Legislature(2005 - 2006)HOUSE FINANCE 519

02/23/2006 12:30 PM RESOURCES


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12:36:34 PM Start
12:39:27 PM HB488
03:53:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ Presentation by the Administration TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
                                                                                                                                
CO-CHAIR RALPH 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."                                                                    
                                                                                                                                
12:39:27 PM                                                                                                                   
                                                                                                                                
DR. PEDRO VAN MEURS, Economic  Consultant, informed the committee                                                               
that  the   committee  packet   should  include   the  PowerPoint                                                               
presentation  entitled,  "Petroleum  Production Tax."    Dr.  Van                                                               
Meurs  said  that he  would  discuss  the proposed  profits-based                                                               
Petroleum   Production   Tax   (PPT)   from   the   international                                                               
perspective.  He began by  highlighting that the fiscal system of                                                               
Alaska, applicable  to oil  and gas,  consists primarily  of four                                                               
components:   royalties, production tax, property  tax, and state                                                               
corporate  income  tax.    Additionally,  the  federal  corporate                                                               
income     tax    would     be    included     when    performing                                                               
worldwide/international comparisons.  He then  turned to slide 3,                                                               
which lays  out the PPT as  specified in HB  488.  The PPT  in HB
488  has a  tax rate  and tax  credit of  20 percent,  a tax-free                                                               
allowance  of   up  to   $73  million,   and  a   capex  [capital                                                               
expenditure] clawback provision in the  amount of 20 percent over                                                               
the last five years.                                                                                                            
                                                                                                                                
CO-CHAIR  SAMUELS recalled  that when  the economic  limit factor                                                               
(ELF) was instituted an extraordinary  tax break incentivized the                                                               
development  of  satellite fields,  which,  20  years later,  has                                                               
resulted in  the state  having many  satellite fields  that don't                                                               
pay  taxes.   Therefore,  Co-Chair Samuels  inquired  as to  what                                                               
would prohibit  a similar situation  [under HB 488] with  the $73                                                               
million in tax-free allowances.                                                                                                 
                                                                                                                                
DR. VAN  MEURS said  he didn't foresee  that problem  because the                                                               
North  Slope will  be the  terrain of  the larger  oil companies.                                                               
The  level of  investment  and the  complexity  of the  resource,                                                               
particularly in  regard to heavy  oil, is the kind  of investment                                                               
that  large/major oil  companies make.   Therefore,  he predicted                                                               
that the vast majority of Alaska  oil and gas will be produced by                                                               
major oil companies over the  coming decades.  However, the small                                                               
oil companies  could be attracted  and the state would  desire to                                                               
attract  them to  the  basins around  Fairbanks  and Cook  Inlet.                                                               
Therefore, Dr. Van Meurs opined  that there is definitely a place                                                               
in  the petroleum  industry for  smaller  companies, although  he                                                               
said he  didn't foresee a  situation in  which 90 percent  of the                                                               
oil would be used by small companies 20 years from now.                                                                         
                                                                                                                                
REPRESENTATIVE LEDOUX inquired as to what a capex clawback is.                                                                  
                                                                                                                                
DR. VAN  MEURS related  that although he  wasn't involved  in its                                                               
development,  he   understood  that  the  concept   is  that  oil                                                               
companies that  have been investing  for the last five  years can                                                               
take capital expenditures  as a deduction over  a specified price                                                               
level, which  he estimated to  be $40 a  barrel.  He  deferred to                                                               
Mr. Dickinson,  consultant to the  governor, for  further details                                                               
and  noted  that  his  analysis   doesn't  include  the  clawback                                                               
provision.                                                                                                                      
                                                                                                                                
12:46:17 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KERTTULA  inquired as to what  other jurisdictions                                                               
have  implemented   something  similar  to  the   capex  clawback                                                               
provision.                                                                                                                      
                                                                                                                                
DR.  VAN  MEURS   said  that  the  concept   of  permitting  past                                                               
depreciation when  a new tax  is introduced is a  normal feature.                                                               
However, in [Alaska's] context it's  a bit unusual since [Alaska]                                                               
permits  a 100  percent  write-off of  the capital  expenditures.                                                               
Contributing to  the uniqueness of  the capex  clawback provision                                                               
is the  fact that  it would  only apply  over a  particular price                                                               
level.   Therefore,  the provision  isn't easily  identifiable in                                                               
other countries.                                                                                                                
                                                                                                                                
12:47:56 PM                                                                                                                   
                                                                                                                                
DR. VAN MEURS  continued with his fourth slide.   He reminded the                                                               
committee that until early January  2006, he had recommended a 20                                                               
percent tax  and a 15  percent credit based on  the international                                                               
competitiveness analysis.   However, as a result  of the economic                                                               
analysis  done   in  DOR  and   input  from  the   various  other                                                               
consultants,  he concluded  that a  25  percent tax  rate and  20                                                               
percent tax  credit rate  was a  better package.   The  20/20 PPT                                                               
package was  adopted after his  analysis, and therefore  he noted                                                               
that his report  doesn't include specific analysis on  that.  Dr.                                                               
Van Meurs moved on to slide 5 with  an outline of his report.  He                                                               
explained  that the  reason he  preferred the  25/20 PPT  and the                                                               
20/15 PPT is  because the tax rate is high  enough to balance the                                                               
credits.  The 20/20 PPT is  a slightly more risky package because                                                               
there may not be enough taxes to  make up for the tax credit.  He                                                               
commented that  there are various risk  distributions among these                                                               
taxation systems.                                                                                                               
                                                                                                                                
12:51:52 PM                                                                                                                   
                                                                                                                                
DR.   VAN  MEURS,   in  response   to  Representative   Kerttula,                                                               
highlighted the  need to understand  the balance between  the tax                                                               
rate and  the tax credit  rate.  He  explained that if  large tax                                                               
credits  are  used  due  to   high  investments,  it  results  in                                                               
significantly  less income.   Therefore,  the notion  is to  have                                                               
sufficient  income  for the  tax  credits  to  be taken,  if  the                                                               
companies heavily invest.   He reiterated that  good balances are                                                               
20/25 and  25/20, although he  noted that the  difference between                                                               
all of  these packages is really  small.  Still, when  there is a                                                               
lower  tax rate  combined  with a  somewhat  higher credit,  it's                                                               
somewhat riskier for the state, he said.                                                                                        
                                                                                                                                
REPRESENTATIVE ROKEBERG  questioned whether  the administration's                                                               
preference for the 20/20 ratio  was impacted by negotiations with                                                               
the producers.  He  then asked if Dr. Van Meurs  has been able to                                                               
quantify/model the capex clawback.                                                                                              
                                                                                                                                
DR.  VAN MEURS  again  deferred to  Mr.  Dickinson regarding  the                                                               
clawback provision.   However, he related  his understanding that                                                               
at  higher prices,  these taxes  bring in  billions more  in tax.                                                               
The clawback  provision, he opined,  is just $1 billion  and thus                                                               
is  a  relatively  minor  component  that  wouldn't  dramatically                                                               
change  the  economic  impacts.   "Consequently,  it  is  just  a                                                               
feature  that results  in somewhat  lower tax  in the  coming few                                                               
years  than  otherwise  would've   been  created,  but  it's  not                                                               
something that  ... would change  the basic conclusions  that I'm                                                               
also presenting," he said.                                                                                                      
                                                                                                                                
 12:56:05 PM                                                                                                                  
                                                                                                                                
DR. VAN MEURS reminded the committee  that he and Mr. Marks, DOR,                                                               
presented  the  full  slate  of  options  to  the  House  Finance                                                               
Committee.  He  opined that all of the options  are attractive to                                                               
the  state,  if  there  is  at  least  a  20  percent  tax  rate.                                                               
Therefore, it  becomes a question  as to the precise  balance for                                                               
the state in  the opinion of the governor.   From a consulting or                                                               
international analysis  point of view,  all of these  systems are                                                               
closely related in terms of  competitiveness.  The higher the tax                                                               
rate and the lower the tax  credit, the more revenue there is for                                                               
the state, he reminded the committee.                                                                                           
                                                                                                                                
12:57:19 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG inquired as to  why HB 488 wasn't drafted                                                               
with a 30/20 [PPT] when another benefit was included.                                                                           
                                                                                                                                
DR. VAN  MEURS pointed out  that there  can be higher  tax rates.                                                               
He noted that  his report analyzed higher tax  rates, including a                                                               
30 percent  tax rate.  However,  he recommended not having  a tax                                                               
rate  that is  too high  because he  believes it  would gradually                                                               
make the system less competitive  and the overall government take                                                               
becomes  gradually unattractive  relative to  other international                                                               
fiscal systems,  and therefore companies would  probably start to                                                               
invest less in  Alaska.  Dr. Van Meurs  related his understanding                                                               
that the goal was for the  taxes to bring in more revenues, which                                                               
any  of the  [PPT] combinations  achieve.   However, at  the same                                                               
time there  was a  desire to see  more investment  and stabilized                                                               
production.  Therefore,  the goal is to find  the balance between                                                               
the aforementioned objectives, he said.                                                                                         
                                                                                                                                
12:59:25 PM                                                                                                                   
                                                                                                                                
DR. VAN  MEURS moved on  to slide 6,  which relates the  range of                                                               
cost scenarios that  were analyzed.  He commented  that with this                                                               
type of  fiscal analysis it's important  to take a wide  range of                                                               
cost and field  sizes because one never knows what  is there.  If                                                               
the  Arctic  National  Wildlife  Refuge is  ever  opened  to  oil                                                               
development,  the  desire is  to  ensure  that there's  a  fiscal                                                               
system in place  that's adequate and that the  fields provide the                                                               
benefit to the state.   However, he acknowledged that the ongoing                                                               
developments  of the  North Slope  relate to  the smaller  fields                                                               
that are gradually  getting expensive.  In order  to test whether                                                               
this test  is suitable for a  wide range of field  sizes, prices,                                                               
and  costs, much  emphasis was  placed  on the  high cost  fields                                                               
because  there is  abundant  evidence that  the  majority of  the                                                               
fields will be "looked at" in the coming years.                                                                                 
                                                                                                                                
1:02:08 PM                                                                                                                    
                                                                                                                                
DR.  VAN MEURS  pointed  out  that slide  7  relates the  various                                                               
outcomes with  a 20/20 PPT tax.   He explained that  the negative                                                               
figures under  the "dry hole" column  are due to the  tax credits                                                               
and the deductions  of the dry hole itself, for  PPT purposes and                                                               
corporate income  tax purposes.   The 64.7 percent  specified for                                                               
the  total under  the "dry  hole" column  means that  the federal                                                               
government and  the state absorb  64.7 percent  of the cost  of a                                                               
dry hole  in terms of deductions.   Therefore, the PPT  will make                                                               
an  enormous  contribution  to  increase  the  attractiveness  of                                                               
exploration because a company could  receive $6.47 back for every                                                               
$10  spent.    Furthermore,  exploration would  become  far  more                                                               
attractive throughout  Alaska.  He  then turned attention  to the                                                               
"50  MM,"  and  explained  that   the  smaller  fields  are  more                                                               
attractive because  of the  $73 million  allowance and  don't pay                                                               
the PPT,  although they  receive the  tax credits.   The  hope is                                                               
that   will  increase   [exploration]  activities,   particularly                                                               
outside  of  the  North  Slope.   He  then  reviewed  the  Alaska                                                               
government take under various  scenarios, which illustrates that,                                                               
in terms  of field  size, there  is a  progressive system  with a                                                               
heavy burden  on the larger  fields.  Therefore,  new investments                                                               
would generate very significant revenue flow to the state.                                                                      
                                                                                                                                
DR.  VAN  MEURS  moved  on  to slide  8,  which  illustrates  the                                                               
importance  of tax  credits for  small fields.   The  tax credits                                                               
have a considerable  impact on the break-even  point, he reminded                                                               
the committee.   The  graph provides  sensitivity analysis  for a                                                               
PPT of 20  percent with no tax credits, a  15 percent tax credit,                                                               
and a  25 percent  tax credit.   The  slide illustrates  that the                                                               
break-even point, in terms of  the PPT received, depends upon the                                                               
tax credits.   He  pointed out  that the  higher the  credit, the                                                               
higher the break-even price.                                                                                                    
                                                                                                                                
1:07:16 PM                                                                                                                    
                                                                                                                                
DR. VAN MEURS  highlighted that the graph on  slide 9 illustrates                                                               
the rate  of return on a  150 million-barrel field.   Again, this                                                               
is  a  sensitivity  analysis  of  the tax  credits.    The  graph                                                               
illustrates that the  internal rate of return  (IRR) is primarily                                                               
determined  by these  tax credits.   Therefore,  the 20/20  [PPT]                                                               
would result in  the same return as the current  system in Alaska                                                               
for the specified  field size.  As the tax  credit increases, the                                                               
IRR  increases.    The  graph  specifies  that  the  IRR  can  be                                                               
increased by  almost 7 percentage points  by moving from 0  to 25                                                               
percent.  The 20/20 [PPT]  proposal in HB 488 would significantly                                                               
increase the  IRR, and therefore  it makes investment  in smaller                                                               
fields  or fields  of  any  size by  smaller  companies far  more                                                               
attractive.   Slide 10,  he said,  enters into  the international                                                               
comparison.    He explained  that  his  job  was to  ensure  that                                                               
whatever   system   was   selected   would   be   internationally                                                               
competitive.       The   analysis   carefully    compares   eight                                                               
jurisdictions in  which the  companies are  very active  and thus                                                               
the  terms  are  sufficiently  attractive  to  merit  significant                                                               
investment.                                                                                                                     
                                                                                                                                
1:11:16 PM                                                                                                                    
                                                                                                                                
DR. VAN  MEURS said  that slide  11 is  important.   He explained                                                               
that one  of the  large drawbacks  on the  Alaska North  Slope is                                                               
that  the wellhead  prices are  much  less than  anywhere in  the                                                               
world relative to West Texas  Intermediate (WTI) taxes.  He noted                                                               
that  there  is a  quality  differential  of about  $2.00,  which                                                               
varies from day-to-day.  Therefore,  in comparing the North Slope                                                               
with the U.S. Gulf of  Mexico, Alaska immediately has to overcome                                                               
a  $7.00  difference [in  value  with  Mexico].   He  noted  that                                                               
Azerbaijan  is similar  to Alaska  in that  it is  a low  netback                                                               
country and  thus has low  wellhead prices relative to  the world                                                               
price.  Within  the economic comparison, Dr. Van  Meurs said that                                                               
he subtracted  the differential in  order to address it  and thus                                                               
if  Alaska is  compared with  Norway or  the United  Kingdom, the                                                               
assumption is  that the value  of the crude  oil in Alaska  is $7                                                               
less  than in  the Gulf  of  Mexico or  $6 less  than in  Norway.                                                               
Therefore, if  the graph illustrates  that Alaska  is competitive                                                               
it's  a real  competitiveness  because it  corrects  for the  low                                                               
wellhead prices.                                                                                                                
                                                                                                                                
1:13:51 PM                                                                                                                    
                                                                                                                                
DR. VAN MEURS then turned  the committee's attention to slide 12,                                                               
which presents a  graph comparing Norway and  the United Kingdom.                                                               
The aforementioned example was chosen  because it presents a good                                                               
spread in that the United  Kingdom has an overall government take                                                               
that is an overall percentage of  the profits of about 50 percent                                                               
whereas for  Norway it's  about 78  percent.   Consequently, that                                                               
almost represents  the world from  the lower government  takes to                                                               
the higher  government takes.   Slide 12  represents an IRR  on a                                                               
very  large field.   Slide  13 addresses  smaller fields  for new                                                               
investors whereby  the IRR  becomes very  significant due  to the                                                               
tax  credit.   From an  international perspective,  these smaller                                                               
fields would be more attractive for the new investors, he said.                                                                 
                                                                                                                                
1:15:49 PM                                                                                                                    
                                                                                                                                
DR. VAN  MEURS, in response  to Representative  Seaton, explained                                                               
that the 20/20  [PPT], which has an attractive  tax credit, would                                                               
have a  high IRR.   Furthermore,  it fits  right over  the United                                                               
Kingdom  and is  a  bit higher  than the  United  Kingdom at  the                                                               
higher price levels.   At the low price levels  for small fields,                                                               
it's  difficult  to  be   attractive  compared  to  international                                                               
circumstances because at $22 the $7  has to be subtracted for the                                                               
netback,  and furthermore  there is  a  very high  cost for  that                                                               
field.   Therefore,  no  matter  the case,  at  low prices  small                                                               
fields  aren't  very attractive  and  not  much  can be  done  to                                                               
address it.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KERTTULA asked  if she  understands the  graph on                                                               
slide 13  correctly in  that the  25/20 [PPT]  at the  high price                                                               
provides the highest IRR.                                                                                                       
                                                                                                                                
DR. VAN MEURS  replied yes.  He explained that  small fields with                                                               
new investors who receive the  $73 million allowance wouldn't pay                                                               
taxes and  would still receive  the tax credits.   Therefore, the                                                               
higher  the tax  rate and  the tax  credits, the  higher the  IRR                                                               
because of the  much higher carry forward on the  losses and thus                                                               
it actually  boosts how  much the  company gets  back.   In other                                                               
words, the 25/20  [PPT] provides $.45 per dollar  while the 20/20                                                               
[PPT]  only provides  $.40 per  dollar, and  therefore the  25/20                                                               
[PPT]  is  more attractive.    However,  once one  reviews  large                                                               
fields, that's not necessarily the case.                                                                                        
                                                                                                                                
1:19:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS   related  his  understanding  then   that  the                                                               
assumption is that it's a small  new company with no other write-                                                               
offs for the $73 million.                                                                                                       
                                                                                                                                
REPRESENTATIVE KERTTULA  inquired as to  what would occur  with a                                                               
30/20 [PPT].   She asked  if it would  result in the  [IRR] being                                                               
even higher for the small fields.                                                                                               
                                                                                                                                
DR. VAN  MEURS replied  yes, and reiterated  that the  higher the                                                               
tax rate and the higher the tax  credit, the higher the IRR.  For                                                               
example, if  the system in place  was a 30/30 [PPT],  the company                                                               
would receive  $.60 per dollar,  which illustrates that  one must                                                               
take  care  with  these  high  tax credits  and  find  the  right                                                               
combination.                                                                                                                    
                                                                                                                                
1:20:40 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  surmised then that  a 30/20 [PPT] would  have a                                                               
higher IRR  for the company than  would a 25/20 [PPT].   However,                                                               
he inquired  as to  whether both  [the tax  rate and  the credit]                                                               
would have  to go up because  only increasing the tax  rate would                                                               
seem to lower the IRR.                                                                                                          
                                                                                                                                
DR.  VAN MEURS  explained that  the reason  for the  situation is                                                               
because  the company  isn't paying  the  tax because  of the  $73                                                               
million shelter.   Therefore, it's an enormous  incentive for the                                                               
companies.                                                                                                                      
                                                                                                                                
1:21:30 PM                                                                                                                    
                                                                                                                                
DR. VAN  MEURS moved on  to slide  14, which reviews  the overall                                                               
government take  of the  various countries  with Norway  being on                                                               
the high  end of the  international scale and the  United Kingdom                                                               
on the  low end.  The  graph illustrates that Alaska  fits in the                                                               
middle,  although located  more  closely to  the United  Kingdom.                                                               
The  graph  further  illustrates  that the  government  take  [in                                                               
Alaska] is modest,  which is because of the  earlier mentioned $7                                                               
[net differential]  problem that doesn't allow  [Alaska] to "ask"                                                               
the same  as Norway or  the United  Kingdom.  However,  the graph                                                               
highlights  that  from  an overall  government  take  it  doesn't                                                               
really  matter  whether the  [PPT]  is  25/20, 20/20,  20/15,  or                                                               
25/20.   At most,  there is  a 2  percent difference  between the                                                               
options  and  thus small  changes  in  the  PPT only  have  small                                                               
effects on the  international competitiveness.  He  said that the                                                               
same is  true for smaller  fields, although the  [government take                                                               
for the  various countries] starts  to spread  a bit at  very low                                                               
prices due to  the high costs of these fields  and thus creates a                                                               
modest degree of progressivity on the PPT.                                                                                      
                                                                                                                                
1:24:28 PM                                                                                                                    
                                                                                                                                
DR. VAN MEURS continued with slide  16, which reviews the PPT and                                                               
competition.    He explained  that  he  systematically rated  the                                                               
fiscal systems to compare them  with the other nations around the                                                               
world in order  to determine whether there was  an improvement in                                                               
competitiveness when moving  from the current system  to the PPT.                                                               
Slide  17 clearly  rates  the  20/15 and  25/20  systems for  the                                                               
various countries.   He  highlighted that  under the  20/15 [PPT]                                                               
Alaska doesn't rate  very well.  However, with  Alaska's PPT, the                                                               
rating improves.   With the  25/20 [PPT], the  competitiveness is                                                               
improved  a  bit,  primarily because  stronger  tax  credits  are                                                               
achieved.   Dr. Van Meurs  opined that  under the 20/20  [PPT] it                                                               
would show  a slight further  improvement in  the competitiveness                                                               
index.                                                                                                                          
                                                                                                                                
1:27:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  inquired  as how  Alaska's  competitiveness                                                               
would be impacted if the 30/20 [PPT] was in place.                                                                              
                                                                                                                                
DR. VAN MEURS  opined that it wouldn't be too  different from the                                                               
25/20 [PPT].   He further  opined that  the 30/20 [PPT]  would be                                                               
somewhat less  competitive because  of the  higher tax  rate that                                                               
would  begin  to  [infringe]  on  the  overall  government  take.                                                               
Still, [the  30/20 PPT] would  be more competitive  than Alaska's                                                               
current system.  He explained  that how the 30/20 would precisely                                                               
rate compared to the 25/20 [PPT],  depends upon the effect on the                                                               
smaller  fields.    However,  he suggested  that  it  would  rate                                                               
somewhat less  that 244, but  significantly better than 363.   In                                                               
further response to Representative Gara,  Dr. Van Meurs agreed to                                                               
provide the committee with a rating for the 30/20 [PPT].                                                                        
                                                                                                                                
1:29:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG highlighted that  slide 17 specifies that                                                               
the 20/20 [PPT] would rate  somewhat more attractive to investors                                                               
than the 25/20 [PPT], although  not significantly more.  He asked                                                               
if that includes the provisions for  the capex clawback.  He also                                                               
inquired as to what impact that would have on the calculations.                                                                 
                                                                                                                                
DR. VAN MEURS clarified that  the aforementioned statements don't                                                               
include the  capex clawback.   He related his  understanding that                                                               
the capex  clawback is a  corporatewide feature and thus  isn't a                                                               
field-by-field feature.  However, Dr.  Van Meurs related that his                                                               
analysis was performed  on a field-by-field basis,  which is what                                                               
his  competition  analysis is  based  on  because investors  make                                                               
decisions  on individual  field  opportunities.   Therefore,  the                                                               
[capex] clawback  wouldn't typically be  included in a  rating of                                                               
this nature  because the  companies can  deduct it  regardless of                                                               
the economic analysis.                                                                                                          
                                                                                                                                
1:31:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  related his understanding that  the analysis on                                                               
slide 17 is for a new company  that can take advantage of the $73                                                               
million  if that  company has  not  taken advantage  of that  $73                                                               
million in another field in another investment.                                                                                 
                                                                                                                                
DR. VAN MEURS said that would be  true.  He then posed an example                                                               
in which  a new company enters  [a field] for the  first time and                                                               
receives its  $73 million  tax-free allowance.   If  that company                                                               
invests  in another  field, it  places the  company over  the $73                                                               
million  allowance  and the  PPT  would  rate significantly  less                                                               
attractive.  Consequently, the rating  is for first investors who                                                               
would really obtain  a boost to enter.  Once  the first investors                                                               
are in  and settled,  the PPT  is still  better than  the current                                                               
system.   However,  not significantly  better, as  illustrated in                                                               
the ratings and thus companies would  still view Alaska as a more                                                               
attractive  environment  than  before.    The  aforementioned  is                                                               
exactly   what's  desired   because   once   the  companies   are                                                               
established, the  incentives to reinvest through  the tax credits                                                               
are beneficial  although the  $73 million  allowance is  gone and                                                               
the full tax is paid on any size field.                                                                                         
                                                                                                                                
1:33:03 PM                                                                                                                    
                                                                                                                                
DR. VAN MEURS confirmed that the  analysis and the $73 million is                                                               
for  new  investors  with  their   first  investment  in  Alaska.                                                               
However, he noted  that the report also  includes rating analysis                                                               
for current operators.  He  related that the analysis illustrates                                                               
that  the [proposed]  system would  be  somewhat more  attractive                                                               
from an investment  point of view, although not  as attractive as                                                               
slide 17 presents.                                                                                                              
                                                                                                                                
REPRESENTATIVE  ROKEBERG  surmised  then that  current  producers                                                               
with  some costs  in capital  investments would  have a  slightly                                                               
higher rate of return than are shown because of the clawback.                                                                   
                                                                                                                                
1:35:00 PM                                                                                                                    
                                                                                                                                
DR. VAN  MEURS replied  yes, and explained  that from  an overall                                                               
corporate perspective  the clawback  would primarily  benefit the                                                               
larger  companies  in Alaska  and  would  lower their  total  PPT                                                               
payments for a few years.                                                                                                       
                                                                                                                                
CO-CHAIR  SAMUELS related  his understanding  that ConocoPhillips                                                               
Alaska,  Inc. ("ConocoPhillips")  would receive  the $73  million                                                               
write-off, but  as it  moves forward to  invest in  another field                                                               
the  $73 million  won't be  counted because  it has  already been                                                               
written  off.   Therefore,  the  proposal will  only  apply to  a                                                               
completely  new  company with  zero  [current  investment in  the                                                               
state].   He surmised that this  won't apply to even  some of the                                                               
smaller  companies,   such  as  Anadarko   Petroleum  Corporation                                                               
("Anadarko")  that  might  be  coming close  to  $73  million  in                                                               
current investments in Alaska.                                                                                                  
                                                                                                                                
DR.  VAN MEURS  agreed and  specified  that he  is attempting  to                                                               
illustrate  that  Alaska is  attractive  to  new companies.    He                                                               
pointed  out  that  these  slides  are  representative  of  small                                                               
companies that  don't go  over the $73  million or  new investors                                                               
such as  Shell.  Although  a company such  as Anadarko is  in the                                                               
middle,  and  will still  benefit  significantly  in the  overall                                                               
corporate  cash  flow  from  the   $73  million,  there  will  be                                                               
production   that  would   go  over   that   limit,  making   the                                                               
reinvestment in  new fields not  as attractive.  For  the smaller                                                               
companies  in  a heavy  investment  mode,  such as  Pioneer,  the                                                               
company  would have  so many  tax  credits that  it wouldn't  pay                                                               
anything,  even  if  it's  over  the  $73  million.    The  large                                                               
companies, as  illustrated by Mr.  Marks' analysis, have  so much                                                               
existing production  that the $73 million  is almost meaningless.                                                               
Furthermore,  the  larger  companies' level  of  reinvestment  as                                                               
compared to  existing production  is relatively modest,  and thus                                                               
as long as  the prices are reasonably high,  the larger companies                                                               
will pay a significant additional PPT.                                                                                          
                                                                                                                                
1:39:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if the  large companies still receive                                                               
the tax credit for their investment.                                                                                            
                                                                                                                                
DR.  VAN MEURS  replied yes.   Therefore,  under the  20/20 [PPT]                                                               
system if ConocoPhillips wanted to  drill a new exploration well,                                                               
it would  receive $4  for every $10  it invested.   Consequently,                                                               
even  for  the  ConocoPhillips  companies,  this  proposal  is  a                                                               
significant  encouragement   to  reinvest.    Faced   with  large                                                               
investment  and budgets,  the tax  credit portion  of the  PPT is                                                               
really designed to get [the  large companies] going on those kind                                                               
of developments.                                                                                                                
                                                                                                                                
1:41:32 PM                                                                                                                    
                                                                                                                                
DR.  VAN MEURS  pointed out  that slide  18 shows  the heavy  oil                                                               
investment and the  various PPTs.  The graph  illustrates that no                                                               
matter the system,  the tax credits are very  important for heavy                                                               
oil development.   Therefore, he  opined that there will  be much                                                               
more  action with  heavy  oil,  which is  necessary  to fill  the                                                               
pipeline and maintain  production.  Dr. Van  Meurs further opined                                                               
that much  of the production in  Alaska will come from  the major                                                               
oil companies and this system is  designed to provide them with a                                                               
strong incentive  to maintain production  on the North  Slope and                                                               
ensure that new technologies and ideas are being developed.                                                                     
                                                                                                                                
1:43:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG recalled the  400-500 differential in the                                                               
IRR,  particularly as  it relates  to  heavy oil.   However,  the                                                               
graph   doesn't  really   illustrate  the   [magnitude]  of   the                                                               
difference  between  a 20  and  a  25  percent  tax credit.    He                                                               
requested that Dr. Van Meurs speak  to the actual numbers and the                                                               
impact of the 5 percent difference on the IRR.                                                                                  
                                                                                                                                
DR.  VAN MEURS  explained  that there's  about  a 1-2  percentage                                                               
point  difference  between a  20  percent  tax  credit and  a  25                                                               
percent tax  credit.  He  further explained that the  graphs were                                                               
included in the report because  there was the desire to determine                                                               
whether the state should support  heavy oil production, even with                                                               
a  higher  tax  credit  than  the  20  percent.    As  the  graph                                                               
illustrates,  the difference  isn't that  much, and  therefore at                                                               
the 25  percent tax credit,  the risk  for the state  becomes too                                                               
high.   Consequently,  Dr. Van  Meurs  opined that  the 25/20  or                                                               
20/20 [PPT]  are good systems to  promote heavy oil and  there is                                                               
no  need  to  over  stimulate that  production  with  higher  tax                                                               
credits.   In  further  response, Dr.  Van  Meurs confirmed  that                                                               
those figures are available in his report.                                                                                      
                                                                                                                                
1:46:36 PM                                                                                                                    
                                                                                                                                
DR. VAN  MEURS, in  further response, clarified  that the  PPT is                                                               
designed  to   stimulate  heavy   oil  exploration  as   well  as                                                               
[exploration] in the smaller fields in other areas.                                                                             
                                                                                                                                
CO-CHAIR  RAMRAS recalled  the  presentations'  from prior  day's                                                               
hearing, and  expressed the  need for there  to be  an apples-to-                                                               
apples  comparison.   He  then  inquired as  to  whether Dr.  Van                                                               
Meurs, on  the tax  credit side, is  comfortable with  the things                                                               
that  are not  included, such  as the  depreciation, the  royalty                                                               
payments, the  tax on which  it's based,  et cetera.   He related                                                               
his understanding  that adopting the  approach [in HB  488] would                                                               
make the  accounting arm of  these large oil companies  much more                                                               
material  in regard  to how  to formulate  new investment  in the                                                               
state  because they  will take  advantage of  these tax  credits.                                                               
"Are  you satisfied  that  we  have enough  of  a  collar on  the                                                               
ability of the accounting arms of  the large oil companies to not                                                               
be too  exploitative of  how to  manage the  credit side  of this                                                               
equation," he asked.  He requested  that Dr. Van Meurs also speak                                                               
to the cost side as well.                                                                                                       
                                                                                                                                
1:49:56 PM                                                                                                                    
                                                                                                                                
DR.  VAN MEURS  noted that  the vast  majority of  countries have                                                               
established a profit-based system.   When a country establishes a                                                               
profit-based  system, it  requires a  deeper accounting  of costs                                                               
and revenues.   He explained that there must  be sufficient power                                                               
and  definition  in order  to  prepare  detailed regulations  and                                                               
accounting procedures  for companies  to calculate  the PPT.   He                                                               
noted that also contemplated is to  make use of the joint venture                                                               
accounting  systems  that  the companies  maintain.    Therefore,                                                               
there are  different ways  to tie  into the  extensive accounting                                                               
that is  already being done.   Moreover,  it wouldn't be  a major                                                               
problem to  organize those  systems.  Dr.  Van Meurs  pointed out                                                               
that [HB  488] also contemplates  that in 2006 companies  will be                                                               
allowed  to continue  on the  old basis  and then  in March  2007                                                               
there will be  a "through up" to ensure that  everything has been                                                               
calculated properly.   From the  government side there will  be a                                                               
shift in  emphasis.   He pointed that  Alaska already  has modest                                                               
experience  with running  profit-based  systems  through the  net                                                               
profits leases that it has held  for decades.  However, the scale                                                               
of the PPT will be much larger  and thus Alaska will also have to                                                               
prepare for  more in-depth auditing  and accounting.   He pointed                                                               
out that although  companies will try to take  advantage of [what                                                               
they can], in  Alaska there is an extremely sound  base of highly                                                               
knowledgeable people who can be hired.   Alaska, he opined, is on                                                               
the  forefront  of   the  oil  and  gas  industry   and  has  the                                                               
infrastructure to properly do this without much difficulty.                                                                     
                                                                                                                                
CO-CHAIR RAMRAS asked, "What kind of  a shift and what kind of an                                                               
empowerment are  we going  to see  from the  different accounting                                                               
arms of the  large producers and some of  these smaller companies                                                               
to  begin to  make  that  shift and  that  assessment of  whether                                                               
projects in  Alaska are viable as  they try to shelter  income by                                                               
taking advantage of tax credits  and the different variables that                                                               
are going to drive that?"                                                                                                       
                                                                                                                                
1:55:47 PM                                                                                                                    
                                                                                                                                
DR.  VAN MEURS  related his  belief  that the  world is  reacting                                                               
quickly  to the  new incentives  as  the world  is becoming  more                                                               
competitive.    The introduction  of  the  PPT system,  which  is                                                               
oriented  toward   reinvestment  and  investment   while  gaining                                                               
significant revenues will gain the  attention of a wider group of                                                               
investors.   The  aforementioned is  desirable and  will increase                                                               
production, he said.                                                                                                            
                                                                                                                                
1:57:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON referred  to  slide 3  of Robynn  Wilson's                                                               
[Tax  Division,  Department  of Revenue  (DOR)]  presentation  on                                                               
February 22nd, which  speaks to incremental revenue  based on the                                                               
Department  of Revenue  forecast.   That  slide illustrates  that                                                               
Alaska's income  under the  PPT will  perform better  through mid                                                               
2008 than  under the current system  with ELF.  However,  the PPT                                                               
seems to under perform and  generates less money than the current                                                               
system through mid 2010 after which  time the PPT and the current                                                               
system remain  even.   He then  pointed out  that Dr.  Van Meurs'                                                               
slide 15 shows the current system out performing the PPT system.                                                                
                                                                                                                                
DR.  VAN MEURS  pointed out  that  [the outcomes]  depend on  the                                                               
various  assumptions made,  including  the oil  prices.   If  oil                                                               
prices are  assumed to  be relatively low  and it's  assumed that                                                               
there  will be  considerable investment,  the PPT  won't be  very                                                               
strong.   If the prices  are high, the  PPT will be  much higher.                                                               
He reminded the  committee that he has not been  able to evaluate                                                               
the  clawback  and  doesn't  know  whether  Ms.  Wilson's  graphs                                                               
include that feature.   The broad concept, he  explained, is that                                                               
at low  prices, the PPT  could be  less than the  current system.                                                               
Dr. Van  Meurs reminded  the committee that  he has  been working                                                               
with  the  state since  1996  and  has  been monitoring  the  ELF                                                               
annually.   The most striking  discovery is that  the predictions                                                               
of the ELF seem to decrease  each year.  For example, three years                                                               
ago  the  ELF was  predicted  to  be at  .1  or  .2 in  the  year                                                               
2011/2012.   However, it is  all gone and  the ELF is  crashing a                                                               
lot  faster than  the typical  production forecasts.   Therefore,                                                               
when looking  forward to  2015 or  later, one  must keep  in mind                                                               
that the ELF may decline faster  than the official forecast.  The                                                               
aforementioned,  he opined,  makes the  introduction of  this new                                                               
system very  important to avoid  entering a situation  that's far                                                               
worse than already predicted.                                                                                                   
                                                                                                                                
2:02:06 PM                                                                                                                    
                                                                                                                                
ROBYNN   WILSON,  Director,   Anchorage  Office,   Tax  Division,                                                               
Department   of  Revenue,   interjected  that   Dr.  Van   Meurs'                                                               
presentation is on  assumed field sizes while the  figures in the                                                               
fiscal  note and  the charts  provided [by  her to  the committee                                                               
yesterday]   are  actual   Alaska   numbers   based  on   certain                                                               
assumptions, which will be fully explained later.                                                                               
                                                                                                                                
2:03:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD  related  his understanding  that  [this                                                               
proposal] is setting  tax rates for both oil and  gas at the rate                                                               
of 6,000 cubic feet  of gas per barrel of oil.   However, all the                                                               
charts  are  related to  the  worldwide  competitiveness of  oil.                                                               
Therefore, he  inquired as  to whether,  by setting  these rates,                                                               
the state's competitiveness with gas is being changed.                                                                          
                                                                                                                                
DR. VAN MEURS  explained that the reason the charts  focus on the                                                               
competitiveness  with  oil is  related  to  [the notion]  that  a                                                               
stranded  gas   contract  would  be  presented,   which  includes                                                               
provisions  with  respect to  the  production  tax for  gas  that                                                               
differ from what's  presented today.  The idea  with the stranded                                                               
gas  contract is  that the  state  takes its  taxed gas  in-kind,                                                               
which  is a  totally different  concept.   Since  it's a  totally                                                               
different package  with regard  to the North  Slope gas  that may                                                               
come on-line  as a result of  the stranded gas contract,  he said                                                               
he  didn't  present the  hypothetical  case  of the  system  also                                                               
applying to  the large gas developments  in the North Slope.   If                                                               
the stranded gas  contract doesn't pass or  isn't submitted, then                                                               
these terms will apply  to gas as well as oil.   In that case the                                                               
Point Thomson  field would be  positively impacted.   The overall                                                               
structure and  investment behavior of  the tax would  be similar,                                                               
he said.                                                                                                                        
                                                                                                                                
2:06:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD asked  if Dr. Van Meurs  means that Point                                                               
Thomson would be  positively affected for the  leaseholder or the                                                               
current  operator  of  the  field.   If  so,  would  it  be  more                                                               
competitive and reduce the state's take, he also asked.                                                                         
                                                                                                                                
DR. VAN  MEURS answered that the  behavior will be the  same.  He                                                               
posed a situation in which there  is no stranded gas contract and                                                               
[HB 488] only applies to Point  Thomson.  In regard to what would                                                               
happen, he  explained that Point  Thomson would receive  the same                                                               
40 percent tax  credit as any oil development.   Therefore, since                                                               
the capital  costs at Point  Thomson are  high, that would  be an                                                               
attractive feature.   At the same time, Point Thomson  is a large                                                               
field and  thus over  time the  PPT would  decrease significantly                                                               
and the  revenues for oil and  gas would be added  together.  The                                                               
aforementioned  would result  in the  total gas  take being  very                                                               
significant and  very high  if prices  increase.   Therefore, the                                                               
overall behavior  demonstrated for  oil would  also apply  to the                                                               
gas development,  in case  there isn't  a stranded  gas contract.                                                               
If there  is a stranded gas  contract, the law would  still apply                                                               
for oil.                                                                                                                        
                                                                                                                                
2:08:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS asked  if the  following is  correct:   the gas                                                               
line  itself  is paid  for  by  the tariffs;  this  [legislation]                                                               
wouldn't have  any implications on the  main gas line or  the gas                                                               
treatment plant (GTP).                                                                                                          
                                                                                                                                
DR. VAN  MEURS resounded that  the tax credits he  mentioned will                                                               
not  apply  to  the  main  gas line.    In  further  response  to                                                               
Representative  Samuels, Dr.  Van  Meurs confirmed  that the  tax                                                               
credits are paid for by the  tariffs, the users, and the shippers                                                               
of the gas.                                                                                                                     
                                                                                                                                
CO-CHAIR SAMUELS  clarified that  the tax  structure for  the gas                                                               
pipeline will  be established in  the contract.   Furthermore, if                                                               
there is  a contract, the tariffs  will pay for the  gas line and                                                               
the associated facilities.                                                                                                      
                                                                                                                                
REPRESENTATIVE GARA  said he is  trying to  differentiate between                                                               
the 25/20  and the 20/20 plans.   He recalled that  Dr. Van Meurs                                                               
had related [prior  to the 20/20 plan] that the  25/20 plan and a                                                               
January  1st effective  date would  place the  state in  a strong                                                               
position competitively  and would  provide a  fair return  to the                                                               
state.   He asked if  that assumption  remains the same  with the                                                               
25/20 plan.                                                                                                                     
                                                                                                                                
2:10:49 PM                                                                                                                    
                                                                                                                                
DR.  VAN MEURS  echoed his  earlier comments  that the  25/20 and                                                               
20/20  plans are  both very  competitive  systems and  considered                                                               
very attractive to investors.   However, a retroactive start date                                                               
in January  as compared to a  mid-year start would gain  an extra                                                               
half year of income to  the state, although typically taxes start                                                               
after they  have been approved.   Dr. Van Meurs confirmed  that a                                                               
January  1st start  date wouldn't  impact the  competitiveness of                                                               
the system because  new investors will not have to  pay tax for a                                                               
while.   However, the difference  between a January 1st  and July                                                               
1st start date is the impact on current production.                                                                             
                                                                                                                                
2:13:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KERTTULA surmised  that  [the  January 1st  start                                                               
date] would  provide another six  months and would result  in the                                                               
full five years for the clawback.                                                                                               
                                                                                                                                
DR. VAN MEURS deferred to Mr. Dickinson.                                                                                        
                                                                                                                                
REPRESENTATIVE   KERTTULA  turned   attention   to  the   royalty                                                               
reduction  and related  her  belief that  it  makes sense  during                                                               
exploration.   However,  once the  company starts  producing, she                                                               
questioned whether the credit should  continue.  She asked if Dr.                                                               
Van Meurs has seen systems that work that way.                                                                                  
                                                                                                                                
2:15:20 PM                                                                                                                    
                                                                                                                                
DR. VAN MEURS explained that the  reason to look at a broader tax                                                               
credit   in   Alaska   is    because   building   the   necessary                                                               
infrastructure is an enormous obstacle  for many of the investors                                                               
entering Alaska.   The beauty of  the proposed tax is  that it is                                                               
an  enormous help  for the  smaller companies  when building  the                                                               
infrastructure  such that  a wider  group of  companies can  have                                                               
access  to   it.    Furthermore,   a  much  stronger   basis  for                                                               
development is formed, he stated.                                                                                               
                                                                                                                                
2:17:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX  asked when the capex  clawback feature was                                                               
first discussed.                                                                                                                
                                                                                                                                
DR.  VAN MEURS  said it  was discussed  over the  last week.   He                                                               
noted that  the capex  clawback was part  of the  discussions the                                                               
governor had  with the  oil companies and  was a  component [that                                                               
attributed]  to  the  companies   supporting  the  package.    He                                                               
clarified  that   the  concept  of  recovering   prior  cost  was                                                               
discussed among the  experts in DOR when alternatives  to the ELF                                                               
were discussed and  when the PPT was discussed,  but the official                                                               
inclusion in the package occurred in the last two weeks.                                                                        
                                                                                                                                
2:19:58 PM                                                                                                                    
                                                                                                                                
ROGER MARKS,  Petroleum Economist,  Department of  Revenue (DOR),                                                               
informed  the  committee that  he  would  provide a  quantitative                                                               
analysis of  HB 488 and  how it  impacts revenues as  compared to                                                               
the status quo.  He further  informed the committee that he would                                                               
describe the  department's model and  its assumptions as  well as                                                               
the   long-term  cumulative   revenues,   annual  revenues,   and                                                               
observations  regarding the  corporate  take  resulting from  the                                                               
tax.   Mr. Marks then  referred to the PowerPoint  entitled, "PPT                                                               
REVENUE STUDIES."                                                                                                               
                                                                                                                                
2:22:47 PM                                                                                                                    
                                                                                                                                
MR. MARKS  explained that it  is important  to know how  much oil                                                               
there will  be, which is difficult  to forecast.  For  the model,                                                               
whether there is enhanced exploration  success and development or                                                               
not and whether there  is a gas line or not,  both of which would                                                               
impact volume scenarios, were segregated.   He specified that the                                                               
presence of a  gas line would impact oil  volumes because Prudhoe                                                               
Bay volumes would decline earlier  on, although the life would be                                                               
extended.  Moreover,  the assumption is that  Point Thomson would                                                               
come on line,  although whether or not it's  economic without the                                                               
gas line is  a question that remains.  The  assumption, from DOR,                                                               
is that  Point Thomson will  only come on  line with a  gas line.                                                               
The DOR, he related, believes  that with Point Thomson there will                                                               
be  15 trillion  cubic feet  (tcf)  additional gas  that will  be                                                               
discovered,  and furthermore  the  department  believes oil  will                                                               
also be discovered with that.                                                                                                   
                                                                                                                                
MR.  MARKS  explained  that  he  would present  a  low  and  high                                                               
scenario such that the low  scenario doesn't include the enhanced                                                               
volumes  and gas  line.   As specified  on slide  5, no  enhanced                                                               
volumes and no  gas line produces a total of  5.5 billion barrels                                                               
through  2030.   The model  includes no  additional heavy  oil at                                                               
prices  under $30.   The  basis of  the volumes  are included  in                                                               
DOR's revenue sources book, including  oil that is in development                                                               
now  and  some  fields  that  are  under  evaluation.    He  then                                                               
explained that the high volume  scenario assumes enhanced volumes                                                               
and a gas line, which  would produce 10.5 billion barrels through                                                               
2050.  The department further  assumes that at the aforementioned                                                               
point,  the North  Slope  would be  cut off  at  2030 because  it                                                               
becomes  questionable  whether  there  would  be  enough  oil  to                                                               
support the pipeline  at that point.  The  high scenario includes                                                               
an additional 3.2 billion barrels  of conventional oil, including                                                               
700 million  barrels from the gas  line as well as  an additional                                                               
1.8  billion barrels  of heavy  oil.   Although DOR  doesn't know                                                               
from  where  the oil  will  come,  the United  States  Geological                                                               
Survey  (USGS) and  Alaska's state  geologists, in  reviewing the                                                               
reserves  on state  and federal  land, estimate  that 23  billion                                                               
barrels  would  be  discovered   in  the  mean  commercial  case.                                                               
Therefore, the  volume scenarios  range from 5.5  billion barrels                                                               
to 10.5 billion barrels.                                                                                                        
                                                                                                                                
2:26:49 PM                                                                                                                    
                                                                                                                                
MR. MARKS turned  attention to the graph located on  slide 6.  He                                                               
explained  that  the  fluctuation  in the  high  volume  scenario                                                               
represent a series of new fields  starting every four years.  Mr.                                                               
Marks pointed  out that DOR knows  the following:  the  more that                                                               
is  invested, the  more is  produced; the  more incentives  there                                                               
are, the  more investment there  is; the  credits in the  PPT are                                                               
incentives; higher  taxes provide less investment;  higher prices                                                               
elicit more  investment; and investment is  driven by competitive                                                               
international  opportunities.   However,  the department  doesn't                                                               
know how to quantify the  aforementioned.  Therefore, the volumes                                                               
as  given  were  taken  and the  revenue  effects  specified  are                                                               
entirely attributable to tax mechanics.                                                                                         
                                                                                                                                
MR. MARKS  then turned  to the  question as  to why  the proposal                                                               
went from  a 25/20  [PPT] to  a 20/20 [PPT].   He  commented that                                                               
what is  internationally competitive  is a broad  spectrum that's                                                               
continually evolving.   If high prices continue,  much oil that's                                                               
not  economic will  become so  and there  could once  again be  a                                                               
situation in which governments are  competing for investment.  He                                                               
opined that  more oil coming  on line may reduce  the competitive                                                               
edge  governments have  if there  are more  governments competing                                                               
for the same amount of investment.   He reminded the committee of                                                               
the Lafer (ph)  curve, which showed that as  taxes increase, more                                                               
revenue  is collected.    However, if  taxes  increase too  much,                                                               
income  could be  lost and  international  economists don't  know                                                               
exactly  the  point at  which  high  tax  rates lead  to  reduced                                                               
activity.   Therefore, the governor's 20/20  proposal attempts to                                                               
[ensure that  the tax rates don't  become high enough to  lead to                                                               
reduced activity].                                                                                                              
                                                                                                                                
2:30:23 PM                                                                                                                    
                                                                                                                                
MR. MARKS returned to the  PowerPoint and the assumptions related                                                               
to costs  and prices, as specified  on slide 7.   He acknowledged                                                               
that "at  the end  of the  day" these  numbers won't  be correct.                                                               
Mr. Marks  informed the committee  that the PPT will  subject the                                                               
[state]  to cost  volatility  such that  if  the ongoing  capital                                                               
costs, operating  costs, and developmental capital  costs are off                                                               
by  $1, the  annual revenues  of the  state will  differ by  $200                                                               
million up or  down.  He highlighted that  for modeling purposes,                                                               
the costs and  prices are in real 2005 dollars  and the heavy oil                                                               
is  discounted  8  percent  for  quality  while  viscous  oil  is                                                               
discounted  at 4  percent for  quality.   Mr.  Marks then  turned                                                               
attention to the cumulative revenues  for the high and low volume                                                               
scenarios  as presented  on  slide  8.   In  the enhanced  volume                                                               
scenario, which includes the oil  from the gas line, the revenues                                                               
specified don't  include the gas  line severance  taxes, although                                                               
they do  include the gas line  costs.  He explained  that the PPT                                                               
is structured  such that the  upstream costs associated  with the                                                               
gas and the capital costs for  developing new gas fields would be                                                               
subject to deductions  and credits through the PPT.   In response                                                               
to  Co-Chair Samuels,  Mr.  Marks confirmed  that  "it" would  be                                                               
upstream of the GTP and wouldn't include the main line.                                                                         
                                                                                                                                
2:35:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA surmised  then that  there will  be enhanced                                                               
volumes of  oil if there  is a gas  pipeline because oil  will be                                                               
found during  the development  of the gas  fields.   However, the                                                               
producers have  always said that  once gas is produced,  less oil                                                               
will be  derived from those [gas  fields].  He asked  whether the                                                               
notion that there  will be more oil  if the gas line  is built is                                                               
based on science or is it debatable.                                                                                            
                                                                                                                                
MR. MARKS said there are two  different effects.  At Prudhoe Bay,                                                               
once  gas is  depleted from  the reservoir,  there is  a loss  in                                                               
pressure,  and  initially  Prudhoe  Bay  volumes  will  decrease.                                                               
However, Mr.  Marks opined  that in  the absence  of a  gas line,                                                               
Prudhoe Bay will shut down in  2030.  Therefore, with a gas line,                                                               
it  becomes  more economic  to  keep  the  oil flowing  and  thus                                                               
extended fuel  life is  experienced at Prudhoe  Bay.   He pointed                                                               
out  that the  extended  life  doesn't offset  all  the oil  lost                                                               
earlier.  He estimated that at  the end of 45 years, Prudhoe Bay,                                                               
as a  result of  a gas  line, may  [produce] 150  million barrels                                                               
less.   The other effect  is that  between Prudhoe Bay  and Point                                                               
Thomson there is  about 35 tcf.  Since  [the department] believes                                                               
the gas  line would  be built  with 50 tcf  in mind,  it believes                                                               
people  will  look  for  another 15  tcf,  which  the  department                                                               
believes is  there.  When that  15 tcf is discovered,  there will                                                               
be oil  associated with  it.   The gas  line is  a net  effect of                                                               
about   700  million   barrels  of   additional  oil,   including                                                               
approximately 250  million from  Point Thomson, 150  million lost                                                               
from  Prudhoe Bay,  and  600  million from  the  yet defined  gas                                                               
field.                                                                                                                          
                                                                                                                                
2:38:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS interjected  that the GTP and the  gas line will                                                               
be paid  for by  the users  of the  gas.   Therefore, the  GTP is                                                               
included in the tariff.                                                                                                         
                                                                                                                                
MR. MARKS  clarified that the  high volume scenario  includes the                                                               
gas line  costs not the  gas line revenues.   At $5 gas,  the gas                                                               
line's revenues  would amount  to about  $1 billion  a year.   In                                                               
order to  provide further clarity,  Mr. Marks explained  that the                                                               
costs  that  are  deductible  and   subject  to  the  credit  are                                                               
technically  costs upstream  from the  point of  production.   He                                                               
confirmed  Co-Chair Samuels  understanding that  the GTP  and the                                                               
pipeline would not be subject to these deductions and credits.                                                                  
                                                                                                                                
MR. MARKS  then moved  on to  Figure 2A on  slide 9,  which shows                                                               
cumulative  revenues between  the status  quo  and HB  488.   The                                                               
graph  illustrates,  depending upon  the  price,  that the  total                                                               
revenues are  either $2 billion  less or  $25 billion more.   The                                                               
crossover point  under the specified  assumptions is $26.50.   In                                                               
reviewing  these graphs,  Mr. Marks  encouraged the  committee to                                                               
keep in  mind that the  ELF is  a modest standard  of comparison.                                                               
With regard  to the  crossover point,  he encouraged  everyone to                                                               
keep in  mind the slope  of the line as  well as the  [amount] at                                                               
the crossover point.  In reference  to Figure 2B on slide 10, Mr.                                                               
Marks highlighted  that although  Plan B  has a  higher crossover                                                               
point, it [over the long term] receives more money that Plan A.                                                                 
                                                                                                                                
2:42:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA returned  to  Figure 2A  on  slide 9,  which                                                               
specifies a crossover point at  $27 a barrel and illustrates that                                                               
the state would receive less  money under the proposed 20/20 plan                                                               
versus current law.   He recalled the  department's fall forecast                                                               
for the  next fiscal year  that estimates total gross  revenue of                                                               
about  $6.5 billion  and  company profits  of  about $2  billion,                                                               
which is about  a 30 percent profit margin.   Representative Gara                                                               
questioned whether that's a high  profit margin at which to begin                                                               
to reduce taxes.                                                                                                                
                                                                                                                                
MR. MARKS offered to provide  Representative Gara an answer after                                                               
thinking  it  through.   He  mentioned  the  need to  be  careful                                                               
because  heavy oil  is expensive  and under  $30, the  department                                                               
doesn't believe it makes sense.   Furthermore, one must take into                                                               
account  what other  countries  are doing  at  those prices,  the                                                               
answer to which he deferred to Dr. Van Meurs.                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA  asked  if   the  numbers  provided  by  the                                                               
department in regard to corporate profitability are reliable.                                                                   
                                                                                                                                
MR.  MARKS  said he  hasn't  reviewed  the numbers  himself,  and                                                               
therefore he  said that he  was uncomfortable addressing  them at                                                               
this point.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON  recalled that  since  this  is a  percent                                                               
profits tax, the  impact of heavy oil isn't as  great as it would                                                               
be for a gross tax.  However,  now he understands Mr. Marks to be                                                               
saying this  is not the case,  and "not only do  we discount what                                                               
is going to  be there, but even with the  percent profits tax and                                                               
the  credit back,  now we're  again  reinjecting a  consideration                                                               
that heavy oil has to be considered differently."                                                                               
                                                                                                                                
MR. MARKS  clarified that  the [crossover point]  of $26.50  is a                                                               
mixture  of  all   the  oil,  both  the  heavy   and  the  light.                                                               
Therefore, increasing the tax rate  or decreasing the credit rate                                                               
to decrease  the crossover point  impacts all the  oil, including                                                               
the  heavy oil.    The effect  is to  water  down the  beneficial                                                               
effects  of  the  PPT  because   heavy  oil  requires  a  lot  of                                                               
investment.   This all makes heavy  oil more of a  challenge than                                                               
it's structured to be treated in HB 488, he said.                                                                               
                                                                                                                                
2:46:13 PM                                                                                                                    
                                                                                                                                
MR. MARKS  moved on to Figure  3A on slide 11,  which relates the                                                               
high volume  scenario.  He  highlighted that the  crossover point                                                               
is higher,  which reflects the gas  line costs and the  heavy oil                                                               
without  the gas  revenues.   Therefore,  under  the high  volume                                                               
scenario, depending upon the price,  [the state] receives from $3                                                               
billion less to  $42 billion more.  On slide  12, the high volume                                                               
scenario with 2.5 percent inflation  results in a crossover price                                                               
of $28.   He then turned his attention to  slide 13 regarding the                                                               
annual revenues.  He pointed out  that at $20 a barrel, the state                                                               
would lose money  and would have bigger problems  than having the                                                               
wrong tax system.                                                                                                               
                                                                                                                                
MR. MARKS,  in response to  Representative Croft,  confirmed that                                                               
the status  quo number [on the  graph on slide 14]  decreases due                                                               
to the  ELF as  well as  the defining volume.   He  then directed                                                               
attention  to slide  15, which  reviews the  low volume  scenario                                                               
with $40  per barrel.   He then  informed the committee  that one                                                               
year at  $40 per barrel oil  allows the state to  recover what it                                                               
lost in the three years at  $20.  Therefore, the state makes more                                                               
money at  high prices than it  loses at low prices.   He reminded                                                               
the committee  that with  the capex  clawback included  at prices                                                               
over $40, [the state] would  [receive] $170 million less for five                                                               
years.   He then  turned to  why the clawback  is included  in HB
488, and  explained that most  of the investment made  to produce                                                               
oil is made to produce future  oil.  The rationale for having the                                                               
clawback  is to  not  penalize the  producers  for not  deferring                                                               
their investments.                                                                                                              
                                                                                                                                
2:51:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HOLM pointed  out that  the [producers]  made the                                                               
investment when oil  was predicted to be about $25  a barrel, and                                                               
therefore  when  the  price  of oil  increases,  it  changes  the                                                               
[producers'] view of their investment life as well.                                                                             
                                                                                                                                
MR. MARKS  reiterated that investments  are for future  oil, that                                                               
is  oil  taken  three  to  fifteen years  in  the  future.    The                                                               
companies  could  have  deferred   those  investments,  and  this                                                               
wouldn't penalize them for not doing so.                                                                                        
                                                                                                                                
CO-CHAIR SAMUELS  inquired as  to when  the producers  expect the                                                               
increase in volume.                                                                                                             
                                                                                                                                
2:53:15 PM                                                                                                                    
                                                                                                                                
MR. MARKS recalled the 1990s  during which extensive gas handling                                                               
expansion projects were implemented.   At that time, more gas was                                                               
coming  up with  the oil,  and that  was the  limiting factor  of                                                               
production.    Therefore,  multi-billion dollar  facilities  were                                                               
built in  order to  process the gas.   Otherwise,  the producers'                                                               
oil production would  have plummeted.  Those  investments made in                                                               
the early 1990s are still producing  lots of oil.  Along the same                                                               
vein, Mr.  Marks indicated  that the  effective date  was changed                                                               
because making  taxes retroactive is  impossible to plan  for and                                                               
creates a weak business environment.                                                                                            
                                                                                                                                
REPRESENTATIVE  SEATON  surmised then  that  HB  488 proposes  to                                                               
retroactively do the tax credits, but not the tax.                                                                              
                                                                                                                                
2:54:54 PM                                                                                                                    
                                                                                                                                
MS. WILSON said  the so-called recent recovery  [clawback] of the                                                               
investments is  not a credit,  but rather is a  deduction similar                                                               
to depreciation  expenses.  Furthermore,  it recognizes  that the                                                               
asset is generating  income into the future.   She explained that                                                               
any time net income is  measured in accounting, it's important to                                                               
match the  income with  the expenses.   The  [clawback provision]                                                               
recognizes that  "this is  an amortized  expense so  it is  not a                                                               
credit that is being taken."                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  surmised that  under a 20/20  [PPT], whether                                                               
it's a 20 percent credit  or deduction, the companies receive the                                                               
same amount of money.                                                                                                           
                                                                                                                                
MS. WILSON replied yes.                                                                                                         
                                                                                                                                
2:56:19 PM                                                                                                                    
                                                                                                                                
MR.  MARKS  continued with  Figure  6,  which illustrates  a  low                                                               
volume scenario at $60 barrel oil.   He noted that the transition                                                               
rules are modeled  and thus there is a reduction  of $170 million                                                               
for  the first  six  years.   He highlighted  that  [at $60]  the                                                               
average annual revenue  amounts to over $600 million  more a year                                                               
than the  status quo.  "This  is, at $4.70 gas  price in Chicago,                                                               
this is  our gas line  revenues without  the gas line  at current                                                               
oil prices," he pointed out.                                                                                                    
                                                                                                                                
REPRESENTATIVE KERTTULA  inquired as to  how much more  the state                                                               
would have made under the 25/20 scenario.                                                                                       
                                                                                                                                
MR. MARKS said he could model that for the committee.                                                                           
                                                                                                                                
2:57:32 PM                                                                                                                    
                                                                                                                                
MR.  MARKS then  turned to  the high  volume scenarios  under the                                                               
$20-$60 prices.   He  reminded the  committee that  these include                                                               
the gas line  costs without the gas line revenues.   As specified                                                               
on slide  17, under the  high volume  scenario with $20  a barrel                                                               
oil, the  average annual  revenue is $110  million less  than the                                                               
status quo while  $40 a barrel oil amounts to  about $190 million                                                               
more than the status quo.                                                                                                       
                                                                                                                                
REPRESENTATIVE CROFT  inquired as  to why  the graphs  have bumpy                                                               
lines.                                                                                                                          
                                                                                                                                
MR. MARKS explained that in the  high volume scenario a series of                                                               
fields  come on  line every  five  years.   Therefore, the  bumps                                                               
illustrate the field coming on line  and then declining.  The dip                                                               
between 2025 and 2030 is when  new investments for new gas fields                                                               
come on  line.  The dip  prior to 2014 is  the upstream deduction                                                               
for the Point Thomson field.                                                                                                    
                                                                                                                                
REPRESENTATIVE  CROFT highlighted  that the  lines converge  even                                                               
with the ELF in 2030 and then separate out.                                                                                     
                                                                                                                                
MR. MARKS explained that the [dip]  in the graph in the year 2030                                                               
illustrates about  $3 billion of  investment for new  gas fields.                                                               
He  then  turned  attention  to  Figure  9  on  slide  19,  which                                                               
illustrates  that  at  the  $60   scenario,  the  average  annual                                                               
revenues  are  $800  million  more  than  the  status  quo.    He                                                               
continued  with  the  effective  tax  rate  under  a  low  volume                                                               
scenario, as specified on slide 21.   He explained that the total                                                               
severance  tax  divided by  the  total  wellhead value  less  the                                                               
royalty  amounts  to the  effective  tax  rate.   With  the  PPT,                                                               
because the upstream costs are  deductible and the tax increases,                                                               
a  higher percentage  of the  wellhead price  is received  as the                                                               
price  increases.   Mr. Marks  explained  that when  the ELF  was                                                               
originally submitted  in 1977,  it was supposed  to be  such that                                                               
[companies] didn't  have to pay  tax on the amount  of production                                                               
necessary to  cover the operating  costs at  the price of  oil at                                                               
the time the  tax is being paid.  Therefore,  as prices increase,                                                               
less oil would be tax free  and thus there would be an increasing                                                               
progressive rate.   However, what ultimately resulted  was a flat                                                               
$300 a barrel  per well per day.   He noted that  the high volume                                                               
graph on slide 22 looks about same.                                                                                             
                                                                                                                                
MR.  MARKS  concluded  by  discussing the  corporate  take.    He                                                               
explained  that  he  reviewed the  U.S.  Department  of  Energy's                                                               
current long-term forecast,  which amounts to about  $58 a barrel                                                               
in 2004 dollars and modeled it  under the status quo and the PPT.                                                               
The  graph [on  slide  24]  illustrates that  $58  over 45  years                                                               
amounts to  about $600  billion in gross  revenues that  would be                                                               
generated,  with  2 percent  inflation  it  amounts to  about  $1                                                               
trillion.    Mr.  Marks  highlighted   that  under  the  PPT  the                                                               
severance tax  increases while the federal  income tax decreases.                                                               
Because severance  taxes are deductible  from the  federal income                                                               
tax, the  federal government essentially  picks up 35  percent of                                                               
the  PPT from  the producer.   The  corporate take,  in terms  of                                                               
gross  revenues, goes  from about  33  percent to  30 percent  of                                                               
gross income  under the PPT  or 49 percent  to 44 percent  of the                                                               
economic rent.   The state, he noted, ends up  with 32 percent of                                                               
the economic rent.   He reminded the committee  that although the                                                               
current system  is a  fairly modest  standard of  comparison, the                                                               
corporations receive  30 percent  of $600 billion,  which amounts                                                               
to $180 billion.                                                                                                                
                                                                                                                                
3:04:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KERTTULA  requested  annual scenarios  under  the                                                               
25/20, 30/20, and  30/15 proposals at $20, $40, and  $60 a barrel                                                               
oil.   She requested  that the  aforementioned proposals  also be                                                               
presented in the same type of chart as is presented on slide 24.                                                                
                                                                                                                                
REPRESENTATIVE BERKOWITZ  requested analysis of a  straight 50/50                                                               
split between the state and the companies' profits.                                                                             
                                                                                                                                
MS.  WILSON surmised  that Representative  Berkowitz is  pointing                                                               
out that  often government take  is quoted based on  profit after                                                               
expenses.   She  further surmised  that Representative  Berkowitz                                                               
was interested in the net profit and a 50/50 split.                                                                             
                                                                                                                                
REPRESENTATIVE ROKEBERG said that he  would like the charts to be                                                               
based on  the fiscal note and  the credits to be  increased to 25                                                               
percent  such that  the  25/25, 30/25,  and  15/25 proposals  are                                                               
reviewed.                                                                                                                       
                                                                                                                                
REPRESENTATIVE SEATON  requested that  Figure 12  on slide  24 be                                                               
presented  under  $20,   $40,  $60,  and  $100   a  barrel  price                                                               
scenarios.                                                                                                                      
                                                                                                                                
3:09:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA   asked  where,   under  current   law,  the                                                               
corporate  profit  margin  would  "sink" to  20  percent  and  15                                                               
percent in order to consider if those are good crossover points.                                                                
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  if   the  department   has  any                                                               
progressivity models that would  represent a sliding scale scheme                                                               
that illustrated the change in both  the tax and the credit rates                                                               
at  different levels  of  pricing  as related  to  the amount  of                                                               
revenue.                                                                                                                        
                                                                                                                                
MR. MARKS  offered to put  together a hypothetical  sliding scale                                                               
range.                                                                                                                          
                                                                                                                                
CO-CHAIR SAMUELS  pointed out  that the  20/20 proposal  would be                                                               
considered flat not regressive nor progressive.                                                                                 
                                                                                                                                
3:12:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MICHAEL  KELLY, Alaska State  Legislature, related                                                               
that  once some  of these  sensitivities are  done, then  all the                                                               
ones  in between  can be  determined  and analyzed  in regard  to                                                               
whether it's appropriate for the state.                                                                                         
                                                                                                                                
REPRESENTATIVE REGGIE JOULE, Alaska  State Legislature, turned to                                                               
the  fiscal note,  and pointed  out  that with  the proposed  tax                                                               
regime, three  additional auditors and another  lower level staff                                                               
person are  required.   He asked  if the  aforementioned staffing                                                               
will be enough to keep up with the changes.                                                                                     
                                                                                                                                
MS. WILSON explained  that the department, under HB  488, will be                                                               
auditing  different  things than  what  it's  accustomed and  the                                                               
department views this as the  necessary increment to increase the                                                               
department's capacity  to audit  additional things.   She pointed                                                               
out  that included  in contractuals  is temporary  audit help  to                                                               
assist in  the transition.   She predicted  that the  primary and                                                               
immediate needs  are auditing the  transition assets  and writing                                                               
regulations.                                                                                                                    
                                                                                                                                
3:16:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS opined  that over  the  years there  has been  a                                                               
great reluctance to  adjust the tax system.  However,  no one has                                                               
tested any  numbers lower than  20/20, which he surmised  to mean                                                               
that [the  administration] is predisposing  the tolerance  of the                                                               
producers  lays at  that  level.   Therefore,  he questioned  the                                                               
responsibility in proposing the 20/20 level.                                                                                    
                                                                                                                                
MS. WILSON  reminded the committee  that a range of  options were                                                               
offered by  Dr. Van Meurs.   Furthermore, the  governor carefully                                                               
considered the  whole picture.   She then pointed out  that other                                                               
states are  competing state-by-state  and although Alaska  is not                                                               
forced  to compete  with other  states, it  is forced  to compete                                                               
globally.    She  opined  that   the  governor  surely  took  the                                                               
aforementioned   into  consideration   when  selecting   what  he                                                               
considers  to  be the  best  scenario  for  Alaska in  the  world                                                               
market.                                                                                                                         
                                                                                                                                
3:21:29 PM                                                                                                                    
                                                                                                                                
ROBERT  MINTZ,  Assistant Attorney  General,  Oil,  Gas &  Mining                                                               
Section,   Civil  Division   (Anchorage),   Department  of   Law,                                                               
announced  that he  would review  the  highlights of  the PPT  as                                                               
presented in  HB 488.   Mr. Mintz specified that  the fundamental                                                               
provision  of  HB  488  is  Section 5,  which  is  a  repeal  and                                                               
reenactment of  AS 43.55.011(a).   He explained that  the current                                                               
production  tax has  a  separate  tax on  oil  and  on gas,  with                                                               
different rates,  minimum tax,  and ELF.   However, under  HB 488                                                               
those  differences are  immaterial because  it proposes  a single                                                               
tax on all oil and gas.   Furthermore, the production tax remains                                                               
a monthly tax  with a flat tax  rate of 20 percent  that is being                                                               
applied to  the net value.   The aforementioned differs  from the                                                               
current production tax that taxes the  gross value of oil and gas                                                               
at the  point of  production.  In  response to  Co-Chair Samuels,                                                               
Mr. Mintz confirmed  that if the gas is used  in the operation of                                                               
the  lease of  property, it's  not considered  produced and  thus                                                               
isn't subject to tax.                                                                                                           
                                                                                                                                
MR. MINTZ then turned attention to  the net value, which is found                                                               
in Section  21.  He informed  the committee that net  value still                                                               
starts with  the gross  value at  the point of  production.    He                                                               
then explained  that one of  the philosophies  with HB 488  is to                                                               
preserve the existing law as much  as possible.  With HB 488, all                                                               
of the gross  value from all of the leases  and properties in the                                                               
state that belong to a  producer together determine the statewide                                                               
value for a producer.  Once  that value is determined, there will                                                               
be   the  following   two  categories   of  deductions:     lease                                                               
expenditures  as   adjusted  and   a  fraction   of  transitional                                                               
investment expenditures.   He  then pointed  out that  Section 31                                                               
slightly  redefines "gross  value  at the  point of  production."                                                               
The  major  change,  he  highlighted,  is  moving  the  point  of                                                               
production downstream  of gas processing  plants.   Under current                                                               
law, once  the oil or  gas leaves the mechanical  separators, the                                                               
matter is either  oil or gas depending upon its  state.  However,                                                               
gas often continues  to contain heavier hydrocarbons  that can be                                                               
extracted  by  gas  processing.   This  legislation  proposes  to                                                               
include  gas  processing  in  the   upstream  of  the  production                                                               
process,  which   results  in   the  liquids  extracted   by  gas                                                               
processing being treated  as oil and the cost  of gas processing,                                                               
including investment  costs, would  be deductible and  subject to                                                               
the capital investment credit.   The purpose, he explained, is to                                                               
encourage small producers  to be able to afford  investing in gas                                                               
processing, which is more economical.                                                                                           
                                                                                                                                
REPRESENTATIVE CROFT asked if the  aforementioned is the opposite                                                               
of what was said in regard to gas treatment.                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  clarified that  earlier he  was referring  to a                                                               
gas treatment plant for gas entering the gas pipeline.                                                                          
                                                                                                                                
DAN  DICKINSON,  Consultant  to   the  Office  of  the  Governor,                                                               
clarified that  HB 488 distinguishes  between gas  processing and                                                               
gas   treatment.     Gas  processing   involves  production   and                                                               
separating the  heavier hydrocarbons.  However,  gas treatment is                                                               
specifically a  transportation process.  Mr.  Dickinson explained                                                               
that gas treatment is being  treated as a transportation cost and                                                               
is viewed  as the first step  of the pipeline process.   However,                                                               
with  gas processing,  as  occurs in  the  central gas  facility,                                                               
there  will be  an upstream  cost for  both the  gas and  liquids                                                               
produced at  that point.   Mr.  Dickinson highlighted  that under                                                               
current  rules  about  8  percent  of  what  is  in  Trans-Alaska                                                               
Pipeline System (TAPS) is considered  gas because the natural gas                                                               
liquids were  extracted at  the central  gas facility.   However,                                                               
under the new  definitions proposed in HB 488, that  8 percent of                                                               
the  TAPS will  be considered  oil.   He said  that under  HB 488                                                               
about 99 percent of what is done at TAPS will be considered oil.                                                                
                                                                                                                                
3:30:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS recalled  Mr. Marks'  example in  which current                                                               
gas  production   facilities  were   held  out  as   a  long-term                                                               
investment as opposed to the GTP.                                                                                               
                                                                                                                                
REPRESENTATIVE SEATON  mentioned that  there has  been discussion                                                               
of stripping some of the  liquids at Fairbanks or elsewhere along                                                               
the line.  He surmised  that these definitions wouldn't shift the                                                               
pipeline or a portion of it to Fairbanks.                                                                                       
                                                                                                                                
MR. MINTZ said  that's not the intent of HB  488 because once the                                                               
[gas] is in the  main line it will be downstream  to the point of                                                               
production.    He  pointed  out   that  Section  33  defines  gas                                                               
processing and gas treatment.                                                                                                   
                                                                                                                                
3:32:19 PM                                                                                                                    
                                                                                                                                
MR.  MINTZ, in  response  to  Representative Rokeberg,  confirmed                                                               
that the language on page 20,  lines 3-4, redefines oil.  He then                                                               
turned attention to [Section 19],  which addresses gross value at                                                               
the point  of production in  the same manner as  current statute,                                                               
save  one  respect that  will  be  mentioned later.    Basically,                                                               
[Section 19] codifies the net  back approach to calculating value                                                               
and thus the cost of transportation is deducted.                                                                                
                                                                                                                                
REPRESENTATIVE   CROFT  related   his   understanding  that   the                                                               
reasonable  costs of  transportation  being used  are the  actual                                                               
costs  of  transportation.   However,  sometimes  reasonable  and                                                               
actual are  not the same.   Therefore, he inquired as  to why the                                                               
two are being equated.                                                                                                          
                                                                                                                                
MR.  DICKINSON  explained  that  the  statute  establishes  three                                                               
conditions, which if met, the  market value of the transportation                                                               
services are  used.   However, the  three conditions  establish a                                                               
fairly high  barrier and thus most  of the time actual  costs are                                                               
used  and   they  are   deductible.     He  indicated   that  [AS                                                               
43.55.150(a)] has  generated hundreds of pages  of regulations in                                                               
order  to  define   actual  costs  for  owners   of  tankers  and                                                               
pipelines.                                                                                                                      
                                                                                                                                
REPRESENTATIVE CROFT  surmised then that the  current standard is                                                               
to assume  that actual  is reasonable unless  it meets  all three                                                               
criteria.                                                                                                                       
                                                                                                                                
3:34:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS opined  that there won't be  the TAPS settlement                                                               
methodology (TSM)  fight again  rather it  will be  determined by                                                               
the   Federal  Energy   Regulatory  Commission   (FERC)  or   the                                                               
Regulatory Commission of Alaska (RCA).                                                                                          
                                                                                                                                
MR. DICKINSON replied yes.                                                                                                      
                                                                                                                                
MR.  MINTZ clarified  that Section  20 the  bill varies  from the                                                               
existing  law  with regard  to  the  net  back calculation.    He                                                               
explained that the legislation would  authorize the department to                                                               
allow  taxpayers  in  certain  situations   to  use  formulas  to                                                               
calculate  the gross  value  at  the point  of  production.   For                                                               
example, if  a taxpayer has  a royalty settlement  agreement with                                                               
the Department of Natural Resources  (DNR) under which there is a                                                               
royalty value that is similar to  the tax value, rather than have                                                               
two  duplicative  calculations  the department  could  allow  the                                                               
royalty  settlement  value  to be  used  subject  to  appropriate                                                               
adjustments.   However, there are  other alternatives, such  as a                                                               
royalty  valuation that  the federal  government utilizes  on its                                                               
leases when no state leases are  involved.  He noted that this is                                                               
an option that the department would have.                                                                                       
                                                                                                                                
3:36:25 PM                                                                                                                    
                                                                                                                                
MR. MINTZ, referring  to Section 21, explained that  net value is                                                               
determined  by  subtracting  various   items  from  gross  value,                                                               
including  lease   expenditures.    Lease  expenditures   are  an                                                               
aggregate of cost of a producer  across the state and are defined                                                               
as   direct,  ordinary,   and  necessary   costs  of   exploring,                                                               
developing, or  producing oil or gas  deposits in the state.   He                                                               
noted  that  exploring  can include  geological  and  geophysical                                                               
exploration.      He   reminded   the   committee   that   [lease                                                               
expenditures]  are  upstream  of  the  point  of  production  and                                                               
downstream costs are  already taken into account  in reaching the                                                               
gross value at the point of production.                                                                                         
                                                                                                                                
REPRESENTATIVE  BERKOWITZ asked  if these  definitions have  been                                                               
litigated.                                                                                                                      
                                                                                                                                
3:37:56 PM                                                                                                                    
                                                                                                                                
MR. MINTZ specified  that the terms "ordinary  and necessary" are                                                               
used  in  the Internal  Revenue  System  (IRS)  code as  well  as                                                               
existing   department  regulations   for  transportation   costs.                                                               
Although  the   term  "direct"  may   not  have  as   much  legal                                                               
interpretation, the  legislation specifies  particulars regarding                                                               
the  types of  costs that  would be  excluded and  included.   In                                                               
continuing  with Section  21 subsection  (c),  he explained  that                                                               
this provision provides additional  guidance to the department in                                                               
determining  the direct,  ordinary, and  necessary costs.     The                                                               
guidance  has to  do  with  the experience  of  the  oil and  gas                                                               
industry in  unit operating agreements and  other joint operating                                                               
agreements, which  are situations  in which an  operator actually                                                               
does the  drilling and producing  and other lessees share  in the                                                               
production  and expenses.   Therefore,  the  other lessees  don't                                                               
want to pay more than they  owe.  The aforementioned are examples                                                               
of  industry practice  to which  the department  would review  in                                                               
developing its  standards for what would  be considered allowable                                                               
costs.    He   then  pointed  out  that   there  are  appropriate                                                               
safeguards in  an existing actual joint  unit operating agreement                                                               
in the  state.  For  example, a  working interest owner,  not the                                                               
operator,  has   enough  incentive   to  audit   it  effectively.                                                               
Therefore,  the department  is authorized  to allow  producers to                                                               
rely on  their actual billings  under the operating  agreement in                                                               
determining the deductible costs.   In response to Representative                                                               
Croft, Mr.  Mintz clarified  that it's a  new concept  because it                                                               
addresses upstream costs that are currently not deductible.                                                                     
                                                                                                                                
REPRESENTATIVE CROFT  surmised that  it gives  substantial weight                                                               
to  the  industry  practice,  although it's  not  how  the  state                                                               
assesses under the income tax or any other oil taxes.                                                                           
                                                                                                                                
MR. MINTZ  replied yes.   The income  tax, he  explained, doesn't                                                               
usually get into  that detail because it starts  with the federal                                                               
taxable income and  merely apportions.  He mentioned  that HB 488                                                               
also directs  DOR to look  to DNR's standards and  regulations in                                                               
regard  to  what costs  are  deductible  under net  profit  share                                                               
leases.                                                                                                                         
                                                                                                                                
CO-CHAIR SAMUELS  commented that  the costs  are a  huge concern.                                                               
He  recalled  yesterday's  testimony  relating  that  the  larger                                                               
fields at Kuparuk  [River Unit] and Prudhoe Bay  have the dynamic                                                               
of the three major producers  looking over each other's shoulders                                                               
exists.   He  characterized the  aforementioned as  good for  the                                                               
state.  Therefore,  he asked whether it's  a completely different                                                               
procedure for  DOR when multiple  producers are present  versus a                                                               
sole operator,  as is  the case  at the Milne  Point [Unit].   He                                                               
then inquired as  to the total revenue of the  Milne Point [Unit]                                                               
versus the Kuparuk [River Unit] and Prudhoe Bay.                                                                                
                                                                                                                                
MR. DICKINSON  highlighted that  the larger  units are  all owned                                                               
jointly and they  pale in size to Prudhoe Bay  and Kuparuk [River                                                               
Unit].   He  informed the  committee  that DOR  doesn't have  any                                                               
procedures because  currently the  department stops at  the point                                                               
of production.  He related  that the department intends to review                                                               
the  standards  being used  with  joint  operating agreements  in                                                               
order for  the state to  utilize when there  is a sole  owner and                                                               
the state [provides oversight].                                                                                                 
                                                                                                                                
CO-CHAIR SAMUELS posed  a situation in which  an individual works                                                               
for BP solely on Alaska issues  but lives in London, and asked if                                                               
that  individual's   salary  is  excluded  [under   the  Commerce                                                               
Clause].                                                                                                                        
                                                                                                                                
MR. DICKINSON said the unit  operating agreement would have to be                                                               
reviewed  regarding whether  the tasks  meet the  standard versus                                                               
where the  task was performed.   He noted that there  are certain                                                               
things for which all parties agree to pay.                                                                                      
                                                                                                                                
CO-CHAIR SAMUELS, returning  to the fiscal note, asked  if it's a                                                               
"shot in the  dark" because the department doesn't  know how many                                                               
auditors  it will  need until  the  first audit  is performed  at                                                               
Milne Point Unit.                                                                                                               
                                                                                                                                
MR. DICKINSON related that in  Texas there are firms that perform                                                               
joint venture audit  billings for smaller partners.   The thought                                                               
is to  hire a firm  or several  to review the  transitional costs                                                               
and at  the same time help  bring Alaska's auditors up  to speed.                                                               
He  indicated that  there wouldn't  be  a long-term  relationship                                                               
with those firms.   Therefore, the fiscal note  specifies a large                                                               
increment  up-front  for  contract  work  and  three  specialized                                                               
auditors with one support person.                                                                                               
                                                                                                                                
3:45:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  inquired as  to who wrote  this section                                                               
and the instructions given to write it.                                                                                         
                                                                                                                                
MR. MINTZ  said that  he basically  wrote HB  488 through  a long                                                               
process.   In terms of the  direction given, Mr. Mintz  said that                                                               
he  attempted to  implement  the  concepts he  was  asked to  do.                                                               
Although  a number  of people  were  involved, he  noted that  he                                                               
worked closely with  Mr. Dickinson who was  generally the conduit                                                               
for   the   direction  provided.      In   further  response   to                                                               
Representative Berkowitz, Mr. Mintz said  that the process was an                                                               
iterative process involving many drafts, reviews, and changes.                                                                  
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked whether  it would be  possible to                                                               
review earlier drafts.                                                                                                          
                                                                                                                                
MR. MINTZ offered to check into that.                                                                                           
                                                                                                                                
REPRESENTATIVE  ROKEBERG informed  the committee  that the  House                                                               
Rules Standing Committee introduced  legislation to reallocate 10                                                               
auditors to  help with this issue.   He then turned  attention to                                                               
[AS   43.55].160(a)  and   (b),  which   refer  to   transitional                                                               
expenditures.  He  asked if those subsections only  relate to the                                                               
transitional investment expenditures.                                                                                           
                                                                                                                                
MR.  MINTZ explained  that [AS  43.55].160(a) provides  the basic                                                               
structure  with  regard to  how  net  value  is calculated.    In                                                               
further response to Representative  Rokeberg, Mr. Mintz confirmed                                                               
that  the  language  on  page   12,  lines  3-6,  relate  to  the                                                               
calculations for the clawback, which  is addressed in subsections                                                               
(g) and (h) on page 15.   Subsection (b) addresses to what extent                                                               
either are deductible  in a given month, and what  can be done if                                                               
the deduction caused  the net value to fall below  zero.  The $40                                                               
floor is  mentioned at the  end of subsection (g)  and elaborated                                                               
on in subsection (h).                                                                                                           
                                                                                                                                
3:49:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG  related  his   belief  that  there  are                                                               
elements  in  subsections   (a)  and  (b)  that   go  beyond  the                                                               
transitional investment expenditure.                                                                                            
                                                                                                                                
MR. DICKINSON clarified that subsections  (a) and (b) are general                                                               
statements   with  regard   to   everything  that's   deductible.                                                               
However, subsections  (g) and (h)  on page 15  specifically refer                                                               
to the  transitional investment  expenditures and  subsection (j)                                                               
on page 16 refers to the allowance.                                                                                             
                                                                                                                                
REPRESENTATIVE  ROKEBERG  referred  to  page 14,  line  1,  which                                                               
relates  that  taxes  based  on  net income  are  excluded.    He                                                               
inquired as to  the federal policy effects on  the revenue stream                                                               
to Alaska if [a windfall profits tax] is enacted.                                                                               
                                                                                                                                
MR. MINTZ related  his understanding that most  taxes that aren't                                                               
income taxes,  including the production  tax, are  deductible for                                                               
income tax  purposes.  Therefore,  the windfall profit  tax would                                                               
not directly  affect the  production liability  if it  works like                                                               
any other income  tax.  However, presumably  price controls would                                                               
effect the gross value at the  point of production and could lead                                                               
to a lower taxable value than if there were no price controls.                                                                  
                                                                                                                                
3:52:04 PM                                                                                                                    
                                                                                                                                
MR.  DICKINSON recalled  when price  controls have  been imposed,                                                               
and related  that if the  department believed the  producers were                                                               
following the price controls, it  would just flow through and the                                                               
lower profits would be recognized.                                                                                              
                                                                                                                                
CO-CHAIR  SAMUELS  then  related  that  tomorrow  he  would  like                                                               
assurance that  the legislation  addresses the  $73 million  in a                                                               
situation  in which  the  Kuparuk  River Unit  is  split into  20                                                               
limited liability  companies (LLC).  He  also requested assurance                                                               
with regard to [the $73 million]  in a situation in which a small                                                               
company finds a good size oil field.                                                                                            
                                                                                                                                
[HB 488 was held over]                                                                                                          

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