taking  the credits  in one  year instead  of two be  opposite                                                              
the philosophy to limit the state's liability, he asked.                                                                        
                                                                                                                                
MR.  PAWLOWSKI  explained  those sections  preserve  the  existing                                                              
treatment of  tax credits  south of  68 degrees [North  latitude],                                                              
meaning not  the North Slope.   It is  for activity in  Cook Inlet                                                              
and Middle Earth,  which under current law are  already allowed to                                                              
be  taken in  one year.   In  further  response to  Representative                                                              
Seaton,  Mr. Pawlowski  explained that  the credit  for the  North                                                              
Slope that  had to  be divided  into two  years was the  qualified                                                              
capital expenditure credit and that credit is being eliminated.                                                                 
                                                                                                                                
1:30:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  drew attention  to  Section  23, page  22,                                                              
lines  12-31, and  inquired whether  the  gross revenue  exclusion                                                              
(GRE), which  effectively lowers the  tax rate from 25  percent to                                                              
18  percent,  has a  sunset  or will  new  oil  be treated  at  18                                                              
percent forever.                                                                                                                
                                                                                                                                
MR. PAWLOWSKI cautioned  against picking specific  numbers because                                                              
each  tax rate  will  functionally depend  on  the actual  capital                                                              
costs  of  that specific  project  because  it  is still  in  that                                                              
system.   The  provision is  saying that  future development  will                                                              
get a  benefit of  20 percent of  the gross  value of that  future                                                              
production.   There  is  no sunset  for two  reasons.   First,  in                                                              
looking  at the  lifecycle  economics  of these  more  challenged,                                                              
higher  cost  projects,  there  needs  to  be  that  help  to  the                                                              
economics  and  the  government  take.    Second,  in  looking  at                                                              
previous efforts  that stopped  or time  limited that benefit,  it                                                              
was seen that  it takes time to  drill out a prospect;  all of the                                                              
wells  for a  prospect are  not drilled  in  one year.   From  the                                                              
start  of sustained  production,  it takes  10-15  years to  truly                                                              
drill out the  prospect, so it becomes functionally  the same over                                                              
time  anyway.   The concern  with a  timeline was  that a  company                                                              
would be  unable to  realize the  benefit that  the gross  revenue                                                              
exclusion is actually trying to put on the table.                                                                               
                                                                                                                                
1:32:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON stated  that if  the tax  rate is going  to                                                              
functionally  be changed permanently  from 25  percent to  more or                                                              
less 18 percent,  depending upon the capitalization  of a project,                                                              
he would  like to see  the effect  on the point  in the  future at                                                              
which 50 percent  of the oil is considered new oil.   Because this                                                              
is for new oil  and the state is counting on new  oil, the bill as                                                              
structured would,  over time, drastically reduce the  tax if there                                                              
is no sunset date.                                                                                                              
                                                                                                                                
MR. PAWLOWSKI  answered that  DOR will work  on that and  bring it                                                              
back  for presentation  to the  committee, but  explained that  it                                                              
gets back to the nexus of that participating area approach.                                                                     
                                                                                                                                
1:34:07 PM                                                                                                                    
                                                                                                                                
BARRY PULLIAM, Economist  & Managing Director, Econ  One Research,                                                              
Inc.,  began  his  presentation  regarding  Alaska's  tax  system,                                                              
North Slope investment  and the administration's  proposal, HB 72.                                                              
He noted  he has  been working  for and  with the  administration,                                                              
the  Department   of  Revenue,  and  the  Department   of  Natural                                                              
Resources  on  this  tax  issue to  help  analyze  what  has  been                                                              
occurring  on the  North Slope,  to  look at  Alaska's tax  system                                                              
relative  to  other areas,  to  look  at  what has  happened  with                                                              
respect  to  investment in  production  in  Alaska, and  to  think                                                              
about appropriate  changes  to that system.   He  said he  will be                                                              
discussing  the work  that has  been  done over  the last  several                                                              
months  and how  the changes  proposed in  HB 72  will affect  the                                                              
activity going on in Alaska.                                                                                                    
                                                                                                                                
MR.  PULLIAM  stated Econ  One  provides  economic research  to  a                                                              
variety of  industries, with  the energy  industry being  the area                                                              
he works in  [slide 2].  It has  worked for and with  the State of                                                              
Alaska for about  two decades on a variety issues,  and has worked                                                              
for the administration  as well as  for the legislature.   He said                                                              
he  spent a  lot of  time  in Alaska  in 2006  and  2007 when  the                                                              
legislature  was considering  the  production  profits tax  (PPT),                                                              
Alaska's Clear  and Equitable  Share (ACES),  and gas line  issue.                                                              
In addition  to Alaska, Econ One  works for several  oil producing                                                              
states, the federal government, and energy companies.                                                                           
                                                                                                                                
1:36:48 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM first  provided some  background on  the North  Slope                                                              
[slide  4], stating  that to  date  the North  Slope has  produced                                                              
about  16 billion  barrels  of  oil.   Approximately  5.5  billion                                                              
barrels  of economically  recoverable  oil  are believed  left  in                                                              
currently known  fields.  The vast  majority of oil  produced from                                                              
the North  Slope has  come from  the giant  fields of Prudhoe  Bay                                                              
and  Kuparuk  [River].     About  90  percent   of  the  resources                                                              
discovered to date were discovered prior to 1970.                                                                               
                                                                                                                                
1:38:11 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM   explained   that  slide  5   puts  the   historical                                                              
production  in context  with what  is believed  to still exist  on                                                              
the North  Slope.   Estimates are  that the  North Slope  contains                                                              
about 40  billion barrels  of additional economically  recoverable                                                              
resources at  today's prices  and about  5.5 billion barrels  sits                                                              
in fields that  have already been discovered.   Another 19 billion                                                              
barrels sits  in fields  that are  yet to  be discovered  on state                                                              
and  federal  lands,  according  to  the  U.S.  Geological  Survey                                                              
(USGS).   Responding  to Co-Chair  Feige, Mr.  Pulliam said  he is                                                              
talking about both onshore and offshore.                                                                                        
                                                                                                                                
1:39:18 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM, in  response to Representative Tuck,  stated that the                                                              
red portion  of the  pie chart on  slide 5  depicts the  amount of                                                              
oil produced  to date,  and the  red and  green portions  together                                                              
represent  [the total discovered  resources]  to date depicted  on                                                              
slide 4.   Responding  further, he confirmed  that the  purpose of                                                              
HB  72  is  to  incentivize  [production]   from  the  [discovered                                                              
conventional resources  estimated at 5.5 billion  barrels of oil].                                                              
The  bill  would  also  incentivize   part  of  the  [undiscovered                                                              
conventional  resources  estimated at  19.2  billion barrels]  and                                                              
potentially  the the  unconventional resources  [estimated at  5.5                                                              
billion barrels].   The aforementioned is everything  that has not                                                              
been  produced  to date  that  Alaska's  tax  system covers.    He                                                              
further confirmed  that unconventional  resources means  shale and                                                              
heavy and  viscous oil, which is  not the light,  conventional oil                                                              
that has been produced to date.                                                                                                 
                                                                                                                                
1:40:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  understood that in  the pie chart  on slide                                                              
5,  the   [undiscovered  conventional   resources],  the   [Arctic                                                              
National  Wildlife   Refuge  (ANWR)],   and  the   [unconventional                                                              
resources] would all be subject to the gross revenue exclusion.                                                                 
                                                                                                                                
MR. PULLIAM answered  that part of the [undiscovered  conventional                                                              
resources] is federal  or offshore production that  the state does                                                              
not tax  and which  would not be  subject to HB  72.  The  portion                                                              
that is on state property would be subject to HB 72.                                                                            
                                                                                                                                
REPRESENTATIVE SEATON  requested that at some future  date this be                                                              
delineated for the committee.                                                                                                   
                                                                                                                                
MR. PULLIAM  replied that  the next slide  shows a breakdown  that                                                              
will be helpful in this regard.                                                                                                 
                                                                                                                                
1:42:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK  referenced   a  report  handed  out  to  the                                                              
committee  on  2/11/13  that  demonstrated   the  current  natural                                                              
decline  of the  major  fields of  Prudhoe Bay  and  Kuparuk.   He                                                              
inquired whether this natural decline can be prevented.                                                                         
                                                                                                                                
MR. PULLIAM responded  it is ultimately unpreventable  because the                                                              
amount of  oil there is fixed,  although the exact extent  of that                                                              
oil is  unknown.  Finding  new resources  within the  field itself                                                              
is something  that can  be done  and it  can be  done to slow  the                                                              
decline rate  or it can be  done to also increase  the production.                                                              
But that  is going  to require  getting at  pockets of  oil within                                                              
those fields  that have  not currently  been gotten  to.   Some of                                                              
that decline has  to do with the way those fields  are constructed                                                              
and the facilities  that are there.  There is a  certain amount of                                                              
gas handling  capacity, particularly  at Prudhoe Bay,  that limits                                                              
what can  be produced over  time.  As  oil is produced,  the ratio                                                              
of gas to oil  increases, which is a natural occurrence,  and with                                                              
that  fixed capacity  in  place there  is  some limitation  there.                                                              
But if  that capacity is  changed, more oil  can be produced.   If                                                              
the  capacity to  handle  gas was  doubled,  then a  lot more  oil                                                              
could be produced.                                                                                                              
                                                                                                                                
1:44:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  surmised the aforementioned would  affect the                                                              
[discovered  conventional resources]  and [historical  production]                                                              
sections depicted in the pie chart on page 5.                                                                                   
                                                                                                                                
MR.   PULLIAM   answered   it   would   affect   the   [discovered                                                              
conventional  resources]  but  not  the  [historical  production].                                                              
The [discovered  conventional resources]  is an estimate  based on                                                              
the technology known  today.  It is important to  keep in mind, he                                                              
continued,  that these  fields have  produced much  more oil  than                                                              
had  been  thought  possible;  technology  has  done  wonders  and                                                              
prices have  played a  part as  well.   As technology gets  better                                                              
these  portions  of  the  pie  will  grow,  particularly  for  the                                                              
estimated 5.6 billion  barrels of oil for discovered  conventional                                                              
resources.                                                                                                                      
                                                                                                                                
1:45:36 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM resumed  his presentation,  discussing the  locations                                                              
of undiscovered  conventional oil  resources [on the  North Slope,                                                              
slide 6].   According  to the  U.S. Geological  Survey (USGS),  he                                                              
reported, at $90  per barrel there are about 3  billion barrels of                                                              
economically recoverable  oil on onshore state lands,  5.8 billion                                                              
barrels  in the Beaufort  Sea, almost  10 billion  in the  Chukchi                                                              
Sea, about  0.5 billion in  the National Petroleum  Reserve-Alaska                                                              
(NPR-A), and close  to 10 billion in the Arctic  National Wildlife                                                              
Refuge  (ANWR), for  a  total of  about 29  billion  barrels.   He                                                              
noted  that $90  per barrel  is a little  less than  the price  of                                                              
today.  He  said the size of these  fields is likely to  be in the                                                              
range  of 50  million barrels,  which is  a lot  smaller than  the                                                              
typical  field producing  on the  North Slope  today, but in  line                                                              
with   the  more   recent  discoveries   that   Alaska  has   had.                                                              
Responding  to Co-Chair Feige,  he explained  that the  columns on                                                              
slide 6  for "P95" and  "P5" indicate probabilities.   If  all the                                                              
oil was found, P5  means a 5 percent probability  that there would                                                              
be  more than  that amount  of oil,  and  P95 means  a 95  percent                                                              
chance that  there is  more than  that volume.   For example,  the                                                              
estimate  for the  Central  North  Slope is  that  there  is a  95                                                              
percent chance of  at least 2.8 billion barrels left  and only a 5                                                              
percent chance  of more  than 3.9  billion barrels left;  however,                                                              
the mean in  that range is about  3.4 billion barrels,  which is a                                                              
pretty tight range.                                                                                                             
                                                                                                                                
1:47:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  referred to slide 6 and inquired  whether the                                                              
figures in  the economically  recoverable column  are under  HB 72                                                              
or under ACES.                                                                                                                  
                                                                                                                                
MR. PULLIAM  replied he  thinks this analysis  was done  under the                                                              
current law of ACES.                                                                                                            
                                                                                                                                
1:48:21 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM,  returning  to  his   presentation,  summarized  the                                                              
unconventional oil  resources [on Alaska's North  Slope, slide 7].                                                              
Not  much is  yet  known about  shale,  he said.    A [2012]  USGS                                                              
report put  the mean  technically recoverable  barrels at  about 1                                                              
billion.  It has  not been shown to be economic  and that estimate                                                              
is very  preliminary.  He  noted that the  early estimates  by the                                                              
USGS of  recoverable shale  oil in  the Lower  48 were much  lower                                                              
than what  they have turned  out to be  and what is  being thought                                                              
now.  Regarding  viscous and heavy oil, he said it  is known there                                                              
is  a lot  of that  oil in  place, somewhere  in the  range of  25                                                              
billion  barrels,  but  the  current  estimate  is  that  only  15                                                              
percent,  4-6 billion barrels,  is economically  recoverable.   He                                                              
reiterated  that,  historically,  technology advances  and  allows                                                              
getting more  of that original oil  out than was once  thought, so                                                              
it would not be surprising to see that number increase.                                                                         
                                                                                                                                
1:49:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  observed  that  the  estimated  5.5  billion                                                              
barrels of  unconventional oil  resources depicted  on slide  5 is                                                              
less than what is depicted on slide 7.                                                                                          
                                                                                                                                
MR.  PULLIAM responded  slide  5 depicts  the  mid-point of  heavy                                                              
oil, which is 3.6-5.6, plus the 1 billion for shale.                                                                            
                                                                                                                                
1:50:27 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM, resuming  his presentation,  provided  a history  of                                                              
Alaska's production tax  system on the North Slope [slide  8].  He                                                              
said the  state began with a  gross system when oil  first started                                                              
flowing in  1977 at  a maximum  tax rate  of 12.25 percent,  which                                                              
was the  highest rate in  the country at  the time.   The economic                                                              
limit factor  (ELF) was  also introduced  at that  time.   In 1981                                                              
the maximum  rate was  increased  to 15 percent,  which was  again                                                              
the highest  rate in the country.   New fields were given  a 12.25                                                              
percent rate for  the first 5 years of production.   Modifications                                                              
to ELF  occurred in  the late  1980s.   Not much happened  between                                                              
then  and  2003,  at which  time  exploration  credits  [of  20-40                                                              
percent] were  introduced.   In 2005 the  Prudhoe Bay  fields were                                                              
aggregated  for  purposes of  calculating  ELF, which  raised  the                                                              
effective  tax rate  on the  satellites  around Prudhoe  Bay.   In                                                              
2006, the  petroleum profits tax  (PPT) was introduced.   The PPT,                                                              
[a net-based tax  system], was a fundamental shift  from the gross                                                              
system, which  many at  the time recognized  had some  real flaws,                                                              
one being  the operation of  ELF and how  it reduced the  tax rate                                                              
in areas where  it was not really  necessary.  The other  flaw was                                                              
that the  gross system did not  always align the economics  of the                                                              
producers with  the economics of the  state and was thought  to be                                                              
inhibiting production, particularly high cost production.                                                                       
                                                                                                                                
1:52:34 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  continuing  the history of  Alaska's production  tax                                                              
system, said  the PPT, being a  net-based tax system,  allowed the                                                              
deduction of  operating and  capital costs.   The PPT  legislation                                                              
as originally  introduced  had a 20  percent base  rate with  a 20                                                              
percent  credit.  During  the course  of the  2006 sessions,  that                                                              
was ultimately  changed to  a 22.5 percent  base rate with  a 0.25                                                              
percent progressivity  piece that kicked  in when the  net taxable                                                              
value was  $40 per  barrel, for  a maximum  combined rate  of 47.5                                                              
percent.   In 2007, PPT  was amended to  the current  system under                                                              
Alaska's  Clear  and  Equitable Share  (ACES).    Key  differences                                                              
between ACES  and PPT were  that the base  rate was changed  to 25                                                              
percent, the  progressivity was increased  to 0.4 percent  and the                                                              
trigger  point  was dropped  to  $30.   At  over $92.50  net,  the                                                              
progressivity  flattens out  to  a 0.1  percent  increase and  the                                                              
maximum rate  was increased  to 75 percent,  which is  not reached                                                              
until very high  prices.  However, he pointed out,  the 75 percent                                                              
number  gets  published  and people  associate  that  number  with                                                              
Alaska.                                                                                                                         
                                                                                                                                
1:54:14 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM moved  to discussing the benchmarking  done for Alaska                                                              
North Slope  (ANS) activity and how  it has behaved over  the past                                                              
decade  compared  to other  areas  [slide  10].   To  control  for                                                              
price,  technology, and  general economic  conditions that  impact                                                              
activity, the North  Slope activity was benchmarked  against other                                                              
producing  areas in countries  belonging to  the Organisation  for                                                              
Economic Co-operation  and Development (OECD).  Since no two areas                                                              
are  exactly alike,  benchmarking  looks at  places  that have  as                                                              
much  in common  as  possible to  allow  for the  most  meaningful                                                              
comparisons.    Areas  used  for   benchmarking  the  North  Slope                                                              
include  the  North  Sea,  the  rest of  the  U.S.  and  some  key                                                              
producing  states,  Canada,  and   Australia.    These  areas  are                                                              
comparable  to Alaska  in  that they  have  similar political  and                                                              
legal  structure  and they  all  have  significant  prospectivity,                                                              
meaning there  is a lot  of oil left to  find.  However,  the easy                                                              
oil has been  produced in all of  these areas and what  remains is                                                              
largely  high cost  conventional  and  unconventional  oil.   Also                                                              
common to  these areas is that  their resources are  developed for                                                              
the most  part by the  private sector, so  the people  looking for                                                              
and producing oil all respond to similar types of incentives.                                                                   
                                                                                                                                
1:56:40 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM said  the aspects looked at for the  benchmarking were                                                              
crude  [oil]  production,  capital  spending,  [petroleum  sector]                                                              
employment, and drilling  activity [slide 11].   Production on the                                                              
Alaska North  Slope has declined to  just over 40 percent  of what                                                              
it  was  a decade  ago.    Capital  spending  on the  North  Slope                                                              
increased in the  mid-2000s and has remained fairly  level for the                                                              
last 4-5  years.  Employment in  the North Slope  petroleum sector                                                              
increased in  about 2006, partly  in response to  corrosion events                                                              
and  then the  efforts  to rebuild  and renew  much  of the  North                                                              
Slope facilities,  particularly  in the legacy  fields.   Drilling                                                              
activity has declined as production has gone down.                                                                              
                                                                                                                                
1:58:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR   inquired  whether  the  2006   increase  in                                                              
petroleum sector employment  could have been related  to either of                                                              
the two changes in the tax system.                                                                                              
                                                                                                                                
MR. PULLIAM  answered  the activity  on the North  Slope has  been                                                              
largely  related to  facility renewal,  and  some of  that may  be                                                              
driven and  aided by  ACES.   The increase  in employment  has not                                                              
seen a corresponding  increase in drilling.  There is  a very real                                                              
need to  update many of  those old facilities  on the  North Slope                                                              
and ACES  has been helpful,  and the state  has provided a  lot of                                                              
the funding for doing that.                                                                                                     
                                                                                                                                
1:59:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON,  in regard  to benchmarking  against  OECD                                                              
countries, asked  why not benchmark  against areas  where industry                                                              
is investing,  such as Russia,  because where industry  is putting                                                              
its capital would tell what is important to them.                                                                               
                                                                                                                                
MR.  PULLIAM  replied  it  will be  seen  in  coming  slides  that                                                              
industry is  putting a significant  amount of capital into  all of                                                              
these OECD areas  that the benchmarking is looking  at.  Regarding                                                              
Russia,  a nice  thing  about the  OECD  areas is  that  a lot  of                                                              
trustworthy data  is available;  outside of that  it is  harder to                                                              
find  the  same  type  and quality  of  information  to  do  those                                                              
comparisons.   For all  of the reasons  summarized on  [slide 10],                                                              
such  as similarity  of  legal  and  political systems,  the  OECD                                                              
areas looked at  do provide a good benchmark without  having to go                                                              
outside of those areas, such as to Russia.                                                                                      
                                                                                                                                
2:01:34 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  continued  his presentation,  summarizing  the  four                                                              
activities  for the  benchmark  areas [slides  12-15].   He  noted                                                              
that the appendix  provides these same comparisons in  detail.  He                                                              
said  the North  Sea (slide  12) is  a good  comparison to  Alaska                                                              
because  the two  are  alike in  many  ways.   The  North Sea  was                                                              
discovered  and  developed  about  the same  time  [as  the  North                                                              
Slope].   North Sea  production has  historically come  from large                                                              
fields  and then  smaller discoveries  in and  around those  large                                                              
fields.   The North Sea has  experienced the same kind  of decline                                                              
as has Alaska,  being a mature basin  in many areas, but  yet with                                                              
lots of  oil still  in the  ground.   The North  Sea had the  same                                                              
pattern in  capital spending  as Alaska until  the last  few years                                                              
when capital  spending increased  in the North  Sea.   Drilling in                                                              
the North Sea declined then stabilized in the last few years.                                                                   
                                                                                                                                
2:03:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  returned to the  history of Alaska's  production                                                              
tax system  on slide 8  and asked what  the overall  effective tax                                                              
rates were for  ELF, ELF II, and  PPT so the committee  can have a                                                              
basis for comparison of the take over those years.                                                                              
                                                                                                                                
MR. PULLIAM responded  it changed over time and  was different for                                                              
each field,  but said for 2005 he  recalls an average tax  rate of                                                              
about  10 percent;  with the  rate  being higher  at Prudhoe  Bay,                                                              
lower at Kuparuk  River Unit, and  lower at the other fields.   In                                                              
further  response, he  confirmed  that was  on a  gross basis  and                                                              
that today Alaska would  be at a 20 percent or more  tax rate on a                                                              
gross basis.   He agreed to calculate  the gross tax rate  for the                                                              
decades  between 1977  and 2007  and provide  that information  to                                                              
the committee.                                                                                                                  
                                                                                                                                
2:05:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK said  it appears  from research  he has  done                                                              
that  the  North Sea  is  naturally  declining  like Alaska.    He                                                              
related  that  according  to  a  recent  news  story  in  London's                                                              
Guardian, the  North Sea's  oil and gas  reserves are  running out                                                            
fast.   Since  comparisons of  capital spending  and drilling  for                                                              
the North  Sea and Alaska are  good ones, he inquired  whether the                                                              
North Sea has reduced or reversed its production decline.                                                                       
                                                                                                                                
MR.  PULLIAM  answered  the  United   Kingdom  (UK)  has  targeted                                                              
several programs,  one being the Brownfield Allowance,  which is a                                                              
reduction in the  tax rate for approved development  spending that                                                              
is  designed to  get additional  barrels out  of existing  fields.                                                              
This  would  be like  the  Gross  Revenue  Exclusion (GRE).    The                                                              
allowance significantly  impacts the  economics for producers  and                                                              
there has been a lot of response from that.                                                                                     
                                                                                                                                
2:07:03 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  returned to  his presentation  and reviewed  the four                                                              
areas  for  the U.S.  excluding  Alaska  North Slope  [slide  13].                                                              
Crude oil  production  has increased  in the U.S.,  as opposed  to                                                              
Alaska's  decline.   Capital spending  has increased  in the  U.S.                                                              
Moving to  slide 14, he  said an increase  in production  has also                                                              
occurred  in  Canada,  much  of  that  being  from  heavy  oil  in                                                              
Alberta, an  example of technology  and prices coming  together to                                                              
allow this  increased production.   Turning to slide 15,  he noted                                                              
that in Australia  much of the  activity in recent years  has gone                                                              
from  mostly producing  oil to  developing  liquefied natural  gas                                                              
(LNG) from that  country's significant gas resources.   He offered                                                              
to walk through  the details of these comparisons that  are in the                                                              
appendix with any committee member wishing to do so.                                                                            
                                                                                                                                
2:08:27 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM next  provided a side-by-side comparison  of crude oil                                                              
production between the  Alaska North Slope, the rest  of the U.S.,                                                              
and OECD  countries [slide  16].   He said  he indexed the  values                                                              
depicted  on  the  graph to  the  2003  level  so  as to  put  the                                                              
comparisons  on a  comparable basis.    In 2003,  the North  Slope                                                              
produced about  950,000 barrels  a day; by  2012, the  North Slope                                                              
produced a  little over 500,000 barrels  a day.  During  this same                                                              
time period,  production  in the  U.S. rose and  overall the  OECD                                                              
declined  a  little  bit,  although  after  going  down  the  OECD                                                              
responded upward  a bit as  prices went  up after the  middle part                                                              
of the  decade.  The U.S.  increase has come  at the same  time as                                                              
prices have come up and it has stayed high from 2008 forward.                                                                   
                                                                                                                                
2:09:54 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  then compared capital  spending [for  exploration and                                                              
development]  between the  North  Slope, the  U.S., and  worldwide                                                              
[slide  17], saying  he again  indexed  to 2003.   From  2003-2006                                                              
spending  in  Alaska  and  elsewhere   in  the  world  was  pretty                                                              
similar, rising  at a similar rate.   But a big shift  occurred in                                                              
2007  when spending  in Alaska  stayed relatively  flat while  the                                                              
rest  of the  world jumped  up as  oil prices  went up,  including                                                              
Prudhoe  prices.    In  2008, Alaska  had  a  little  increase  in                                                              
spending and  the rest  of the world  had a  bigger increase.   In                                                              
2009,  spending  in  Alaska,  the U.S.,  and  worldwide  was  back                                                              
together again  as oil prices  dropped dramatically.   However, as                                                              
oil  prices came  up  and stayed  high in  2010,  2011, and  2012,                                                              
Alaska's  spending  has  stayed  about  the  same  while  spending                                                              
elsewhere  really  expanded.   He  clarified  this  comparison  is                                                              
limited  to  exploration  and  development  spending  for  putting                                                              
assets in place  to get the oil out of the ground;  therefore, the                                                              
comparison does not include spending to acquire companies.                                                                      
                                                                                                                                
2:11:17 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  moved to  reviewing  how  the ACES  tax  calculation                                                              
works,  stating  it is  important  to understand  the  differences                                                              
between ACES  and HB 72 [slide  19].  He  said ACES is a  net tax,                                                              
with the  tax calculated on the  net value of  taxable production.                                                              
Taxable production  is total production minus the  royalties.  The                                                              
net value  that is  taxed is  the gross  wellhead value,  which is                                                              
the  West Coast  price  minus transportation,  minus  the cost  of                                                              
production.   Costs of  production are  the operating and  capital                                                              
costs  necessary to  pull the  oil out  of the ground.   The  base                                                              
rate under  ACES is 25  percent and this  rate applies  across the                                                              
price spectrum.   Additionally, ACES  has a progressive rate:   as                                                              
the  taxable value  of  the  oil rises  over  $30 per  barrel,  an                                                              
additional  0.4  percent of  tax  is  added  for each  dollar  [of                                                              
increase].   Another way  to think  of the  progressive tax  is to                                                              
add 4  percent for  every $10 increase.   Once  the price  is over                                                              
$92.50  per barrel,  the rate  becomes  1 percent  for every  $10.                                                              
For example, at  a production tax value of $100  per barrel, which                                                              
is roughly  a West Coast  ANS price of  $135 per barrel,  the base                                                              
rate  is  25  percent,  plus  a  progressive  rate  tax  of  25.75                                                              
percent, for  a total tax rate of  50.75 percent.  In  addition to                                                              
the tax,  ACES provides a 20  percent credit, taken over  2 years,                                                              
against  the tax obligation.   Small  producers  have a credit  of                                                              
$12  million  per  year  that  is   phased  out  as  a  producer's                                                              
production  increases over  50,000  barrels per  day.   The  state                                                              
purchases the credits  and net operation losses  (NOLs) from those                                                              
companies that have  no tax obligation - purchasing  45 percent of                                                              
capital  expenditures and  25 percent  of operating  expenditures.                                                              
The  majority of  expense  for  most exploration  and  development                                                              
companies is capital related, he noted.                                                                                         
                                                                                                                                
2:14:30 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  next reviewed the  mechanics for calculating  the tax                                                              
under  ACES  and the  effective  tax  rate  after credits  for  50                                                              
million  barrels  of production  at  three  West Coast  ANS  price                                                              
scenarios:   $80,  $100, and  $120 per  barrel [slide  20].   At a                                                              
transportation cost  of $10 per  barrel, the wellhead  value would                                                              
be $70, $90,  and $110, respectively.   At operating costs  of $15                                                              
per  barrel and  capital  costs of  $15  per barrel,  the  taxable                                                              
value would  be $40, $60,  and $80, respectively.   The  ACES base                                                              
tax rate  for all  three prices  is 25  percent.  The  progressive                                                              
tax rate (on the  taxable value over the trigger  price of $30 per                                                              
barrel) is  4 percent  at the price  of $80,  12 percent  at $100,                                                              
and 20 percent at  $120.  [The total tax rate is  29 percent at an                                                              
ANS price of  $80, 37 percent at  $100, 45 percent at  $120.]  The                                                              
total wellhead  value is  calculated by  multiplying the  wellhead                                                              
value  per  barrel  times  the production  volume  of  50  million                                                              
barrels.    The  total  operating  and  capital  expenditures  are                                                              
calculated  by  multiplying  these  per  barrel  costs  times  the                                                              
production  volume of 50  million barrels.   The total  production                                                              
tax value  is calculated  by subtracting  the total operating  and                                                              
total capital  expenditures from  the total  wellhead value.   The                                                              
production  tax before credits  is calculated  by multiplying  the                                                              
production tax value  times the [total] tax rate.   The production                                                              
tax  after  credits  is  calculated  by  subtracting  the  capital                                                              
credit  (20  percent  times the  capital  expenditures)  from  the                                                              
production  tax before credits.   He  noted the deduction  happens                                                              
over a  2-year period,  but for  simplicity in  the example  he is                                                              
showing it  all in one column.   The production tax  after credits                                                              
is thus  $430 million  at a price  of $80,  $960 million  at $100,                                                              
and  $1.65  billion at  $120,  for  an effective  tax  rate  after                                                              
credits  of  [21.5]  percent,  32  percent,  and  [41.3]  percent,                                                              
respectively.                                                                                                                   
                                                                                                                                
2:17:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  surmised taxable value  is the same  thing as                                                              
profit.                                                                                                                         
                                                                                                                                
MR. PULLIAM concurred taxable value is a proxy for profit.                                                                      
                                                                                                                                
REPRESENTATIVE  TUCK  concluded  that  at  a  price  of  $120  per                                                              
barrel,  making $80  in  profit,  a company  could  spend $20  per                                                              
barrel more  on capital  expenditures within  the state  of Alaska                                                              
and drop itself to [$60 in profit] per barrel.                                                                                  
                                                                                                                                
MR.  PULLIAM  concurred, saying  he  will  show  this in  a  later                                                              
slide.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  TUCK  further  concluded that  by  investing  back                                                              
into Alaska,  a company can  significantly reduce its  taxation by                                                              
8 percent or more.                                                                                                              
                                                                                                                                
MR.  PULLIAM confirmed  a company  can buy  down the  tax rate  by                                                              
spending more in Alaska.                                                                                                        
                                                                                                                                
2:18:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  the  credit, taken  over                                                              
two years, is applied to the tax liability as well.                                                                             
                                                                                                                                
MR. PULLIAM  replied the tax  liability in  a given year  is going                                                              
to be  based on half  of a company's  capital spending  from prior                                                              
year  plus  half  of  the  company's  capital  spending  from  the                                                              
current year.   In  the example on  slide 20,  he is assuming  the                                                              
putting  of those  two together,  which  amounts to  $15 a  barrel                                                              
over  the current  production, so  the company's  credit would  be                                                              
calculated that way.                                                                                                            
                                                                                                                                
2:19:39 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  resumed his presentation,  moving to  the calculation                                                              
of tax  under ACES at  a West Coast ANS  price of $100  per barrel                                                              
and  varying costs  [slide  21].   At [a  constant  transportation                                                              
cost of $10 per  barrel] and combined operating  and capital costs                                                              
of [$20,  $35, and $50] per  barrel, the effective tax  rate after                                                              
credits  is   [38.1  percent,  29.5   percent,  and   19  percent,                                                              
respectively].   At  a  West Coast  ANS price  of  $80 per  barrel                                                              
[slide 22],  and the  same aforementioned costs  of $20,  $35, and                                                              
$50,  the respective  effective tax  rates after  credits are  [29                                                              
percent, 18.4 percent, and 5 percent].                                                                                          
                                                                                                                                
2:21:11 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  demonstrated  the  impact  of  additional  [capital]                                                              
spending on the  tax obligation under ACES using an  example of 50                                                              
million  barrels  of  annual  taxable  production  at  an  initial                                                              
expenditure  of $1.5  billion plus  an  additional expenditure  of                                                              
$250 million  [slide 23].  At a  West Coast ANS price  of $80, the                                                              
taxable valuable before  that additional expenditure is  $40.  The                                                              
additional expenditure  of $250 million  amounts to $5  per barrel                                                              
of production,  reducing the taxable value  from $40 to  $35.  The                                                              
tax rate before  that additional expenditure is  29 percent, which                                                              
is the  25 percent base  rate plus 4  percent progressivity.   The                                                              
tax rate after  that additional expenditure drops  from 29 percent                                                              
to 27  percent because  the $5 in  additional expenditure  reduces                                                              
the taxable  value from $40  to $35, which  reduces the  tax rate.                                                              
The production  tax  would then be  calculated  based on the  [27]                                                              
percent and the  $35 tax value, so  a lower tax rate  applied to a                                                              
lower taxable value  after the expenditure.  Thus,  a $250 million                                                              
additional  expenditure  reduces the  tax  obligation  at $80  per                                                              
barrel by about  $157 million, a 63 percent reduction;  20 percent                                                              
of  that is  due to  the  credits and  43 percent  is  due to  the                                                              
change in  tax obligation  prior to the  credits.  That  reduction                                                              
increases as the  price per barrel increases:  at  $120 per barrel                                                              
the  total  reduction  in  taxes   after  credits  rises  to  $237                                                              
million.    Thus,  the  credit  remains  the  same,  the  spending                                                              
remains  the same,  but at  higher prices  the amount  of the  tax                                                              
reduction  for a given  spending gets  much higher.   At  $120 per                                                              
barrel the tax obligation is reduced by 95 percent.                                                                             
                                                                                                                                
2:24:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  commented "not a  bad deal" and asked  whether the                                                              
spending  under  ACES leads  directly  to  more production  or  is                                                              
being spent on production.                                                                                                      
                                                                                                                                
MR.  PULLIAM   responded  it  does   not  have  to  be   spent  on                                                              
production, as  long as it is  a capital expenditure  it qualifies                                                              
for the  credit.  An operating  expenditure also  still qualifies,                                                              
but would not get  the 20 percent.  So, the  buy-down effect still                                                              
applies whether  it is  an operating  or capital expenditure,  but                                                              
the additional credits come in for the capital expenditure.                                                                     
                                                                                                                                
CO-CHAIR  FEIGE understood  the money  the state  has been  giving                                                              
away  to companies  for credits  and  reduction in  taxes has  not                                                              
resulted in any further oil for the state to tax down the road.                                                                 
                                                                                                                                
MR.  PULLIAM   answered   the  industry  in   general  is   making                                                              
investments both  in drilling  and a lot  in facilities.   He said                                                              
he  thinks industry  would argue  that those  investments are  all                                                              
necessary  to  support   production  today  and   in  the  future.                                                              
However,  he  continued,  the state  is  providing  a  significant                                                              
piece of that spending.                                                                                                         
                                                                                                                                
2:26:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  inquired whether this same modeling  could be                                                              
done  for a  West  Coast  ANS price  of  $60  since that  was  the                                                              
approximate price in 2009.                                                                                                      
                                                                                                                                
MR. PULLIAM agreed to do so.                                                                                                    
                                                                                                                                
2:26:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK understood  the lower  tax rate  is based  on                                                              
the lower tax value.   He related that industry talks  quite a bit                                                              
about lucrative  in-field projects.   Observing from the  chart on                                                              
slide  23 that  at  a  price of  $80  per barrel,  an  expenditure                                                              
increase  of 17  percent reduces  the taxation  by as  much as  63                                                              
percent, he asked why more oil is not being produced.                                                                           
                                                                                                                                
MR. PULLIAM replied  people thought this would be  a big incentive                                                              
when  ACES was  being put  together, but  forthcoming slides  will                                                              
show why this is maybe not the case.                                                                                            
                                                                                                                                
2:27:37 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  continued  his  presentation,  turning  to  a  graph                                                              
[slide 24]  excerpted from  PFC Energy's  1/31/13 presentation  to                                                              
the  Senate  Special  Committee  TAPS  Throughput,  which  depicts                                                              
estimates of capital  and operating expense on a  per barrel basis                                                              
[for  projects in  Texas, Louisiana,  North  Dakota, and  Alaska].                                                              
He noted  that the bar  depicting capital  costs of about  $16 for                                                              
new light  oil in Alaska  is pretty consistent  with what  he used                                                              
in his  work for this  presentation.  The  bars for  capital costs                                                              
for  mid-high  cost  development  and  high  cost  development  in                                                              
Alaska depict about [$25] and $34 per barrel, respectively.                                                                     
                                                                                                                                
2:28:46 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  next  reviewed  the  effective  tax  rates  for  new                                                              
development  by  an incumbent  producer  with  a large  amount  of                                                              
production typical  of the  legacy fields [slide  25].   For light                                                              
conventional oil at  a West Coast ANS price of $70  per barrel and                                                              
a  cost of  $16  per barrel,  the  tax rate  after  credits is  20                                                              
percent on  the additional  production value;  the tax  rate after                                                              
credits rises to about  50 percent at a price of  $140.  For high-                                                              
cost  light oil  at a  cost of  $34,  the effective  tax rate,  or                                                              
additional taxes  paid on that  new production, is  negative until                                                              
the price rises  above $90 per barrel.  Another way  of looking at                                                              
it is that  at lower prices the  state's tax revenues fall  if the                                                              
producer makes  this investment.   Taxes for  high cost  light oil                                                              
do not increase  until the price  per barrel is over  $90, [rising                                                              
from  -40 percent  effective tax  rate  at a  price of  $80 to  40                                                              
percent effective tax rate at a price of $140].                                                                                 
                                                                                                                                
2:30:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  understood that  high cost light  oil would                                                              
be at a base case limitation of 25 percent of profit.                                                                           
                                                                                                                                
MR. PULLIAM  confirmed 25 percent  would be the base,  but pointed                                                              
out that the  aforementioned is additive to a  producer's existing                                                              
production.  These  areas are going to be places  where a producer                                                              
will be  in a progressivity  level anyway,  so adding  this higher                                                              
cost  oil  will  reduce a  producer's  progressivity  and  give  a                                                              
producer credits  to apply  against that even  if the  producer is                                                              
in a base case.                                                                                                                 
                                                                                                                                
2:31:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  requested  an  explanation  of  the  minus                                                              
percentages shown on  the graph for the effective  tax rate [slide                                                              
25], given  there is a  25 percent base  case and a  producer gets                                                              
credits and deductions.                                                                                                         
                                                                                                                                
MR.  PULLIAM explained  the graph  is showing  the additional  tax                                                              
that the incumbent  would pay as a percentage of  the value of the                                                              
oil  that  the  company is  developing,  so  that  production  tax                                                              
value.   The additional  tax is actually  negative in  these cases                                                              
of high cost and low price.                                                                                                     
                                                                                                                                
2:33:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON presumed if  the tax  is negative  it means                                                              
the company is getting money.                                                                                                   
                                                                                                                                
MR. PULLIAM  replied  the company  is not getting  a refund,  just                                                              
paying less in taxes.                                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON  understood,  then,  that  a  negative  tax                                                              
means  the company  is  paying  less in  taxes  than  it would  be                                                              
otherwise.   So, not only does the  company have the value  of the                                                              
oil, but it gets to reduce the tax on the rest of its oil.                                                                      
                                                                                                                                
MR.  PULLIAM confirmed  it  is coming  that  way  and through  the                                                              
credits provided  by the state.   He posed  a scenario in  which a                                                              
company starting  with a tax obligation  of $1 billion  makes this                                                              
investment  and reduces  its total  tax  to $900  million.   Thus,                                                              
this company's  taxes have  gone down, the  value of the  oil that                                                              
has been produced has gone up.                                                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON   concluded  that  the  negative   is  very                                                              
positive to  the company because  it is  getting the value  of the                                                              
oil plus  reducing its  taxes on  all its  other oil, meaning  the                                                              
company has a lot more money in its pocket.                                                                                     
                                                                                                                                
MR. PULLIAM answered correct.                                                                                                   
                                                                                                                                
2:34:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  surmised the  companies have  therefore                                                              
been  receiving  credits for  maintenance  costs  that they  would                                                              
have had to do anyway.                                                                                                          
                                                                                                                                
MR. PULLIAM  replied, "Yes,  those investments  needed to  be made                                                              
anyway."                                                                                                                        
                                                                                                                                
2:34:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER requested  further  explanation on  how to  read                                                              
the graph on slide 25.                                                                                                          
                                                                                                                                
MR. PULLIAM  posed a scenario  to explain:   A company  starts out                                                              
owing $1 billion  in taxes.  It invests in new  production.  After                                                              
making this investment  in new production, the  company's tax bill                                                              
goes down  to $900 million.   The company  has saved  $100 million                                                              
in taxes, but the  value of that new production is  positive.  The                                                              
graphs  shows, as  a  percentage,  the incremental  tax  generated                                                              
from this new  production.  The tax  is a percentage of  the value                                                              
of that new  production.  If a  company's tax goes down,  then the                                                              
rate is  negative.  In  further response,  he agreed to  meet with                                                              
Co-Chair Saddler later for additional explanation.                                                                              
                                                                                                                                
2:36:19 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  resumed  his presentation,  moving  to  analysis  of                                                              
investments in  Alaska under ACES  relative to investments  in the                                                              
North Sea,  Canada oil sands,  and the Lower  48's Eagle  Ford and                                                              
Bakken.  Displaying  a graph depicting the production  profiles of                                                              
these five areas  [slide 27], he noted that production  for Alaska                                                              
and the  North Sea look  similar:   conventional plays  that reach                                                              
peak  production in  the first  few  years and  then decline  over                                                              
time, with  a long  time period  between making  an investment  to                                                              
initial production.   However,  the Bakken  and Eagle Ford,  where                                                              
much activity is  currently being seen, are different:   very high                                                              
production  at the  outset that  falls  off very  quickly, with  a                                                              
very short  time period  between making  an investment  to initial                                                              
production.     The  difference   in  the   time  period   between                                                              
investment  and  initial  production   is  important  in  how  the                                                              
economics compare, he explained.                                                                                                
                                                                                                                                
2:37:45 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM, in  response to Representative Tuck,  said that wells                                                              
in the  Eagle Ford  and the  Bakken can  be drilled very  quickly,                                                              
getting to production very quickly.                                                                                             
                                                                                                                                
2:37:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  inquired whether the  reason for that  is the                                                              
seasons and being unable to drill in Alaska year round.                                                                         
                                                                                                                                
MR. PULLIAM responded  it is the seasons, the  facilities, and the                                                              
availability of the  types of rigs.  In the Lower  48, much of the                                                              
equipment is interchangeable, which is not the case in Alaska.                                                                  
                                                                                                                                
REPRESENTATIVE  TUCK concluded  that when  looking at  what to  do                                                              
going forward,  it must  be considered  that Alaska  has a  longer                                                              
time  period compared  to these  other  investment scenarios  that                                                              
are being looked at.                                                                                                            
                                                                                                                                
MR. PULLIAM  answered that is the  case relative to the  Lower 48,                                                              
but less so for the North Sea.                                                                                                  
                                                                                                                                
2:38:45 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  returned  to  his   presentation,  noting  that  the                                                              
investment  metrics  used in  the  analysis  of how  Alaska's  tax                                                              
system  stacks up  relative to  elsewhere included:   net  present                                                              
value    (NPV),   internal    rate   of    return   (IRR),    cash                                                              
generation/margin,  profitability index,  and government  take, as                                                              
well  as the  net present  value  of the  state's revenues  [slide                                                              
28].  Information  for these metrics  is collapsed into  the chart                                                              
depicted  on   slide  29,  he   continued,  and  details   of  the                                                              
information  can  be  found  in the  appendix.    Information  for                                                              
Alaska is  located to the  left side of  the vertical line  in the                                                              
chart and information  for all of the other areas  is to the right                                                              
of the  vertical line.   Each  metric was  analyzed at three  West                                                              
Coast ANS prices:   $80, $100, and  $120 per barrel.   The numbers                                                              
in the top line  of the chart reflect the net  present value (NPV)                                                              
of the  investment to a  producer.  He  explained that NPV  is the                                                              
taking  of  all  future  positive  and  negative  cash  flows  and                                                              
bringing them  back to today  at the industry's  standard discount                                                              
rate  of  12 percent.    At  $80  per barrel,  development  of  50                                                              
million barrels [of  light conventional oil] in  Alaska would have                                                              
a net present value  of $2.55 to a new participant  and [$3.71] to                                                              
an incumbent.   The NPV is higher  to an incumbent because  of the                                                              
buy-down  effect in progressivity,  which  a new participant  does                                                              
not have.   Development of 50  million barrels of heavy  high cost                                                              
oil at $80 per  barrel in Alaska [has an NPV of  minus $4.51 for a                                                              
new participant  and  minus $2.43  for an incumbent],  so it  does                                                              
not pencil out  and would not be  undertaken at this price.   At a                                                              
price of  $100 and $120  [the NPV for  a new participant  is minus                                                              
$2.45 and minus  $1.09, respectively; for an incumbent  the NPV is                                                              
positive  $2.48  and  positive  $6.53,  respectively].    However,                                                              
these positive  NPVs for  the incumbent  producer under  ACES come                                                              
at a  cost to the State  of Alaska [of  $7.81 at a price  of $100,                                                              
and a cost of $4.31 at a price of $120].                                                                                        
                                                                                                                                
2:42:55 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  then drew attention to  the NPV figures on  the chart                                                              
for the  Eagle Ford,  Bakken, Canada  oil sands,  Norway, and  the                                                              
UK.   He noted the UK  has two different  tax rates, one  for pre-                                                              
1993 fields  and a lower  one for  fields brought into  production                                                              
post-1993.    At  $80  per  barrel, the  NPV  of  a  post-1993  UK                                                              
development  is  $2.41,  fairly   equivalent  to  that  of  a  new                                                              
participant  in  Alaska   for  light  oil.     The  UK's  recently                                                              
implemented   Brownfield    Allowance   greatly    increases   the                                                              
attractiveness of  investment, with the  NPV rising to $4.62  at a                                                              
price of $80.   At a price of $100 for light  oil, Alaska projects                                                              
do not stack up  as well for a new participant  as compared to the                                                              
benchmark  areas; for an  incumbent participant  the projects  are                                                              
more in  line with the  other areas but  not as attractive  as the                                                              
UK brownfield.   At  a price  of $100  for heavy  oil, the  NPV of                                                              
$2.48  for an  incumbent in  Alaska  does not  look so  attractive                                                              
when  compared  to that  of  the  other  areas.   So,  while  ACES                                                              
increases the attractiveness  of heavy oil in Alaska,  it does not                                                              
pencil  out  when   an  incumbent  looks  at  what   is  available                                                              
elsewhere at a price level of $100.                                                                                             
                                                                                                                                
2:45:26 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM, still  referencing the chart on slide  29, he further                                                              
noted  that the  profitability  index,  internal  rate of  return,                                                              
cash margins, and  government take are other important  things the                                                              
producers  look at  when making  investments.   The takeaway  from                                                              
the chart is that  the economics are probably not  yet quite right                                                              
for Alaska  heavy oil.   For light oil,  the economics  under ACES                                                              
are not  great relative  to opportunities elsewhere,  particularly                                                              
for  new participants.   Beside  low  NPVs, the  cash margins  for                                                              
both new  and incumbent participants  in Alaska are  not generally                                                              
as attractive  as  elsewhere.   Additionally, Alaska's  government                                                              
take is  fairly high,  particularly  for a new  participant.   For                                                              
someone  wondering why  Alaska  does not  have  more activity  and                                                              
more companies  participating, he  would suggest that  Alaska does                                                              
not look attractive relative to much of the rest of the world.                                                                  
                                                                                                                                
2:47:16 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  in response to  Representative Tarr,  confirmed that                                                              
the  government  take  depicted  on  slide  29  includes  the  top                                                              
federal tax rate of 35 percent.                                                                                                 
                                                                                                                                
REPRESENTATIVE TARR  requested Mr. Pulliam to provide  examples of                                                              
how a  producer could  affect its  federal tax  rate based  on its                                                              
investments in Alaska.                                                                                                          
                                                                                                                                
MR. PULLIAM  replied he  could break  down the  take by  state and                                                              
federal, but  advised that  it is  irrelevant from the  investors'                                                              
standpoint  because  the investors  are  interested  in what  they                                                              
will  walk away  with.    Alaska has  no  control over  what  that                                                              
federal rate is.   While it is true that tax paid  to the state is                                                              
deductible  from  the federal  tax,  the  investor does  not  care                                                              
where  it  is  going  when  it  is  going  someplace  besides  the                                                              
investor's pocket.                                                                                                              
                                                                                                                                
2:48:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON   understood  the   aforementioned   chart                                                              
encompasses  every kind  of tax,  including  Alaska's 9.4  percent                                                              
corporate income tax.   He pointed out, however,  that a company's                                                              
effective corporate income tax rate could be 6.6 percent.                                                                       
                                                                                                                                
MR. PULLIAM responded  he used 6.5 percent in  the analysis, given                                                              
that is closer to what the companies effectively pay.                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON presumed the  [state/municipal NPV]  is not                                                              
included [for the  benchmark areas] because it  is included within                                                              
the percent of government take.                                                                                                 
                                                                                                                                
MR. PULLIAM  confirmed it  is in  the total  government take.   He                                                              
said he  included the state/municipal  NPV for Alaska so  it could                                                              
be seen how Alaska's system works for the state.                                                                                
                                                                                                                                
REPRESENTATIVE  SEATON  inquired  whether  private  royalties  are                                                              
included in  the government  take section for  the Eagle  Ford and                                                              
Bakken areas.                                                                                                                   
                                                                                                                                
MR.  PULLIAM confirmed  the government  take  is generically  used                                                              
for all royalties  and taxes, and  said it is correct that  in the                                                              
Eagle  Ford  and Bakken  areas  most  of  the production  is  from                                                              
private lands and subject to private royalties.                                                                                 
                                                                                                                                
2:50:22 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  continued his presentation,  stating that  even under                                                              
ACES the  economics  of high cost  heavy oil  development are  not                                                              
yet quite right  [slide 30].  Referring  to the top left  chart on                                                              
the  slide,  he said  that  as  prices  climb  above $90  the  net                                                              
present value for  an incumbent is positive under  ACES, rising to                                                              
nearly $8  per barrel and  then tapering off.   But for  the state                                                              
(bottom left chart),  the NPV is negative as a result  of the buy-                                                              
down  and  a  result  of  the credits  going  out.    He  said  he                                                              
therefore  looked to see  if there  was a  system the state  could                                                              
put in place  that would help make  that a better deal.   He found                                                              
that even  if the state  had no taxes and  no credits the  NPV for                                                              
high cost heavy  oil is still not very attractive  until very high                                                              
price  levels.   However,  he qualified,  that  is  for today;  it                                                              
could be  different in  the future  as technology advances  making                                                              
it cheaper and easier  to get at heavy oil.  But,  right now, even                                                              
a no-tax  system probably would  not bring  on some of  that heavy                                                              
oil.   Moving to slide  31, Mr. Pulliam  noted that  the economics                                                              
for high cost light  oil development are a little  bit better than                                                              
for heavy oil,  but still not yet  quite ripe even with  no taxes.                                                              
The state  could pay companies to  produce by giving  credits, but                                                              
that may not be something the state wants to be doing.                                                                          
                                                                                                                                
2:53:19 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  next looked at  projected cash generation  from other                                                              
jurisdictions  and  ongoing  North Slope  production  under  ACES,                                                              
based on the  Department of Revenue's production  forecast for the                                                              
period  2017-2021 [slide  32].   He  explained  the chart  depicts                                                              
what would  happen if investment was  made today to bring  on this                                                              
production.   As the  price of  oil goes  up, the cash  generation                                                              
under ACES is not  as attractive as it is in  [Canada, Eagle Ford,                                                              
Bakken, Norway,  and the UK].  This  is a result of  Alaska's cost                                                              
structure and the progressivity, he said.                                                                                       
                                                                                                                                
2:54:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  whether the  line on  the chart  for                                                              
ACES assumes no buy-down on the tax rate by re-investment                                                                       
                                                                                                                                
MR.  PULLIAM answered  there  is  some buy-down  going  on in  the                                                              
depiction because  it assumes a continued level  of investment and                                                              
operating  cost in  Alaska and  the advancing  of new  investments                                                              
coming on.   The line depicting ACES  is done as an  overall slope                                                              
number, so  it assumes  a projection of  the new investments  that                                                              
are going to be taking place in this time period.                                                                               
                                                                                                                                
2:55:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  the  current system  was designed  to                                                              
stimulate investment  because prior to PPT and ACES  there was not                                                              
the level  of investment that  Alaska wanted to  see.  He  said he                                                              
is asking whether  the analysis was done looking  at investment in                                                              
the status quo or  looking at a stimulation of investment.   If it                                                              
considered stimulation  in investment  then it would  also include                                                              
the corresponding  credits  the state  is paying  out.  Given  the                                                              
state is  paying out  a billion  dollars in  credits per  year, he                                                              
maintained that increased investment appears to be happening.                                                                   
                                                                                                                                
MR. PULLIAM  clarified that [slide  32] is for the  producers, not                                                              
the State of Alaska.   The graph looks at the  cash that producers                                                              
would expect to  take out of Alaska assuming all  of that activity                                                              
occurs, so  it does assume  credits in there  as well.   This goes                                                              
to Representative  Tuck's question,  he said.   Why is  Alaska not                                                              
getting what was  hoped for out of the ACES system?   He suggested                                                              
one  reason   is  that  when   companies  look  at   their  Alaska                                                              
operations, they  see what  is shown on  this chart -  Alaska does                                                              
not generate  a lot of  cash relative to  what the company  can do                                                              
elsewhere.   That is  an important aspect  for companies  that are                                                              
looking   to  pay   shareholders   and   to  provide   funds   for                                                              
reinvestment, he stressed.                                                                                                      
                                                                                                                                
2:57:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  asked  whether   the  cash  margin  per  barrel                                                              
depicted on the graph is the same as profit per barrel.                                                                         
                                                                                                                                
MR.  PULLIAM responded  it is  different  than profit;  it is  the                                                              
amount  of  cash that  the  producer  gets.    It is  profit  with                                                              
depreciation  added back in,  which is  an expense against  profit                                                              
and which  is not  an outflow  of cash.   It  is a deduction  when                                                              
calculating a company's  accounting profit.  When  looking at what                                                              
a company's cash flow is, that deduction is added back in.                                                                      
                                                                                                                                
2:57:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON returned to  slide 29  and observed  the 5-                                                              
year  cash  margins for  new  and  incumbent producers  in  Alaska                                                              
compared  to the  Eagle  Ford.   He  asked  why the  cash  margins                                                              
depicted  on the  chart on  slide 32  are lower  than the  numbers                                                              
shown on slide 29.                                                                                                              
                                                                                                                                
MR. PULLIAM answered  that the slides are two  different pieces of                                                              
analysis.  The table  on slide 29 looks at the  economics of a new                                                              
investment;  it looks at  just that  investment on a  stand-alone.                                                              
The graph  on slide  32 looks  at cash  flow for  the whole  North                                                              
Slope for  this [same  time period  of 2017-2021],  so it  is more                                                              
than just the new  investment and is across all  operations - both                                                              
ongoing and new.   In further response, he said  the difference in                                                              
the two  is that  [slide 29]  is for a  single investment  whereas                                                              
[slide 32]  is the cash flow  for all ongoing operations  so there                                                              
is  melding that  is  going  on.   He  agreed to  provide  further                                                              
explanation to Representative Seaton at a later time.                                                                           
                                                                                                                                
3:01:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  announced the  committee  would  stand in  recess                                                              
until 3:30  p.m.   [HB 72  was taken  up again  at 7:49 p.m.  this                                                              
same day.]                                                                                                                      
                HB  72-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
7:49:32 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM continued  his review  of  projected cash  generation                                                              
per barrel  from ongoing  production under  ACES in comparison  to                                                              
other jurisdictions  [slide  32].   He explained  the graph  is an                                                              
average across  all of the  North Slope  and is not  reflective of                                                              
an incremental  investment.   Cash is  generated from all  ongoing                                                              
activity  and  the  graph  compares  it  with  the  cash  that  is                                                              
available from  other locations, and it  can be seen on  the graph                                                              
that the effect  of progressivity keeps the cash  generation lower                                                              
in Alaska than in other jurisdictions.                                                                                          
                                                                                                                                
7:50:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  inquired why the  line depicting Canada  is stair-                                                              
stepped while the lines depicting the other areas are smooth.                                                                   
                                                                                                                                
MR. PULLIAM replied  Canada has different brackets in  the way its                                                              
very complex system is applied.                                                                                                 
                                                                                                                                
7:50:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  noted Norway has a 78 percent  tax and a 28                                                              
percent  [indisc.].   Observing from  the graph  that at $100  per                                                              
barrel  the cash  margin  for Norway  is  $40,  he concluded  this                                                              
depicts a tax rate of 60 [percent].                                                                                             
                                                                                                                                
MR. PULLIAM  responded no,  there is still  that [78  percent] tax                                                              
rate at  least in  the initial  period.   He explained  Norway has                                                              
some  uplifts  and  some  recovery   of  costs  that  add  to  the                                                              
producer's margin in  the first number of years  of production, so                                                              
the complexity of  Norway's overall system gives the  look seen on                                                              
the graph.   That higher margin is  a function of the  uplifts and                                                              
the  recovery of  that initial  investment  against the  different                                                              
taxes in Norway.                                                                                                                
                                                                                                                                
7:52:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  related that when [Alaska  legislators] met                                                              
with Norway's oil  finance minister, the minister  said the uplift                                                              
was to  partially mimic or  get to where  Alaska is  with allowing                                                              
deductibility in the  year.  Given that Alaska's  and Norway's tax                                                              
rates are  very similar,  he asked  why the  graph depicts  such a                                                              
huge  discrepancy  between  the  two  areas.    He  further  asked                                                              
whether  the graph  depicts the  initial years  for Norway  rather                                                              
than the ongoing.                                                                                                               
                                                                                                                                
MR. PULLIAM answered  the graph is for the initial  years in and a                                                              
lower  margin will  probably be  seen  later in  the lifecycle  in                                                              
Norway.                                                                                                                         
                                                                                                                                
7:53:05 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM resumed  his presentation, specifying  it is important                                                              
to  think about  investment opportunities  as  well as  industry's                                                              
perception  of  Alaska's  system  [slide  33].   He  related  that                                                              
reports published  about  the different systems  around the  world                                                              
talk about  Alaska's  tax rate being  between  25 and 75  percent,                                                              
which  is an  accurate  description.   For  example,  in 2011  the                                                              
consulting firm IHS  CERA did a report for the  U.S. Department of                                                              
Interior.   [Page 225]  of that report  describes Alaska's  fiscal                                                              
system  and  states Alaska's  profit  tax  is  between 25  and  75                                                              
percent.   People looking at  this kind  of report do  not scratch                                                              
down through  the surface  to figure out  what rate applies,  they                                                              
see  the  report and  that  is  their initial  perception  of  the                                                              
state.   This  is consistent  with what  Commissioner Sullivan  is                                                              
reporting about  his talks with  companies interested in  Alaska -                                                              
their impression right  off the bat is that Alaska's  tax rates go                                                              
up pretty high.                                                                                                                 
                                                                                                                                
7:55:09 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  noted the  2011 IHS  CERA report  also ranked  fiscal                                                              
systems  throughout  the world  to  help  the U.S.  Department  of                                                              
Interior gauge  the competitiveness  of the federal  system [slide                                                              
34].   Alaska's fiscal  system was ranked  second to  the highest,                                                              
which is not  a good place because from an  investor's perspective                                                              
the lower the ranking  the better.  While he does  not necessarily                                                              
agree with  the complex way that  this rating system was  done, he                                                              
said it is  published and is  what people are seeing  when looking                                                              
at participating  in Alaska.   Responding to Co-Chair  Saddler, he                                                              
said  the  parameters  used in  this  ranking  include  government                                                              
take, profitability  index  (PI), internal  rate of return  (IRR),                                                              
and progressivity/regressivity.   He explained the  method used in                                                              
this  ranking gives  a poorer  score  to systems  that are  highly                                                              
progressive  or  regressive,  so relatively  neutral  systems  get                                                              
better scores  from an investor's  standpoint.  Another  parameter                                                              
used is  revenue risk,  which has  to do with  the timing  of when                                                              
the sovereign  receives its  money.  Also  used as a  parameter is                                                              
the stability of  the system over time, which  considers the types                                                              
of change  that have  occurred in  the fiscal  system, as  well as                                                              
the  applicability, degree,  and frequency  of change.   There  is                                                              
subjectiveness to  the way the ranking  is done, but this  is what                                                              
people are  looking at  and from  an investor's standpoint  Alaska                                                              
is  at  the  tougher  end  of  the  spectrum.    This  ranking  is                                                              
consistent  with  what  is  seen  in  government  take  statistics                                                              
generally  in which  Alaska  has  some of  the  higher numbers  in                                                              
government take.                                                                                                                
                                                                                                                                
7:58:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK noted chapter  4 of  the book, [The  Taxation                                                            
of Petroleum  and  Minerals: Principles,  Problems and  Practice],                                                            
discusses  that  the  effectiveness  of  a tax  regime  cannot  be                                                              
looked at by  the tax rates alone.   He therefore asked  what else                                                              
legislators  should  be  considering  with the  fiscal  system  of                                                              
Alaska when comparing slides 33 and 34.                                                                                         
                                                                                                                                
MR. PULLIAM  replied  the chart  [on page  34] looks  at a lot  of                                                              
different  categories.  The  take is  a measure  of the  tax rate.                                                              
The  type  looks  at  whether  it  is  progressive  or  regressive                                                              
system.    The PI  and  the  IRR  measure whether  the  system  is                                                              
designed in a  way that provides acceptable profitability  for the                                                              
investor.   The four categories  of [type, applicability,  degree,                                                              
and frequency  of change] measure how  stable a system is  and how                                                              
responsive  it is.   Stability and  competitiveness are  important                                                              
components for investors  in thinking about a fiscal  system.  So,                                                              
yes, the  tax rate  is important,  as are  the competitiveness  of                                                              
the government  take and the degree  to which the system  is going                                                              
to stay  in place  and not  be subject  to change.   A  frequently                                                              
changing system  makes it difficult  to plan,  so the risk  of the                                                              
investment  is greater.    People want  to  see a  system that  is                                                              
durable   and  will   last   for  as   long   as  is   reasonable.                                                              
Circumstances in the  world change and that necessitates  at times                                                              
that  systems  change.   Investors  appreciate  that  systems  are                                                              
dynamic  in some  ways.  A  key factor  is that  investors can  be                                                              
confident  that   if  changes  occur,   the  system   will  remain                                                              
competitive and  attractive relative to  what the investor  can be                                                              
doing elsewhere.                                                                                                                
                                                                                                                                
8:01:28 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM next  addressed the administration's  proposed changes                                                              
in HB  72 [slide 36].   He outlined  key aspects of  the proposal,                                                              
saying it  would:   establish a  25 percent  flat [net tax]  rate,                                                              
which  is the  current  base  rate, and  eliminate  progressivity;                                                              
eliminate capital  credit and state purchase of  losses; establish                                                              
a 20  percent gross revenue  exclusion (GRE) to  incent production                                                              
of  new   oil;  allow  producers   to  recover  losses   from  the                                                              
development  phase by  carrying them  forward  to when  production                                                              
occurs and  a tax obligation  is incurred  to count them  against;                                                              
extend  the new  entrant or  small producer  credit through  2022;                                                              
and not change the tax structure outside the North Slope.                                                                       
                                                                                                                                
8:03:05 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  reviewed benefits  of  HB  72, specifying  it  would                                                              
provide  a balance  between  the state  and  the producers  [slide                                                              
37].  Reduction  of tax rates  at higher prices would  be balanced                                                              
with  elimination  of  credits.    The  state  would  continue  to                                                              
receive the largest  percentage of oil production  revenues at any                                                              
price  -  larger  than  the federal  share  and  larger  than  the                                                              
producer  share.  The  bill would  provide tax  relief and  higher                                                              
margins in a sustainable  price range, which is about  $80 to $140                                                              
per barrel.   He noted  that prices above  and below  those levels                                                              
would be hard  to sustain on an  ongoing basis, but that  does not                                                              
mean  such prices  might not  occur from  time to  time.   Another                                                              
benefit of  the bill  is that it  would greatly simplify  Alaska's                                                              
tax system  and provide better clarity  for planning.  It  will be                                                              
easier  to   factor  in  how  the   system  is  going   to  impact                                                              
investments, will  eliminate the high marginal tax  rate, and will                                                              
eliminate  the uncertainty  of what  a producer's  tax will  be at                                                              
different  prices.    It eliminates  incentive  for  producers  to                                                              
"gold plate"  by spending  money less  efficiently at high  prices                                                              
when the state's share of spending rises to almost one for one.                                                                 
                                                                                                                                
8:05:58 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  continuing his review  of the bill's  benefits, said                                                              
it maintains  an alignment  between the  state and the  producers'                                                              
economics by  staying with  a net tax system.   The  gross revenue                                                              
exclusion (GRE)  provides a  way to lower  the effective  tax rate                                                              
for  new  development  without  the  treasury  having  to  provide                                                              
significant funds  upfront to  do the same.   The GRE  substitutes                                                              
economically  for those credits  that the  state provides  because                                                              
it  allows the  producers to  keep a  greater share  of what  they                                                              
produce when  it actually comes on  line.  Finally, the  bill will                                                              
send a  very positive  message to potential  investors as  well as                                                              
to those  already here.  It  will encourage broader  participation                                                              
on  the North  Slope, which  is something  the state  needs.   The                                                              
bill will  move the economics of  new participants closer  to what                                                              
the incumbents enjoy.                                                                                                           
                                                                                                                                
8:07:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON, in regard  to maintaining the  incentives,                                                              
recounted   that  when   the   legislature   was  developing   the                                                              
production  profits tax  (PPT) and  Alaska's  Clear and  Equitable                                                              
Share  (ACES),  the  companies  testified  that  tying  investment                                                              
credits to  production would not  incentivize them because  of the                                                              
long  lead times;  that  it  was most  appropriate  to  tie it  to                                                              
investment because those  investments are made up front  and are a                                                              
known  quantity.     He   inquired  whether   industry  told   the                                                              
legislature  wrong, given  that now  the  proposal is  to tie  the                                                              
credits to production.                                                                                                          
                                                                                                                                
MR. PULLIAM responded  that is a good recollection  of the history                                                              
and said  he can understand  from the beneficiary's  viewpoint why                                                              
the  beneficiary  would  rather have  that  credit  guaranteed  by                                                              
tying  it to  the outlay  of capital  as  opposed to  performance-                                                              
based production.   However,  he continued,  what is being  talked                                                              
about  here is  eliminating  the  credit itself  and  the need  to                                                              
provide  that  outlay, but  rather  letting  the producer  keep  a                                                              
greater  portion of  the  profits that  come  from the  production                                                              
itself.   Some  people  say that  the credits  do  not offset  the                                                              
increased take  of progressivity at  prices of $90 per  barrel and                                                              
higher.   Progressivity bites more  than the credit  provides from                                                              
the producers'  standpoint.  Under  HB 72, eliminating  the credit                                                              
and also eliminating  the progressivity maintains  the appropriate                                                              
economic  incentives,  and inclusion  of  the GRE  enhances  those                                                              
incentives without having to provide that credit up front.                                                                      
                                                                                                                                
8:11:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  recalled  testimony before  the  committee                                                              
about  new oil  where the  companies stated  that if  expenditures                                                              
were made  in a new field  that turned out  to be dry  there would                                                              
be no help from  the state and so no security.   The testimony was                                                              
that to  incentivize development it  was much more  appropriate to                                                              
have  it tied  to investment.   Now  it  is being  said they  will                                                              
invest,  when before  the companies  said it  would not  stimulate                                                              
investment.                                                                                                                     
                                                                                                                                
MR. PULLIAM  answered he does  not think  the context of  what was                                                              
put  forward  to  the companies  before  was  whether  they  would                                                              
rather have  the credits  and pay  a higher tax  rate or  not have                                                              
credits and  pay a  lower tax rate.   What  is being talked  about                                                              
here, he  said, is  a credit  versus a  higher tax rate  tradeoff.                                                              
The system  proposed under HB  72 maintains appropriate  economics                                                              
for the incumbents  to continue and expand investment  by lowering                                                              
the tax rate  even though the credit  is being removed.   Also, it                                                              
enhances those  economics particularly  for new participants  even                                                              
though the  state is  not going  to be  buying those credits  from                                                              
them up  front, because it  removes progressivity and  offers them                                                              
the  GRE  and  allows  an uplift  on  their  initial  outlays  for                                                              
development.   All  of those  things  factor in  to enhancing  the                                                              
investment decision.                                                                                                            
                                                                                                                                
8:13:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  said a criticism of the credits  is that they                                                              
are being applied  to maintenance costs and things  not related to                                                              
production.   However,  [the state]  needs the  companies to  keep                                                              
making  those maintenance  investments  for  some  period of  time                                                              
until the  new production  comes on.   So, it  appears there  is a                                                              
timing issue where  there is a disincentive now for  some of those                                                              
costs  because the  companies would  not  have the  credits.   She                                                              
requested Mr.  Pulliam to  speak to  how other jurisdictions  deal                                                              
with credits and whether they are up front.                                                                                     
                                                                                                                                
MR. PULLIAM  replied that  from his review,  where those  types of                                                              
things are  offered they  are typically  taken against  production                                                              
and taxable  income.   He surmised that  imbedded in  the question                                                              
is a  concern that  removing the  credits removes the  appropriate                                                              
incentives to continue with necessary maintenance.                                                                              
                                                                                                                                
8:15:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  agreed that is  correct in part, but  said it                                                              
seems to her that  the timing is not totally in  sync with ongoing                                                              
costs that  might be happening  in the near  term related  to what                                                              
happens when new production comes on.                                                                                           
                                                                                                                                
MR.  PULLIAM responded  part  of  any business  endeavor  involves                                                              
making  an investment  up front  in hopes  of making  a profit  on                                                              
that investment,  and the oil industry  is very typical  that way.                                                              
The companies  make an investment  up front - they  explore, shoot                                                              
seismic, drill exploratory  wells, and then develop.   The largest                                                              
part of  the expense  is in  the development  and then after  that                                                              
the  company  gets   production.    The  industry   is  very  well                                                              
accustomed   to  footing   the  bill  for   that  development   in                                                              
anticipation  of receiving  a profit on  it down  the road.   When                                                              
Alaska went to the  PPT system, and more so when  it went to ACES,                                                              
the  state  said  it  was going  to  provide  companies  a  bigger                                                              
incentive  to make  that upfront  investment by  giving them  this                                                              
credit, but would  recover that by taking more of  the profit down                                                              
the road.   The state tried to  tilt the scale to  accelerate that                                                              
investment,  thinking that by  providing more  up front,  it would                                                              
be  sufficient  for industry  to  forego  a  bigger piece  of  the                                                              
revenue stream  down the road;  however, it  has not worked.   The                                                              
proposed  legislation,   he  continued,   removes  those   upfront                                                              
credits   and   significantly   reduces    the   amount   of   the                                                              
progressivity  down the road  when the  production actually  comes                                                              
on.  This would  put Alaska to being more like  what the companies                                                              
experience in the  rest of the world, which is the  norm and is an                                                              
environment in which the companies know how to play.                                                                            
                                                                                                                                
8:17:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  stated that at  high oil prices  more capital                                                              
is available for  producers to buy down their tax  rates by making                                                              
sure they invest  in Alaska.  It  does not help them  investing it                                                              
outside of  Alaska, but it greatly  benefits them here  in Alaska.                                                              
There is  17 percent more  investment from  one year to  the next,                                                              
and by  adding that  17 percent,  industry can  get 63-95  percent                                                              
more tax  break [slide 23].   He said  it seems that  reducing the                                                              
tax  rates   at  high   prices  and   then  balancing   that  with                                                              
eliminating the  credits is  doing just the  opposite -  the state                                                              
is giving  more profit back, but  there is no guarantee  that that                                                              
is  going  to  be spent  in  Alaska,  especially  when  those  tax                                                              
credits are  eliminated.  [For new  participants] the state  has a                                                              
10-year period  in which those  tax credits  can be carried.   The                                                              
span between  investment and  start of  production is much  longer                                                              
in Alaska than  elsewhere due to the seasonal  limitations on when                                                              
work  can be  done.   Giving upfront  credits frees  cash for  the                                                              
company to  invest next year.   He asked whether the  problem [the                                                              
administration]  has with  this provision  of ACES  is that  it is                                                              
hard to know  whether [the credits]  will lead to production.   He                                                              
further  asked  why  the  state   would  not  want  to  have  more                                                              
investment in  Alaska and let industry  determine what is  best to                                                              
get oil down the line, given that is what industry wants to do.                                                                 
                                                                                                                                
8:20:02 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM answered  industry wants  to make  money and  getting                                                              
oil down  the line is  industry's way to  make money, but  only if                                                              
it can keep a  competitive portion of what it puts  down the line.                                                              
He  agreed that  moving  the tax  rate  down and  eliminating  the                                                              
credits is  opposite of where the  state is now.   Providing those                                                              
big credits and  having the progressivity means that  as long as a                                                              
company  brings that  money  back to  Alaska,  then it  is a  good                                                              
deal.  But  if the company decides  not to, then it is  not a good                                                              
deal.  If you  were an investor looking at where  to invest, would                                                              
you  want  to invest  someplace  where  you  have the  freedom  to                                                              
respond to oil  and market opportunities and reinvest  your profit                                                              
where it makes  sense?  Or, would  you rather spend your  money in                                                              
a place  that says it  will let you  earn those profits,  but only                                                              
if  you keep  them here?   Alaska's  current  system provides  for                                                              
bringing the funds  back to Alaska, but that does  not produce the                                                              
same quality  of profit that can  be produced elsewhere.   That is                                                              
like owing money  to someone and asking whether  that person would                                                              
like cash  or a gift  certificate.  Which  would you  rather have,                                                              
which is more valuable?   The norm elsewhere is you  get the cash.                                                              
Investors would find  it much more valuable and  would find Alaska                                                              
much more  attractive as  an investment  opportunity if  they have                                                              
the  freedom  to use  their  profits  in  the best  way  possible.                                                              
While there  would be  no guarantees that  they would  reinvest in                                                              
Alaska, the  state can  provide a  competitive system that  allows                                                              
investors  to then  respond  to normal  market  incentives to  put                                                              
that money back  here.  If investors can earn in  Alaska what they                                                              
can  earn elsewhere,  the state  ought to  see it  put back  here.                                                              
Alaska is  allowing them  to earn  essentially gift  certificates,                                                              
and giving  them something  they can  get elsewhere.   He  said he                                                              
thinks that  is part of  the reason why  Alaska is not  seeing the                                                              
behavior it thought it would see under ACES.                                                                                    
                                                                                                                                
8:23:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  said he is having  a hard time  with bringing                                                              
down Alaska's system  to the lowest common denominator  and hoping                                                              
to see  investments in Alaska.   All activity  on the  North Slope                                                              
leads to  production at  some time because  everybody wants  to be                                                              
profitable.   It almost  makes more  sense that getting  companies                                                              
to  produce and  then  reducing will  guarantee  that money  comes                                                              
into Alaska  and is reinvested in  Alaska, he argued.   During the                                                              
days of  the economic  limit factor  (ELF), Alaska's fields,  some                                                              
of the  largest fields  in North America,  still declined  and did                                                              
not flatten  out.  The  declines are natural  and Prudhoe  Bay has                                                              
been [producing]  for 35 years.   He asked how long the  North Sea                                                              
has been [producing].                                                                                                           
                                                                                                                                
MR. PULLIAM replied they were developed about the same time.                                                                    
                                                                                                                                
8:24:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  stated he does not see the  North Sea curving                                                              
up any differently than is Alaska.                                                                                              
                                                                                                                                
MR. PULLIAM  responded the United  Kingdom (UK) has  recently made                                                              
significant changes  to its  system to try  to address that.   The                                                              
UK and other  places got caught  up with trying to  increase taxes                                                              
as  those natural  declines  were occurring  and  prices went  up.                                                              
They found that  it continued to scare off investment  and, unlike                                                              
in  many other  places, as  prices  have come  up the  UK has  not                                                              
gotten  the kind  of  response  it was  looking  for.   North  Sea                                                              
production  is down  just like  it  is in  Alaska and  the UK  has                                                              
taken  measure to  address that.   Recognizing  that not  everyone                                                              
will  agree with  him,  he  said he  thinks  it is  a  fundamental                                                              
matter  of  economics  that  incenting   activity  requires  being                                                              
competitive  with  the other  opportunities  that  are out  there.                                                              
Also, he continued,  a system that does not attach  strings to the                                                              
profit earned  is better quality  and more attractive.   Those are                                                              
the appropriate  kinds of incentives to provide  to profit-seeking                                                              
companies  to  make investments.    When  those freedoms  are  not                                                              
allowed,  there  is  not  the same  quality  of  opportunity  that                                                              
exists  elsewhere  and  a  natural  result of  that  is  that  the                                                              
desired kind of activity will not be seen.                                                                                      
                                                                                                                                
8:27:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   disagreed  with  Mr.   Pulliam's  earlier                                                              
statement that the  reaction under ACES was not  as anticipated or                                                              
was  not  very  good.    He pointed  out  that  a  number  of  new                                                              
companies, such  as "Repsol, Brooks  Range, ENI, Stat  Oil, Loyal,                                                              
Great Bear,  Savant," are  now on  the North  Slope that  were not                                                              
there before  [ACES] and just about  half of the  total investment                                                              
credits are in that  investment.  He allowed that  tweaks could be                                                              
made, but  asked how  it can  be said  that ACES  has not had  the                                                              
desired effect  given that  activity and  that many new  companies                                                              
have come into Alaska.                                                                                                          
                                                                                                                                
MR. PULLIAM maintained  a great number of those  companies were in                                                              
Alaska before  enactment of  ACES.  He said  Pioneer is  a company                                                              
that has gone through ELF, PPT, and ACES and is still here.                                                                     
                                                                                                                                
REPRESENTATIVE SEATON noted he did not mention Pioneer.                                                                         
                                                                                                                                
MR.  PULLIAM  continued,   saying  ENI  bought  its   interest  in                                                              
Nikaitchuq  before ACES  was in  place.   Repsol  was courted  and                                                              
attracted to  Alaska by Armstrong,  the same folks  that attracted                                                              
ENI.  He  said he thinks the  interest is due to the  resource and                                                              
given where prices  have gone there would have  been more interest                                                              
had there  been a more  simple system without  the high  take that                                                              
Alaska has.                                                                                                                     
                                                                                                                                
8:29:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR said the  7-10 year  timeframe that  has been                                                              
discussed as  the amount of time  it takes to bring  on production                                                              
is affirmed  in HB 72 because  the proposed certificates  are good                                                              
for  10 years.    She therefore  asked  whether  the situation  is                                                              
being  assessed prematurely  because there  has not  yet been  the                                                              
typical timeframe to bring on new production.                                                                                   
                                                                                                                                
MR.  PULLIAM  answered that  is  certainly  something to  keep  in                                                              
mind,  but said  he does not  think it  premature  to look at  the                                                              
effects  five years  into ACES and  six years  since PPT  passage.                                                              
As  indicated   by  the  slides   earlier  in  his   presentation,                                                              
production was  looked at along  with other measures  of activity,                                                              
such  as  drilling  and investment,  and  those  things  have  not                                                              
increased  under ACES as  they have  elsewhere in  the world.   As                                                              
prices  have  gone   up,  those  activity  levels   have  gone  up                                                              
elsewhere.     Looking   at  all   of  that   in  combination   is                                                              
instructive.   Given the kind of  price increase and what  is seen                                                              
elsewhere,  it would  be expected  to  have a  bigger increase  in                                                              
Alaska and  the question  is why  not.  He  charged that  ACES has                                                              
been an  impediment to more  activity and  to putting Alaska  in a                                                              
more robust situation.                                                                                                          
                                                                                                                                
8:31:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON cautioned members about  going under the                                                              
premise  that ACES was  totally planned  out and  that it  planned                                                              
for certain  things to  happen.  She  pointed out that  amendments                                                              
were  made  on the  floor  with  no  clue  as to  how  they  would                                                              
interact with each  other, so there is no way to  look at ACES and                                                              
say there was a plan.                                                                                                           
                                                                                                                                
MR. PULLIAM  replied  he was less  involved with  the ACES  debate                                                              
than he was with  PPT.  The PPT was a major change  from the prior                                                              
system and  a lot of thought  went into it,  he said.  It  was new                                                              
ground  that  was  being  charted   and  a  lot  of  analysis  and                                                              
consideration  was paid to  what was an  appropriate tax  rate and                                                              
what  kind of  progressivity  could be  put  in place  so that  if                                                              
prices went up substantially  the take would go up.   While he was                                                              
less involved  with  ACES, where  he was involved  he was  telling                                                              
people  to be  very  careful about  moving  up that  progressivity                                                              
piece.   A  lot of  the reason  for moving  it was  based on  some                                                              
analysis  strictly  involving  internal  rate of  return.    While                                                              
internal rate of  return is a measure to use, it  is certainly not                                                              
a deciding  measure  and one  that he  would be  very cautious  in                                                              
using on  its own.   He recalled that  the move from  0.25 percent                                                              
progressivity  to 0.4  percent came  very  quickly at  the end  of                                                              
session  and  the  ramifications  of  the 0.4  were  not  as  well                                                              
considered,  particularly  given the  kind  of changes  in  price.                                                              
Back then  people did  not think  high prices  of $100 per  barrel                                                              
could happen  and that if they did  it would not be  sustained for                                                              
more than  a month every  three or four  years, and  therefore the                                                              
high progressivity  would not  do much damage.   However, it  is a                                                              
different situation  if that  is where the  price is on  a regular                                                              
basis.   He offered his agreement  with much of  Representative P.                                                              
Wilson's characterization.                                                                                                      
                                                                                                                                
8:35:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  pointed  out  that  credits  were  adopted                                                              
before PPT  and ACES, and  then noted that  nothing is  being said                                                              
about the  balancing act that  took place  when PPT and  ACES were                                                              
being discussed.   Under  the previous gross  tax, a  company paid                                                              
tax  whether it  made  or lost  money.   The  companies asked  for                                                              
protection  on the  downside, but  he  is not  seeing any  balance                                                              
with the downside  protection coming back in with  taking away the                                                              
progressivity.   The  two elements  of balance  - giving  downside                                                              
protection  while  taking  more of  the  upside  - are  not  being                                                              
looked at.  He requested Mr. Pulliam to discuss this.                                                                           
                                                                                                                                
MR. PULLIAM  addressed the  request by moving  to slide 38  in his                                                              
presentation  regarding  the average  government  take under  ACES                                                              
versus HB  72 for all  existing North  Slope producers  for fiscal                                                              
years 2015-2019.   He explained that under ACES  the percentage of                                                              
government take  rises [as the price  per barrel rises]:   at just                                                              
above $80  per barrel, government  take reaches [approximately  64                                                              
percent], which  is the take also  envisioned under HB 72  at that                                                              
price;  the take  continues upward  until reaching  75 percent  at                                                              
higher  prices [of  $150 and  above].    Under  HB 72,  government                                                              
take at  [$70 per barrel] is  actually greater [about  66 percent]                                                              
than  under  ACES [about  62  percent],  then it  [decreases]  and                                                              
flattens out  as prices  increase [about 62  percent take  at $160                                                              
per  barrel].   So, HB  72  actually has  a  little more  downside                                                              
protection than there currently is under ACES.                                                                                  
                                                                                                                                
8:38:31 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM next  compared the  average government  take at  $100                                                              
per  barrel for  jurisdictions  throughout  the world  for  fiscal                                                              
years 2015-2019  (slide 39  prepared by PFC  Energy).  He  said he                                                              
used PFC's  data from slide  39 to develop  the graph on  slide 40                                                              
[depicting average  government take for all existing  producers in                                                              
Alaska under ACES  and under HB 72, and the average  of government                                                              
take for  the other jurisdictions].   The average  government take                                                              
for the other  jurisdictions stays at about 65  percent [at prices                                                              
ranging from $70  to $160 per barrel].  Looking at  only the major                                                              
OECD jurisdictions,  the average  government take starts  at about                                                              
65 percent  [at $70 per barrel] and  falls to about 63  percent as                                                              
prices  go  up  [to  $160 per  barrel].    He  said  this  decline                                                              
reflects a  slight regressivity  due mostly to  the effect  of the                                                              
gross-based  royalty and  tax system  used in  the Lower 48  which                                                              
gives  a somewhat  regressive take.    [Under HB  72, the  average                                                              
government  take begins  at about  65 percent  at $70 per  barrel,                                                              
falling to  about 62 percent at  $160 per barrel; under  ACES, the                                                              
average  government  take  begins  at about  62  percent  at  $70,                                                              
rising to about 75 percent at $160.]                                                                                            
                                                                                                                                
8:40:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  inquired whether the  aforementioned graphs                                                              
include downside  protection in  credits, as he  does not  see any                                                              
change in  HB 72 as  far as changing  the production  tax downside                                                              
protection.                                                                                                                     
                                                                                                                                
MR.  PULLIAM  responded  yes,  credits   are  factored  into  this                                                              
analysis  as they are  part of  the government  take.  Under  ACES                                                              
the state  provides a tax  credit of 20  percent even  when prices                                                              
go down and that is a big part of what is being seen.                                                                           
                                                                                                                                
REPRESENTATIVE SEATON  surmised that [HB  72] does not  change the                                                              
downside protection  in the  production tax,  but just  takes away                                                              
the upside.                                                                                                                     
                                                                                                                                
MR. PULLIAM  understood current  law has a  floor of 4  percent on                                                              
the gross  and said he does  not think the proposal  changes that.                                                              
The base level of  25 percent is maintained [in HB  72], so at low                                                              
prices the  tax is 25  percent without  credits, which  provides a                                                              
higher take than currently under ACES.                                                                                          
                                                                                                                                
8:41:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  observed that slide 40 is  for all existing                                                              
producers and  asked whether  Mr. Pulliam  will be addressing  the                                                              
effect of the GRE when it becomes a large percentage of the oil.                                                                
                                                                                                                                
MR.  PULLIAM  answered   he  will  have  analysis   later  in  his                                                              
presentation  that  looks at  how  the GRE  would  play  out.   He                                                              
pointed  out that  the  gross revenue  exclusion  does apply  here                                                              
because it  is a forecast  of fiscal years  2015-2019 and  some of                                                              
the production during those years will qualify for the GRE.                                                                     
                                                                                                                                
REPRESENTATIVE SEATON asked which production is included.                                                                       
                                                                                                                                
MR.  PULLIAM replied  Nikaitchuq  and Oooguruk  would qualify  for                                                              
the GRE.   In further  response, he said  those two fields  are on                                                              
right now.                                                                                                                      
                                                                                                                                
CO-CHAIR FEIGE noted the unit was formed after January 1, 2004.                                                                 
                                                                                                                                
8:43:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  observed slide 40  only goes down to  a price                                                              
of $70  and inquired  whether Mr. Pulliam  thinks prices  will not                                                              
go down  below that.   Perhaps  the prices  should go down  lower,                                                              
she  suggested,  in the  interest  of  being cautious  given  that                                                              
during the ACES  debate no one predicted that oil  prices would go                                                              
so high.                                                                                                                        
                                                                                                                                
MR.  PULLIAM agreed  to provide  an  expansion of  the graph,  but                                                              
cautioned  against  putting too  much  weight  on it  because  the                                                              
challenge  of  $60 per  barrel  is  whether  it is  a  sustainable                                                              
number.    That  price would  be  uneconomic,  he  explained,  and                                                              
therefore a  lot of  production that is  occurring now  would just                                                              
fall off.   That is not to say  there would be no time  periods in                                                              
which the  price could  fall below $70,  he continued,  because in                                                              
2009 prices  dropped $100 per  barrel in  the course of  6 months,                                                              
but they did not stay there very long.                                                                                          
                                                                                                                                
8:45:00 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  resumed  his presentation,  moving to  slide 41.   He                                                              
pointed  out that  under [HB  72], cash  generation [from  ongoing                                                              
North Slope  production during  fiscal years  2017-2021] moves  up                                                              
[as prices  increase from $70 to  $160 per barrel].  He  said this                                                              
cash generation  is in  the range  seen elsewhere  in the  OECD, a                                                              
positive for the investment community.                                                                                          
                                                                                                                                
MR. PULLIAM  next posed a  hypothetical scenario of  a 50-million-                                                              
barrel  field  of  light  conventional  oil  developed  by  a  new                                                              
participant in  Alaska [slide 42].   He compared the  annual state                                                              
revenues  and producer  cash flows  of ACES  with HB  72 for  this                                                              
hypothetical field at  a West Coast ANS price of  $100 per barrel.                                                              
He said he  used this field size  because it is the kind  of field                                                              
that is  recently being  discovered  and which  is expected  to be                                                              
seen more often than  a large field.  Under ACES,  the NPV is $192                                                              
million and  the cash  flow for  the producer  over the  course of                                                              
the project  would be  [$981 million].   Under HB  72, the  NPV is                                                              
$309  million  and the  producer's  cash  flow would  increase  to                                                              
[nearly $1.6  billion].   For state revenues,  there would  not be                                                              
the large  outflow under  HB 72  like there  is under ACES  during                                                              
the development  period.  This  is because  under HB 72  the state                                                              
would not  be buying back the  credits and the NOLs;  however, the                                                              
state would be  allowing recovery of those losses  when production                                                              
starts.  As a  result, the NPV of state revenues  would be reduced                                                              
[from an  NPV of $666 million  and total revenues of  $2.5 billion                                                              
under ACES  to an NPV of $486  million and total revenues  of $1.6                                                              
billion under HB 72].                                                                                                           
                                                                                                                                
8:47:54 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM then  posed this  same hypothetical  scenario for  an                                                              
incumbent participant  [slide 43].  For producer  cash flows under                                                              
ACES, an  incumbent's NPV would  be $307  million and under  HB 72                                                              
it would  be $310.   For  state revenues,  the NPV  would also  be                                                              
pretty comparable  [$489 million  under ACES,  $485 under  HB 72].                                                              
What these  two graphs show  is that HB  72 would have  the effect                                                              
of enhancing  the new  participant's economics  and bringing  them                                                              
in line  with what an  incumbent already  enjoys.  In  response to                                                              
Co-Chair  Feige, he  explained that  $0 in the  Y axis  represents                                                              
when  the first  spending  starts  to occur,  so  the decision  to                                                              
proceed to  develop would have been  made shortly before  that and                                                              
some production would start in year four.                                                                                       
                                                                                                                                
8:49:22 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  summarized investment  metrics for a  new participant                                                              
in a  hypothetical light  conventional oil  development in  Alaska                                                              
under  ACES and  under  HB 72  versus  the other  benchmark  areas                                                              
[slide 44].  At  a [West Coast ANS] price of $100  per barrel, the                                                              
NPV under  ACES would  be $3.85  a barrel.   Under  HB 72 the  NPV                                                              
rises  to $6.18  with  the GRE,  which  a new  participant  should                                                              
qualify for  and which  compares favorably with  the Lower  48 and                                                              
the UK [$6.75 in  Eagle Ford, $4.29 in Bakken,  $6.04 post-1993 in                                                              
UK, $8.25 post-1993  with Brownfield Allowance in UK].   The other                                                              
metrics  [under HB 72]  are improved  as well;  for example,  with                                                              
the GRE  the government take falls  [to 61.1 percent]  and without                                                              
the GRE  it is  [64.7 percent],  both of  which are  significantly                                                              
lower  than  is currently  the  case  under ACES  [75.8  percent],                                                              
making it attractive relative to what exists elsewhere.                                                                         
                                                                                                                                
8:51:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted  the government  take, both with  and                                                              
without  the GRE  [under HB  72], is  lower than  the Eagle  Ford,                                                              
Bakken, and other provinces.                                                                                                    
                                                                                                                                
MR. PULLIAM responded  it is lower than some provinces  and higher                                                              
than others.   The  average for  all OECD  countries is  around 63                                                              
percent and  the average for all  jurisdictions is 65  percent, so                                                              
Alaska would be a bit better than that, which is a good thing.                                                                  
                                                                                                                                
8:52:35 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  continued  his presentation,  looking  at  the  same                                                              
hypothetical  scenario but  this time  from the  standpoint of  an                                                              
incumbent [slide 45].   At $100 per barrel, the NPV  under ACES is                                                              
$6.14 compared  to [$3.85]  for new  participants.  He  reiterated                                                              
that  [HB 72]  brings up  the economics  for  new participants  to                                                              
where an  incumbent is.   For an  incumbent under  HB 72,  the NPV                                                              
[of $6.20]  is comparable  to ACES  and at  a higher price  [$120]                                                              
the NPV is better  than ACES [$9.69 versus $8.82].   This compares                                                              
favorably to  other development opportunities  in the rest  of the                                                              
world.  Thus,  it can be seen  that the cash margins  are enhanced                                                              
quite a bit under  HB 72 relative to ACES.   Government take under                                                              
HB 72 is a  little different [62.6 percent at  $100/barrel] for an                                                              
incumbent than for  a new producer since new producers  have a tax                                                              
credit that the incumbent does not have.                                                                                        
                                                                                                                                
8:54:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR,  observing  that the  five-year  predictions                                                              
are  for fiscal  years  2017-2021, inquired  whether  it would  be                                                              
more appropriate to  be looking forward for the coming  years in a                                                              
closer timeframe given that HB 72 would take effect immediately.                                                                
                                                                                                                                
MR. PULLIAM  answered  he looked  at the period  of 2017-2021  for                                                              
this  hypothetical development  because  the  field was  developed                                                              
out in  that [earlier]  time period and  the producer  is starting                                                              
to  earn revenues  during the  2017 period.   It  should not  look                                                              
different  if a  different  five-year period  is  used looking  at                                                              
that same development cycle.                                                                                                    
                                                                                                                                
8:54:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  said it seems like the heavy  investment cost                                                              
that comes in those early years would affect this.                                                                              
                                                                                                                                
MR.  PULLIAM  specified that  what  is  being  looked at  is  once                                                              
production gets  on line because  margins are not  generated until                                                              
production  gets  on line.    A hypothetical  development  started                                                              
this next year  would be on line  and producing in about  2017, so                                                              
that is  the reason  for using the  time period  of 2017-2021.   A                                                              
development started  before now and just now  beginning production                                                              
under  this system  should  show  the same  picture.   In  further                                                              
response,  he  confirmed  it  would show  the  same  picture  even                                                              
though the elimination of credits.                                                                                              
                                                                                                                                
8:55:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  surmised that of the jurisdictions  listed on                                                              
slide 39,  the North Sea  is close to  what Alaska has  in Prudhoe                                                              
Bay.    He  asked whether  any  of  the  other  jurisdictions  are                                                              
similar  to Prudhoe  Bay  or the  North Sea,  and  whether any  of                                                              
those have  reversed their  decline.   He said  he does  not think                                                              
the North Sea's decline has yet been reversed.                                                                                  
                                                                                                                                
MR. PULLIAM responded  he knows some reversal has  occurred in the                                                              
North Sea.   The emphasis, though,  is that there has not  been an                                                              
aggregate  turnaround.   Turning  around a  basin  is a  different                                                              
issue than  turning around  a field, he  stressed.  Fields  have a                                                              
natural decline and  making that decline go as  slowly as possible                                                              
is the goal.   Prudhoe Bay  has produced much longer  than anybody                                                              
ever expected;  the decline  has been extended  and extended.   It                                                              
is one of  the most prolific fields  in the history of  the world.                                                              
He  said he  does not  think the  view is  that it  can be  turned                                                              
around by  adding a significant  amount of gas handling  capacity.                                                              
The  decline  can  be  stemmed by  doing  certain  things  and  is                                                              
something  people would  like  to  see happen.    But the  decline                                                              
overall is  really a basin-wide thing  and to stem that,  oil must                                                              
be brought in  from other areas.   As far as pointing  to a field,                                                              
he  said there  have certainly  been  some, such  as Apache  doing                                                              
that in a North  Sea field.  But, in general,  the effort there is                                                              
to incent  oil production in and  around existing fields  and find                                                              
new  oil.   He said  his  experience is  that  turnaround is  more                                                              
basin-wide or area-wide than it is field-wide.                                                                                  
                                                                                                                                
8:59:24 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM concluded  his presentation by directing  attention to                                                              
the  appendix   [slides  46-62],  which  provides   more  detailed                                                              
comparisons of Alaska  activity to places elsewhere  in the world.                                                              
He pointed  out that  many of the  investment metrics  he reviewed                                                              
in tabular form are in chart and pictorial form in the appendix.                                                                
                                                                                                                                
9:00:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON recalled  an  earlier  discussion with  the                                                              
Department  of Natural  Resources commissioner  about the  Forties                                                              
Field,  the  only  example  of  a  turnaround  field.    A  legacy                                                              
producer  that was  been in  decline  for years  sold the  Forties                                                              
Field; so, the only  turnaround was one that came  due to a change                                                              
in the culture  of the operating  company.  It has been  stated in                                                              
testimony,  he related,  that  the  companies' strategic  view  of                                                              
Alaska  is to  generate income  for other  investments around  the                                                              
world.  Therefore,  he asked, how does going from  ACES to [HB 72]                                                              
function to actually  change the decision making  culture that has                                                              
been ongoing  on the North Slope  since pre-PPT and  is continuing                                                              
in the legacy fields.                                                                                                           
                                                                                                                                
MR. PULLIAM,  rather than  talking about  a culture, replied  that                                                              
these companies  are in the business  of making money and  the way                                                              
they make money is  by producing oil.  To the extent  that [HB 72]                                                              
is an  attractive, profitable  proposition,  the companies  can be                                                              
expected  to respond  to  the incentives.    The companies  should                                                              
respond  if Alaska puts  the right  incentives  in front of  them,                                                              
the opportunity  to make  money, to make  a competitive  return on                                                              
their  investment  similar to  what  they are  getting  elsewhere.                                                              
Some of  the more mature  basins do  attract other companies  that                                                              
are not the companies  that developed those basins.   That is what                                                              
is  wanted  in Alaska.    A system  can  be  provided that  is  as                                                              
welcoming  to those  companies  as possible.    The changes  being                                                              
talked about in HB 72 do exactly that.                                                                                          
                                                                                                                                
9:04:22 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM, continuing  his response  to Representative  Seaton,                                                              
said examples  similar to what was  done in the Forties  Field can                                                              
be found in  California where Occidental bought  out the interests                                                              
of companies  that had developed  fields and that  those companies                                                              
had decided no  longer fit with their strategic  interest.  Alaska                                                              
cannot really do  anything to determine who the producer  is or is                                                              
not.   But  Alaska  can try  to  make it  attractive  for them  to                                                              
operate here  and do  so in a  way that  makes the opportunity  in                                                              
Alaska competitive  with what they  have elsewhere, whether  it is                                                              
a new or incumbent  producer.  Culture notwithstanding,  it can be                                                              
expected that  rational investors  would respond  to that.   There                                                              
is no reason to  believe that these folks are not  rational.  They                                                              
may not always  do things that Alaska  likes and they may  do them                                                              
in a  different time  frame, but they  are rational investors  and                                                              
if incentives  are put  in front  of them to  earn in Alaska  what                                                              
they  can elsewhere,  then [policy  makers] have  done their  job.                                                              
And if they get  down the road and decide an asset  no longer fits                                                              
with  their strategic  desire  and  they want  to  sell  out to  a                                                              
smaller  company, then  Alaska  would have  the  right system  for                                                              
them to operate in.                                                                                                             
                                                                                                                                
9:06:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  agreed with the statement that  companies are                                                              
rational investors;  they want  to make money.   He said  Alaska's                                                              
aggressive tax credit  system is one of the best  in the world and                                                              
he is led to  believe the companies are making  rational decisions                                                              
in  investments  on  the  North   Slope.    More  investments  are                                                              
happening now than under prior tax regimes ...                                                                                  
                                                                                                                                
MR. PULLIAM  interjected, stating he  disagreed.  Alaska  has seen                                                              
a higher  level of  investment, he  said, but  when the  worldwide                                                              
increase  in prices  is controlled  for,  Alaska does  not have  a                                                              
significantly higher  level of investment.   Investment  in Alaska                                                              
has lagged  relative to that elsewhere  in the world.   Yes, it is                                                              
higher than  it was  in, say,  2003, but  it is higher  everywhere                                                              
and the  increase is  much, much  higher elsewhere  than it  is in                                                              
Alaska.  So,  he sees that as  a slowdown and that Alaska  has not                                                              
kept  pace.   It has  become  more expensive  to  operate in  this                                                              
higher-price  world,  he continued,  so  just  the same  things  a                                                              
company was  doing back  in 2003  cost more  today and because  of                                                              
that,  more  has  to  be  spent  to  maintain  the  same  kind  of                                                              
activity.                                                                                                                       
                                                                                                                                
9:08:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK pointed out  that more  companies are  now in                                                              
Alaska and said  more may have sprung up around  the world because                                                              
the profits  are so high.   He understood that  existing producers                                                              
will not  put themselves  out of  business any  quicker than  they                                                              
have to,  so they are  going to maximize  the price that  they can                                                              
per drop  of oil.  It  may not be in  their best interest  to just                                                              
produce, produce,  produce, especially if they can  maintain those                                                              
prices  high - the  basic laws  of supply  and demand.   He  noted                                                              
that tankers  are coming  back to  Valdez with  their hulls  still                                                              
full because the  refining capacity is full.  What  is in the best                                                              
interest of  the companies  may be against  the best  interests of                                                              
what Alaska  wants to see.   So, there  is this balance  of trying                                                              
to get to that  million dollar barrel a day that  the governor has                                                              
put  forth.   It  would be  nice  to have  more  concrete ways  of                                                              
getting there,  but it  goes back to  making sure the  investments                                                              
stay in Alaska as best as possible.                                                                                             
                                                                                                                                
MR. PULLIAM  responded that,  from his  perspective, he  would say                                                              
it a little differently:   It is not to make  sure the investments                                                              
stay  in  Alaska,   it  is  to  make  sure  Alaska   attracts  the                                                              
investments.   What is wanted is  for the people who are  here now                                                              
to have more incentive  to invest here and for the  people who are                                                              
not here  to have  incentive to invest  here.   He said  he thinks                                                              
Alaska  would do  a better  job with  that  under HB  72 than  the                                                              
current  system.   While there  are  more companies  on the  North                                                              
Slope, what  is wanted is even  more.  The proposed  changes would                                                              
move Alaska in that direction in a real positive way.                                                                           
                                                                                                                                
9:10:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  offered  a  correction   regarding  the  tankers,                                                              
saying  the reason  they came  back to  Valdez with  oil in  their                                                              
holds was because  the storage facilities at the  refineries could                                                              
not take  it.   Part of  that was  a capacity  problem due  to two                                                              
fires, a  major one being at  Cherry Point, Washington,  that shut                                                              
down  the  refinery  from  February-June  2012.    Another  was  a                                                              
maintenance  issue at the  refinery in  Oakland, California.   The                                                              
tankers  had to  return, not  necessarily  because the  refineries                                                              
could  not  take  their  oil,  but  because  Alaska  needed  those                                                              
tankers back  in Valdez to take oil  out of the tanks  because the                                                              
Trans-Alaska  Pipeline System  (TAPS) was  approaching 90  percent                                                              
fill.  Had  those tankers not come  back, wells would have  had to                                                              
be  shut in,  which  would  have  adversely affected  the  state's                                                              
production of oil.                                                                                                              
                                                                                                                                
9:12:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE understood  Mr. Pulliam  to be  saying that  while                                                              
ACES  incentivizes  spending,  there   is  nothing  in  ACES  that                                                              
ensures that  that spending  results in  production.  Even  though                                                              
there is  no guarantee in  ACES, that guarantee  has led to  a lot                                                              
of new  pipes and many  well maintained  facilities, but  ACES has                                                              
not  led  to production,  and  production  is  what the  State  of                                                              
Alaska makes  its money on in the  future.  He said he  thinks Mr.                                                              
Pulliam  has highlighted  very nicely  that credits  must be  tied                                                              
much more  closely to  production and,  hence, future tax  revenue                                                              
for the State of Alaska.                                                                                                        
                                                                                                                                
9:13:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  requested runs  be  made  for when  Alaska                                                              
reaches  50 percent  new oil  because if  the state  is trying  to                                                              
have a durable  system, the economics  must be known for  the time                                                              
when half  of the state's  oil is at an  effective tax rate  of 18                                                              
or 20 percent instead of 25 percent.                                                                                            
                                                                                                                                
MR.  PULLIAM said  he will  talk with  the modeling  folks at  the                                                              
Department of Revenue who can run those types of scenarios.                                                                     
                                                                                                                                
REPRESENTATIVE SEATON  further requested  that those runs  be done                                                              
going down to $50 per barrel.                                                                                                   
                                                                                                                                
MR. PULLIAM agreed to do so.                                                                                                    
                                                                                                                                
9:14:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR commented  she is still  having trouble  with                                                              
the idea that, given  it is so expensive to invest  in Alaska, why                                                              
the tax  credits  are not a  good idea.   She  asked whether  [the                                                              
administration], when  first contemplating a  proposal, considered                                                              
adjusting  progressivity  for  the  higher prices  that  were  not                                                              
anticipated at the time ACES was passed.                                                                                        
                                                                                                                                
MR. PULLIAM  answered that  reducing progressivity  was an  option                                                              
he and  others considered,  such as going  back to what  the state                                                              
had under  PPT or what was  proposed originally under  ACES before                                                              
the  progressivity was  increased  or another  way  of reining  in                                                              
that progressivity.   In  looking at  all of  the options,  it was                                                              
concluded that a  cleaner system, one that accomplishes  the goals                                                              
over   all  that   is   wanted,  is   the   one  that   eliminates                                                              
progressivity.    The  proposal eliminates  some  of  the  strange                                                              
incentives  that are caused  under progressivity  and at  the same                                                              
eliminates the credit.   It is a more straight  forward system and                                                              
it  matches  better  with  what  is  seen  elsewhere.    From  the                                                              
standpoint  of a  company, the  planning  and investment  decision                                                              
making  will be cleaner  and more  straight forward.   It  removes                                                              
some  of the  problems with  the  decoupling issue,  which is  the                                                              
issue about  when gas comes in and  the effect on the  state's tax                                                              
revenues.   A similar issue  to that, but  on a smaller  scale, is                                                              
the high  cost heavy oil  that he talked  about and which  has the                                                              
effect  of reducing  the tax  rate and  dramatically reducing  the                                                              
state's revenue.   He said he and  the people at DOR and  DNR felt                                                              
that this proposal is a "better mousetrap".                                                                                     
                                                                                                                                
9:17:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER said  he has heard  it argued  in committee  and                                                              
elsewhere before  that the  economic limit  factor (ELF)  is proof                                                              
that low taxes  do not affect production because  taxes were lower                                                              
under ELF and there  was declining throughput.  Under  ELF the tax                                                              
rates  were different  for  larger and  smaller  fields; taxes  on                                                              
large  fields rose  and production  from  those fields  decreased,                                                              
satellite fields  sprung up and  net production from  those fields                                                              
increased.   He requested  Mr. Pulliam to  provide an  analysis of                                                              
the argument  that ELF  proves that  tax rates  do not  affect the                                                              
decline in oil production.                                                                                                      
                                                                                                                                
MR. PULLIAM  replied he does not  think a conclusion can  be drawn                                                              
that low  tax rates  do not  affect production  and do  not affect                                                              
investment, it is  nonsensical.  Clearly, there  is a relationship                                                              
between the  tax rate and  the attractiveness of  that investment,                                                              
it is basic  economics.  There  is no causality between  a decline                                                              
in production while  there is a low tax rate.   The time period of                                                              
ELF  was a  period of  relatively low  oil prices,  about $30  per                                                              
barrel, and  the cost for  moving that oil  to the West  Coast was                                                              
$8 per  barrel, for a  netback of $22.   Additionally,  there were                                                              
the production costs,  so what was left over was not  a lot.  This                                                              
was  the  same for  both  Alaska  and elsewhere.    Investment  in                                                              
Alaska  was  going  on  at  that  time  -  Alpine  had  just  been                                                              
developed  and satellites  around  Alpine and  Kuparuk were  being                                                              
developed.   Referring to the  capital spending depicted  on slide                                                              
17, he pointed out  that investment in Alaska tracked  the rest of                                                              
the world from  2003 to 2006 and  it increased as prices  went up.                                                              
Yes,  production  continued to  decline  during that  period,  but                                                              
that does not mean  there was no activity going on.   Newer fields                                                              
were being  brought on, they  just were  not replacing all  of the                                                              
oil that  was going  away from  the declining  large fields.   So,                                                              
there was  activity and investment  going on in new  fields during                                                              
those times  of lower tax  rates and it  was consistent  with that                                                              
in  the rest  of  the  world.   In  his  view, he  continued,  the                                                              
decoupling occurs  from 2007 forward,  when the rest of  the world                                                              
accelerates and Alaska stays flat.                                                                                              
                                                                                                                                
9:21:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK requested that  slides 20-23  be done  in the                                                              
same manner  as was  done for  ACES, but  for HB  72.  He  further                                                              
requested  that columns be  added for  oil prices  up to  $140 and                                                              
down to $60.                                                                                                                    
                                                                                                                                
MR. PULLIAM agreed to do so.                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK thanked  Mr.  Pulliam  for his  presentation,                                                              
the new information, and the opportunity to ask questions.                                                                      
                                                                                                                                
9:23:33 PM                                                                                                                    
                                                                                                                                
[HB 72 was held over.]                                                                                                          

Document Name Date/Time Subjects
HB04 Rep. Hawker & AGDC Responses.pdf HRES 2/13/2013 1:00:00 PM
HB 4
HB04 Legal Memo RE Judicial Review.pdf HRES 2/13/2013 1:00:00 PM
HB 4
HRES HB 72 EconOne Presentation.pdf HRES 2/13/2013 1:00:00 PM
HB04 DNR Response RE ROW Leasing.pdf HRES 2/13/2013 1:00:00 PM
HB 4
HRES HB 72 Econ One 2.13.13.pdf HRES 2/13/2013 1:00:00 PM
HB 72