Legislature(2005 - 2006)HOUSE FINANCE 519

02/22/2006 12:30 PM RESOURCES

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12:35:40 PM Start
12:39:07 PM HB488
03:20:39 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
Heard & Held
+ Presentation by the Administration TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
BILL CORBUS, Commissioner, Department of  Revenue, said HB 488 is                                                               
the  first  major oil  and  gas  tax  legislation that  has  been                                                               
pursued  by  an  administration  since 1989.    The  profit-based                                                               
[petroleum]  production  tax  (PPT)  contained  in  HB  488  will                                                               
replace the  existing Economic  Limit Factor-based  severance tax                                                               
(ELF),  which is  broken.   The PPT  will encourage  badly needed                                                               
investment  in   oil  and   gas  exploration,   development,  and                                                               
production,  he said.   It  will provide  special incentives  for                                                               
emerging  small  Alaskan companies,  and  it  will enhance  state                                                               
revenues,  particularly during  periods  of high  oil prices,  he                                                               
added.   Commissioner Corbus said  severance tax reform  has been                                                               
under  study   for  a  long   time,  beginning  with   the  prior                                                               
administration.  He  noted that oil and gas  consultant Dr. Pedro                                                               
van Meurs was originally engaged with  the state in 1996, and the                                                               
current administration  began working on this  issue after taking                                                               
12:39:07 PM                                                                                                                   
COMMISSIONER  CORBUS  said  there  are  three  days  of  hearings                                                               
scheduled before the House Resources  Standing Committee, and the                                                               
committee  will  be  hearing  from  several  professionals.    He                                                               
acknowledged others who were involved in the process.                                                                           
CO-CHAIR SAMUELS  gave a timeline of  the hearings.  He  said the                                                               
big question  is why the tax  rate was dropped from  the publicly                                                               
announced 25 percent rate to 20 percent.                                                                                        
COMMISSIONER CORBUS said  in early February, Dr.  Pedro van Meurs                                                               
made  a presentation  to a  joint finance  committee analyzing  a                                                               
range  of  tax  rates and  tax  credits.    As  a result  of  his                                                               
analysis, he recommended  a 25 percent tax rate and  a 20 percent                                                               
investment credit.  "Earlier this  week, we had meetings with the                                                               
[oil  and  gas]  producers,  and  we  ultimately  decided  on  an                                                               
acceptable 20 percent  tax rate, 20 percent  investment rate that                                                               
was acceptable  to both  parties.   The administration  felt that                                                               
this was  in range  of reasonableness  compared to  other regimes                                                               
around the world."  He said  Dr. van Meurs will be testifying and                                                               
he can address that issue in more depth.                                                                                        
REPRESENTATIVE KAPSNER  said the governor  has said that  the tax                                                               
would be retroactive to January 1, but it is not.                                                                               
12:45:15 PM                                                                                                                   
COMMISSIONER CORBUS stated that the  effective date "that we have                                                               
before you in HB 488 is July 1, 2006."                                                                                          
REPRESENTATIVE KAPSNER  said that represents $500  million if the                                                               
tax rate  is 20 percent  and $750 million if  the tax rate  is 25                                                               
12:45:37 PM                                                                                                                   
MICHAEL  MENGE,  Commissioner-designate,  Department  of  Natural                                                               
Resources, said  the issue of lowering  the tax rate gets  at the                                                               
heart of  what will have  to be dealt  with over the  next weeks.                                                               
He said the policy calls cannot  be measured for decades, and the                                                               
entire spectrum  of [oil] companies  needs to be  considered, not                                                               
just the  big three.   He said  on state lands  there will  be an                                                               
increasing  number  of  small  fields  that  mid-size  and  small                                                               
companies  will be  interested  in  developing.   He  said he  is                                                               
talking about the fields with 100 to 150 million barrels.                                                                       
12:48:20 PM                                                                                                                   
COMMISSIONER MENGE  said he does  not know what lies  beneath the                                                               
surface, so the state needs  additional drilling and exploration.                                                               
The governor's proposal sets a  balance allowing "us to deal with                                                               
what we do know today," and  it sets a stage to encourage smaller                                                               
companies  "to  lead us  to  the  solutions  and the  future  for                                                               
Alaska."  One can be  critical about a particular provision, "but                                                               
you really  have to back  off and  see how that  particular point                                                               
interacts with  1,000 other  points across  the spectrum  for oil                                                               
and  gas exploration."   There  are  two major  benefits of  this                                                               
historic  undertaking, he  said, one  is smaller  companies doing                                                               
exploration and those  benefits will come later.   He said, "Lord                                                               
willing, we will have  our gas line and there will  be a gas pipe                                                               
line; the  results of  these companies  will also  send a  lot of                                                               
additional  gas down  the pipe  line."   He added  that the  true                                                               
benefit lies in the future with increased investment.                                                                           
12:50:55 PM                                                                                                                   
COMMISSIONER MENGE said there are  70 people working right now on                                                               
the North  Slope "that  are bringing home  pay checks  and buying                                                               
candy  bars and  bunny boots  and  making a  net contribution  to                                                               
society,"  because of  royalty relief.   He  said next  year that                                                               
number will grow to several hundred,  but a single penny will not                                                               
come to the State of Alaska, but  he surmised that there is a net                                                               
benefit  to   society  "by  virtue   of  [Alaska]   providing  an                                                               
investment scene  that encourages  small and  mid-sized companies                                                               
to step up."  The royalties  are unaffected by HB488, and that is                                                               
where the  real benefit  will be  to Alaska.   He said  the state                                                               
hopes to garner additional production taxes, too.                                                                               
12:52:26 PM                                                                                                                   
COMMISSIONER  MENGE said  there  are basins  in  Alaska that  are                                                               
geologically  stressed because  of  hard rock  minerals, but  the                                                               
temperatures  are  not so  high  that  the hydrocarbon  has  been                                                               
destroyed.   He said  it is  important to  set an  economic scene                                                               
that allows that kind of exploration.   He said there is a mature                                                               
basin in Cook Inlet that is  diminishing in prospects where it is                                                               
critically  important  to bridge  the  gap  until bringing  North                                                               
Slope gas  "into the bowl."   He noted  an emerging basin  on the                                                               
Alaska  Peninsula that  is a  high risk  and the  state needs  to                                                               
encourage  people to  step  up.   "So  all  of  these things  are                                                               
wrapped  up in  what  you  are seeing  presented  to you  today."                                                               
Measure  and judge  the proposal  in  that context,  he told  the                                                               
committee.   "If you ultimately  put blinders on and  simply hone                                                               
in on specific issues, you will  find plenty there to work with."                                                               
He  said to  look at  the entire  spectrum and  the benefit  that                                                               
Alaska will  garner over  the years  by encouraging  companies to                                                               
drill holes and hopefully find gas.   He said the Nenana Basin is                                                               
very  exciting because  the  first hole  had  very high  pressure                                                               
areas of gas,  but there was a large shale  section.  The driller                                                               
needed to  do "some exotic  things" to maintain the  integrity of                                                               
the well, but it  is enough to make them go back.   We are trying                                                               
to provide the  incentives for companies to roll  those dice, and                                                               
it will  be a partnership,  he said.  HB  488 is not  charity, he                                                               
stated,  if those  companies don't  find anything,  "at least  we                                                               
will have looked."                                                                                                              
12:56:43 PM                                                                                                                   
COMMISSIONER MENGE said  HB 488 does not just deal  with 2006; it                                                               
deals with the next two decades.   If the tax is changed, "you're                                                               
going to  see people coming here  from all over the  world making                                                               
investments, and those  investments will bear results."   He said                                                               
there  are tremendous  opportunities  in  the National  Petroleum                                                               
Reserve  Alaska and  the  Arctic National  Wildlife  Refuge.   He                                                               
concluded that this  legislation is a balance and  sets the stage                                                               
to  enhance  Alaska's  oil  and  gas  future.    He  said  he  is                                                               
absolutely  impressed   with  the  seriousness  with   which  the                                                               
legislature is taking  this issue, and "all of us  will write our                                                               
names in the charter of history."                                                                                               
12:59:01 PM                                                                                                                   
REPRESENTATIVE  CRAWFORD  asked  what  the  legislature  will  be                                                               
voting on.  The governor said the  bill is for a gas line and oil                                                               
tax  package,  and  it is  an  up  or  down  vote.   He  said  in                                                               
authorizing  the  Stranded Gas  Act,  the  language was  specific                                                               
about being  only a gas  deal--that oil taxes would  be separate.                                                               
"Are we  doing this under the  Stranded Gas Act with  a simple up                                                               
or down vote, or is this a separate  oil tax deal that is open to                                                               
amendment? he asked."                                                                                                           
1:00:50 PM                                                                                                                    
COMMISSIONER MENGE said the Stranded  Gas Act set parameters that                                                               
"we" used.   He  said the  gas pipeline  is tied  to the  oil and                                                               
"everything."  In  negotiating the gas contract,  it became "very                                                               
obvious that we  were going to have to deal  with oil taxation as                                                               
well."  He continued:                                                                                                           
     Imagine  a  situation  where the  companies  agreed  to                                                                    
     spend $20 billion to build  an infrastructure, and they                                                                    
     reached  the day  when they  make the  commitments, the                                                                    
     orders go in for the pipe,  and the price of gas drops,                                                                    
     and we sit back as a  body here in the state going 'hmm                                                                    
     not quite a good deal as  we thought.  Let's just bring                                                                    
     the oil  taxation piece in  and let's plump up  the oil                                                                    
     side so we  compensate for the gas side.'   So then the                                                                    
     oil   companies  are   not   only   taking  a   beating                                                                    
     economically   on  the   pipeline,  but   they're  also                                                                    
     threatened significantly on the oil  side.  If you look                                                                    
     at  that  they  are   inextricably  linked.    But  the                                                                    
     Stranded Gas  Act said very specifically,  as you point                                                                    
     out...you cannot do this.   We were locked on the horns                                                                    
     of a  dilemma at  that point.   The oil  companies were                                                                    
     unwilling to  proceed without a  recognition of  a need                                                                    
     for oil certainty.                                                                                                         
COMMISSIONER MENGE said the state  resisted that for many months,                                                               
but it became obvious  the state was not going to  get a gas deal                                                               
unless the it  dealt with oil.  Because oil  was not specifically                                                               
excluded under the  Stranded Gas Act, "we said  this will require                                                               
a structured approach."  The oil  taxation is critical to the gas                                                               
line,  "but  it  is  so  important it  touches  everyone  in  the                                                               
state...We are not authorized to  present that to the legislature                                                               
in an up or down vote."   The decision was to present this stand-                                                               
alone oil legislation.   Regardless of a gas line,  the oil piece                                                               
in the bill  will become the law  of the land, and  it will exist                                                               
for 20 years or more.                                                                                                           
COMMISSIONER  MENGE said  HB  488  will be  subject  to the  full                                                               
committee process.   "It  is connected but  it's in  a sequence,"                                                               
and he continued:                                                                                                               
     The oil  thing is  done by  itself, fully  amendable by                                                                    
     the   legislature.      You  exercise   all   of   your                                                                    
     authorities,  and at  the end  a  product is  produced.                                                                    
     That product is  then set next to  the oil legislation,                                                                    
     but  because  we are  now  authorized  to include  this                                                                    
     within the Stranded  Gas Act, we will come  to you with                                                                    
     a package  of amendments to  the Stranded Gas Act.   So                                                                    
     step two, after  you pass the stand-alone  oil, will be                                                                    
     contemplation  of  a  package   of  amendments  to  the                                                                    
     Stranded Gas  Act.   Within that  will be  an amendment                                                                    
     requesting  your  blessing  to  attach it  to  the  gas                                                                    
     contract.   Again, this will  be amendable.   This will                                                                    
     be for  the full consideration of  the legislature, and                                                                    
     you will draw  your own conclusions as  to whether this                                                                    
     is an  appropriate thing to do.   If, as we  hope, this                                                                    
     is  appropriate,  you  will  have  passed  a  piece  of                                                                    
     historic oil legislation.  You  will have authorized us                                                                    
     to  attach  it  to   the  gas  contract  through  those                                                                    
     amendments.   And then we  will lay the  entire platter                                                                    
     before you:  the oil  piece is  there that  you already                                                                    
     blessed; the  ability to  connect it  to the  gas line,                                                                    
     which you  will bless; and  the gas contract.   And you                                                                    
     will contemplate all of this  as a single entity.  That                                                                    
     is  the thing  that  you will  vote up  or  down on  as                                                                    
     specified in the Stranded Gas Act.                                                                                         
1:05:40 PM                                                                                                                    
COMMISSIONER  MENGE  repeated  the  sequence.    The  package  is                                                               
necessary in order  to set the economic  environment within which                                                               
people are prepared  to invest $20 billion or more  and deal with                                                               
the uncertainty  of natural gas,  he said.   He said  natural gas                                                               
prices  spiked recently  because of  [hurricane] Katrina.   "Risk                                                               
reduction is  best done  through being  able to  have certainty,"                                                               
and the bill provides certainty for  taxation.  He said the state                                                               
was guilty of  changing the tax structure  after the Trans-Alaska                                                               
Pipeline was  built.  Gas  is more subject to  market fluctuation                                                               
than oil,  he noted.   He  said there was  great pressure  to put                                                               
this into  an up or down  vote, but he recognized  the importance                                                               
of running it through the legislative process.                                                                                  
1:08:43 PM                                                                                                                    
CO-CHAIR SAMUELS said  there is a three-vote  scenario: voting on                                                               
oil; voting  on whether to  include oil  with gas; and  voting on                                                               
the  package.   All  three  votes  have consequences,  he  added.                                                               
There will be three separate votes  in order, but right now it is                                                               
only a discussion of HB 488, he  said.  Members must know that it                                                               
is  a  long-term  decision,  "but you  cannot  base  solely  your                                                               
decision on that because we might  be changing the oil tax system                                                               
and that's  all we do  this session."  He  said right now  only a                                                               
revision of the oil tax is before the committee.                                                                                
1:10:24 PM                                                                                                                    
REPRESENTATIVE  GATTO  said  it  is being  stated  that  the  oil                                                               
legislation is "stand  alone," but then it was said  that it will                                                               
be combined with gas.                                                                                                           
COMMISSIONER MENGE  said the  linkages will occur  at the  end of                                                               
the day.   "Once you  have passed  judgment on the  oil pipeline,                                                               
there will be a consequential  definition of an economic picture.                                                               
Now when you make the decision to  link the oil piece to the gas,                                                               
that  will  redefine   the  economic  picture."     He  said  the                                                               
legislature can contemplate gas without  any of the "others."  It                                                               
comes with its own specific economic picture.                                                                                   
1:12:28 PM                                                                                                                    
REPRESENTATIVE MCGUIRE asked if the  governor will veto HB 488 if                                                               
the  legislature  chooses not  to  adopt  the amendments  to  the                                                               
Stranded Gas Act.                                                                                                               
COMMISSIONER MENGE said he doesn't know.                                                                                        
1:12:50 PM                                                                                                                    
CO-CHAIR SAMUELS  said if  HB 488 passes,  the second  vote won't                                                               
take place until after the public comment period.                                                                               
1:13:10 PM                                                                                                                    
REPRESENTATIVE KERTTULA  said, "You already made  an agreement on                                                               
how the  oil piece fits into  the gas line contract.   My problem                                                               
is, if it  is a sequence of  events, we almost have  to know what                                                               
the end [indecipherable] before we can take step number one."                                                                   
COMMISSIONER CORBUS said, "We have  not completed that portion of                                                               
our discussions with the producers."                                                                                            
REPRESENTATIVE KERTTULA asked,  "Can you tell me  what the issues                                                               
around  this is?"   She  said she  is particularly  interested in                                                               
what is being spoke of as certainty with regard to oil tax.                                                                     
COMMISSIONER  CORBUS  said,  "Exactly  how  the  wording  in  the                                                               
contract  concerning  fiscal  certainty   on  oil  has  not  been                                                               
determined.   Certainly how HB  488 comes out will  be important,                                                               
but it is envisioned that it  will be referenced in the contract,                                                               
and that  those will be most  of the terms that  will go forward.                                                               
As far  as the  years of  fiscal certainty goes,  we're not  in a                                                               
position yet to go public on that issue."                                                                                       
1:14:53 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG said  HB 488  has general  applicability                                                               
and is not  designed to extract the maximum benefit  in the short                                                               
term.   He  asked  how that  reconciles  with the  constitutional                                                               
requirement to maximize the benefit for all Alaskans.                                                                           
COMMISSIONER  MENGE said  he thinks  the  constitution takes  the                                                               
long view.                                                                                                                      
1:17:19 PM                                                                                                                    
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue                                                               
explained the agenda and introduced speakers.                                                                                   
1:21:19 PM                                                                                                                    
DAN DICKINSON,  Consultant to  the Office  of the  Governor, said                                                               
the PPT stands for Proposed  Production Tax [although others have                                                               
said that  PPT stands for  Petroleum Production Tax  or Petroleum                                                               
Profits Tax].   In   fiscal year 2005  the state brought  in $8.9                                                               
billion  in revenues,  and he  said $3.4  billion came  from oil;                                                               
$2.8 billion  came from investments;  $1.9 billion came  from the                                                               
federal government; and $800 million  came from other things.  He                                                               
said  oil revenue  accounts for  88 percent  of the  unrestricted                                                               
1:23:09 PM                                                                                                                    
MR.  DICKINSON showed  a pie  chart of  FY2005 petroleum  revenue                                                               
where the largest  amount of is from royalties and  25 percent of                                                               
that  goes to  the  permanent fund  or public  school  fund.   He                                                               
showed the portion of the  property taxes that the state receives                                                               
and the corporate income tax.   The production tax, which is what                                                               
HB 488  deals with, was  $863.2 million in  FY2005.  He  said the                                                               
forecast for FY2006 is over $1  billion.  The production tax is a                                                               
large piece of  the total petroleum revenue picture,  but not the                                                               
largest,  he noted.    He showed  a slide  of  oil production  in                                                               
Alaska and said Prudhoe Bay is  huge, but its huge days are over.                                                               
In 1988  Alaska produced 2  million barrels  of oil per  day, and                                                               
1.6 million of those came from  Prudhoe Bay.  He said the Kuparuk                                                               
River Unit is the second largest  oil field in the United States,                                                               
but it is very small compared to  Prudhoe Bay.  He said the North                                                               
Slope has tiny  areas of new production.  He  noted that it would                                                               
be  a vibrant  place,  except Prudhoe  Bay  is declining  rapidly                                                               
because the easy days of production are over.                                                                                   
1:26:17 PM                                                                                                                    
MR.  DICKINSON  showed the  trend  in  Alaska North  Slope  (ANS)                                                               
production and price on a graph.   He said the price is rising so                                                               
the value  of the production is  the same as when  production was                                                               
high.   He  said it  is important  that the  change in  price not                                                               
obscure the continued decline in production.                                                                                    
1:28:28 PM                                                                                                                    
MR. DICKINSON  said he  will concentrate on  the revenues  of the                                                               
PPT and the potential impacts  on investments and production.  He                                                               
said the state has been looking  at production tax issues for two                                                               
years.   He  spoke  of an  administration  decision to  aggregate                                                               
several fields  in the Prudhoe  Bay unit  into a single  unit for                                                               
purposes of ELF.  Assuming  the bill passes, the aggregation will                                                               
have been  in effect for  18 months  and will have  raised almost                                                               
$400  million   in  additional  revenue.     He  said   what  the                                                               
legislature sees is part of an ongoing study.                                                                                   
1:30:23 PM                                                                                                                    
MR.  DICKINSON showed  a graph  of  the capital  spending on  the                                                               
North Slope  without money spent  on tankers or  the Trans-Alaska                                                               
Pipeline.   He said it  has been about $1  billion per year.   He                                                               
said tax is  not the direct driver behind how  much investment is                                                               
made,  "I  would never  claim  it  is  the ultimate  reason  that                                                               
investment gets  made or doesn't  get made."   He stated  that at                                                               
the margin, tax policy can  have an effect, so the administration                                                               
is proposing a  tax policy that favors  making investments, which                                                               
the status quo does not.                                                                                                        
1:31:49 PM                                                                                                                    
MR.  DICKINSON  said  in  FY2005 the  state  produced  about  330                                                               
million barrels, and the average  price was $43.43 per barrel, so                                                               
the ANS oil was worth about  $14 billion at the destination point                                                               
on the West  Coast.  He said  the cost of getting the  oil to the                                                               
West Coast  was about $1.5 billion.   At the point  of production                                                               
it was worth  about $12.8 billion.  The  capital, exploration and                                                               
operating costs were  about $2 billion.  "That gives  you the net                                                               
value at the  point of production...of about $11  billion."  That                                                               
money  gets  divided up  for  royalties,  federal taxes  and  the                                                               
remaining either goes to producers or  is what is hit by Alaska's                                                               
production tax.                                                                                                                 
1:34:26 PM                                                                                                                    
MR. DICKINSON  said under  the PPT, Alaska  would take  the $12.8                                                               
billion,  remove  the  royalty  and  get a  net  value  of  $11.2                                                               
billion.   Under  the current  system a  15 percent  tax rate  is                                                               
multiplied by the  ELF, which is currently .55, so  taxes in 2005                                                               
would  be about  $927.15  million.   He said  it  is not  exactly                                                               
correct,  just  an   overview,  but  that  is   how  the  current                                                               
production tax works.  He  said the current tax doesn't recognize                                                               
the investments on  the North Slope necessary to get  the oil out                                                               
of the ground; it looks at the gross  value of oil.  There are no                                                               
incentives  for  getting heavy  oil  out  of  the ground  and  no                                                               
recognition of the  upstream investments, he noted.   He said the                                                               
proposed PPT would  begin with the oil value net  of royalty, and                                                               
allow   deductions  for   the  upstream   costs.     It  includes                                                               
exploration, wells  and everything that  it takes to get  the oil                                                               
out of the ground.   The taxable value in his  example is down to                                                               
$9 billion,  and with the  proposed 20  percent tax rate  and tax                                                               
credits of  20 percent it would  generate $1.6 billion.   He said                                                               
the  important thing  is  recognizing the  investments.   With  a                                                               
"huge slug of incremental investment,"  for example $1.7 billion-                                                               
worth,  the production  tax comes  out  at $927  million--exactly                                                               
where it  started.  The point  is Alaska either gets  the cash or                                                               
the investment.  The PPT  is meant to incentivize investment, but                                                               
"if we don't get the investment, we  get the cash.  The taxes are                                                               
higher  for  folks  not  making investments."    In  the  current                                                               
system,  taxes  are   the  same  whether  a   company  is  making                                                               
investments or not.                                                                                                             
1:39:05 PM                                                                                                                    
MR. DICKINSON said  the current system is broken  because the ELF                                                               
was supposed  to be  a proxy for  costs.  It  was supposed  to be                                                               
high for easy oil and low when  oil was difficult to recover.  He                                                               
said the ELF was  a very poor proxy for costs  because it bore no                                                               
relation to price.  At the $9  per barrel prices in 1999, the ELF                                                               
would not  even have covered all  the costs that were  spent, and                                                               
at the  $55 per  barrel price,  the ELF creates  a proxy  that is                                                               
many  times higher  than  the  actual cost.    Under the  current                                                               
system there  is a deduction  as if investments were  being made,                                                               
but  it's not  being  made,  he stated,  and  the  proxy was  not                                                               
accurate with the price range of oil today.                                                                                     
1:41:15 PM                                                                                                                    
MR. DICKINSON  said the  PPT provides  recognition that  it costs                                                               
money to get the oil out of the ground.                                                                                         
CO-CHAIR SAMUELS  asked if the PPT  is risky when there  are high                                                               
investments and  then oil  prices crash.   How  much risk  is the                                                               
state exposed  to if there  is a  big investment followed  by low                                                               
prices? he asked.                                                                                                               
MR. DICKINSON said he has wrestled  with that.  "I think you have                                                               
correctly identified  the problem."   He said there is  money for                                                               
investing now.   In a  low price environment, especially  four or                                                               
five years  from now,  the production  tax will  only be  $100 or                                                               
$200 million.   He said Co-Chair Samuels was right;  when the PPT                                                               
is only $200 million, there is a  very large hole in the pie, and                                                               
the fact  that it is  $100 million lower,  there will have  to be                                                               
other measures  taken at  those low prices  whether the  state is                                                               
using the  PPT or  not.  But  for every year  of high  prices, it                                                               
will take  5-6 years  of low  prices to balance  out.   The state                                                               
will have to look at other ways  of dealing with cash flow at low                                                               
prices,  and the  PPT will  make  revenues more  voluble, "but  I                                                               
suggest to you that they will also be higher over time."                                                                        
1:44:23 PM                                                                                                                    
CO-CHAIR SAMUELS  said cost  allocations are  a problem,  and the                                                               
industry will  not trust the  state regulator, and "I  don't want                                                               
to pay  for a building  in Houston."   He said he  wants specific                                                               
attention to cost allocations and auditing.                                                                                     
REPRESENTATIVE  MCGUIRE said  it  is a  real  situation that  the                                                               
chair poses  because "we allow,  in this legislation,  for unused                                                               
tax  credits  to  be  transferred,  and so  you  can  envision  a                                                               
scenario where  prices start to  dip, folks may not  be exploring                                                               
actively  but they  may  have  these unused  tax  credits out  in                                                               
circulation."  She asked how many years they are transferable.                                                                  
1:45:49 PM                                                                                                                    
MR. DICKINSON  said there is no  limit on how long  the transfers                                                               
can be use.   He said he tried to make those  credits as close to                                                               
their face  value as  possible.   He added  that it  is important                                                               
that investors  "can sell the credit  as close to a  cents on the                                                               
dollar as  they can do  it."  He said  there has been  trading of                                                               
credits at over 90 cents on the  dollar.  The notion, he said, is                                                               
the  companies taking  the risk,  "who  are likely  to incur  the                                                               
losses, we  want those  to be  able to trade  at full  value, and                                                               
therefore we did not put a  restriction on how long they could be                                                               
used."   He said there  are other restrictions  in the bill.   He                                                               
said the problem  Representative McGuire raised is  real, but the                                                               
credits can't be  used to reduce anyone's tax  burden below zero.                                                               
When looking at  a low price environment, the  important point is                                                               
that even  though a company  can reduce  its taxes to  zero, when                                                               
prices recover there will be revenues again.                                                                                    
1:47:47 PM                                                                                                                    
REPRESENTATIVE  MCGUIRE  asked  if   the  Department  of  Revenue                                                               
considered  setting  a  cap.   There  has  been  other  incentive                                                               
legislation,  like the  raw  fish tax,  with  a five-year  limit.                                                               
There is also a  limit of 50 percent, so the  state knows it will                                                               
always get 50 percent back.                                                                                                     
MR. DICKINSON  said there is a  limit on purchased credits  of 20                                                               
percent  of owed  tax; however,  if a  company generates  its own                                                               
credits while making a huge  investment and prices fall, there is                                                               
no restriction  on using those  credits in  the future.   He said                                                               
this is the kind of thing we need  to get cleaned up.  There were                                                               
"a lot  of things  like this" that  created internal  debates, he                                                               
added, and now they can be debated in a much larger circle.                                                                     
1:49:15 PM                                                                                                                    
REPRESENTATIVE  GARA said  that  Mr. Dickinson  said  that a  tax                                                               
policy often doesn't have an  impact on industry investments.  He                                                               
said  he  really  wonders  if  this  PPT  will  have  an  impact.                                                               
According to the  Department of Revenue, profits  next year would                                                               
be about  $1 billion at  $20 per barrel,  but at $60  per barrel,                                                               
the profits  to the industry  would be  about $7 billion.   Under                                                               
the  current system  and in  the  last three  years, oil  company                                                               
profits have  multiplied 5-600 percent,  he said.   The companies                                                               
pay  a zero  percent production  tax, but  investments have  gone                                                               
down, he  stated.   Under this  proposal, the  state is  going to                                                               
give them  an extra  20 percent  of their  costs back  and charge                                                               
them  a 20  percent tax.    So if  a  zero percent  tax with  600                                                               
percent more money led to  less investment, "why should I believe                                                               
that  giving them  20 percent  more  money--and increasing  their                                                               
taxes--is  going to  lead to  substantially more  investment than                                                               
the current system?"                                                                                                            
1:50:49 PM                                                                                                                    
MR. DICKINSON  said the current  effective tax rate on  the North                                                               
Slope is  between 7 and  8 percent rate.   He said there  are two                                                               
fields that  have come  on in the  past several  years, Northstar                                                               
Unit and Alpine,  that are paying tax rates close  to 10 percent.                                                               
Other smaller  fields are paying  zero taxes.  He  said companies                                                               
other than the smallest fields will pay  tax.  He said one of the                                                               
reasons why  investments are  not being made  in Alaska  and they                                                               
are  being made  in other  parts of  the world  is because  other                                                               
places  reward  those investments  differently.    He noted  that                                                               
every decision is not made by  tax rates, but "part of the reason                                                               
that investment  has flowed to  places that  recognize investment                                                               
is because  you can make  bigger investments or  your investments                                                               
have more bang for the buck."                                                                                                   
1:52:51 PM                                                                                                                    
REPRESENTATIVE GARA  said his point  is that most new  fields pay                                                               
zero tax and some pay up to 10  percent, and a lot more cash flow                                                               
has been  made because  of high  oil prices.   He noted  that the                                                               
proposal is  to increase the  tax.  He  asked why giving  the oil                                                               
companies a  20 percent tax credit  benefit "is going to  lead to                                                               
so much  more investment  than the 600  percent benefit  that oil                                                               
prices have given them that has led to a decline in investment."                                                                
1:53:53 PM                                                                                                                    
MR. DICKINSON  said there are  two pieces,  and a 20  percent tax                                                               
rate means that  for every dollar generated, "we get  20 cents on                                                               
it."  There  will be other government takes, so  the company will                                                               
take home 40  cents on the dollar.   "We are moving  that rate up                                                               
so once the  tax basis is calculated, we are  now taking a larger                                                               
piece of it."   But the bill gives the  companies the opportunity                                                               
to  lower the  tax base  for investment  incentive.   He said  if                                                               
people  thought  there would  continue  to  be high  prices,  why                                                               
wouldn't companies drill  every possible hole in the  ground.  He                                                               
said the  state could never  create the same incentives  that the                                                               
current price  structure does now.   He said the state  is trying                                                               
to be "a little more focused"  and to make investment in Alaska a                                                               
better proposition than investment elsewhere.                                                                                   
1:55:31 PM                                                                                                                    
REPRESENTATIVE CRAWFORD asked about  Mr. Dickinson's example of a                                                               
small company  drilling three  dry holes  and getting  credit for                                                               
its  losses, but  the  credits  don't just  come  from losses;  a                                                               
company gets credits whether it is dry or not.                                                                                  
MR. DICKINSON said that is exactly  right.  He said he was giving                                                               
an  example of  a company  coming to  Alaska, spending  a lot  of                                                               
money and getting a zero return.   He said the state wants to say                                                               
the state will  take part of the  loss with tax credits.   But he                                                               
said the  state will  never question a  company on  whether their                                                               
activities  were successful  or not.   Supporting  exploration is                                                               
one  of best  ways  to  incentivize future  production.   Once  a                                                               
company has drilled  and found oil, the chances are  that it will                                                               
develop  the discovery.   The  bill kicks  in at  the exploration                                                               
level and creates  a credit, and the downside is  a dry hole, and                                                               
"we're going to make the downside a little bit less worse."                                                                     
1:57:57 PM                                                                                                                    
MR. DICKINSON  said the ELF  uses the  volume from wells  and the                                                               
field to calculate  the tax rate, creating a  problem when volume                                                               
falls.  The ELF is an  exponential formula, and the net effect is                                                               
when volume  falls, the ELF falls  faster.  He showed  a graph of                                                               
the Kuparuk production.  In 1993,  at the height of production in                                                               
the  unit, 12  percent  of  every barrel  was  being  taxed.   As                                                               
production fell  by about one  third, the  ELF fell by  more than                                                               
half.  From 2000 to 2005  the ELF essentially disappeared.  So as                                                               
volume falls,  the ELF falls  more rapidly.   With the  PPT there                                                               
would still be a fall in taxes, but less quickly.                                                                               
2:00:47 PM                                                                                                                    
MR.  DICKINSON said  taxes  go  down in  maturing  fields due  to                                                               
decreased  production, but  with the  ELF  it goes  down to  near                                                               
zero.   He addressed the North  Star and Alpine fields  where the                                                               
ELF goes  down to  zero when  volumes fall  by about  50 percent.                                                               
The sensitivity to volume is  overstated, just as the sensitivity                                                               
to price is understated, and  he showed a slide highlighting that                                                               
point.   "Should we have  a tax system that  automatically falls-                                                               
has  a  smaller tax  on  each  barrel  that  is remaining  to  be                                                               
produced, or  as we're proposing  here, we tax  the profitability                                                               
on each barrel..."                                                                                                              
2:03:25 PM                                                                                                                    
CO-CHAIR  RAMRAS  asked  for  an   addendum  to  Mr.  Dickinson's                                                               
presentation  that describes  the problem  with the  current tax.                                                               
He said there will be surplus  money this year, and royalties are                                                               
invested around  the world, and  not generally in Alaska.   Money                                                               
that  goes  to government  services  doesn't  generally help  the                                                               
Alaska  economy, he  noted.    He asked  Mr.  Dickinson to  later                                                               
discuss   the  incentive   for  exploration   and  the   economic                                                               
multiplier created  by the additional exploration,  "and I'd like                                                               
to  see  what that  will  do  for employment  opportunities,  for                                                               
revenue and dollars that go into our  economy."  He said it was a                                                               
great presentation but "I found that  why it is a problem is also                                                               
why we have  had retarded growth in the Alaska  economy over this                                                               
as the ELF  broke and as production broke down,  we also have not                                                               
had the  blossoming economy we  should have  had."  He  asked for                                                               
different scenarios  of exploration at different  rates that have                                                               
been mentioned:  1 to 3  billion; "What  that would mean  when we                                                               
apply some kind of an  economic multiplier...to see how broken is                                                               
that part of the system..."                                                                                                     
2:05:52 PM                                                                                                                    
MR. DICKINSON said,  "I think you've made the point,  and I think                                                               
it's very true that when  we talk about investments yielding more                                                               
barrels, that's  only one  of the effects,  and clearly  any work                                                               
going on on the North Slope  or around the state has a multiplier                                                               
2:06:12 PM                                                                                                                    
MS. WILSON said  the problem with the current tax  is the lack of                                                               
incentive  to   reinvest  in  Alaska.     "It  has  a   low  take                                                               
internationally at high  prices, and a high take  at low prices."                                                               
The tax is  referred to as a regressive tax,  and the maturing of                                                               
the North Slope leads to a decline in tax revenue.                                                                              
REPRESENTATIVE  ROKEBERG said  it is  not  fair to  say there  is                                                               
currently no incentive.  The ELF  was designed to try to generate                                                               
investments,  and   the  question  is  whether   it  is  working.                                                               
Producers are investing substantial money,  he noted.  He said he                                                               
is concerned  about the de  facto tax credit  that Representative                                                               
Gara referred to.                                                                                                               
MR. DICKINSON  said that is  a fair  point, "and maybe  we should                                                               
say  that  there is  no  effective  incentive."   He  noted  that                                                               
investment can  be its  own reward,  and the  state is  trying to                                                               
create  a   specific  incentive  tied   to  the  amount   of  the                                                               
2:09:15 PM                                                                                                                    
MS.  WILSON  told  the  committee  to keep  four  ideas  in  mind                                                               
regarding HB  488: the relative encouragement  of the investment;                                                               
competitive   rates  internationally;   encouragement  of   small                                                               
companies to  invest in  Alaska; and the  efforts that  have been                                                               
made on  streamlining the tax process.   She said there  are five                                                               
basic elements  of HB 488.   1) Tax base-or  what is taxed.   The                                                               
current tax  system is  based on  gross and the  PPT is  based on                                                               
net.    2) Tax  rate  of  20 percent.    3)  Incentive credit  to                                                               
encourage companies to reinvest in  Alaska.  4) Base allowance of                                                               
$73 million, which is akin  to the standard deduction on personal                                                               
income  tax.   5)  Transition  provision  that recognizes  recent                                                               
investments in oil exploration and production.                                                                                  
REPRESENTATIVE KAPSNER addressed the  $73 million base allowance,                                                               
and asked if any other industries have a base allowance.                                                                        
MR.  DICKINSON  said the  only  similarity  might be  the  mining                                                               
license tax  where there is an  extended period of time  in which                                                               
there is no tax paid.                                                                                                           
2:12:45 PM                                                                                                                    
REPRESENTATIVE KERTTULA  asked if the  allowance is on  the gross                                                               
profit or on the net profit.                                                                                                    
2:13:18 PM                                                                                                                    
MS. WILSON  said the base  allowance is  a deduction on  the net.                                                               
In  terms  of a  personal  tax  return,  the allowance  would  be                                                               
similar to a charitable  contribution deduction; however, credits                                                               
are  akin to  the  childcare credit  and other  dollar-for-dollar                                                               
credits.   She noted that the  gross versus net can  be confusing                                                               
and said that  the bottom-line might be the same  for a gross and                                                               
net system.   She gave an  example of both systems  where the tax                                                               
would be the same where a tax on  gross might be 15 percent and a                                                               
PPT on net  would be 20 percent, but the  tax before credit would                                                               
be the  same.   "It makes sense  that when you  tax net  your tax                                                               
rate will be higher."                                                                                                           
2:15:55 PM                                                                                                                    
MS.  WILSON said  the tax  base starts  with gross  value at  the                                                               
point of production and then  subtracts lease expenditures, which                                                               
include operating  costs, capital expenditures and  allowance for                                                               
overhead.   She noted that  capital expenditures are  expected to                                                               
generate income  over a number  of years.   In HB 488,  "the plan                                                               
allows   for   basically   immediate   write   off   of   capital                                                               
expenditures,  so just  as normal  lease  operating expenses  are                                                               
deductible in the year that they  are incurred, by the same token                                                               
then machinery,  things that are  normally capitalized  that will                                                               
have  a life  over a  number  of years,  are immediately  written                                                               
off."   She said there  will also  be an allowance  for overhead,                                                               
but  the  exact  formula  has  not been  "fleshed  out,"  so  the                                                               
division   will  be   writing   the  regulations.     The   lease                                                               
expenditures must be  direct costs and they must  be ordinary and                                                               
necessary, she added.   The deductible expenses are  in the bill.                                                               
She  said  the  department  will write  regulations  on  defining                                                               
"direct" and "ordinary  and necessary".  The  bill specifies that                                                               
substantial weight  be given to  industry practice  and standards                                                               
adopted by the Department of Natural Resources.                                                                                 
2:19:15 PM                                                                                                                    
CO-CHAIR  SAMUELS  asked   if  it  will  be   completely  in  the                                                               
regulatory environment,  and asked  if that will  create constant                                                               
conflict between  the state  and the  industry on  valuations and                                                               
costs.   He said  industry is  going to  be mistrustful  that the                                                               
state will not  allow expenses that it thinks is  real.  "I'm not                                                               
going to want to pay for  the building in London and Houston," he                                                               
said.   He  suggested  the conflict  might  continue because  the                                                               
issue will not be in statute.                                                                                                   
2:20:12 PM                                                                                                                    
MS.  WILSON  said,   "This  is  an  area  where   there  is  some                                                               
streamlining, as I would see it."   She said with regard to lease                                                               
expenditures,  there  is  recognition  of  established  practices                                                               
where  there  is   joint  interest.    She  said   there  may  be                                                               
disagreements  about allocation  of overhead,  but "we  have been                                                               
given marching orders,  so I would hope that  that would minimize                                                               
the conflict."                                                                                                                  
CO-CHAIR SAMUELS asked about the timeframe for the regulations.                                                                 
MS. WILSON said  the administration has not started on  them.  It                                                               
may be required to be done on an expedited basis, she added.                                                                    
2:21:23 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  asked  if  the net  profit  formula  in                                                               
Alaska leases has ever been litigated.                                                                                          
MR.  DICKINSON  said   he  doesn't  believe  it   has  gotten  to                                                               
litigation, but  there have been  differences.  "I  don't believe                                                               
that the  overhead was  one of  those because  I believe  that is                                                               
specified in the net profit share regulations as they exist."                                                                   
REPRESENTATIVE  ROKEBERG   asked,  "Are  you  not   adopting  the                                                               
USC...the federal tax code?"                                                                                                    
MR.  DICKINSON said,  "We will.   For  capitalized expensive,  in                                                               
other  words, the  rules  that  say when  you  self construct  an                                                               
asset, how much of  your overhead can go into that,  or has to go                                                               
into that...we will be adopting the  federal code for that."  The                                                               
issue, for  example, is when an  operator at Prudhoe Bay  uses an                                                               
engineer  in Anchorage  to  do  work on  the  North Slope,  other                                                               
working-interest owners  will be billed  an overhead  beyond that                                                               
engineer's  salary,  "so when  we  say  we're  going to  look  at                                                               
industry practice, that's  really what we want  to look at...like                                                               
Prudhoe Bay where  there are lease expenses and  how the operator                                                               
charges overhead to other lessees."                                                                                             
2:23:14 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  asked  about   the  analysis  for  an                                                               
MR.  DICKINSON  said  a  lease  generally  has  several  working-                                                               
interest  owners,  and  independents or  wholly-owned  operations                                                               
have no one  looking over their shoulders, and  "that's when it's                                                               
going to get a  little bit harder, and that is  where we are just                                                               
going to  have to  look at  industry practice  and set  out rules                                                               
that embody  industry practice and  try to  make sure we  come as                                                               
close to  a reasonable number  as possible."   He said  he didn't                                                               
try  to embody  a  rule  in HB  488  because  "we thought  having                                                               
regulations with a  direction to look at  industry practice would                                                               
probably keep us more in line."                                                                                                 
2:24:42 PM                                                                                                                    
CO-CHAIR SAMUELS said  there was a previous bill  on a decoupling                                                               
because   the  federal   government   did   something  that   the                                                               
legislature did not  like.  He asked if there  would be a problem                                                               
with a federal  rule change, "is there some worry  that now we're                                                               
stuck  with this...and  we have  moved  down the  road with  [the                                                               
industry], and now  the feds come in and do  something to the two                                                               
of us that changes the economics  of the project or the economics                                                               
of the state?"                                                                                                                  
2:25:47 PM                                                                                                                    
REPRESENTATIVE SEATON  said, "We are looking  at establishing the                                                               
oil statute  and then coupling  that possibly with a  future vote                                                               
into gas; now  is that going to couple in  the regulations or are                                                               
we essentially  setting up regulations that...determine  some tax                                                               
policy that could be changed at  a future date that are not going                                                               
to  be tied  in  here?"   He  said he  sees  future conflict  and                                                               
litigation,  "if we're  talking about  trying to  couple statutes                                                               
into the  long term  gas, but  then we're  decoupling regulations                                                               
that could be changed.  Could that be a future problem?"                                                                        
2:26:59 PM                                                                                                                    
MR. DICKINSON said  that in the context of the  Stranded Gas Act,                                                               
discussions   about  fiscal   stability   focus   very  much   on                                                               
regulations because  that is something the  department really can                                                               
do, aside from  listening to public input,  because the decision-                                                               
making rests with  the department.  But with HB  488, "what we're                                                               
trying to do  here is create enough  flexibility...the cost areas                                                               
here  are  much  more  specific  than they  are  in  the  current                                                               
statute."  The  current statute uses 12 words  talking about what                                                               
costs are, and "we have  written hundreds of pages of regulations                                                               
interpreting what  those 12 words do."   He said he  has tried to                                                               
be  more  specific  in  HB  488  while  maintaining  flexibility.                                                               
"Clearly, what's contemplated in the  Stranded Gas Act, and again                                                               
I can only  tell you a window into that,  is the discussion about                                                               
regulations and  the effects  that they  may or  may not  have on                                                               
someone signing the Stranded Gas Act contract."                                                                                 
REPRESENTATIVE SEATON  said he would  like that addressed.   This                                                               
is a stand-alone bill but the intent  is to have a future vote to                                                               
tie it  into a Stranded Gas  Act bill.   He wants to know  if the                                                               
regulations that  are establishing  these costs  will be  tied to                                                               
stranded  gas, or  could there  be litigation  based on  changing                                                               
allowable costs in the regulations.                                                                                             
2:29:07 PM                                                                                                                    
MR. DICKINSON  said, "I think  what we contemplate is  that where                                                               
the statute  sets up the  option for regulations,  essentially in                                                               
the Stranded  Gas Act, we  might essentially come up  with that."                                                               
He  gave an  example  using the  Stranded Gas  Act  to guide  how                                                               
overhead  will be  calculated.   He  said the  hope  is that  the                                                               
Stranded Gas Act will be  completed before the regulatory process                                                               
of HB 488.   There might be a situation where  a signatory to the                                                               
Stranded Gas  Act had one  set of interpretations, and  a company                                                               
that did  not sign onto  the act would have  something different.                                                               
"They'd   be  under   the  same   statutory  authority   but  the                                                               
interpretation might be slightly different."                                                                                    
REPRESENTATIVE ROKEBERG referred to the  remark of coming back to                                                               
committee if  there were a  change in  federal law, and  he asked                                                               
Mr.  Dickinson  to speak  to  the  issue  of a  federal  windfall                                                               
profits tax.                                                                                                                    
2:30:25 PM                                                                                                                    
CO-CHAIR SAMUELS  asked about  the extent  of exposure  the state                                                               
and industry would have to the federal government.                                                                              
2:30:56 PM                                                                                                                    
MS. WILSON said for income  tax, what the federal government does                                                               
is important because the state  adopts the internal revenue code.                                                               
But the production  tax will not piggyback to the  code except in                                                               
certain  areas.   If  the federal  government  wants to  generate                                                               
activity and not capitalize certain  things, then the state could                                                               
not capitalize those things.  She  said the state is not adopting                                                               
the  code  generally, so  a  windfall  profit  tax would  be  not                                                               
applicable because it is based on net income.                                                                                   
2:32:34 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  asked  if  the bill  was  adopting  the                                                               
federal code by reference.                                                                                                      
MS.  WILSON  said no,  and  the  last  point  is that  any  lease                                                               
expenses  where the  producer  is  receiving any  reimbursements,                                                               
those would be taken off the expense amount.                                                                                    
2:33:14 PM                                                                                                                    
MS. WILSON listed  non-deductible expenses: depreciation, royalty                                                               
payments,  taxes  based on  net  income,  interest and  financing                                                               
charges, lease  acquisition costs and  other costs.   Rather than                                                               
depreciating, the  producer gets an  immediate write off  in year                                                               
one.  Royalty  payments never enter the calculation  in the first                                                               
place,  she  said.   She  said  taxes  based  on net  income  and                                                               
interest are  general expenses not  tied to leases.   Other costs                                                               
including arbitration,  donations and  costs of  organizing joint                                                               
ventures  are  general expenses  that  are  not tied  to  certain                                                               
leases.  She  said the non-deductible expense list is  on page 13                                                               
of the bill.                                                                                                                    
2:35:29 PM                                                                                                                    
MR. DICKINSON said  any conflict or court case  against the state                                                               
is  not deductible,  nor are  conflicts between  interest owners.                                                               
An injury case would be allowed as a deductible expense.                                                                        
MS. WILSON  discussed how value  is determined under  the current                                                               
system.    Transportation  expenses, including  TAPS  and  marine                                                               
transportation,  are  backed out  and  simplified  under the  PPT                                                               
because marine transportation expenses take  a lot of audit time.                                                               
Under the PPT  the producer can elect to use  royalty values, and                                                               
that  would  be royalty  values  accepted  by the  Department  of                                                               
Natural Resources.   The other  option is  to use a  formula that                                                               
estimates the  value at a specific  location, such as at  a point                                                               
of delivery...common carrier pipeline.                                                                                          
CO-CHAIR  SAMUELS asked  about the  Trans-Alaska Pipeline  System                                                               
settlement methodology  (TSM), and what  the bill says  about the                                                               
trust on the tariff that is  paid to the Alyeska Pipeline Service                                                               
Company, which is probably not as high as it should be.                                                                         
2:38:37 PM                                                                                                                    
MR.  DICKINSON   said  when   TSM  expires   there  will   be  an                                                               
alternative.     He  said  he  contemplated   going  to  publicly                                                               
available  values for  calculating  a  netback, particularly  for                                                               
small  companies that  aren't doing  their own  "tankering".   He                                                               
said he never contemplated anything  other than using a published                                                               
MR.  DICKINSON  said,  "The current  standard,  which  we're  not                                                               
changing,  talks about  actual cost,  so  I suppose  that if  the                                                               
department believed  that what was ultimately  determined was not                                                               
actual cost,  they could argue it's  not deductible.  I  think in                                                               
general, what we've  contemplated is we have  enough arguments on                                                               
our hands  about other things,  we'll let  those fights go  on in                                                               
the proper forums."                                                                                                             
2:39:56 PM                                                                                                                    
MS.  WILSON  said  the  bill specifies  that  the  Department  of                                                               
Revenue  may use  other factors  like  published prices,  quality                                                               
differentials,  applicable  transportation  costs  and  inflation                                                               
adjustments to guide  it in the formula.  She  noted that the tax                                                               
rate  is  20  percent  of  net profits,  and  the  bill  provides                                                               
incentive  credits  of   20  percent,  which  may   be  taken  on                                                               
exploration costs and  capital costs incurred on the  lease.  She                                                               
said  the   credits  are  transferable  and   subject  to  audit.                                                               
Exploration  costs  include  geological  and  geophysical  costs.                                                               
Capital costs include intangible  drilling costs, which are under                                                               
the federal  code and written  off in  the first year,  but under                                                               
the  PPT, "what  we've said  is you've  got a  credit on  capital                                                               
costs and  that includes any  IDCs."   The purchaser of  a credit                                                               
can only reduce their tax by 20 percent.                                                                                        
REPRESENTATIVE ROKEBERG asked about the  credit and tax rate, and                                                               
if they are additive.                                                                                                           
2:43:52 PM                                                                                                                    
MS. WILSON  showed a  slide of  how losses are  handled.   "If we                                                               
look at a gross value...of $50,  and we write off lease operating                                                               
expenses  of $12.50,  and we  give  a deduction  for the  capital                                                               
expenditures--that  is,   write  off   the  equipment   that  was                                                               
purchased--that  leaves,  at  this  point,   a  net  loss,  which                                                               
commonly is referred to as a  NOL, net operating loss, of $22.50.                                                               
Net  operating losses.   That's  before  any credit.   Right  now                                                               
you've  gotten to  a  negative place.   You  don't  have any  tax                                                               
against which  to apply  the credit,  so, you have  a loss.   And                                                               
what the  bill provides  for is  that the  loss can  be converted                                                               
into a credit and we apply 20  percent of that amount to just get                                                               
it on a dollar for dollar."                                                                                                     
REPRESENTATIVE ROKEBERG asked about breaking even.                                                                              
MS. WILSON  said if the  bottom line was  zero there would  be no                                                               
tax; a company would not utilize any credit at that point.                                                                      
REPRESENTATIVE  ROKEBERG  asked  if   he  would  get  20  percent                                                               
investment credit.                                                                                                              
MS. WILSON said  he would get it  on the books and  have to carry                                                               
it forward.                                                                                                                     
REPRESENTATIVE  GARA   said  he   is  worried  there   is  double                                                               
accounting.  The tax credit is  for exploration and then also for                                                               
building a facility, "so there's  20 percent there, and if you're                                                               
a profitable  company, when you  pay your  20 percent tax  on the                                                               
other side, you're deducting your  costs.  So you're deducting 20                                                               
percent  of your  costs on  the tax  side and  then getting  a 20                                                               
percent credit on the credit side.   For those companies that are                                                               
making a profit...aren't they 40 percent credit?"                                                                               
2:47:23 PM                                                                                                                    
MS.  WILSON  said  that  is  correct,  "if  there's  a  piece  of                                                               
equipment on  the lease, you will  be able to write  off the cost                                                               
of  equipment in  year one  as a  deduction, and  that will  also                                                               
qualifies for a tax credit of 20  percent."  It was done this way                                                               
to maximize the incentives for investment.                                                                                      
REPRESENTATIVE GARA said it really  benefits the bigger companies                                                               
who can get it at both ends.   He suggested giving credit to help                                                               
find oil but  once it is found, why should  the state give credit                                                               
"after you've struck gold?"                                                                                                     
2:48:44 PM                                                                                                                    
MR. DICKINSON said  no matter the size of the  company, if it has                                                               
expense,  it gets  20  percent  if profits  are  below  zero.   A                                                               
company  can convert  it into  a credit,  which is  the same  for                                                               
large and small companies.   He said Representative Gara is right                                                               
that  the state  wants  to incentivize  credits for  exploration.                                                               
"One  of  the reason's  this  larger  policy  call was  made  was                                                               
looking  at the  kinds of  investments that  were occurring,  and                                                               
whether in fact  a focus on merely  exploration versus exploiting                                                               
resources  that we  know that  they're  there in  place, but  for                                                               
whatever  reason, appear  to be  more challenged.   For  example,                                                               
heavy oil."   People know where  heavy oil is, "but  the question                                                               
is,  should we  be creating  a system  where you  go out  and you                                                               
incentivize  finding light  oil  more than  just  taking a  known                                                               
reserve of  heavy oil and  monetizing it?  So  as we look  at the                                                               
resources in the North Slope,  is focus on exploration important?                                                               
Absolutely,  but so  too is  taking some  of the  more challenged                                                               
pools of oil  where we know exactly where they  are...and try and                                                               
incent  the technology  and the  investment to  get those  up and                                                               
running at a higher productivity level."                                                                                        
2:50:49 PM                                                                                                                    
REPRESENTATIVE ROKEBERG said  he has concern about  heavy oil and                                                               
frontier exploration, and having  a discussion about a two-tiered                                                               
system.  He said  it relates back to a three  step gas line deal,                                                               
and the adoption,  by reference, of something that  would be much                                                               
more  volatile.   He mentioned  separate legislation  for further                                                               
incentives for those types of investments.                                                                                      
2:51:46 PM                                                                                                                    
MR.  DICKINSON said  he  is  trying not  to  create a  multi-tier                                                               
system,  but a  system  where  one gets  the  same  bang for  the                                                               
investment buck.                                                                                                                
REPRESENTATIVE ROKEBERG said that may not be working.                                                                           
MS. WILSON  said she sees  the ability  to transfer credits  as a                                                               
way to help a small producer.                                                                                                   
2:52:50 PM                                                                                                                    
MS. WILSON  said the base  allowance is a $73  million deduction,                                                               
and  that number  came  from  allowing $200,000  per  day in  net                                                               
profit  to  be produced  without  taxation.    It is  a  standard                                                               
deduction that  cannot generate a  net operating loss  and cannot                                                               
be carried  forward.  It  is taken  in monthly chunks,  she said.                                                               
She added that  there is a monthly return filing,  and "this bill                                                               
envisions  sort of  a 90  percent  safe harbor  amount, month  by                                                               
month."   There will  be a yearly  true up on  March 31  when the                                                               
rest of the tax is due.  "I  see that as being sort of a taxpayer                                                               
friendly  reasonable thing  to do."   The  bill has  an effective                                                               
date of July 1, 2006, she stated.                                                                                               
REPRESENTATIVE  SEATON asked  if the  90 percent  safe harbor  is                                                               
MR. DICKINSON  said, "If you pay  90 percent in any  month, there                                                               
would be  no tax due  when you pay  the additional 10  percent on                                                               
the  March 31  true up  date."   But if  a company  only paid  85                                                               
percent, then it would owe interest on five percent.                                                                            
REPRESENTATIVE  SEATON said  so  this isn't  a  safe harbor  from                                                               
penalty, it is a safe harbor from penalty and interest.                                                                         
2:57:07 PM                                                                                                                    
MR. DICKINSON  said that  is correct.   Penalty is  about willful                                                               
neglect, he  said, and this  simply says  by paying 90  percent a                                                               
oil company won't have to pay interest.                                                                                         
MS. WILSON said the transition  provision allows cost recovery of                                                               
assets placed  in service in  July 2001  through June 2006.   She                                                               
said when an oil company buys  a piece of equipment for the North                                                               
Slope, it  will get  100 percent  write off in  year one.   "What                                                               
that means then  is the assets that were invested  last year, for                                                               
example, they're getting no representation  in the calculation of                                                               
net income."   She said those  assets are producing income  for a                                                               
number of  years and yet if  they were purchased last  year, they                                                               
aren't  represented.   The bill  allows cost  recovery of  assets                                                               
that  were placed  in service  in  the previous  five years,  and                                                               
those deductions  will be allowed  for six years.   The deduction                                                               
will only be available when the  average price of oil exceeds $40                                                               
a barrel.                                                                                                                       
2:59:00 PM                                                                                                                    
CO-CHAIR  SAMUELS asked  if companies  can  carry that  deduction                                                               
forward  beyond six  years if  the price  of oil  is below  $40 a                                                               
barrel in the fifth and sixth year.                                                                                             
MS. WILSON said yes.                                                                                                            
2:59:17 PM                                                                                                                    
CO-CHAIR RAMRAS said the three  majors have chosen to explore and                                                               
reinvest  in Alaska  between  2001  and 2006,  and  he asked  Ms.                                                               
Wilson to  monetize it for  each producer.   He said he  wants to                                                               
know who will benefit most from this transition provision.                                                                      
MR. DICKINSON  said there is  publicly available  information but                                                               
it  is not  broken down.    He said  ConocoPhillips Alaska,  Inc.                                                               
reports   segment  accounting,   "so   they  report   a  set   of                                                               
numbers...we  could certainly  present  that,"   but things  that                                                               
occur outside of that process are confidential.                                                                                 
CO-CHAIR   RAMRAS  asked   who  benefits   from  the   transition                                                               
provision, and why is it there.                                                                                                 
3:01:05 PM                                                                                                                    
MR. DICKINSON  said it  would benefit the  taxpayer who  has made                                                               
the largest investment,  and the taxpayer who  made no investment                                                               
will get no benefit from it.                                                                                                    
CO-CHAIR  RAMRAS said,  "We're  really only  talking about  three                                                               
taxpayers."  He again asked which company will benefit the most.                                                                
MR. DICKINSON  said ExxonMobil Corporation  holds a third  of the                                                               
Prudhoe Bay unit and ConocoPhillips  Alaska, Inc. has the same in                                                               
Prudhoe Bay and  owns a majority of Kuparuk and  Alpine field, so                                                               
it will  have higher investments.   BP owns a much  smaller piece                                                               
of Prudhoe Bay, but also has holdings in other places.                                                                          
CO-CHAIR RAMRAS  said the title  of the presentation  is "Current                                                               
Production Tax, and why it is a  Problem."  He asked who has been                                                               
the  problem   in  stimulating   exploration.     The  transition                                                               
provision assumes someone  benefits more or less.   "Who benefits                                                               
more, and who benefits less?"                                                                                                   
3:02:39 PM                                                                                                                    
MR. DICKINSON  said the two major  fields that have opened  up in                                                               
the last  five years were  North Star,  owned by BP,  and Alpine,                                                               
owned  by  ConocoPhillips Alaska,  Inc.    "Those are  two  large                                                               
investments  that  will  probably   figure  prominently  in  this                                                               
CO-CHAIR  SAMUELS  said  costs  that were  incurred  by  the  oil                                                               
companies three  years ago  have probably  been recovered  by the                                                               
$60 a  barrel price.  As  the price went up,  the recovery should                                                               
have  been  there,  he  said.    If oil  was  $30  a  barrel  the                                                               
transition  provision would  make  sense,  because the  companies                                                               
would  have calculated  that into  their rate  of return,  but he                                                               
asked if it makes sense.                                                                                                        
3:04:31 PM                                                                                                                    
MS. WILSON  said in the  accounting world, buying  machinery will                                                               
yield the value  each year it is  used.  "Just because  you had a                                                               
windfall  in year  two...doesn't change  your view  that in  year                                                               
five  that asset  is still  producing that  income and  should be                                                               
offset  against that.    I think  it's really  from  a, sort  of,                                                               
accounting perspective."                                                                                                        
REPRESENTATIVE  SEATON asked  about  the  presentation about  ELF                                                               
spiraling  down  and  that  ELF stopped  functioning  as  it  was                                                               
anticipated.    He  suggested  the  investment  costs  have  been                                                               
recovered by ELF not functioning.                                                                                               
3:07:08 PM                                                                                                                    
MR.  DICKINSON said  in the  sense of  gross cash  flows the  ELF                                                               
provided a large  window "that allowed that."  He  said the state                                                               
is taxing  profits regardless  of what has  been captured  in the                                                               
past.  "We  are trying to create a situation  where there is some                                                               
recognition  of that--their  contribution  of  the profits  going                                                               
REPRESENTATIVE SEATON said everything  that has been invested "up                                                               
there" is in the same structures.   He noted that 2001 happens to                                                               
be where ELF free falls, but  why are investments in 1999 or 2000                                                               
still not  producing assets.   He said he doesn't  understand the                                                               
transition going back to 2001.                                                                                                  
3:08:39 PM                                                                                                                    
MR.  DICKINSON said  it could  have  been a  different number  of                                                               
years.  "This is what the governor is recommending."                                                                            
REPRESENTATIVE GATTO said he is  curious about the chart that the                                                               
oil companies will show regarding the PPT.                                                                                      
MR. DICKINSON said the legislature  will get many charts from the                                                               
oil companies.   He said the  state will show charts  on who will                                                               
get what with the PPT.                                                                                                          
3:10:34 PM                                                                                                                    
MS. WILSON said additional revenue will  be based on the price of                                                               
oil and  the amount  of producer  investment in  the state.   The                                                               
revenue   forecast  was   modeled   on   three  different   price                                                               
predictions.   The  Department  of Revenue  forecasts  oil to  be                                                               
$25.50 per  barrel after two years.   In that forecast  the state                                                               
revenue is  less than it would  be with the current  system.  She                                                               
says she views that as the  worst-case scenario, and it is in the                                                               
fiscal note.                                                                                                                    
3:13:25 PM                                                                                                                    
REPRESENTATIVE GARA said  a chart by Pedro van  Meurs showed that                                                               
under a 20:20 system, the state  would earn less money with a PPT                                                               
than the current system  at $27 a barrel.  Now  she is showing it                                                               
roughly  even at  $25 a  barrel, and  asked about  any change  in                                                               
MR.  DICKINSON said  that modeling  is based  on five  different-                                                               
sized  fields, but  the state  analysis looks  only at  the North                                                               
3:14:39 PM                                                                                                                    
MS. WILSON  showed the  fiscal impact at  today's oil  prices and                                                               
then the impact of a "moderate" $40 per barrel.                                                                                 
3:15:14 PM                                                                                                                    
MS. WILSON said the fiscal note  shows tax revenues, and in terms                                                               
of  expenditures,  there  will   be  increases  for  auditing  of                                                               
expenses, except  there will be  less auditing  on transportation                                                               
costs.   She  noted that  the transition  deduction will  require                                                               
much auditing done  quickly.  There will be  heavy upfront costs,                                                               
and that  work will be outsourced.   There will be  an additional                                                               
three auditors  and an employee for  filing.  There will  also be                                                               
outside help for  regulation writing.  Basic  programming will be                                                               
required, she concluded.                                                                                                        
REPRESENTATIVE SEATON asked for a chart on oil at $18 a barrel.                                                                 
REPRESENTATIVE  GARA said  he would  like  to see  the charts  on                                                               
three  other tax/credit  scenarios,  including  30/15, 30/20  and                                                               
25/20, which is what the governor proposed the prior week.                                                                      
3:20:27 PM                                                                                                                    
[HB 488 was held over.]                                                                                                         

Document Name Date/Time Subjects